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EX-21 - EX-21 - CHAUS BERNARD INC | y05207exv21.htm |
EX-31.1 - EX-31.1 - CHAUS BERNARD INC | y05207exv31w1.htm |
EX-32.1 - EX-32.1 - CHAUS BERNARD INC | y05207exv32w1.htm |
EX-23.1 - EX-23.1 - CHAUS BERNARD INC | y05207exv23w1.htm |
EX-31.2 - EX-31.2 - CHAUS BERNARD INC | y05207exv31w2.htm |
EX-32.2 - EX-32.2 - CHAUS BERNARD INC | y05207exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended July 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 | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
530 Seventh Avenue, New York, New York | 10018 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code
(212) 354-1280
(212) 354-1280
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | None; securities quoted on the Over the Counter Bulletin Board |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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). o Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant on December 31, 2010 was $2,610,169.
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
Date | Class | Shares Outstanding | ||
September 30, 2011 | Common Stock, $0.01 par value | 37,481,373 |
Documents Incorporated by Reference
Portions of the Registrants Proxy Statement related to its 2011 Annual Meeting of Stockholders, to
be filed pursuant to Regulation 14A within 120 days after Registrants fiscal year end, are
incorporated by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business.
General
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 upscale contemporary womens apparel lines sold
through department stores and specialty stores. The Companys private label product lines are
designed and sold to various customers. 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 began shipping Camuto licensed products in June 2011. 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.
The Company had a license agreement (the KCP License Agreement) with Kenneth Cole
Productions, Inc. (KCP) to manufacture and sell womens sportswear under various labels. On
October 19, 2010, the Company entered into an agreement with KCP (the KCP Termination Agreement)
pursuant to which the license agreement terminated on June 1, 2011. Under the KCP Termination
Agreement, the Company was 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 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 based
on sales to certain customers through June 1, 2011, as specified in the agreement.
Unless the context otherwise requires, the terms Company, we, us and our refer to
Bernard Chaus, Inc. As used herein, fiscal 2011 refers to the fiscal year ended July 2, 2011 and
fiscal 2010 refers to the fiscal year ended July 3, 2010.
Bernard Chaus, Inc. is a New York corporation incorporated on April 11, 1975 with its
principal headquarters located on Seventh Avenue in New York City, New York.
Recent Developments
As stated above, the Company began shipment of Camuto licensed products pursuant to the Camuto
License Agreement in June 2011.
We are currently in negotiations with one of our suppliers, China Ting Group Holdings Limited
(CTG), to convert approximately $12 million of debt owed by the Company to CTG from accounts
payable into two interest-bearing term loans with initial terms of two years and five years.
On March 29, 2010, we entered into an amended and restated financing and factoring agreement
with our lender, CIT Group/Commercial Services, Inc. (CIT) (the New Financing Agreement), which
amended and restated the previous factoring and financing agreement. The New Financing Agreement
has an original maturity of September 30, 2011 with automatic annual extensions to September
30th (Anniversary Date) unless terminated by CIT with at least sixty days written
notice before the Anniversary Date. No such termination notice has been received by the Company
from CIT. The Company is
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currently in discussions with CIT about a new or amended financing agreement that would, among
other things, permit the conversion of the accounts payable owed to CTG into a secured term
obligation.
On September 15, 2011, the Company received a cash merger proposal from Camuto pursuant to
which shareholders other than members of the Chaus family, CTG and Camuto would receive $0.13 per
share. The proposal is subject to a number of conditions including, among other things, the
negotiation and execution of definitive agreements, the approval of the transaction by Chaus Board
and shareholders, the receipt of a fairness opinion, the approval of the transaction by the Boards
of Camuto and CTG, the conversion of certain amounts owed by Chaus to CTG into term loans and the
entry by Chaus into a new financing agreement with CIT on terms satisfactory to all parties. The
proposal from Camuto must be approved by 2/3 of the Companys shareholders and is currently being
considered by the Companys independent directors, assisted by legal and financial advisers.
On September 29, 2011, the Company
was served with a summons and complaint in connection with a purported shareholder class action lawsuit relating to the
Camuto proposal. The lawsuit was filed in the Supreme Court of the State of New York and alleges, among other things,
breach of fiduciary duties by certain current and prior directors of the Company. The Company has not yet responded
to the complaint.
There can be no assurance that the negotiations discussed in this section between the Company
and CTG and the Company and CIT will be successful. Also, the proposal received from Camuto on
September 15, 2011 is only a proposal and has not yet been fully considered by the Board of
Directors of the Company nor approved by the shareholders of the Company. There is no assurance
that any transactions or agreements contemplated by the Camuto proposal or the negotiations with
CTG and CIT will take place or be entered into by the Company.
Products
We market our products as coordinated groups as well as separate items of jackets, skirts,
pants, blouses, sweaters and related accessories principally under the following brand names that
also include products for women and petite sizes:
Chaus and Josephine Chaus collections of better career and casual clothing as well as separate
items that include jackets, pants, skirts, knit tops, sweaters, and dresses.
Cynthia Steffe and Cynthia Cynthia Steffe a collection of upscale contemporary
clothing that includes tailored suits, dresses, jackets, skirts and pants.
Kenneth Cole a better sportswear line focused on a contemporary customer. Under the
KCP License Agreement that terminated on June 1, 2011, the Company had an exclusive license to
design, manufacture, sell and distribute womens sportswear under KCPs trademark KENNETH COLE
REACTION and KENNETH COLE NEW YORK (cream label) in the United States in the womens better
sportswear and better petite sportswear department of approved department stores and approved
specialty retailers and UNLISTED and UNLISTED, A KENNETH COLE PRODUCTION brands.
Vince Camuto a collection of womens sportswear and ready-to-wear apparel. Under the Camuto
License Agreement, the Company has 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 began shipping Camuto licensed products in June 2011.
Private Label private label apparel manufactured according to customers specifications.
During fiscal 2011, the suggested retail prices of the majority of our Chaus products sold in
the department store channels ranged in price between $29.00 and $99.00. Jackets ranged in price
between $79.00 and $99.00, skirts and pants ranged in price between $49.00 and $69.00, and knit
tops, blouses and sweaters ranged in price between $29.00 and $79.00.
During fiscal 2011, the suggested retail prices of the majority of our Cynthia Steffe products
ranged in price between $75.00 and $595.00. Jackets ranged in price between $295.00 and $595.00,
skirts and pants ranged in price between $95.00 and $195.00, blouses and sweaters ranged in price
between $95.00 and $195.00 and dresses ranged in price between $225.00 and $595.00.
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During fiscal 2011, the suggested retail prices of the majority of our Kenneth Cole New York
products ranged in price between $39.00 and $299.00. Jackets ranged in price between $99.00 and
$299.00, skirts and pants ranged in price between $69.00 and $89.00, knit tops, blouses, and
sweaters ranged in price between $39.00 and $99.00, and dresses ranged in price between $99.00 and
$139.00.
While the Vince Camuto product line was not available in retail stores during fiscal 2011, the
suggested retail prices of the majority of these products will generally range between $39.00 and
$195.00. Knit tops, blouses, and sweaters range in price between $39.00 and $165.00, jackets range
in price between $150.00 and $195.00, skirts and pants range in price between $69.00 and $125.00,
and dresses range in price between $99.00 and $165.00.
The following table sets forth a breakdown by percentage of our net revenue by class for
fiscal 2011 and 2010:
Fiscal Year Ended | ||||||||
2011 | 2010 | |||||||
Josephine Chaus and Chaus |
21 | % | 23 | % | ||||
Private Labels |
11 | 14 | ||||||
Licensed Products |
55 | 52 | ||||||
Cynthia Steffe and Cynthia Cynthia Steffe |
13 | 11 | ||||||
Total |
100 | % | 100 | % | ||||
Business Segments
We operate in one segment, womens career and casual sportswear. Less than 3% of total
revenue is derived from customers outside the United States. Substantially all of our long-lived
assets are located in the United States. Financial information about this segment can be found in
our consolidated financial statements, which are included herein,
commencing on page F-1.
Customers
Our products are sold nationwide in an estimated 4,500 points of distribution operated by
approximately 400 department store chains, specialty retailers and other retail outlets. We do not
have any long-term commitments or contracts with any of our customers.
During fiscal 2011, approximately 27% of our net revenue was from two corporate entities
TJX Companies (14%) and Dillards Department Stores (13%). During fiscal 2010, approximately 38% of
our net revenue was from three corporate entities TJX Companies (14%), Dillards Department
Stores (13%) and Nordstrom (11%). As a result of our dependence on our major customers, such
customers may have the ability to influence our business decisions. The loss of or significant
decrease in business from any of our customers could have a material adverse effect on our
financial position and results of operations. In addition, our ability to achieve growth in
revenues is dependent, in part, on our ability to identify new distribution channels.
Sales and Marketing
Our selling operation is highly centralized. Sales to our store customers are made primarily
by our full time sales executives located in our New York City showrooms. Our Cynthia Steffe
subsidiary also utilizes independent sales representatives and distributors to market our products
to specialty stores throughout the United States and internationally.
Products are marketed to department and specialty store customers during market weeks,
generally four to five months in advance of each of our selling seasons. We assist our customers in
allocating their purchasing budgets among the items in the various product lines to enable
consumers to view the full range of our offerings in each collection. During the course of the
retail selling seasons, we monitor our product sell-through at retail in order to directly assess
consumer response to our products.
