Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - CHAUS BERNARD INC | y04194aexv31w2.htm |
EX-10.6 - EX-10.6 - CHAUS BERNARD INC | y04194aexv10w6.htm |
EX-31.1 - EX-31.1 - CHAUS BERNARD INC | y04194aexv31w1.htm |
EX-32.1 - EX-32.1 - CHAUS BERNARD INC | y04194aexv32w1.htm |
EX-32.2 - EX-32.2 - CHAUS BERNARD INC | y04194aexv32w2.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 October 2, 2010.
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 definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 | ||
November 22, 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)
October 2, | July 3, | September 30, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
(Unaudited) | ( * ) | (Unaudited) | ||||||||||
Assets |
||||||||||||
Current Assets |
||||||||||||
Cash |
$ | 3 | $ | 4 | $ | 2,840 | ||||||
Accounts receivable factored |
18,793 | 19,404 | 15,471 | |||||||||
Accounts receivable net |
2,568 | 1,789 | 1,214 | |||||||||
Inventories net |
8,785 | 8,846 | 6,133 | |||||||||
Prepaid expenses and other current assets |
498 | 536 | 586 | |||||||||
Total current assets |
30,647 | 30,579 | 26,244 | |||||||||
Fixed assets net |
920 | 885 | 818 | |||||||||
Other assets |
7 | 25 | 100 | |||||||||
Trademarks |
1,000 | 1,000 | 1,000 | |||||||||
Total assets |
$ | 32,574 | $ | 32,489 | $ | 28,162 | ||||||
Liabilities and Stockholders Deficiency |
||||||||||||
Current Liabilities |
||||||||||||
Revolving credit borrowings |
$ | 9,990 | $ | 11,175 | $ | 11,476 | ||||||
Accounts payable |
20,732 | 19,399 | 9,136 | |||||||||
Accrued expenses |
1,353 | 2,305 | 2,726 | |||||||||
Total current liabilities |
32,075 | 32,879 | 23,338 | |||||||||
Deferred income |
3,135 | 3,234 | 3,534 | |||||||||
Long term liabilities |
1,773 | 1,735 | 1,486 | |||||||||
Deferred income taxes |
180 | 173 | 154 | |||||||||
Total liabilities |
37,163 | 38,021 | 28,512 | |||||||||
Stockholders 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 October 2,
2010, July 3,2010 and
September 30, 2009 |
375 | 375 | 375 | |||||||||
Additional paid-in capital |
133,441 | 133,440 | 133,421 | |||||||||
Deficit |
(135,885 | ) | (136,827 | ) | (131,737 | ) | ||||||
Accumulated other comprehensive loss |
(1,040 | ) | (1,040 | ) | (929 | ) | ||||||
Less: Treasury stock at cost
62,270 shares at October 2, 2010, July 3, 2010 and
September 30, 2009 |
(1,480 | ) | (1,480 | ) | (1,480 | ) | ||||||
Total stockholders deficiency |
(4,589 | ) | $ | (5,532 | ) | (350 | ) | |||||
Total liabilities and stockholders deficiency |
$ | 32,574 | $ | 32,489 | $ | 28,162 | ||||||
* | Derived from audited financial statements at July 3, 2010. |
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 | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net revenue |
$ | 27,716 | $ | 23,710 | ||||
Cost of goods sold |
21,123 | 17,239 | ||||||
Gross profit |
6,593 | 6,471 | ||||||
Selling, general and administrative expenses |
7,295 | 7,251 | ||||||
Accrued gain on early termination of
license agreement |
(1,857 | ) | | |||||
Income (loss) from operations |
1,155 | (780 | ) | |||||
Interest expense |
201 | 153 | ||||||
Income (loss) before income tax provision |
954 | (933 | ) | |||||
Income tax provision |
12 | 10 | ||||||
Net income (loss) |
$ | 942 | $ | (943 | ) | |||
Basic earnings (loss) per share |
$ | 0.03 | $ | (0.03 | ) | |||
Diluted earnings (loss) per share |
$ | 0.03 | $ | (0.03 | ) | |||
Weighted average number of common shares
outstanding- basic |
37,481,000 | 37,481,000 | ||||||
Weighted average number of common and
common equivalent shares outstanding-
diluted |
37,481,000 | 37,481,000 | ||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating Activities |
||||||||
Net income (loss) |
$ | 942 | $ | (943 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
89 | 192 | ||||||
Amortization of deferred income |
(99 | ) | (66 | ) | ||||
Stock compensation expense |
1 | 5 | ||||||
Deferred rent expense |
26 | 166 | ||||||
Deferred income taxes |
7 | 7 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable factored |
611 | (4,608 | ) | |||||
Accounts receivable |
(779 | ) | (1,281 | ) | ||||
Inventories |
61 | (2,294 | ) | |||||
Prepaid expenses and other assets |
38 | (267 | ) | |||||
Accounts payable |
1,333 | 2,885 | ||||||
Accrued expenses and long term liabilities |
(940 | ) | 187 | |||||
Net cash provided by (used in) operating activities |
1,290 | (6,017 | ) | |||||
Investing Activities |
||||||||
Purchases of fixed assets |
(106 | ) | (139 | ) | ||||
Cash used in investing activities |
(106 | ) | (139 | ) | ||||
Financing Activities |
||||||||
Net proceeds (payments) from revolving credit
borrowings |
(1,185 | ) | 4,870 | |||||
Proceeds from supply agreement |
| 4,000 | ||||||
Net cash provided by (used in) financing activities |
(1,185 | ) | 8,870 | |||||
