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EX-32.2 - EX-32.2 - CHAUS BERNARD INC | y04875exv32w2.htm |
EX-31.2 - EX-31.2 - CHAUS BERNARD INC | y04875exv31w2.htm |
EX-32.1 - EX-32.1 - CHAUS BERNARD INC | y04875exv32w1.htm |
EX-31.1 - EX-31.1 - CHAUS BERNARD INC | y04875exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 April 2, 2011.
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)
(Registrants telephone number, including area code)
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 | ||
May 17, 2011 | 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)
April 2, | July 3, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(Unaudited) | ( * ) | (Unaudited) | ||||||||||
Assets |
||||||||||||
Current Assets |
||||||||||||
Cash |
$ | 3 | $ | 4 | $ | 51 | ||||||
Accounts receivable factored |
14,467 | 19,404 | 19,136 | |||||||||
Accounts receivable net |
1,648 | 1,789 | 1,854 | |||||||||
Inventories net |
5,235 | 8,846 | 6,825 | |||||||||
Prepaid expenses and other current assets |
1,356 | 536 | 490 | |||||||||
Total current assets |
22,709 | 30,579 | 28,356 | |||||||||
Fixed assets net |
936 | 885 | 809 | |||||||||
Other assets |
3 | 25 | 71 | |||||||||
Trademarks |
1,000 | 1,000 | 1,000 | |||||||||
Total assets |
$ | 24,648 | $ | 32,489 | $ | 30,236 | ||||||
Liabilities and Stockholders Deficiency |
||||||||||||
Current Liabilities |
||||||||||||
Revolving credit borrowings |
$ | 9,966 | $ | 11,175 | $ | 9,180 | ||||||
Accounts payable |
19,067 | 19,399 | 16,116 | |||||||||
Accrued expenses |
1,158 | 2,305 | 2,611 | |||||||||
Total current liabilities |
30,191 | 32,879 | 27,907 | |||||||||
Deferred income |
2,934 | 3,234 | 3,333 | |||||||||
Long term liabilities |
1,851 | 1,735 | 1,617 | |||||||||
Deferred income taxes |
193 | 173 | 168 | |||||||||
Total liabilities |
35,169 | 38,021 | 33,025 | |||||||||
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 April 2, 2011,
July 3, 2010 and March 31, 2010 |
375 | 375 | 375 | |||||||||
Additional paid-in capital |
133,440 | 133,440 | 133,437 | |||||||||
Deficit |
(141,516 | ) | (136,827 | ) | (134,192 | ) | ||||||
Accumulated other comprehensive loss |
(1,040 | ) | (1,040 | ) | (929 | ) | ||||||
Less: Treasury stock at cost
3,062,270 shares at April 2, 2011, 62,270 at July
3, 2010 and March 31, 2010 |
(1,780 | ) | (1,480 | ) | (1,480 | ) | ||||||
Total stockholders deficiency |
(10,521 | ) | (5,532 | ) | (2,789 | ) | ||||||
Total liabilities and stockholders deficiency |
$ | 24,648 | $ | 32,489 | $ | 30,236 | ||||||
* | Derived from audited financial statements at July 3, 2010. |
See accompanying notes to consolidated financial statements.