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We emphasize the development of long-term customer relationships by consulting with our
customers concerning the style and coordination of clothing purchased by the store, optimal
delivery schedules, floor presentation, pricing and other merchandising considerations. Frequent
communications between senior management and other sales personnel and their counterparts at
various levels in the buying organizations of our customers is an essential element of our
marketing and sales efforts. These contacts allow us to closely monitor retail sales volume to
maximize sales at acceptable profit margins for both us and our customers. Our marketing efforts
attempt to build upon the success of prior selling seasons to encourage existing customers to
devote greater selling space to our product lines and to penetrate additional individual stores
within existing customers. We discuss with our largest customers retail trends and their plans
regarding anticipated levels of total purchases from us for future seasons. These discussions are
intended to assist us in planning the production and timely delivery of our products.
Design
Our products and certain of the fabrics from which they are made are designed by in-house
staff based in our New York office. We believe that our design staff is well regarded for its
distinctive styling capabilities and ability to contemporize fashion classics. Where appropriate,
emphasis is placed on the coordination of outfits and quality of fabrics to encourage the purchase
of more than one garment.
Manufacturing and Distribution
We do not own any manufacturing or distribution facilities; all of our products are
manufactured in accordance with our design specifications and production schedules through
arrangements with independent manufacturers and we utilize third party distribution centers in New
Jersey and California for shipping of our finished goods.
We believe that outsourcing our manufacturing maximizes our flexibility while avoiding
significant capital expenditures, work-in-process buildup and the costs of a large workforce. For
the year ended July 2, 2011, approximately 96% of our product was manufactured in China and
elsewhere in the Far East and approximately 4% of our product was manufactured in the United
States. During fiscal 2011, we purchased approximately 98% of our finished goods from our ten
largest manufacturers, including approximately 69% of our purchases from our largest manufacturer,
CTG. As of July 2, 2011 except as discussed below for our exclusive supply agreement, no
contractual obligations exist between us and our manufacturers except on an order-by-order basis.
As of July 2, 2011 we no longer produce products domestically.
Our technical production support staff coordinates the production of patterns and the
production of samples from the patterns by its production staff and by overseas manufacturers. The
production staff also coordinates the marking and the grading of the patterns in anticipation of
production by overseas manufacturers. The overseas manufacturers produce finished garments in
accordance with the production samples and obtain necessary quota allocations and other requisite
customs clearances.
We select a broad range of fabrics in the production of our clothing, consisting of synthetic
fibers (including polyester and acrylic), natural fibers (including cotton and wool) and blends of
natural and synthetic fibers which are purchased by our manufacturers. During fiscal 2011, most of
the fabrics used in our products manufactured in the Far East were produced by a limited number of
suppliers located in the Far East. To date, our manufacturers have not experienced any significant
difficulty in obtaining fabrics or other raw materials and we consider our sources of supply to be
adequate.
We operate under substantial time constraints in producing each of our collections. Orders
from our customers generally precede the related shipping period by up to four months. In order to
make timely delivery of merchandise which reflects current style trends and tastes, we attempt to
schedule a substantial portion of our fabric and manufacturing commitments relatively late in a
production cycle. However, in order to secure adequate amounts of quality raw materials, especially
greige (i.e., undyed) goods, we must make some advance commitments to suppliers of such goods.
Many of these early commitments are made subject to changes in colors, assortments and/or delivery
dates.
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Exclusive Supply Agreement
In July 2009 we entered into an exclusive supply agreement with CTG. This agreement expands
the long standing relationship we have had with CTG. CTG is a vertically integrated garment
manufacturer, exporter and retailer with headquarters in Hong Kong and principal garment
manufacturing facilities in Hangzhou, China. CTG became the exclusive supplier of substantially all
merchandise purchased by us in Asia beginning with our Spring 2010 line (product shipping in
January 2010 to our customers) in addition to providing sample making and production supervision
services. CTG is responsible for manufacturing product according to our specifications. As part of
this agreement, CTG assumed the responsibilities previously managed by our Hong Kong office and the
majority of the staff that worked at our Hong Kong office transferred to CTG and continue to manage
these functions under CTGs supervision.
Imports and Import Restrictions
Arrangements with our manufacturers and suppliers are subject to the risks attendant to doing
business abroad, including the availability of quota and other requisite customs clearances, the
imposition of export duties, political and social instability, currency revaluations and
restrictions on the transfer of funds. Until January 2005 our textile apparel was subject to quotas
that restrict the amount of certain categories of merchandise that may be exported and imported
between countries. On January 1, 2005 pursuant to the Agreement on Textile and Clothing, quotas
were eliminated for World Trade Organization (WTO) member countries, including the United States.
Although quotas were eliminated, Chinas accession agreement for membership in the WTO provides
that the WTO member countries, including the United States, reserve the right to impose quotas or
other penalties if such country determines that imports from China have surged and caused a market
disruption. No such quotas have been imposed to date.
The United States and the countries in which our products are manufactured may, from
time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust
presently prevailing quotas, duty or tariff levels, with the result that our operations and our
ability to continue to import products at current or increased levels could be adversely affected.
We cannot predict the likelihood or frequency of any such events occurring. We monitor duty and
tariff developments, and continually seek to minimize our potential exposure to duty and tariff
risks through, among other measures, geographical diversification of our manufacturing sources,
allocation of production of merchandise categories where more quota is available and shifts of
production among countries and manufacturers. The diversification in the past few years of our
varied manufacturing sources and the variety of countries in which we have potential manufacturing
arrangements, although not the result of specific import restrictions, have had the result of
reducing the potential adverse effect of any increase in such restrictions. In addition,
substantially all of our products are subject to United States customs duties. Due to the large
portion of our products which are produced abroad, any substantial disruption of our foreign
suppliers could have a material adverse effect on our operations and financial condition.
Backlog
As of September 23, 2011 and September 21, 2010 our order book reflected unfilled customer
orders for approximately $31.2 million and $34.3 million of merchandise, respectively. Order book
data at any date are materially affected by the timing of the initial showing of collections to the
market, as well as by the timing of recording of orders and of shipments. The order book
represents customer orders prior to discounts. Accordingly, a comparison of unfilled orders from
period to period is not necessarily meaningful and may not be indicative of eventual actual
shipments.
Trademarks
CHAUS, CHAUS & CO., JOSEPHINE, JOSEPHINE CHAUS, JOSEPHINE STUDIO, CYNTHIA STEFFE, CYNTHIA
CYNTHIA STEFFE and FRANCES & RITA are registered trademarks of the Company for wearing apparel. We
consider our trademarks to be strong and highly recognized and to have significant value in the
marketing of our products. We
also registered and made filings for many of our trademarks for use in other categories
including accessories, fragrances, cosmetics and related retail selling services in certain foreign
countries, including countries in Asia and the European Union.
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We have an exclusive license with Camuto 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 began shipping Camuto licensed products in June 2011.
The Company had a license agreement with KCP to manufacture and sell womens sportswear under
various labels, which terminated as of June 1, 2011.
Competition
The womens apparel industry is highly competitive, both within the United States and abroad.
We compete with many apparel companies, some of which are larger and have better established brand
names and greater resources. A greater number of competitors have been making branded products
available to various channels of distribution, increasing our competition. In some cases we also
compete with private label brands of our department store customers.
We believe that our ability to effectively anticipate, gauge and respond to changing consumer
demand and taste relatively far in advance, as well as our ability to operate within substantial
production and delivery constraints is necessary to compete successfully in the womens apparel
industry. Consumer and customer acceptance and support, which depend primarily upon styling,
pricing, quality (both in material and production) and product branding, are also important
aspects of competition in this industry. We believe that our success will depend upon our ability
to remain competitive in these areas.
Furthermore, our traditional department store customers, which account for a substantial
portion of our business, encounter intense competition from off-price and discount retailers, mass
merchandisers and specialty stores. We believe that our ability to increase our present levels of
sales will depend on such customers ability to maintain their competitive position and our ability
to increase market share of sales to department stores and other retailers.
Employees
As of July 2, 2011, we employed 76 employees as compared with 90 employees as of July 3, 2010.
This total includes 20 in managerial and administrative positions, approximately 39 in design,
production and production administration and 17 in marketing, merchandising and sales. We are party
to an agreement with Workers United covering 4 fulltime employees. This agreement expired on
September 1, 2011 and we are in discussions regarding renewal terms.
We consider relations with our employees to be satisfactory and have not experienced any
business interruptions as a result of labor disagreements with our employees.
Executive Officers
The executive officers of the Company are:
NAME | AGE | POSITION | ||||
Josephine Chaus
|
60 | Chairwoman of the Board and Chief Executive Officer | ||||
William P. Runge
|
57 | Interim Chief Financial Officer |
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus is a co-founder of the Company and has held various positions with the Company
since its inception. She has been a director of the Company since 1977, President from 1980
through February 1993, Chief Executive Officer from July 1991 through September 1994 and again
since December 1998, Chairwoman of the Board since 1991 and member of the Office of the Chairman
since September 1994.
William P. Runge has been the Companys Director of Financial Planning and Control
since joining the Company in March 2009. Prior to joining the Company, from 1988 until 2008, Mr.
Runge held positions of increasing responsibility with Popular Club Plan, Inc., a club-based
multi-channel retailer of apparel and home store merchandise, and was its Vice President-Finance
from 2004 until 2008.