Increase (decrease) in cash |
(1 | ) | 2,714 | |||||
Cash, beginning of year |
4 | 126 | ||||||
Cash, end of year |
$ | 3 | $ | 2,840 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for: |
||||||||
Taxes |
$ | 14 | $ | 13 | ||||
Interest |
$ | 182 | $ | 139 | ||||
5
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended October 2, 2010 and September 30, 2009
(UNAUDITED)
Three Months Ended October 2, 2010 and September 30, 2009
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®, CHAUS SPORT®, CYNTHIA STEFFE®, SEAMLINE 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 (the KCP License Agreement)
with Kenneth Cole Productions, Inc. (KCP) to manufacture and sell womens sportswear under
various labels. These products offer high-quality fabrications and styling at better price
points. On October 19, 2010, the Company entered into an agreement with KCP (the KCP Termination
Agreement) pursuant to which the license agreement will terminate on June 1, 2011 rather than the
original termination date of June 30, 2012. Under the KCP Termination Agreement, the Company is
relieved of certain restrictions on engaging in transactions and activities in the apparel industry
as well as the obligation to pay certain promotional, marketing and advertising fees required under
the license agreement. KCP has agreed to assume certain of the Companys liabilities associated
with the Companys performance under the license agreement as well to pay the Company a termination
fee upon termination of the agreement in June 2011. The termination fee is based on sales to
certain customers through June 1, 2011, as defined in the agreement, and $1.9 million has been
recorded during the three months ended October 2, 2010 as an accrued gain on early termination of
the license agreement on the accompanying Consolidated Statement of Operations.
On November 18, 2010, the Company entered into a trademark license agreement (Camuto License
Agreement) with Camuto Consulting, Inc. d/b/a Camuto Group (Camuto). This agreement grants the
Company an exclusive license to design, manufacture, sell and distribute womens sportswear and
ready-to-wear apparel under the trademark Vince Camuto in approved department stores, specialty
retailers and off-price channels in the United States, Canada and Mexico. The initial term of the
Camuto License Agreement expires on December 31, 2015. The Company has the option to renew the
agreement for an additional term of three years if it meets specified sales targets and is in
compliance with the terms of the agreement. In addition, Camuto has the ability to terminate the
agreement under certain circumstances, as described in the agreement. The Company is required to
pay Camuto certain royalties on net sales and has agreed to guaranteed minimum yearly royalty and
advertising amounts. In addition, it is obligated to expend a minimum amount each quarter on
marketing. See Note 6 for further information.
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 2011 business plan anticipates improvement from fiscal 2010, by achieving
improved gross margin percentages and additional cost reduction initiatives primarily in the last
six months of fiscal 2011. The Companys ability to achieve its fiscal 2011 business plan is
critical to maintaining adequate liquidity. The Company relies on CIT, the sole source of its
financing, to borrow money in order to fund its operations. Should CIT cease funding its
operations, the Company may not have sufficient cash flow from operations to meet its liquidity
needs. In addition, China Ting Group Holdings Limited (CTG) manufactures the majority of the
Companys product on favorable payment terms. For additional information see Note 4 below. In the
event CTG terminates this agreement or requires a change in the favorable payment terms, the
Company may be unable to locate alternative
suppliers in a timely manner or obtain similarly favorable payment terms. For the fiscal year
ended July
6
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
3, 2010, the KCP license agreement accounted for approximately 50% of the Companys
revenues and this agreement will terminate on June 1, 2011. While the Company entered into the
Camuto License Agreement on November 18, 2010, there can be no assurance that it will be able to
derive revenue from this agreement sufficient to offset the loss in revenue resulting from the
termination of the KCP license agreement. Should CIT cease funding the Companys operations, CTG
terminate its agreement with the Company or require a change in the favorable payment terms, or the
Company fails to offset the revenue lost as a result of the termination of the KCP license
agreement, there could be a material adverse effect on the Companys business, liquidity and
financial condition.