3
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BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net revenue |
$ | 23,260 | $ | 27,781 | $ | 67,885 | $ | 72,588 | ||||||||
Cost of goods sold |
18,812 | 19,722 | 54,790 | 53,357 | ||||||||||||
Gross profit |
4,448 | 8,059 | 13,095 | 19,231 | ||||||||||||
Selling, general and administrative expenses |
6,956 | 7,817 | 21,262 | 22,023 | ||||||||||||
Accrued gain on early termination of license agreement |
(1,165 | ) | | (4,055 | ) | | ||||||||||
Income (loss) from operations |
(1,343 | ) | 242 | (4,112 | ) | (2,792 | ) | |||||||||
Interest expense |
163 | 216 | 541 | 576 | ||||||||||||
Income (loss) before income tax provision |
(1,506 | ) | 26 | (4,653 | ) | (3,368 | ) | |||||||||
Income tax provision |
12 | 10 | 36 | 30 | ||||||||||||
Net income (loss) |
$ | (1,518 | ) | $ | 16 | $ | (4,689 | ) | $ | (3,398 | ) | |||||
Basic earnings (loss) per share |
$ | (0.04 | ) | $ | 0.00 | $ | (0.13 | ) | $ | (0.09 | ) | |||||
Diluted earnings (loss) per share |
$ | (0.04 | ) | $ | 0.00 | $ | (0.13 | ) | $ | (0.09 | ) | |||||
Weighted
average number of shares outstanding basic |
34,514,000 | 37,481,000 | 36,492,000 | 37,481,000 | ||||||||||||
Weighted average number of common and common equivalent
shares outstanding diluted |
34,514,000 | 37,481,000 | 36,492,000 | 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)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating Activities |
||||||||
Net loss |
$ | (4,689 | ) | $ | (3,398 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
275 | 521 | ||||||
Loss on disposal of fixed assets |
| 43 | ||||||
Amortization of deferred income |
(300 | ) | (267 | ) | ||||
Stock compensation expense |
| 21 | ||||||
Deferred rent expense |
78 | 248 | ||||||
Deferred income taxes |
20 | 21 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable factored |
4,937 | (8,547 | ) | |||||
Accounts receivable |
141 | (1,647 | ) | |||||
Inventories |
3,611 | (2,986 | ) | |||||
Prepaid expenses and other assets |
(820 | ) | (180 | ) | ||||
Accounts payable |
(332 | ) | 9,865 | |||||
Accrued expenses and long term liabilities |
(1,109 | ) | 121 | |||||
Net cash provided by (used in) operating activities |
1,812 | (6,185 | ) | |||||
Investing Activities |
||||||||
Purchases of fixed assets |
(304 | ) | (464 | ) | ||||
Cash used in investing activities |
(304 | ) | (464 | ) | ||||
Financing Activities |
||||||||
Net proceeds from (repayments of) revolving
credit borrowings |
(1,209 | ) | 2,574 | |||||
Purchase of treasury stock |
(600 | ) | | |||||
Proceeds from reissuance of treasury stock |
300 | | ||||||
Proceeds from supply agreement |
| 4,000 | ||||||
Net cash provided by (used in) financing activities |
(1,509 | ) | 6,574 | |||||
Decrease in cash |
(1 | ) | (75 | ) | ||||
Cash, beginning of year |
4 | 126 | ||||||
Cash, end of period |
$ | 3 | $ | 51 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for: |
||||||||
Taxes |
$ | 13 | $ | 14 | ||||
Interest |
$ | 499 | $ | 528 | ||||
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BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended April 2, 2011 and March 31, 2010
(UNAUDITED)
Nine Months Ended April 2, 2011 and March 31, 2010
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 as 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 $4.1 million has
been recorded during the nine months ended April 2, 2011 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 Company will begin
shipping Camuto licensed products in the first quarter of fiscal 2012. 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 ability to sustain such availability 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. The agreements governing our relationship with CIT expire in September 2011. Should
CIT cease funding the Companys operations, or should the Company be unable to renew these
agreements or negotiate similar agreements on acceptable terms, 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. 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
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manner or obtain similarly favorable payment terms. For the fiscal year ended July 3, 2010 and the nine
months ended April 2, 2011, 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. There could be a material adverse effect on the
Companys business, liquidity and financial condition should any of the following occur: a) CIT
ceases its funding of the Companys operations or the Company is unable to renew its agreement with
CIT or obtain similar or acceptable terms during the course of negotiating such renewal; b) CTG
terminates its agreement with the Company or requires a change in the agreements favorable payment
terms; or c) the Company fails to offset the revenue lost as a result of the termination of the KCP
license agreement.