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Forward Looking Statements
Certain statements contained herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
that have been made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are indicated by words or phrases such as anticipate,
estimate, project, expect, believe, may, could, would, plan, intend and similar
words or phrases. Such statements are based on current expectations and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the overall level of consumer
spending on apparel; the financial strength of the retail industry, generally and our customers in
particular; changes in trends in the market segments in which we compete and our ability to gauge
and respond to changing consumer demands and fashion trends; the level of demand for our products;
our dependence on our major department store customers; the success of the Vince Camuto license
agreement; the highly competitive nature of the fashion industry; our ability to satisfy our cash
flow needs by meeting our business plan; our ability to operate within production and delivery
constraints, including the risk of failure of manufacturers and our exclusive supplier to deliver
products in a timely manner or to quality standards; our ability to meet the requirements of the
Vince Camuto license agreement; our ability to operate effectively in the new quota environment,
including changes in sourcing patterns resulting from the elimination of quota on apparel products;
our ability to attract and retain qualified personnel; and changes in economic or political
conditions in the markets where we sell or source our products, including war and terrorist
activities and their effects on shopping patterns, as well as other risks and uncertainties set
forth in the Companys publicly-filed documents, including this Annual Report on Form 10-K. 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. We
disclaim any intention or obligation to update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise.
Item 1A. Risk Factors.
We rely on a few significant customers, so the decrease in business from one or more of these
significant customers could have a material adverse impact on our business. During fiscal 2011,
approximately 27% of our net revenue was from two corporate entities TJX Companies (14%) and
Dillards Department Stores (13%). We have no long- term agreements with our customers and a
decision by any of these key customers to reduce the amount of purchases from us whether motivated
by strategic and operational initiatives or financial difficulties could have a material adverse
impact on our business, financial condition and results of operations. Continued vertical
integration by retailers and the development of their own labels could also result in a decrease in
business which could have a material adverse impact on us.
We must remain competitive by our ability to adequately anticipate market trends, respond to
changing fashion trends and consumer buying patterns. Fashion trends can change rapidly, and our
business is sensitive to such changes. We must effectively anticipate, gauge and respond to
changing consumer demand and taste relatively far in advance of delivery to the consumer. There can
be no assurance that we will accurately anticipate shifts in fashion trends to appeal to changing
consumer tastes in a timely manner. Consumer and customer acceptance and support, which depend
primarily upon styling, pricing and quality, are important to remain competitive. If we are
unsuccessful in responding to changes in fashion trends, our business, financial condition and
results of operations will be materially adversely affected.
CTG supplies us with the majority of our products on favorable payment terms. In the event CTG
terminates its agreement with us or requires a change in the payment terms, it could have a
material adverse effect on our business. In July 2009, we entered into an exclusive supply
agreement with CTG. In fiscal 2011, purchases from CTG accounted for 69% of our product purchases
and we expect this percentage to increase in fiscal 2012 and beyond. Should CTG terminate this
agreement with us or require a change in the payment terms, we may be unable to locate alternative
suppliers in a timely manner or obtain
similarly favorable payment terms. As a result, any termination of this agreement or change in the
favorable payment terms could have a material adverse effect on our business.
We rely on our lender
CIT to borrow money in order to fund our operations. We rely on CIT,
which is the sole source of our financing, to borrow money in order to fund our operations as well
as to provide credit and collection services to our business. Our borrowings from CIT are based on
the sufficiency of our assets and are at the discretion of CIT. If we do not maintain sufficient
assets, CIT can choose to cease funding our business. While we believe we could obtain alternative
financing
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we may not have sufficient cash flow from operations to meet our liquidity needs.
Therefore, any decision by CIT to cease funding our business could have a material adverse effect
on our business, liquidity and financial condition.
We use foreign suppliers for the manufacturing of our products and in July 2009 we entered
into an exclusive supply agreement with one of our major manufacturers CTG. We do not own any
manufacturing facilities and CTG is our exclusive supplier of substantially all product we purchase
in Asia/China. CTG is responsible for the manufacturing of our products in accordance with our
design specifications and production schedules. Consistent with fiscal 2011 and 2010,we expect in
the future that over 95% of our products will be manufactured in Asia, substantially all of which
will be sourced through CTG. The inability of a manufacturer or the inability of CTG to ship
orders in a timely manner in accordance with our specifications could have a material adverse
impact on us. Our customers could refuse to accept deliveries, cancel orders, request significant
reductions in purchase price or vendor allowances. We believe that CTG has the resources to
manufacture our products in accordance with our specifications and delivery schedules. In the event
CTG is unable to meet our requirements and/or our agreement is to terminate, we believe that we
would have the ability to develop, over a reasonable period of time, adequate alternate
manufacturing sources. However, there can be no assurance that we would find alternate
manufacturers of finished goods on satisfactory terms to permit us to meet our commitments to our
customers on a timely basis. In such event, our operations could be materially disrupted,
especially over the short-term.
There are other risks associated with using foreign manufacturers such as:
| Political and labor instability in foreign countries | ||
| Terrorism, military conflict or war | ||
| Changes in quotas, duty rates or other politically imposed restrictions by China and other foreign countries or the United States | ||
| Delays in the delivery of cargo due to security considerations or other shipping disruptions | ||
| A decrease in availability or increase in the cost of raw materials |
The success of our Vince Camuto licensed products depends on the value of the licensed brands
and our achieving sufficient sales to offset the minimum royalty payments and advertising amounts
that we must pay with respect to these products. The success of our Vince Camuto licensed
products depends on the value of the Vince Camuto brand name. Our sales of these products could
decline if Vince Camutos image or reputation were to be negatively impacted. If sales of our Vince
Camuto licensed products decline, our profitability and earnings could be negatively affected
because we would remain obligated to pay minimum royalties and advertising amounts. Under the
Camuto License Agreement we are required to pay certain minimum royalties and advertising costs and
to expend a minimum amount each quarter on marketing. If we fail to make the minimum payments,
Camuto will have the right to terminate the license agreement. If Camuto were to terminate the
license agreement, our revenues would decrease.
We operate in a highly competitive industry. The apparel business is highly competitive with
numerous apparel designers, manufacturers and importers. Many of our competitors have greater
financial and marketing resources than we do and, in some cases, are vertically integrated, owning
and operating retail stores in addition to distributing on a wholesale basis. The competition
within the industry may result in reduced prices and therefore reduced sales and profitability of
the Companys product lines, which could have a material adverse effect on us.
Further consolidation in the retail industry could have a material adverse impact on our
business. The retail industry has experienced an increase in consolidation over the past few years
particularly with the merger of Federated Department Stores and May Department Stores. Mergers of
these types further reduce the number of customers for our products and increase the bargaining
power of these stores which could have a material adverse impact on our sales and profitability.
Risks associated with the ownership of Common Stock. As of July 2, 2011, our Chairwoman and
Chief Executive Officer owned approximately 50.2% of our outstanding stock. Accordingly, she has
the ability to exert significant influence over our management and policies, such as the election
of our directors, the appointment of new management and the approval of any other action requiring
the approval of our stockholders, including any amendments to our certificate of incorporation, a
sale of all or substantially all of our assets or a merger.
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We will be subject
to cyclical variations in the apparel markets. The apparel industry
historically has been subject to substantial cyclical variations. We and other apparel vendors
rely on the expenditure of discretionary income for most, if not all, sales. Downturns in economic
conditions or prospects, whether real or perceived, could adversely affect consumer spending habits
and, therefore, have a material adverse effect on our revenue, cash flow and results of operations.
Our success is dependent upon our ability to attract new and retain existing key personnel.
Our operations will also depend to a great extent on our ability to attract new key personnel with
relevant experience and retain existing key personnel in the future. The market for qualified
personnel is extremely competitive. Our failure to attract additional qualified employees could
have a material adverse effect on our prospects for long-term growth.
Our success is dependent on consumer
demand and economic conditions stabilizing. Our
operations are dependent on consumer demand for our products and the stabilization of the economic
climate. If the economic environment were to deteriorate consumer demand for our products may be
affected, thus having an adverse impact on our operations.
Item 2. Properties.
Our principal executive office is located at 530 Seventh Avenue in New York City, where the
Company leases approximately 33,000 square feet. This lease will expire in May 2019. This
facility also houses our Chaus and Vince Camuto showrooms and our sales, design, production,
merchandising, administrative, finance personnel and computer operations.
Our Cynthia Steffe subsidiary is located at 550 Seventh Avenue in New York City, where we
lease approximately 12,000 square feet. This lease expires in October 2013.
We had a sublease for approximately 14,000 square feet located at 65 Enterprise Ave. South,
Secaucus, New Jersey for use by our administrative and finance personnel and our computer
operations. We have closed this office as of December 2009 and terminated this lease.
We had a lease for approximately 8,500 square feet in Hong Kong. We have closed this office as
of December 2009 and have terminated this lease.
Item 3. Legal Proceedings.
We are involved in legal proceedings from time to time arising out of the ordinary course of
business. We believe that the outcome of these proceedings in the aggregate will not have a
material adverse effect on our financial condition, results of operations or cash flows.
On September 29, 2011, the Company
was served with a summons and complaint in connection with a purported shareholder class action lawsuit relating to the
Camuto proposal. The lawsuit was filed in the Supreme Court of the State of New York and alleges, among other things,
breach of fiduciary duties by certain current and prior directors of the Company. The Company has not yet responded
to the complaint.