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 months ended October 2, 2010 are not necessarily indicative of the results that may be
expected for the year ending July 2, 2011 or any other period. The balance sheet at July 3, 2010
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 July 3, 2010.
Fiscal Year:
On June 18, 2010, the Board of Directors of the Company approved a change to the Companys
fiscal year end from June 30th to the Saturday closest to June 30th and
effective immediately the Company now reports on a fifty-two/fifty-three week fiscal year-end. Due
to the change, the three months ended October 2, 2010 and September 30, 2009 contained ninety and
ninety-one days, respectively. The net sales for the one day is not deemed material.
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:
Sales are recognized upon shipment of products to customers since title and risk of loss
passes upon shipment. Revenue relating to goods sold on a consignment basis is recognized when the
Company has been notified that the buyer has resold the product. 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 March 29, 2010, the Company entered into an amended and restated factoring and financing
agreement (New Financing Agreement) with The CIT Group/Commercial Services, Inc. (CIT). The New
Financing Agreement provides for a non-recourse factoring arrangement which provides notification
factoring on substantially all of the Companys sales on terms substantially similar to those in
effect under the previous factoring and financing agreement
whereby CIT, based on credit approved orders, assumes the accounts receivable risk of the Companys
customers in the
7
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
event of insolvency or non-payment. The Company assumes the accounts receivable
risk on sales factored to CIT but not approved by CIT as non-recourse factored receivables, which
approximated $0.7 million at October 2, 2010, $0.7 million at July 3, 2010, and $0.4 million at
September 30, 2009. The Company receives payment on non-recourse factored receivables from CIT as
of the earliest 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. All 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 $1.4 million
as of October 2, 2010, $2.2 million as of July 3, 2010 and $2.0 million as of September 30, 2009,
have been recorded as a reduction of either accounts receivable factored or accounts receivable
net based upon the classification of the respective customer balance to which they pertain. The
Company also assumes the risk on accounts receivable not factored to CIT which is shown as accounts
receivable-net on the accompanying balance sheets. See Note 3 for additional information about
the Companys financing agreement with CIT.
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 $0.7 million at October 2, 2010, $0.5 million
at July 3, 2010 and $0.6 million
at September 30, 2009. 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 and Trademarks:
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 its estimated future
cash flows including market participant assumptions, when available. 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. There were no impairment charges for the three months ended
October 2, 2010 or September 30, 2009.
Income Taxes:
The Company accounts for income taxes under the asset and liability method in accordance with
the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) 740.
Deferred income taxes reflect the future tax consequences of differences between the tax bases of
assets and liabilities and their financial reporting amounts at year-end. The Company periodically
reviews its historical and projected taxable income and considers available information and
evidence to determine if it is more likely than not that a portion of the deferred tax assets will
be realized. A valuation allowance is established to reduce the deferred tax assets to the amount
that is more likely than not to be realized. As of October 2, 2010, July 3, 2010 and
September 30, 2009, 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.
8
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 computed by dividing the applicable net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings per share has been
computed by dividing the applicable net income by the weighted average number of common shares
outstanding and common share equivalents.
For the Three Months Ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Denominator for earnings (loss) per share (in millions): |
||||||||
Denominator for basic earnings (loss) per share
weighted-average shares outstanding |
37.5 | 37.5 | ||||||
Assumed exercise of potential common shares |
| | ||||||
Denominator for diluted earnings (loss) per share |
37.5 | 37.5 | ||||||
Options to purchase approximately 754,000 and 895,000 shares of common stock were excluded
from the computation of diluted earnings per share for the three months ended October 2, 2010 and
September 30, 2009, respectively because their exercise prices were 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 January 2010, FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements, which provides amendments to subtopic 820-10 that
require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value
measurements and the presentation of separate information regarding purchases, sales, issuances and
settlements for Level 3 fair value measurements. Additionally, ASU 2010-06 provides amendments to
subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and
valuation techniques. ASU 2010-06 is effective for financial statements issued for interim and
annual periods ending after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which
are effective for interim and annual periods ending after December 15, 2010. The Company does not
expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial
statements.