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 nine months ended April 2, 2011 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 April 2, 2011 and March 31, 2010 contained 91 and 90 days,
respectively, and the nine months ended April 2, 2011 and March 31, 2010 contained 273 and 274
days, respectively. The net sales for the additional day in the three and nine months ended March
31, 2010 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.
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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 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 $0.4 million at April 2,
2011, $0.7 million at July 3, 2010, and $0.7 million at March 31, 2010. 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 $2.0 million as of April 2, 2011, $2.2
million as of July 3, 2010 and $2.3 million as of March 31, 2010, 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 $0.4 million at April 2, 2011, $0.5 million
at July 3, 2010 and $0.4 million
at March 31, 2010. 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 and nine months
ended April 2, 2011 and March 31, 2010.
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 April 2, 2011, July 3, 2010 and
March 31, 2010, based upon its evaluation of the Companys
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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 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 income (loss) per share has been computed by dividing the applicable net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings (loss) per share has
been computed by dividing the applicable net income (loss) by the weighted average number of common
shares outstanding. Options to purchase approximately 689,000 and 819,000 shares of common stock
were excluded from the computation of diluted earnings per share for the three and nine months
ended April 2, 2011 and March 31, 2010, respectively, because their exercise prices were greater
than the average market price.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Denominator for earnings (loss) per share (in
millions): |
||||||||||||||||
Denominator for basic earnings (loss) per share: |
||||||||||||||||
weighted-average shares outstanding |
34.5 | 37.5 | 36.5 | 37.5 | ||||||||||||
Assumed exercise of potential common shares |
| | | | ||||||||||||
Denominator for diluted earnings (loss) per share |
34.5 | 37.5 | 36.5 | 37.5 | ||||||||||||
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 was 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
were effective for interim and annual periods ending after December 15, 2010. The adoption of ASU
2010-06 did not have a material impact on the Companys 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
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disclosures about its financing receivables and related allowance for credit losses. ASU
2010-20 was 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 were effective for interim and annual reporting periods beginning on or after
December 15, 2010. The adoption of ASU 2010-20 did not have a material impact on the Companys
consolidated financial statements.
2. Inventories net
April 2, | July 3, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(in thousands) | ||||||||||||
(unaudited) | (*) | (unaudited) | ||||||||||
Raw materials |
$ | 288 | $ | 457 | $ | 543 | ||||||
Work-in-process |
104 | 63 | 213 | |||||||||
Finished goods |
4,843 | 8,326 | 6,069 | |||||||||
Total |
$ | 5,235 | $ | 8,846 | $ | 6,825 | ||||||
* | 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 $1.7
million at April 2, 2011, $4.3 million at July 3, 2010 and $2.6 million at March 31, 2010.
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 April 2, 2011 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
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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 April 2, 2011, the Company had $1.1 million of outstanding letters of credit, total
availability of approximately $1.1 million, and $10.0 million of revolving credit borrowings,
including a short-term extension of $0.3 million (see Notes 7 and 8) under the New Financing
Agreement. On March 31, 2010, the Company had $2.0 million of outstanding letters of credit, total
availability of approximately $5.2 million, and $9.2 million of revolving credit borrowings under
the previous factoring and financing agreement.
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 April 2, 2011, $0.4 million of the
premium is included in accrued expenses and approximately $2.9 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 and nine months ended April 2, 2011 and March 31, 2010, the
Company recognized approximately $0.1 million and $0.3 million, respectively, of income as a
reduction to cost of goods sold. For the nine months ended March 31, 2010, 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 April 2, 2011, amounts owed to
CTG for merchandise approximated $13.2 million and are included in accounts payable.
5. Pension Plan
Components of Net Periodic Benefit Cost
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Service cost |
$ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||
Interest cost |
28 | 28 | 84 | 84 | ||||||||||||
Expected return on plan assets |
(26 | ) | (26 | ) | (78 | ) | (78 | ) | ||||||||
Amortization of net loss |
9 | 20 | 27 | 60 | ||||||||||||
Net periodic benefit cost |
$ | 13 | $ | 24 | $ | 39 | $ | 72 | ||||||||
Employer Contributions
The Company will be required to contribute approximately $25,000 to the pension plan in fiscal
2011.