Item 4. Removed and Reserved
PART II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our common stock, par value $0.01 per share (the Common Stock), is currently traded in the
over the counter market and quotations are available on the Over the Counter Bulletin Board (OTC
BB: CHBD).
The following table sets forth for each of the Companys fiscal periods indicated the high and
low bid prices for the Common Stock as reported on the OTC BB. These prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
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High | Low | |||||||||
Fiscal 2010
|
First Quarter | $ | 0.20 | $ | 0.12 | |||||
Second Quarter | 0.29 | 0.19 | ||||||||
Third Quarter | 0.29 | 0.10 | ||||||||
Fourth Quarter | 0.15 | 0.01 | ||||||||
Fiscal 2011
|
First Quarter | $ | 0.17 | $ | 0.06 | |||||
Second Quarter | 0.23 | 0.05 | ||||||||
Third Quarter | 0.17 | 0.10 | ||||||||
Fourth Quarter | 0.16 | 0.10 |
As of September 29, 2011, we had approximately 386 stockholders of record and our shares were
trading on the OTC at a price of approximately $0.15.
We have not declared or paid cash dividends or made other distributions on the Common Stock
since prior to our 1986 initial public offering. The payment of dividends, if any, in the future
is within the discretion of the Board of Directors and will depend on our earnings, capital
requirements and financial condition. It is the present intention of the Board of Directors to
retain all earnings, if any, for use in our business operations and, accordingly, the Board of
Directors does not expect to declare or pay any dividends in the foreseeable future. In addition,
our Financing Agreements prohibit the Company from declaring dividends or making other
distributions on our capital stock without the consent of the lender. See Managements Discussion
and Analysis of Financial Condition and Results of Operations Financial Condition, Liquidity and
Capital Resources.
On February 9, 2011, the Company and Camuto entered into a Subscription Agreement pursuant to
which Camuto purchased from the Company three million (3,000,000) shares of Common Stock for a
purchase price of three hundred thousand dollars ($300,000). These shares were sold in a private
placement in reliance upon the exemption from registration provisions of the Securities Act of
1933, as amended, contained in Section 4(2) of the Securities Act. To support such exemption, the
Company received representations from Camuto as to its status as an accredited investor within
the meaning of Rule 501(a) of Regulation D of the Securities Act and its acquisition of such shares
for investment purposes only and not with a view to any distribution in violation of the Securities
Act or the rules or regulations thereunder. Any certificate representing these shares will contain
a legend to the effect that such shares are not registered under the Securities Act and may not be
transferred except pursuant to a registration which has become effective under the Securities Act
or pursuant to an exemption from such registration.
On April 29, 2011, the Company entered into a Subscription Agreement pursuant to which CTG
purchased from the Company three million (3,000,000) shares of Common Stock for a purchase price of
three hundred thousand dollars ($300,000). These shares were sold in a private placement in
reliance upon the exemption from registration provisions of the Securities Act
of 1933, as amended (the Securities Act), contained in Section 4(2) of the Securities Act. To
support such exemption, the Company received representations from CTG as to its status as an
accredited investor within the meaning of Rule 501(a) of Regulation D of the Securities Act and
its acquisition of such shares for investment purposes only and not with a view to any distribution
in violation of the Securities Act or the rules or regulations thereunder. The certificate
representing the CTG Shares contains a legend to the effect that such shares are not registered
under the Securities Act and may not be transferred except pursuant to a registration which has
become effective under the Securities Act or pursuant to an exemption from such registration.
As disclosed in the Form 8-K filed by the Company on September 20, 2011, on September 15,
2011, the Company received a cash merger proposal from Camuto pursuant to which shareholders other
than members of the Chaus family, CTG and Camuto would receive $0.13 per share. The proposal must
be approved by 2/3 of the Companys shareholders and is currently being considered by the Companys
independent directors, assisted by legal and financial advisers.
On September 29, 2011, the Company
was served with a summons and complaint in connection with a purported shareholder class action lawsuit relating to the
Camuto proposal. The lawsuit was filed in the Supreme Court of the State of New York and alleges, among other things,
breach of fiduciary duties by certain current and prior directors of the Company. The Company has not yet responded
to the complaint.
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Item 6. Selected Financial Data.
This item is not required to be completed by smaller reporting companies. Please refer to item
8.- Financial Statements and Supplementary Data regarding our consolidated financial statements.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
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, discount stores, wholesale clubs and other retail
outlets. On November 18, 2010, the Company entered into the Camuto License Agreement which 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. We began shipping Camuto
licensed products in June 2011.
We also had the KCP License Agreement, which allowed us to manufacture and sell womens
sportswear under various labels. The KCP License Agreement terminated on June 1, 2011. KCP agreed
to pay the Company a termination fee upon termination of the agreement based on sales to certain
customers through June 1, 2011, as specified in the agreement. Accordingly, we recorded a $4.4
million gain on early termination of the license agreement for the year ended July 2, 2011.
The last fiscal year was one of substantial transition as a result of the termination of the
KCP License Agreement, the arrangements relating to that termination, and the commencement of
product design and development under the Camuto license in advance of material levels of shipments,
which began in fiscal 2012. Our financial information should be viewed in the context of these
changes and events.
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 Business Manufacturing and
Distribution Exclusive Supply Agreement for more information about this agreement.
Results of Operations
The following table sets forth, for the years indicated, certain items expressed as a percentage of
net revenue.
Fiscal Year Ended | ||||||||
2011 | 2010 | |||||||
Net revenue |
100.0 | % | 100.0 | % | ||||
Gross profit |
19.0 | % | 24.4 | % | ||||
Selling, general and administrative expenses |
32.5 | % | 29.6 | % | ||||
Gain on early termination of license agreement |
5.1 | % | | |||||
Interest expense |
0.9 | % | 0.8 | % | ||||
Net loss |
(9.3 | )% | (6.0 | )% |
Fiscal 2011 Compared to Fiscal 2010
Net revenues for fiscal 2011 decreased 15.3% or $15.4 million to $84.8 million as compared to
$100.2 million for fiscal 2010. Units sold decreased by 15.7% and the overall price per unit
increased by approximately 0.5%. Our net revenues decreased primarily due to decreases in revenues
in our Chaus product lines of $5.7 million, in our licensed product lines of $5.5 million and
private label product lines of $5.0 million offset by an increase in revenues in our Cynthia Steffe
product lines
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of $0.8 million. The decrease in business in our Chaus product lines
was primarily
attributable to decreases in our club and discount channels of distribution as a result of our
decision to reduce levels of inventory with off-price retailers. The decrease in licensed product
lines was primarily due to the KCP license termination agreement. The decrease in private label
revenue resulted from a reduction of business with two customers. The increase in our Cynthia
Steffe product lines was due to increases in all channels of distribution.
Gross profit for fiscal 2011 decreased $8.3 million to $16.1 million as
compared to $24.4 million for fiscal 2010, primarily attributable to decreases in revenues.
Specifically, the decrease in gross profit was primarily due to decreases in gross profit in our
licensed product lines of $3.8 million, private label product lines of $2.2 million, Chaus product
lines of $1.7 million and, Cynthia Steffe product lines of $0.6 million. As a percentage of sales,
gross profit decreased to 19.0% for fiscal 2011 from 24.4% for fiscal 2010. The decrease in gross
profit percentage was reflected across all channels of distributions and all product lines 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 $2.0 million to $27.6
million for fiscal 2011 as compared to $29.6 million in fiscal 2010. As a percentage of net
revenue, SG&A expenses increased to 32.5% in fiscal 2011 as compared to 29.6% in fiscal 2010. The
decrease in SG&A expenses was primarily due to decreases in distribution costs of $0.7 million,
marketing and advertising cost of $0.6 million, payroll and payroll related costs of $0.4 million,
product development costs of $0.2 million, and depreciation and amortization of $0.2 million. The
decrease in distribution costs was due to reduced shipping. The decrease in marketing and
advertising costs was primarily due to lower advertising royalty costs and fewer marketing
promotions. The decrease in payroll and payroll- related costs was due to staff reductions during
the third and fourth quarters of fiscal 2011. The decrease in product development costs was a
result of cost reduction initiatives across all product lines. The increase in SG&A expense as a
percentage of net revenue was due to the overall decrease in sales volume which decreased our
leverage on SG&A expenses.
Gain on early termination fee of the KCP License Agreement was $4.4 million for the year ended
July 2, 2011 and was based on sales to certain customers as specified in the KCP Termination
Agreement.
Interest expense decreased by $0.1 million in fiscal 2011 compared to fiscal 2010,
primarily due to reduced bank borrowing throughout the year, partially offset by increased interest
rates in connection with the amendment to our CIT agreement in March 2010.
Our income tax provision for fiscal 2011 includes provisions and prior year overaccruals for
state and local taxes and a deferred provision for the temporary difference 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
July 2, 2011 and July 3, 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 (NOLs). In fiscal 2011, the valuation allowance was decreased by $6.5 million
to $27.1 million as of July 2, 2011 from $33.6 million as of July 3, 2010, primarily due to the
partial expiration of NOL carryforwards, offset by our current years net operating loss, and other
changes in deferred tax assets. 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 discussion below under Critical Accounting Policies and Estimates regarding income
taxes and our federal NOL carryforward.