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses, which improves the
disclosures that an entity provides about the credit quality of its financing receivables and the
related allowance for credit losses. As a result of these amendments, an entity is required to
disaggregate by portfolio segment or class certain existing disclosures and provide certain new
disclosures about its financing receivables and related allowance for credit losses. ASU 2010-20 is
effective for financial statements issued for interim and annual periods ending on or after
December 15, 2010 except for disclosures about activity that occurs during a reporting period,
which are effective for interim and annual reporting periods beginning on or
after December 15, 2010. The Company does not expect the adoption of ASU 2010-20 to have a
material impact on its consolidated financial statements.
9
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
2. Inventories net
October 2, | July 3, | September 30, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
(in thousands) | ||||||||||||
(unaudited) | (*) | (unaudited) | ||||||||||
Raw materials |
$ | 399 | $ | 457 | $ | 257 | ||||||
Work-in-process |
46 | 63 | 28 | |||||||||
Finished goods |
8,340 | 8,326 | 5,848 | |||||||||
Total |
$ | 8,785 | $ | 8,846 | $ | 6,133 | ||||||
* | Derived from the audited financial statements at July 3, 2010. |
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 $3.5
million at October 2, 2010, $4.3 million at July 3, 2010 and $2.6 million at September 30, 2009.
3. Financing Agreements
On March 29, 2010, the Company entered into the New Financing Agreement,
with CIT, which amended and restated the previous factoring and financing agreement. In connection
with entering into the New Financing Agreement, CIT waived the events of default under the Previous
Factoring and Financing Agreement resulting from the Companys failure to comply with the financial
covenants as of December 31, 2009 set forth in that agreement.
The New Financing Agreement eliminates the Companys $30 million revolving line of credit and
permits CIT to make loans and advances on a revolving basis at CITs Sole Discretion, which is
defined as the sole and absolute discretion exercised in good faith in accordance with customary
business practices for similarly situated asset-based lenders in comparable asset-based lending
transactions. Borrowings are based on a borrowing base formula, as defined, and include a sublimit
in the amount of $2 million for the issuance of letters of credit. The New Financing Agreement also
eliminates most of the financial reporting and financial covenants that had been required under the
previous financing agreement, as well as eliminating the early termination fee and the fee for any
unused line of credit. The New Financing Agreement calls for an increase in the applicable margin
interest rate on borrowing by one point (from 2.00% to 3.00%) above the JP Morgan Chase Bank Rate,
however, the applicable margin shall revert to the original 2.00% interest rate in the event that
the Company achieves two successive quarters of profitable business. The Companys obligations
under the New Financing Agreement continue to be secured by a first priority lien on substantially
all of the Companys assets, including the Companys accounts receivable, inventory, intangibles,
equipment, and trademarks, and a pledge of the Companys interest in its subsidiaries. The New
Financing Agreement expires on September 30, 2011.
The borrowings under the New Financing Agreement accrue interest at a rate of 3% above prime.
The interest rate as of October 2, 2010 was 6.25%. The Company has the option to terminate the New
Financing 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.
Prior to the New Financing Agreement, the Companys previous agreements with CIT provided 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 agreements contained various financing and operating
covenants and charged various interest rates that were increased due to covenant defaults. The
Companys obligations under the previous agreements were secured by the same assets as the New
Financing Agreement.
On October 2, 2010, the Company had $1.3 million of outstanding letters of credit, total
availability of approximately $3.8 million, and $10.0 million of revolving credit borrowings under
the New Financing Agreement. On September 30,
10
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
2009, the Company had $1.5 million of outstanding letters of credit, and $11.5 million of
revolving credit borrowings under the previous factoring and financing agreement. The Company had
$2.8 million of cash as of September 30, 2009, as a result of drawing down all its availability.
Factoring Agreement
The New Financing Agreement provides for a non-recourse factoring arrangement which provides
notification factoring on substantially all of the Companys sales on terms substantially similar
to those in effect under the previous factoring and financing agreement. 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.