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:
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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 | ||
7. Treasury Stock
In connection with the KCP Termination Agreement, in January 2011, the Company repurchased 6 million shares of common stock owned by KCP for $0.6 million utilizing a short term extension of credit by CIT. In February 2011, the Company sold 3 million of the repurchased shares to Camuto, a licensor to the Company, for $0.3 million. The proceeds of the sale were used to repay a portion of the short term extension of credit by CIT (see Note 8 below). |
8. Subsequent Event
In May 2011, the Company sold the remaining 3 million repurchased shares in connection with
the KCP Termination Agreement to CTG for $0.3 million. The proceeds of the sale will be used to
repay the remaining balance of the short term extension of credit by CIT noted above.
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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 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 (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, we entered into an
agreement with KCP (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 as the obligation to pay certain promotional,
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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 Company will begin
shipping Camuto licensed products in the first quarter of fiscal 2012. 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. See note
6 for further information.
Exclusive Supply Agreement
In July 2009 we entered into an exclusive supply agreement with China Ting Holdings
Limited (CTG) 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 | For the Nine Months Ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross Profit |
19.1 | % | 29.0 | % | 19.3 | % | 26.5 | % | ||||||||
Selling, general and administrative expenses |
29.9 | % | 28.1 | % | 31.3 | % | 30.3 | % | ||||||||
Accrued gain on early termination of license agreement |
(5.0) | % | | % | (6.0) | % | | % | ||||||||
Interest expense |
0.7 | % | 0.8 | % | 0.8 | % | 0.8 | % | ||||||||
Net income (loss) |
(6.5 | )% | 0.1 | % | (6.9 | )% | (4.7 | )% |
Net revenues for the three months ended April 2, 2011 decreased by 16.2%, or $4.5
million, to $23.3 million from $27.8 million for the three months ended March 31, 2010. Units sold
decreased by approximately 9.9% and the overall price per unit decreased by approximately 7.1%. Our
net revenues decreased in our Chaus product lines of $1.9 million, private label product lines of
$1.6 million, licensed product lines of $0.5 million, and our Cynthia Steffe product lines of $0.5
million. The decrease in the Chaus product line was largely a result of reductions in the off-price
and club channels of distribution. The private label revenue decrease resulted from a reduction of
business with two customers. The KCP license termination agreement has resulted in decreased
revenue in our licensed product line. The decrease in the Cynthia Steffe product line was largely a
result of reductions in the department store channel of distribution.
Net revenues for the nine months ended April 2, 2011 decreased by 6.5%, or $4.7 million, to
$67.9 million from $72.6 million for the nine months ended March 31, 2010. Units sold decreased by
approximately 4.0% and the overall price per unit decreased by approximately 2.6%. Our net revenues
decreased in our Chaus product lines of $3.9 million and private label product lines of $2.4 million, offset partially by increases in our
Cynthia Steffe product lines of $1.5 million and our licensed product lines of $0.1 million. The
decrease in our Chaus product line was largely due to decreases in our off-price and club channels
of distribution. The decrease in private label revenue resulted from a reduction of business with
two customers.
Gross profit for the three months ended April 2, 2011 decreased $3.7 million to $4.4 million
as compared
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to $8.1 million for the three months ended March 31, 2010 as a result of a decrease in
revenues and a decrease in gross profit percentage. The decrease in gross profit was due to
decreases in gross profit in our Chaus product lines of $1.3 million, licensed product lines of
$1.1 million, private label product lines of $0.8 million and in our Cynthia Steffe product lines
of $0.5. As a percentage of sales, gross profit decreased to 19.1% for the three months ended April
2, 2011 from 29.0% for the three months ended March 31, 2010. The decrease in gross profit
percentage was reflected across all channels of distribution, due to rising costs for raw materials
and labor in Asia combined with lower average selling prices.