Financial Condition, Liquidity and Capital Resources
General
Net cash provided by operating activities was $9.2 million in fiscal 2011 as compared to net
cash used in operating activities of $8.1 million for fiscal 2010. Net cash provided by operating
activities for fiscal 2011 resulted primarily from a
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decrease in accounts receivable-factored
($12.9 million), a decrease in inventory ($3.8 million) and an increase in accounts payable ($1.2
million), offset by our net loss of ($7.9 million) and an increase in prepaid expenses and other
assets of ($0.9 million). The decrease of accounts receivable-factored was predominately due to
the decrease in sales during the fourth quarter of fiscal 2011 as compared to fiscal 2010. The
decrease in inventory is primarily the result of a decrease in sales and the termination of the KCP
license agreement. Net cash used in operating activities in fiscal
2010 resulted primarily from an
increase in accounts receivable-factored ($8.8 million), our net loss ($6.0 million), an increase
in inventory ($5.0 million) and an increase in accounts receivable ($1.6 million). These items were
offset by an increase in accounts payable ($13.1 million). The net increase of accounts
receivablefactored and accounts receivable ($10.4 million) was predominately due to the increase
in sales during the fourth quarter of fiscal 2010 as compared to fiscal 2009. The increase in
accounts payable of $13.1 million is primarily the result of an increase in purchases from CTG on
more favorable terms.
Net cash used in investing activities was $622,000 in fiscal 2011 as compared to $587,000 in
fiscal 2010. The purchases of fixed assets during 2011 consisted primarily of in store shop and
showroom fixtures and upgrades in management information systems and software.
Net cash used in financing activities of $8.6 million for fiscal 2011 resulted from repayments
of revolving credit borrowings. Net cash provided by financing activities of $8.6 million for
fiscal 2010 resulted primarily from revolving credit borrowings of $4.6 million and proceeds from
the CTG supply premium of $4.0 million.
Financing Agreements
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 eliminated our $30 million revolving line of credit and
permits CIT to make loans and advances on a revolving basis at
CITs sole discretion. 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 has an original maturity of September 30, 2011
with automatic annual extensions to September 30th (Anniversary Date) unless
terminated by CIT with at least sixty days written notice of the Anniversary Date. No such
termination notice has been received by the Company from CIT. The Company is currently in
discussions with CIT about a new or amended financing agreement that would, among other things,
permit the conversion of the accounts payable owed to CTG into a secured term obligation.
The borrowings under the New Financing Agreement accrue interest at a rate of
3% above prime. The interest rate as of July 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 July 2, 2011, we had $1.2 million outstanding letters of credit, total availability of
approximately $3.0 million and revolving credit borrowings of $2.6 million under the New Financing
Agreement.
Factoring Agreements
As discussed above, on March 29, 2010, we entered into the New Financing Agreement with CIT,
which amended and
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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
For the year ended July 2, 2011, we realized losses from operations of $7.1 million and
at July 2, 2011 had a working capital deficit of $10.6 million and stockholders
deficiency of $13.4 million. Our business plan requires the availability of sufficient cash flow
and borrowing capacity to finance our product lines and to meet our cash needs. We expect to
satisfy such requirements through cash on hand, cash flow from operations and borrowings from our
lender. Our fiscal 2012 business plan anticipates improvement from fiscal 2011, by primarily
achieving increased revenues and improved gross margin percentages. Our ability to achieve our
fiscal 2012 business plan is critical to maintaining adequate liquidity. 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
CTG terminates the agreement or requires a change in the favorable payment terms, we may be unable
to locate alternative suppliers in a timely manner or obtain similarly favorable payment terms. For
the fiscal year ended July 2, 2011, the KCP License Agreement accounted for approximately 54% of
our revenues and this agreement terminated on June 1, 2011. While we entered into the Camuto
License Agreement, there can be no assurance 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. There could be a material adverse effect on our business, liquidity and
financial condition should any of the following occur: a) CIT ceases its funding of our operations,
b) CTG terminates its agreement with us or requires a change in the favorable payment terms, or c)
we fail to offset the revenue lost as a result of the termination of the KCP License Agreement. See
the section entitled Risk Factors for more information.
We are also in negotiations with CTG to convert approximately $12 million of debt owed by the
Company to CTG from accounts payable to two term loans with initial terms of 2 years and five
years. There can be no assurance that negotiations with CTG will be successful and result in the
conversion of the Companys debt.
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.
Off Balance Sheet Arrangements
As of July 2, 2011, we do not have any off-balance sheet arrangements except for letters of
credit under the Financing Agreements. See Financing Agreements.
Inflation
We do not believe that the relatively moderate rates of inflation which recently have been
experienced in the United States, where we compete, have had a significant effect on our net
revenue or profitability.
Seasonality of Business and Fashion Risk
Our principal products are organized into seasonal lines for resale at the retail level during
the Spring, Summer, Fall and Holiday Seasons. Typically, our products are designed as much as one
year in advance and manufactured approximately one season in advance of the related retail selling
season. Accordingly, the success of our products is often dependent on our
ability
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to successfully
anticipate the needs of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Historically, our sales and operating results fluctuate by quarter, with the greatest sales
typically occurring in our first and third fiscal quarters. It is in these quarters that our Fall
and Spring product lines, which traditionally have had the highest volume of net sales, are shipped
to customers, with revenues recognized at the time of shipment. As a result, we experience
significant variability in our quarterly results and working capital requirements. Moreover, delays
in shipping can cause revenues to be recognized in a later quarter, resulting in further
variability in such quarterly results.
Foreign Operations
Our foreign sourcing operations are subject to various risks of doing business abroad and any
substantial disruption of our relationships with our foreign suppliers could adversely affect our
operations. Any material increase in duty levels, material decrease in quota levels or material
decrease in available quota allocation could adversely affect our operations. Approximately 96% of
our products sold in fiscal 2011 were manufactured by independent suppliers located primarily in
China and elsewhere in the Far East. See Risk Factors and Business Exclusive Supply
Agreement.
Critical Accounting Policies and Estimates
Significant accounting policies are more fully described in Note 2 to the consolidated
financial statements. Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, observation of trends in the industry, information
provided by customers and information available from other outside sources, as appropriate.
Significant accounting policies include:
Revenue Recognition Sales are recognized upon shipment of products to customers since title
and risk of loss pass 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 agreement whereby CIT, based on credit approved orders, assumes the accounts receivable
risk of our customers in the event of insolvency or nonpayment. We assume the accounts receivable
risk on sales factored to CIT but not approved by CIT as non-recourse which as of July 2, 2011 and
July 3, 2010 approximated $0.2 million and $0.7 million respectively. We receive payment on
non-recourse factored receivables from CIT as of the earlier of: a) the date that CIT has been paid
by our customers; b) the date of the customers longest maturity if the customer is in a 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 approximately $2.3 million and $2.2 million as of July 2, 2011 and July 3,
2010, respectively, have been recorded as a reduction 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 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 July 2, 2011, and $0.5 million at July 2, 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.
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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 years ended July 2, 2011 and July 3, 2010.
Income Taxes- Results of operations have generated a federal tax NOL carryforward of
approximately $59.5 million as of July 2, 2011. Approximately 15% of the Companys NOL carryforward
expires in 2012. Generally accepted accounting principles require that we record a valuation
allowance against the deferred tax asset associated with this NOL if it is more likely than not
that we will not be able to utilize it to offset future taxable income. As of July 2, 2011, based
upon its evaluation of our historical and projected results of operations, the current business
environment and the magnitude of the NOL, we recorded a full valuation allowance on our deferred
tax assets including NOLs. The provision for income taxes primarily relates to provisions for
state and local taxes and a deferred provision for temporary differences associated with indefinite
lived intangibles. It is possible, however, that we could be profitable in the future at levels
which cause us to conclude that it is more likely than not we will realize all or a portion of
the NOL carryforward. Upon reaching such a conclusion, we would record the estimated net realizable
value of the deferred tax asset at that time and would then provide for income taxes at a rate
equal to our combined federal and state effective rates. Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause our provision for income taxes to vary from
period to period, although its cash tax payments would remain unaffected until the benefit of the
NOL is utilized.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk- We are subject to market risk from exposure to changes in interest rates
based primarily on our financing activities. The market risk inherent in the financial instruments
represents the potential loss in earnings or cash flows arising from adverse changes in interest
rates. These debt obligations with interest rates tied to the prime rate are described in
Financial Condition, Liquidity and Capital Resources, as well as Note 6 of the Notes to the
Consolidated Financial Statements. We manage these exposures through regular operating and
financing activities. We have not entered into any derivative financial instruments for hedging or
other purposes. The following quantitative disclosures are based on the prevailing prime rate.
These quantitative disclosures do not represent the maximum possible loss or any expected loss that
may occur, since actual results may differ from these estimates.
As of July 2, 2011 and July 3, 2010, the carrying amounts of our revolving credit borrowings
approximated fair value. As of July 2, 2011, our revolving credit borrowings bore interest at a
rate of 6.25%. As of July 2, 2011, a hypothetical immediate 10% adverse change in prime interest
rates relating to our revolving credit borrowings would have less than $0.1 million unfavorable
impact on our earnings and cash flows over a one-year period.
Item 8. Financial Statements and Supplementary Data.
The Companys consolidated financial statements are included herein commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure 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
16
Table of Contents
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 Financial Officer (CFO), 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) and the Companys CFO, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this
evaluation, our management, with the participation of the CEO and CFO, concluded that, as of July
2, 2011, our internal controls over financial reporting were effective.