4. Deferred Income
In July 2009, the Company entered into an exclusive supply agreement with CTG. Under this
agreement, CTG acts 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 October 2, 2010, $0.4 million of the
premium is included in accrued expenses and approximately $3.1 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 each of the three months ended October 2, 2010 and September 30, 2009, the Company
recognized approximately $0.1 million of income as a reduction to cost of goods sold. For the
three months ended September 30, 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. At October 2, 2010, amounts owed to CTG for merchandise approximated
$12.8 million and are included in accounts payable.
5. Pension Plan
Components of Net Periodic Benefit Cost
Pension Plan | ||||||||
For the Three Months Ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Service cost |
$ | 2 | $ | 2 | ||||
Interest cost |
28 | 28 | ||||||
Expected return on plan assets |
(26 | ) | (26 | ) | ||||
Amortization of net loss |
9 | 20 | ||||||
Net periodic benefit cost |
$ | 13 | $ | 24 | ||||
Employer Contributions
The Company will be required to contribute approximately $25,000 to the pension plan in fiscal
2011.
11
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
6. Commitments and Contingencies
As disclosed in Note 1, on November 18, 2010, the Company entered into the Camuto License
Agreement which includes the following minimum royalties, advertising and marketing expenses
through December 31, 2015:
Fiscal year ending: | Amount | |||
(in thousands) | ||||
2011 |
$ | 0 | ||
2012 |
2,140 | |||
2013 |
1,350 | |||
2014 |
1,635 | |||
2015 |
1,860 | |||
2016 |
975 | |||
Total |
$ | 7,960 | ||
12
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 continued support of retailers for our
Kenneth Cole licensed merchandise through the termination of the license; the success of the new
Camuto Licensing Agreement; the highly competitive nature of the fashion industry; our ability to
satisfy our cash flow needs, including the cash requirements under the Camuto Licensing Agreement;
our ability to achieve our business plan and have adequate access to capital; 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; the risk
that our exclusive supplier will continue to supply product to us on favorable payment terms; our
ability to meet the requirements of the Camuto Licensing Agreement; our ability to source product in
an environment of high volatility and inflationary pressures on prices of labor and raw materials;
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 July 3, 2010, 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®, CHAUS SPORT®, CYNTHIA STEFFE®, SEAMLINE 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.
We have a license agreement with Kenneth Cole Productions, Inc. (KCP) to manufacture and
sell womens sportswear under various labels. These products offer high-quality fabrications and
styling at better price points. On October 19, 2010, we entered into the KCP Termination
Agreement pursuant to which the KCP License Agreement will terminate on June 1, 2011 rather than
the original termination date of June 30, 2012. Under the KCP Termination
Agreement, we are relieved of certain restrictions on engaging in transactions and activities in
the apparel industry as well
13
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
as the obligation to pay certain promotional, marketing and
advertising fees required under the KCP License Agreement. KCP has agreed to assume certain of our
liabilities associated with our performance under the KCP License Agreement as well to pay us a
termination fee upon termination of the agreement in June 2011.
On November 18, 2010, we entered into a trademark license agreement (Camuto License
Agreement) with Camuto Consulting, Inc. d/b/a Camuto Group (Camuto). This agreement grants us
an exclusive license to design, manufacture, sell and distribute womens sportswear and
ready-to-wear apparel under the trademark Vince Camuto in approved department stores, specialty
retailers and off-price channels in the United States, Canada and Mexico. The initial term of the
Camuto License Agreement expires on December 31, 2015. We have the option to renew the agreement
for an additional term of three years if we meet specified sales targets and are in compliance with
other terms of the agreement. In addition, Camuto has the ability to terminate the agreement under
certain circumstances, as described in the agreement. We are required to pay Camuto certain
royalties on net sales and have agreed to guaranteed minimum yearly royalty and advertising
amounts. In addition, we are obligated to expend a minimum amount each year on marketing.
Exclusive Supply Agreement
In July 2009 we entered into an exclusive supply agreement pursuant to which CTG serves
as the exclusive supplier of substantially all merchandise purchased by us in Asia in addition to
providing sample making and production supervision services. See Note 4 for more information about
this agreement.