Gross profit for the nine months ended April 2, 2011 decreased $6.1 million to $13.1 million
as compared to $19.2 million for the nine months ended March 31, 2010 as a result of a decrease in
revenues and a decrease in gross profit percentage. The decrease in gross profit was due to the
decrease in gross profit in our licensed product lines of $2.5 million, Chaus product lines of $2.2
million, private label product lines of $1.2 million, and our Cynthia Steffe product lines of $0.2.
Gross profit for the nine months ended March 31, 2010 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 Note 4 for more information. As a percentage
of sales, gross profit decreased to 19.3% for the nine months ended April 2, 2011 from 26.5% for
the nine months ended March 31, 2010. The decrease in gross profit percentage was reflected across
all channels of distribution, due to rising costs for raw materials and labor in Asia combined with
lower average selling prices.
Selling, general and administrative (SG&A) expenses decreased by $0.8 million to $7.0
million for the three months ended April 2, 2011 from $7.8 million for the three months ended March
31, 2010. As a percentage of net revenue, SG&A expenses increased to 29.9% for the three months
ended April 2, 2011 compared to 28.1% for the three months ended March 31, 2010. The decrease in
SG&A expenses for the three months ended April 2, 2011, was the result of decreases in marketing
and advertising expenses of $0.3 million, warehouse expenses of $0.3 million, and payroll and
payroll related expenses of $0.2 million. The increase in SG&A as a percentage of net revenue was
due to the overall decrease in sales volume which decreased our leverage on SG&A expenses.
SG&A expenses decreased by $0.7 million to $21.3 million for the nine months ended April 2,
2011 from $22.0 million for the nine months ended March 31, 2010. As a percentage of net revenue,
SG&A expenses increased to 31.3% for the nine months ended April 2, 2011 compared to 30.3% for the
nine months ended March 31, 2010. The decrease in SG&A expenses for the nine months ended April 2,
2011, was a result of decreases in marketing and advertising expenses of $0.3 million, payroll and
payroll related expenses of $0.2 million, warehouse expenses of $0.1 million, facilities expenses
of $0.1 million, communications expenses of $0.1 million and reductions in other categories of $0.2
million were offset by an increase in professional fees and consulting fees of $0.3 million. The
increase in SG&A as a percentage of net revenue was due to the overall decrease in sales volume
which decreased our leverage on SG&A expenses.
Accrued gain on early termination of the KCP License Agreement was $1.2 million and $4.1
million for the three and nine months ended April 2, 2011, respectively. This gain is based on
sales to certain customers as defined in the KCP Termination Agreement.
Interest expense was approximately $0.2 million in each of the three months ended April 2,
2011 and March 31, 2010. Interest expense was approximately $0.5 million and $0.6 million for the
nine months ended April 2, 2011 and March 31, 2010, respectively, due to the elimination of the
unused line fees, offset by higher interest rates in connection with our New Financing Agreement
entered into in March 2010.
Our income tax provision for the three and nine months ended April 2, 2011 and March 31, 2010
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 April 2, 2011 and March 31, 2010, 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
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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 carry-forward.
Financial Position, Liquidity and Capital Resources
General
Net cash provided by operating activities was $1.8 million for the nine months ended April 2,
2011 as compared to net cash used in operating activities of $6.2 million for the nine months ended
March 31, 2010. Net cash provided by operating activities for the nine months ended April 2, 2011
resulted primarily from a decrease in accounts receivable- factored of $4.9 million, inventories of
$3.6 million, which was partially offset by a net loss of $4.7 million, a decrease in accrued
expenses and long term liabilities of $1.1 million, and an increase in prepaid expenses and other
assets of $0.8 million. The decrease in accounts receivable-factored of $4.9 million was due to the
reduction of sales for the three months ended April 2, 2011 as compared to the three months ended
July 3, 2010. Net cash used in operating activities for the nine months ended March 31, 2010
resulted primarily from a net loss of $3.4 million, an increase in accounts receivable factored
of $8.5 million, an increase in accounts receivable non-factored of $1.6 million, and an increase
in inventories of $3.0 million, which were partially offset by an increase in accounts payable of
$9.9 million and accrued expenses and long term liabilities of $0.4 million.