Changes in Internal Control over Financial Reporting
During the fiscal year ended July 2, 2011, there was no change in the Companys internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). A system of internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation and fair presentation of financial
statements for external purposes in accordance with generally accepted accounting principles. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chairwoman
and CFO, we conducted an assessment of the effectiveness of our internal control over financial
reporting as of July 2, 2011. 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 assessment, management concluded that our internal
control over financial reporting was effective as of July 2, 2011.
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by the Companys independent registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide
only managements report in this annual report.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the executive officers of the Company is set forth in Part I of
this Annual Report on Form 10-K in the section entitled Executive Officers.
17
Table of Contents
Information called for by Item 10 is incorporated by reference to the information to be set
forth under the heading Election of Directors in the Companys definitive proxy statement
relating to its 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the
2011 Proxy Statement).
Item 11. Executive Compensation.
Information called for by Item 11 is incorporated by reference to the information to be set
forth under the heading Executive Compensation in the Companys 2011 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
matters.
Information called for by Item 12 is incorporated by reference to the information to be set
forth under the heading Security Ownership of Certain Beneficial Owners and Management in the
Companys 2011 Proxy Statement.
Information with respect to securities authorized for issuance under equity compensation plans
is incorporated by reference to the information to be set forth under the heading Compensation
Program Components in the Companys 2011 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information called for by Item 13 is incorporated by reference to the information to be set
forth under the headings Executive Compensation and Certain Transactions in the Companys 2011
Proxy Statement.
Item 14. Principal Accounting Fees and Services.
Information called for by Item 14 is incorporated by reference to the information to be set
forth under the headings Report of the Audit Committee and Auditors in the Companys 2011 Proxy
Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedule
(a) | Financial Statements and Financial Statement Schedule: See List of Financial Statements and Financial Statement Schedule on page F-1. | ||
(b) | Exhibits |
3.1
|
Restated Certificate of Incorporation (the Restated Certificate) of the Company (incorporated by reference to Exhibit 3.1 of the Companys Registration Statement on Form S-1, Registration No. 33-5954 (the 1986 Registration Statement)). | |
3.2
|
Amendment dated November 18, 1987 to the Restated Certificate (incorporated by reference to Exhibit 3.11 of the Companys Registration Statement on Form S-2, Registration No. 33-63317 (the 1995 Registration Statement)). | |
3.3
|
Amendment dated November 15, 1995 to the Restated Certificate (incorporated by reference to Exhibit 3.12 of Amendment No. 1 to the 1995 Registration Statement). | |
3.4
|
Amendment dated December 9, 1998 to the Restated Certificate (incorporated by reference to Exhibit 3.13 of the Companys Form 10-K for the year ended June 30, 1998 (the 1998 Form 10-K)). | |
3.5
|
By-Laws of the Company, as amended (incorporated by reference to exhibit 3.1 of the Companys Form 10-Q for the quarter ended December 31, 1987). |
18
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3.6
|
Amendment dated September 13, 1994 to the By-Laws (incorporated by reference to Exhibit 10.105 of the Companys Form 10-Q for the quarter ended September 30, 1994). | |
10.77
|
1998 Stock Option Plan, as amended by Amendment No.1 thereto including form of related stock option agreement (incorporated by reference to Exhibit A and Exhibit B of the Companys Proxy Statement filed with the Commission on October 17, 2000). | |
10.81
|
Collective Bargaining Agreement between the Company and Amalgamated Workers Union, Local 88 effective as of September 24, 1999 (incorporated by reference to Exhibit 10.81 of the Companys Form 10-K for the year ended June 30, 1999 (the 1999 Form 10-K)). | |
10.82
|
Lease between the Company and Adler Realty Company, dated June 1, 1999 with respect to the Companys executive offices and showroom at 530 Seventh Avenue, New York City (incorporated by reference to Exhibit 10.82 of the 1999 Form 10-K). | |
10.83
|
Lease between the Company and Kaufman Eighth Avenue Associates, dated September 11, 1999 with respect to the Companys technical support facilities at 519 Eighth Avenue, New York City (incorporated by reference to Exhibit of the Companys Form 10-K for the year ended June 30, 2000 (the 2000 Form 10-K)). | |
10.90
|
Lease modification agreement between the Company and Hartz Mountain Industries, Inc., dated August 30, 1999 with respect to the Companys distribution and office facilities in Secaucus, NJ. (incorporated by reference to Exhibit 10.90 of the Companys Form 10-K for the year ended June 30, 2001 (the 2001 Form 10-K)). | |
10.100
|
Financing Agreement between the Company and CIT/Commercial Services, Inc., as Agent, dated September 27, 2002. (incorporated by reference to Exhibit 10.100 of the 2002 Form 10-K). | |
10.101
|
Factoring Agreement between the Company and CIT/Commercial Services, Inc., dated September 27, 2002. (incorporated by reference to Exhibit 10.101 of the 2002 Form 10-K). | |
10.102
|
Joinder and Amendment No. 1 to Financing Agreement by and among the Company, S.L. Danielle and The CIT Group/Commercial Services, Inc., as agent, dated November 27, 2002. (incorporated by reference to Exhibit 10.102 of the Companys Form 10-Q for the quarter ended December 31, 2002). | |
10.103
|
Amendment No. 1 to Factoring Agreement between the Company and The CIT Group/Commercial Services, Inc., dated November 27, 2002. (incorporated by reference to Exhibit 10.103 of the Companys Form 10-Q for the quarter ended December 31, 2002). | |
10.104
|
Factoring Agreement between S.L. Danielle and The CIT Group/Commercial Services, Inc., dated November 27, 2002. (incorporated by reference to Exhibit 10.104 of the Companys Form 10-Q for the quarter ended December 31, 2002). | |
10.105
|
Asset Purchase Agreement between S.L. Danielle and S.L. Danielle, Inc., dated November 27, 2002. (incorporated by reference to Exhibit 10.105 of the Companys Form 10-Q for the quarter ended December 31, 2002). | |
10.106
|
Joinder and Amendment No. 2 to Financing Agreement by and among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and The CIT Group/Commercial Services, Inc., as agent, dated January 30, 2004. (incorporated by reference to Exhibit 10.106 of the Companys Form 10-Q for the quarter ended December 31, 2003). |
19
Table of Contents
10.107
|
Amendment No. 2 to Factoring Agreement between the Company and The CIT Group/Commercial Services, Inc., dated January 30, 2004. (incorporated by reference to Exhibit 10.107 of the Companys Form 10-Q for the quarter ended December 31, 2003). | |
10.108
|
Amendment No. 1 to Factoring Agreement between S.L. Danielle and The CIT Group/Commercial Services, Inc., dated January 30, 2004. (incorporated by reference to Exhibit 10.108 of the Companys Form 10-Q for the quarter ended December 31, 2003). | |
10.109
|
Factoring Agreement between Cynthia Steffe Acquisition, LLC and The CIT Group/Commercial Services, Inc., dated January 15, 2004. (incorporated by reference to Exhibit 10.109 of the Companys Form 10-Q for the quarter ended December 31, 2003). | |
10.112
|
Notice of Defactoring among Bernard Chaus, Inc., S.L. Danielle Acquisition, LLC and the CIT Group/Commercial Services, Inc., dated March 31, 2004. (incorporated by reference to Exhibit 10.112 of the Companys Form 10-Q for the quarter ended March 31, 2004). | |
10.113
|
Amendment No. 1 to Factoring Agreement between Cynthia Steffe Acquisition LLC and the CIT Group/Commercial Services, Inc., dated April1, 2004. (incorporated by reference to Exhibit 10.113 of the Companys Form 10-Q for the quarter ended March 31, 2004). | |
10.114
|
Amendment No. 3 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. as agent, dated September 15, 2004 (incorporated by reference to Exhibit 10.114 of the 2004 Form 10-K). | |
10.117
|
Amendment No. 4 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. as agent, dated November 11, 2004. (incorporated by reference to Exhibit 10.117 of the Companys form 10-Q the quarter ended December 31, 2004). | |
10.118
|
Amendment No. 2 to Factoring Agreement between Cynthia Steffe Acquisition LLC and the CIT Group/Commercial Services, Inc., dated November 11, 2004. (incorporated by reference to Exhibit 10.118 of the Companys form 10-Q the quarter ended December 31, 2004). | |
10.119
|
Amendment No.5 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated May 12, 2005. (incorporated by reference to Exhibit 10.119 of the 2005 Form 10-K). | |
10.120
|
Stock Purchase Agreement between Bernard Chaus, Inc. and Kenneth Cole Productions, Inc. dated June 13, 2005 (incorporated by reference to Exhibit 10.120 of the 2005 Form 10-K). | |
10.121
|
License Agreement between Kenneth Cole Productions (LIC), Inc. and Bernard Chaus, Inc. dated June 13, 2005 (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). (incorporated by reference to Exhibit 10.121 of the 2005 Form 10-K). | |
10.122
|
Amendment No.6 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated September 15, 2005. (incorporated by reference to Exhibit 10.122 of the 2005 Form 10-K). | |
10.123
|
Amendment No.7 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated May 8, 2006. (incorporated by reference to Exhibit 10.123 of the 2006 Form 10-K). |
20
Table of Contents
10.124
|
Amendment No.8 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated September 21, 2006. (incorporated by reference to Exhibit 10.124 of the 2006 Form 10-K). | |