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 | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Net revenue |
100.00 | % | 100.00 | % | ||||
Gross profit |
23.8 | % | 27.3 | % | ||||
Selling, general and administrative expenses |
26.3 | % | 30.6 | % | ||||
Accrued gain on early termination of license
agreement |
(6.7 | )% | | |||||
Interest expense |
0.7 | % | 0.6 | % | ||||
Net income (loss) |
3.4 | % | (4.0 | )% |
Net revenues for the three months ended October 2, 2010 increased by 16.9%, or $4.0 million,
to $27.7 million from $23.7 million for the three months ended September 30, 2009. Units sold
increased by approximately 7.8% and the overall price per unit increased by approximately 8.4%. Our
net revenues increased due to an increase in revenues in our licensed product lines of $2.6
million, Cynthia Steffe product lines of $1.5 million, and private label product lines of $0.3
million, partially offset by a decrease in our Chaus product lines of $0.5 million. The increase in
our licensed product lines was substantially due to increased penetration of various Kenneth Cole
labels into existing department store customers as well as an increase in our club channel of
distribution. The increase in our Cynthia Steffe product lines was due to increases in all channels
of distribution. The decrease in business in our Chaus product lines was primarily attributable to
a decrease in our club channel of distribution.
Gross profit for the three months ended October 2, 2010 increased $0.1 million to $6.6 million
as compared to $6.5 million for the three months ended September 30, 2009 primarily attributable to
an increase in revenues. The increase in gross profit was primarily due to the increase in gross
profit in our Cynthia Steffe product lines of $0.4 million, private label product lines of $0.1
million, licensed product lines of $0.1 million, offset by a decrease in gross profit in our Chaus
product lines of $0.5. Gross profit for the three months ended September 30, 2009 was reduced by a
14
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 Note 4 for more information. As a
percentage of sales, gross profit decreased to 23.8% for fiscal 2011 from 27.3% for fiscal 2010.
The decrease in gross profit percentage was associated with the decrease in gross profit percentage
in our Chaus, licensed and Cynthia Steffe product lines due to the change in the mix of sales
within each of these product lines.
Selling, general and administrative (SG&A) expenses were $7.3 million in each of the three
months ended October 2, 2010 and September 30, 2009. As a percentage of net revenue, SG&A expenses
decreased to 26.3% for the three months ended October 2, 2010 compared to 30.6% for the three
months ended September 30, 2009. In the three months ended October 2, 2010, increases in warehouse
expense of $0.1 million and payroll and payroll related costs of $0.1 million, were substantially
offset by reductions in other categories. The decrease in SG&A as a percentage of net revenue was
due to the overall increase in sales volume which increased our leverage on SG&A expenses.
Accrued gain on early termination of the KCP License Agreement was $1.9 million for the three
months ended October 2, 2010. This gain is based on sales to certain customers as defined in the
KCP Termination Agreement.
Interest expense increased during the three months ended October 2, 2010 as compared to the
three months ended September 30, 2009, primarily due to higher bank borrowings and increased
interest rates in connection with our New Financing Agreement entered into in March 2010.
Our income tax provision for the three months October 2, 2010 and September 30, 2009 includes
provisions for state and local taxes and for the temporary differences associated with the
Companys trademarks.
We periodically review our historical and projected taxable income and consider 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 October 2, 2010 and September 30,
2009, based upon its 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 Operations at our estimated effective tax rate. See Critical Accounting Policies and
Estimates below for more information regarding income taxes and our federal NOL carryforward.
Financial Position, Liquidity and Capital Resources
General
Net cash provided by operating activities was $1.3 million for the three months ended October
2, 2010 as compared to net cash used in operating activities of $6.0 million for the three months
ended September 30, 2009. Net cash provided by operating activities for the three months ended
October 2, 2010 resulted primarily from an increase in accounts payable of $1.3 million and our net
income of $0.9 million, which was partially offset by a decrease in accrued expenses and long term
liabilities of $0.9 million. The increase in accounts payable of $1.3 million was due to extended
terms provided by CTG. Net cash used in operating activities for the three months ended September
30, 2009 resulted primarily from our net loss of $0.9 million, an increase in accounts
receivable-factored of $4.6 million, an increase in inventories of $2.3 million and an increase in
accounts receivable of $1.3 million which were partially offset by an increase in accounts payable
of $2.9 million.
Cash used in investing activities for the three months ended October 2, 2010 was $106,000
compared to $139,000 in the previous year. The purchases of fixed assets for the three months ended
October 2, 2010 consisted primarily of management information system upgrades. In fiscal 2011, the
Company anticipates capital expenditures of approximately $400,000 primarily for management
information system upgrades and other capital items. The unexpended portion of capital
expenditures for fiscal 2011 is approximately $300,000.