Cash used in investing activities for the nine months ended April 2, 2011 was $304,000
compared to $464,000 in the previous year. The purchases of fixed assets for the nine months ended
April 2, 2011 consisted primarily of management information system upgrades.
Net cash used in financing activities of $1.5 million for the nine months ended April 2, 2011
was primarily the result of net repayments of short-term bank borrowings and the net effect of our
treasury stock transactions of $0.3 million whereby we repurchased 6 million shares of common stock
owned by KCP and sold 3 million of these shares to Camuto. Net cash provided by financing
activities of $6.6 million for the nine months ended March 31, 2010 was primarily the result of net
proceeds from short-term bank borrowings of $2.6 million and proceeds from the CTG supply premium
of $4.0 million.
Following the end of the third quarter, on May 3, 2011, we sold the remaining 3 million shares
repurchased from KCP to CTG and repaid the remaining balance of the short term extension of credit
by CIT (see below).
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,
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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 April 2, 2011 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 April 2, 2011, the Company had $1.1 million of outstanding letters of credit, total
availability of approximately $1.1 million, and $10.0 million of revolving credit borrowings under
the New Financing Agreement. The revolving credit borrowings at April 2, 2011 include the
remaining $0.3 million of a short-term extension from CIT to repurchase common stock from KCP.
This $0.3 million was repaid in May 2011 following the Companys sale of the 3 million shares of
repurchased common stock to CTG . On March 31, 2010, the Company had $2.0 million of outstanding
letters of credit, total availability of approximately $5.2 million, and $9.2 million of revolving
credit borrowings under the previous factoring and financing agreement.
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 April 2, 2011, we had a working capital deficit of $7.5 million as compared with
working capital of $0.4 million at March 31, 2010. 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 ability to sustain such availability 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 and these agreements
mature in September 2011. Should CIT cease funding our operations, or should we be unable to renew
these agreements or obtain similar or acceptable terms during the course of negotiating such
renewal, 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 and the nine months ended April 2, 2011, 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
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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 $0.4 million at April 2, 2011, $0.7 million at July 3, 2010, and $0.7 million at March
31, 2010. 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 $2.0 million as of April 2, 2011, $2.2 million as
of July 3, 2010 and $2.3 million as of March 31, 2010 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 and record inventory when the
merchandise is received 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 $0.4 million at April 2, 2011, $0.5 million at July 3,
2010, and $0.4 million at March 31, 2010. 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 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 and nine months ended April 2, 2011 or March 31, 2010.
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 April 2, 2011, 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 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
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BERNARD CHAUS, INC. AND SUBSIDIARIES
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 April 2, 2011 and March 31, 2010, the carrying amounts of our revolving credit borrowings
approximated fair value. As of April 2, 2011, our revolving credit borrowings bore interest at a
rate of 6.25%. As of April 2, 2011, 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 Interim
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 (CEO), along with the Companys Interim Chief 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 April 2, 2011, our internal controls over
financial reporting were effective.
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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 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.
On January 21, 2011, the Company repurchased 6 million shares of its common stock from Kenneth Cole
Productions for $0.6 million. On February 9, 2011 the Company sold 3 million shares of its common
stock to Camuto Consulting, Inc. pursuant to an exemption from registration contained in Section
4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits (filed herewith)
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 Interim 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 William P. Runge, Interim 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: May 17, 2011 | By: | /s/ Josephine Chaus | ||
JOSEPHINE CHAUS | ||||
Chairwoman of the Board, and Chief Executive Officer |
||||
Date: May 17, 2011 | By: | /s/ William P.Runge | ||
William P. Runge | ||||
Interim 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 Interim 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 William P. Runge, Interim Chief Financial Officer of
Bernard Chaus, Inc. |
22