10.125
|
Amendment No.9 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated August 31, 2007. (incorporated by reference to Exhibit 10.125 of the 2007 Form 10-K). | |
10.126
|
Amendment No. 1 License Agreement between Kenneth Cole Productions (LIC), Inc. and Bernard Chaus, Inc. dated September 26, 2007 (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). (incorporated by reference to Exhibit 10.126 of the 2007 Form 10-K). | |
10.127
|
Amendment No.10 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated January 31, 2008. (incorporated by reference to Exhibit 10.127 of the Companys form 10-Q the quarter ended December 31, 2007). | |
10.128
|
Amendment 2 to License Agreement between Kenneth Cole Productions (LIC), Inc. and Bernard Chaus, Inc. dated December 31, 2007 (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). (incorporated by reference to Exhibit 10.1 of the Companys Form 8-K filed on January 16, 2008). | |
10.129
|
Amendment No.11 to Financing Agreement among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. dated September 02, 2008. (incorporated by reference to Exhibit 10.129 of the 2008 Form 10-K). | |
10.130
|
Financing Agreement between the Company and CIT/Commercial Services, Inc., as Agent, dated September 18, 2008. (incorporated by reference to Exhibit 10.130 of the 2008 Form 10-K). | |
10.131
|
Factoring Agreement between the Company and CIT/Commercial Services, Inc., dated September 18, 2008. (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions there of) (incorporated by reference to Exhibit 10.131 of the 2008 Form 10-K). | |
10.132
|
Lease modification agreement between the Company and G&S Realty 1, LLC dated October 7, 2008 with respect to the Companys executive offices and showrooms at 530 Seventh Avenue, New York, New York. (incorporated by reference to Exhibit 10.132 of the Companys form 10-Q the quarter ended September 30, 2008). | |
10.133
|
Amendment No. 1 to Amendment and Restated Financing Agreement and Waiver, dated February , 2009, between the Company and the CIT Group/Commercial Services, Inc. (incorporated by reference to Exhibit 10.133 of the Companys form 10-Q the quarter ended December 31, 2008). | |
10.1
|
Amendment to the Financing Agreement by and among Bernard Chaus, Inc., Cynthia Steffe Acquisition LLC, S.L. Danielle Acquisition, LLC and The CIT Group/Commercial Services, Inc., dated May 12, 2009. (incorporated by reference to Exhibit 10.1 of the Companys form 10-Q the quarter ended March 31, 2009). | |
10.2
|
Amendment to the Factoring Agreement by and among Bernard Chaus, Inc., Cynthia Steffe Acquisition LLC, S.L. Danielle Acquisition, LLC and The CIT Group/Commercial Services, Inc., dated May 12, 2009. (incorporated by reference to Exhibit 10.2 of the Companys form 10-Q the quarter ended March 31, 2009). | |
10.3
|
Amended and Restated Factoring and Financing Agreement by and among Bernard Chaus, Inc., Cynthia Steffe Acquisition LLC, S.L. Danielle Acquisition, LLC and The CIT Group/Commercial Services, Inc., dated September 10, 2009. (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). ) (incorporated by reference to Exhibit 10.3 of the Companys 2009 Form 10-K). |
21
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10.4
|
Amended and Restated Factoring and Financing Agreement by and among Bernard Chaus, Inc., Cynthia Steffe Acquisition LLC, S.L. Danielle Acquisition, LLC and The CIT Group/Commercial Services, Inc., dated March 29, 2010. (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). ) (incorporated by reference to Exhibit 10.1 of the Companys Form 8-K filed on March 30, 2010). | |
10.5
|
Agreement, dated October 19, 2010, between Kenneth Cole Productions (LIC) and Bernard Chaus, Inc., related to the termination of the Kenneth Cole licensing agreement (filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). (incorporated by reference to Exhibit 10.5 of the Companys 2010 Form 10-K). | |
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). (incorporated by reference to Exhibit 10.6 of the Companys form 10-Q the quarter ended October 2, 2010). | |
*21
|
List of Subsidiaries of the Company. | |
*23.1
|
Consent of Mayer Hoffman McCann CPAs (The New York Practice of Mayer Hoffman McCann P.C.), Independent Registered Public Accounting Firm. | |
*31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Josephine Chaus. | |
*31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William P. Runge. | |
*32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Josephine Chaus. | |
*32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for William P. Runge. |
| Management agreement or compensatory plan or arrangement required to be filed as an exhibit. | |
* | Filed herewith. |
22
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
||||
By: | /s/ Josephine Chaus | |||
Josephine Chaus | ||||
Date: |
Chairwoman of the Board and
Chief Executive Officer September 30, 2011 |
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Josephine Chaus
|
Chairwoman of the Board and Chief Executive Officer |
September 30, 2011 | ||
/s/ William P. Runge
|
Interim Chief Financial Officer | September 30, 2011 | ||
/s/ Philip G. Barach
|
Director | September 30, 2011 | ||
/s/ Robert Flug
|
Director | September 30, 2011 |
23
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Bernard Chaus, Inc. and subsidiaries are
included in Item 8:
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-7 | ||
The following consolidated financial statement schedule of Bernard Chaus, Inc. and subsidiaries is included in Item 15: | ||
S-1 |
The other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus, Inc. and
subsidiaries as of July 2, 2011 and July 3, 2010 and the related consolidated statements of
operations, stockholders equity (deficiency) and comprehensive loss and cash flows for the years
then ended. Our audits also included the financial statement schedule listed in the Index at item
15 for the years ended July 2, 2011 and July 3, 2010. These financial statements and financial
statement schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Bernard Chaus, Inc. and subsidiaries at July 2, 2011 and July 3, 2010,
and the results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Mayer Hoffman McCann CPAs | ||||
(The New York Practice of Mayer Hoffman McCann P.C.) | ||||
New York, New York
September 30, 2011
September 30, 2011
F-2
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 3 | $ | 4 | ||||
Accounts receivable factored |
6,466 | 19,404 | ||||||
Accounts receivable net |
1,004 | 1,789 | ||||||
Inventories net |
5,077 | 8,846 | ||||||
Prepaid expenses and other current assets |
1,476 | 536 | ||||||
Total current assets |
14,026 | 30,579 | ||||||
Fixed assets net |
1,159 | 885 | ||||||
Other assets |
| 25 | ||||||
Trademarks |
1,000 | 1,000 | ||||||
Total assets |
$ | 16,185 | $ | 32,489 | ||||
Liabilities and Stockholders Deficiency |
||||||||
Current Liabilities |
||||||||
Revolving credit borrowings |
$ | 2,577 | $ | 11,175 | ||||
Accounts payable |
20,605 | 19,399 | ||||||
Accrued expenses |
1,473 | 2,305 | ||||||
Total current liabilities |
24,655 | 32,879 | ||||||
Deferred income |
2,834 | 3,234 | ||||||
Long term liabilities |
1,927 | 1,735 | ||||||
Deferred income taxes |
200 | 173 | ||||||
Total liabilities |
29,616 | 38,021 | ||||||
Commitments and Contingencies (Notes 6, 8, and 10) |
||||||||
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 July 2, 2011 and July 3, 2010 |
375 | 375 | ||||||
Additional paid-in capital |
133,443 | 133,440 | ||||||
Deficit |
(144,684 | ) | (136,827 | ) | ||||
Accumulated other comprehensive loss |
(1,085 | ) | (1,040 | ) | ||||
Less: Treasury stock at cost 62,270 shares at July 2, 2011
and July 3, 2010 |
(1,480 | ) | (1,480 | ) | ||||
Total stockholders deficiency |
(13,431 | ) | (5,532 | ) | ||||
Total liabilities and stockholders deficiency |
$ | 16,185 | $ | 32,489 | ||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended | ||||||||
2011 | 2010 | |||||||
Net revenue |
$ | 84,818 | $ | 100,153 | ||||
Cost of goods sold |
68,730 | 75,730 | ||||||
Gross profit |
16,088 | 24,423 | ||||||
Selling, general and administrative expenses |
27,557 | 29,597 | ||||||
Gain on early termination of license agreement |
(4,355 | ) | | |||||
Loss from operations |
(7,114 | ) | (5,174 | ) | ||||
Interest expense |
726 | 811 | ||||||
Loss before income tax provision |
(7,840 | ) | (5,985 | ) | ||||
Income tax provision |
17 | 48 | ||||||
Net loss |
$ | (7,857 | ) | $ | (6,033 | ) | ||
Basic loss per share |
$ | (0.22 | ) | $ | (0.16 | ) | ||
Diluted loss per share |
$ | (0.22 | ) | $ | (0.16 | ) | ||
Weighted average number of common shares
outstanding basic |
36,484 | 37,481 | ||||||
Weighted average number of common and common
equivalent shares outstanding diluted |
36,484 | 37,481 | ||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
AND COMPREHENSIVE LOSS
(In thousands, except number of shares)
AND COMPREHENSIVE LOSS
(In thousands, except number of shares)
Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||
Additional | Accumulated Other |
|||||||||||||||||||||||||||||||
Number | Paid-in | Number | Comprehensive | |||||||||||||||||||||||||||||
of Shares | Amount | Capital | Deficit | of Shares | Amount | Loss | Total | |||||||||||||||||||||||||
Balance at July 1, 2009 |
37,543,643 | $ | 375 | $ | 133,416 | $ | (130,794 | ) | 62,270 | $ | (1,480 | ) | $ | (929 | ) | $ | 588 | |||||||||||||||
Stock option compensation
expense |
| | 24 | | | | | 24 | ||||||||||||||||||||||||
Net change in pension liability |
| | | | | | (111 | ) | (111 | ) | ||||||||||||||||||||||
Net loss |
| | | (6,033 | ) | | | | (6,033 | ) | ||||||||||||||||||||||
Comprehensive loss |
(6,144 | ) | ||||||||||||||||||||||||||||||
Balance at July 3, 2010 |
37,543,643 | 375 | 133,440 | (136,827 | ) | 62,270 | (1,480 | ) | (1,040 | ) | (5,532 | ) | ||||||||||||||||||||
Stock option compensation
expense |
| | 3 | | | | | 3 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | 6,000,000 | 600 | 600 | |||||||||||||||||||||||||
Reissuance of treasury stock |
| | | | (6,000,000 | ) | (600 | ) | (600 | ) | ||||||||||||||||||||||
Net change in pension liability |