15
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
Net cash used in financing activities of $1.2 million for the three months ended October 2,
2010 was primarily the result of net payments on short-term bank borrowings. Net cash provided by
financing activities of $8.9 million for the three months ended September 30, 2009 was primarily
the result of net proceeds from short-term bank borrowings of $4.9 million and proceeds from the
CTG supply premium of $4.0 million.
Financing Agreement
On March 29, 2010, we entered into an amended and restated financing and factoring
agreement with CIT (the New Financing Agreement), which amended and restated the previous
factoring and financing agreement. In connection with entering into the New Financing Agreement,
CIT waived the events of default under the previous factoring and financing agreement resulting
from our failure to comply with the financial covenants as of December 31, 2009 set forth in that
agreement.
The New Financing Agreement eliminates our $30 million revolving line of credit and
permits CIT to make loans and advances on a revolving basis at CITs Sole Discretion, which is
defined as the sole and absolute discretion exercised in good faith in accordance with customary
business practices for similarly situated asset-based lenders in comparable asset-based lending
transactions. Borrowings are based on a borrowing base formula, as defined, and include a sublimit
in the amount of $2 million for the issuance of letters of credit. The New Financing Agreement also
eliminates most of the financial reporting and financial covenants that had been required under the
previous financing agreement, as well as eliminating the early termination fee and the fee for any
unused line of credit. The New Financing Agreement calls for an increase in the applicable margin
interest rate on borrowing by one point (from 2.00% to 3.00%) above the JP Morgan Chase Bank Rate,
however, the applicable margin shall revert to the original 2.00% interest rate in the event that
we achieve two successive quarters of profitable business. Our obligations under the New Financing
Agreement continue to be secured by a first priority lien on substantially all of our assets,
including our accounts receivable, inventory, intangibles, equipment, and trademarks, and a pledge
of our interest in our subsidiaries. The New Financing Agreement expires on September 30, 2011.
The borrowings under the New Financing Agreement accrue interest at a rate of 3% above
prime. The interest rate as of October 2, 2010 was 6.25%. We have the option to terminate the New
Financing Agreement with CIT. If we terminate the agreement with CIT due to non-performance by CIT
of certain of its obligations for a specified 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.
On October 2, 2010, we had $1.3 million of outstanding letters of credit, total
availability of approximately $3.8 million, and $10.0 million of revolving credit borrowings under
the New Financing Agreement. On September 30, 2009, we had $1.5 million of outstanding letters of
credit and $11.5 million of revolving credit borrowings under our previous financing agreement. We
also had $2.8 million of cash as of September 30, 2009, as a result of drawing down all of our
availability.
Factoring Agreement
As discussed above, on March 29, 2010, we entered into the New Financing Agreement with
CIT, which amended and restated our previous factoring and financing agreement. The New Financing
Agreement provides for a non-recourse factoring arrangement which provides notification factoring
on substantially all of the Companys sales on terms substantially similar to those in effect under
the previous factoring and financing agreement. 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.
Future Financing Requirements
At October 2, 2010, we had a working capital deficit of $1.4 million as compared with
working capital of $2.9 million at September 30, 2009. 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 CIT. Our fiscal 2011 business plan anticipates improvement from fiscal 2010, by
achieving improved gross margin percentages and additional cost reduction initiatives primarily in
the last six
16
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
months of fiscal 2011. Our ability to achieve our fiscal 2011 business plan is
critical to maintaining adequate liquidity. There can be no assurance that we will be successful in
our efforts. We rely on CIT, the sole source of our financing, to borrow money in order to fund our
operations. Should CIT cease funding our operations, we may not have sufficient cash flow from
operations to meet our liquidity needs. In addition, CTG manufactures the majority of our product
on favorable payment terms. In the event that CTG terminates this agreement with us or requires a
change in the favorable payment terms, we may be unable to locate alternative suppliers in a timely
manner or unable to obtain similarly favorable payment terms. In fiscal 2010, the KCP License
Agreement accounted for approximately 50% of our revenues and we have agreed to an early
termination of this agreement effective June 1, 2011. While the Company entered into the Camuto
License Agreement on November 18, 2010, there can be no assurances that we will be able to derive
revenue from this agreement sufficient to offset the loss in revenue resulting from the termination
of the KCP license agreement.
The foregoing discussion contains forward-looking statements which are based upon current
expectations and involve a number of uncertainties, including our ability to maintain our borrowing
capabilities, maintain our current arrangement with CTG and replace the revenues which will be lost
as a result of the termination of the KCP License Agreement. Should any of these events fail to
occur, this could result in a material adverse effect on our business, liquidity and financial
condition.
Critical Accounting Policies and Estimates
Significant accounting policies are more fully described in Note 1 to our consolidated
financial statements, which are included herein. 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. Revenue relating to goods sold on a consignment basis is
recognized when we have been notified that the buyer has resold the product. 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, we cannot guarantee that we will continue to
experience the same rates as in the past.
Factoring Agreement and Accounts Receivable We have a factoring agreement with CIT whereby
substantially all of our receivables are factored. The factoring agreement is a non-recourse
factoring arrangement whereby CIT, based on credit approved orders, assumes the accounts receivable
risk of our customers in the event of insolvency or non-payment. We assume the accounts receivable
risk on sales factored to CIT but not approved by CIT as non-recourse factored receivables, which
approximated $0.7 million at October 2, 2010, $0.7 million at July 3, 2010, and $0.4 million at
September 30, 2009. We receive payment on non-recourse factored receivables from CIT as of the
earliest 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.
All 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 $1.4 million as of October
2, 2010, $2.2 million as of July 3, 2010 and $2.0 million as of September 30, 2009 have been
recorded as reductions of either accounts receivable factored or accounts receivable-net based
on the classification of the respective customer balance to which they pertain. We also assume
the risk on accounts receivable not factored to CIT which is shown as Accounts Receivable-net on
the accompanying balance sheets.
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
$0.7 million at October 2, 2010, $0.5 million at July 3, 2010, and $0.6 million at September 30,
2009. Inventory reserves are based upon
17
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 and Trademarks We conduct 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 its estimated future cash flows including market
participant assumptions, when available. The review of trademarks and long lived assets
is based upon projections of anticipated future undiscounted cash flows. 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. There were no
impairment charges for the three months ended October 2, 2010 or September 30, 2009.
Income Taxes Results of operations have generated a federal tax NOL carryforward of
approximately $73.1 million as of July 3, 2010. Approximately 45% of the Companys NOL carryforward
expires between 2011 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. We periodically
review our historical and projected taxable income and consider 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 October 2, 2010, based upon our evaluation
of our historical and projected results of operations, the current business environment and the
magnitude of the net operating loss, we recorded a full valuation allowance on our deferred tax
assets including NOLs. If the we determine 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 we will provide for an income tax benefit in our Statement of Operations at our
estimated effective tax rate. 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 our cash 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 Position, Liquidity and Capital Resources, as well as in Note 3 of our 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 October 2, 2010 and September 30, 2009, the carrying amounts of our revolving credit
borrowings approximated fair value. As of October 2, 2010, our revolving credit borrowings bore
interest at a rate of 6.25%. As of October 2, 2010, a hypothetical immediate 10% adverse change in
prime interest rates relating to our revolving credit borrowings and term loan would have less than
$0.1 million unfavorable impact on our 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
Commissions 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 along with the Companys Chief
Operating and Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
18
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 (CEO), along with the Companys Chief Operating and Financial Officer (CFO),
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework. Based on this evaluation, our management, with the
participation of the CEO and CFO, concluded that, as of October 2, 2010, our internal controls over
financial reporting were effective.
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 July 3, 2010, 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 July 3, 2010. 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.
None.
Item 5. Other Information.
None.
19
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 6. Exhibits (filed herewith)
10.6 | Trademark License Agreement, dated November 18, 2010, between Bernard Chaus, Inc. and Camuto Consulting, Inc. d/b/a Camuto Group (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). | |
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 and 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 and Financial Officer of Bernard Chaus, Inc. |
20
Table of Contents
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: November 22, 2010 | By: | /s/ Josephine Chaus | ||
JOSEPHINE CHAUS | ||||
Chairwoman of the Board, and Chief Executive Officer |
||||
Date: November 22, 2010 | By: | /s/ David Stiffman | ||
DAVID STIFFMAN | ||||
Chief Operating and Financial Officer |
21
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
Exhibit Number | Exhibit Title | |
10.6
|
Trademark License Agreement, dated November 18, 2010, between Bernard Chaus, Inc. and Camuto Consulting, Inc. d/b/a Camuto Group (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). | |
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 and 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 and Financial Officer of Bernard Chaus, Inc. |
22