| | | | | | (45 | ) | (45 | ) | ||||||||||||||||||||||
Net loss |
| | | (7,857 | ) | | | | (7,857 | ) | ||||||||||||||||||||||
Comprehensive loss |
(7,902 | ) | ||||||||||||||||||||||||||||||
Balance at July 2, 2011 |
37,543,643 | $ | 375 | $ | 133,443 | $ | (144,684 | ) | 62,270 | $ | (1,480 | ) | $ | (1,085 | ) | $ | (13,431 | ) | ||||||||||||||
See accompanying notes to consolidated financial statements
F-5
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BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
Fiscal Year End | ||||||||
2011 | 2010 | |||||||
Operating Activities |
||||||||
Net loss |
$ | (7,857 | ) | $ | (6,033 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
373 | 618 | ||||||
Loss on disposal of fixed assets |
| 43 | ||||||
Amortization of deferred income |
(400 | ) | (366 | ) | ||||
Stock compensation expense |
3 | 24 | ||||||
Deferred rent expense |
96 | 297 | ||||||
Deferred income taxes |
27 | 26 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable factored |
12,938 | (8,815 | ) | |||||
Accounts receivable |
785 | (1,582 | ) | |||||
Inventories |
3,769 | (5,007 | ) | |||||
Prepaid expenses and other assets |
(940 | ) | (230 | ) | ||||
Accounts payable |
1,206 | 13,148 | ||||||
Accrued expenses and long term liabilities |
(781 | ) | (227 | ) | ||||
Net cash provided by (used in) operating activities |
9,219 | (8,104 | ) | |||||
Investing Activities |
||||||||
Purchases of fixed assets |
(622 | ) | (587 | ) | ||||
Cash used in investing activities |
(622 | ) | (587 | ) | ||||
Financing Activities |
||||||||
Net proceeds
from (repayments of) revolving credit borrowings |
(8,598 | ) | 4,569 | |||||
Purchase of treasury stock |
(600 | ) | | |||||
Proceeds from reissuance of treasury stock |
600 | | ||||||
Proceeds from supply premium |
| 4,000 | ||||||
Net cash provided by (used in) financing activities |
(8,598 | ) | 8,569 | |||||
Decrease in cash |
(1 | ) | (122 | ) | ||||
Cash, beginning of year |
4 | 126 | ||||||
Cash, end of year |
$ | 3 | $ | 4 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for: |
||||||||
Taxes |
$ | 13 | $ | 14 | ||||
Interest |
$ | 650 | $ | 743 | ||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 2, 2011 AND JULY 3, 2010
YEARS ENDED JULY 2, 2011 AND JULY 3, 2010
1. 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 upscale contemporary womens apparel lines sold
through department stores and specialty stores. The Companys private label product lines are
designed and sold to various customers. 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 began shipping Camuto licensed products in June 2011. See Note 10
for further information.
The Company had a license agreement (the KCP License Agreement) with Kenneth Cole
Productions, Inc. (KCP) to manufacture and sell womens sportswear under various labels. On
October 19, 2010, the Company entered into an agreement with KCP (the KCP Termination Agreement)
pursuant to which the license agreement terminated on June 1, 2011. Under the KCP Termination
Agreement, the Company was 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 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 based
on sales to certain customers through June 1, 2011, as specified in the agreement. Accordingly,
the Company recorded a $4.4 million gain on early termination of the license agreement which is
included in the accompanying Consolidated Statement of Operations for the year ended July 2, 2011.
For the year ended July 2, 2011, the Company realized losses from operations of $7.1 million
and as of July 2, 2011 had a working capital deficit of $10.6 million and stockholders deficiency
of $13.4 million. 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 2012 business plan anticipates improvement from fiscal 2011, by
primarily achieving increased revenues and improved gross margin percentages. The Companys ability
to achieve its fiscal 2012 business plan is critical to maintaining adequate liquidity. The Company
relies on The CIT Group/Commercial Services, Inc. (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 (see Note 7). In the event CTG terminates the 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 2, 2011, the KCP
License Agreement accounted for approximately 54% of the Companys revenues, and this agreement
terminated on June 1, 2011. While the Company entered into the Camuto License Agreement, 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, b) CTG terminates its
agreement with the Company or requires a change in the favorable payment terms, or c) the Company
fails to offset the revenue lost as a result of the termination of the KCP License Agreement.
F-7
Table of Contents
2. Summary of Significant Accounting Policies
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 reported on a fifty-two/fifty-three week fiscal year-end. The
years ended July 2, 2011 and July 3, 2010 each contained fifty-two weeks however due to the change,
the year ended July 3, 2010 also contained an extra three days. Net sales for these three days was
approximately $4.9 million.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Company recognizes sales upon shipment of products to customers since title and risk of
loss pass 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.
Historically, the Companys sales and operating results fluctuate by quarter, with the
greatest sales typically occurring in the Companys first and third fiscal quarters. It is in
these quarters that the Companys Fall and Spring product lines, which traditionally have had the
highest volume of net sales, are shipped to customers, with revenues recognized at the time of
shipment. As a result, the Company experiences significant variability in its quarterly results
and working capital requirements. Moreover, delays in shipping can cause revenues to be recognized
in a later quarter, resulting in further variability in such quarterly results.
Shipping and Handling:
Shipping and handling costs are included as a component of selling, general and administrative
expenses in the consolidated statements of operations. In fiscal year 2011 and 2010 shipping and
handling costs approximated $2.5 million and $3.2 million, respectively.
Cooperative Advertising:
Cooperative advertising allowances are recorded in selling, general and administrative
expenses in the period in which the costs are incurred. In fiscal 2011 and 2010 cooperative
advertising expenses approximated $0.5 million and $0.4 million, respectively.
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 CIT. The New Financing Agreement provides for a
non-recourse factoring arrangement which
F-8
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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 which
approximated $.2 million and $.7 million at July 2, 2011 and July 3, 2010, respectively. The
Company receives payment on non-recourse factored receivables from CIT as of the earlier of: a) the
date that CIT has been paid by the Companys customers; b) the date of the customers longest
maturity if the customer is in a 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
other receivable risks for customer deductions that reduce the customer receivable balances are
retained by the Company, including, but not limited to, allowable customer markdowns, operational
chargebacks, disputes, discounts and returns. These deductions totaling $2.3 million and $2.2
million as of July 2, 2011 and July 3, 2010, respectively, 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.
During fiscal 2011 approximately 27% of the Companys net revenue was from two corporate
entities TJX Companies (14%) and Dillards Department Stores (13%). During fiscal 2010
approximately 38% of the Companys net revenue was from three corporate entities TJX Companies
(14%), Dillards Department Stores (13%) and Nordstrom (11%). As a result of the Companys
dependence on its major customers, such customers may have the ability to influence the Companys
business decisions. The loss of or significant decrease in business from any of its major
customers could have a material adverse effect on the Companys financial position and results of
operations.
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, assumes the risk of loss and records
inventory when the merchandise is received at the boat or airplane overseas. Reserves for slow
moving and aged merchandise are provided to write-down inventory costs to net realizable value
based on historical experience and current product demand. Inventory reserves were $0.4 million at
July 2, 2011 and $0.5 million at July 3, 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.
Cost of goods sold:
Cost of goods sold includes the costs incurred to acquire and produce inventory for sale,
including product costs, freight-in, duty costs, commission cost and provisions for inventory
losses. During fiscal 2011, the Company purchased approximately 69% of its finished goods from
CTG. In July 2009 the Company entered into an exclusive supply agreement with CTG (see Note 7).
The Company believes that CTG has the resources to manufacture its products in accordance with the
Companys specification and delivery schedules. In the event CTG is unable to meet the Companys
requirements and/or the agreement was to terminate, the Company believes that it would have the
ability to develop, over a reasonable period of time, adequate alternate manufacturing sources.
However, there can be no assurance that the Company would find alternate manufacturers of finished
goods on satisfactory terms to permit it to meet its commitments to its customers on a timely
basis. In such event, the Companys operations could be materially disrupted, especially over the
short-term.
Cash and Cash Equivalents:
All highly liquid investments with an original maturity of three months or less at the date of
purchase are classified as cash equivalents.
F-9
Table of Contents
Long-Lived Assets and Trademarks:
At July 2, 2011 and July 3, 2010, trademarks related to the Cynthia Steffe division 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 was no impairment recorded for fiscal 2011 or 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 July 2, 2011 and July 3, 2010, 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.
Stock-based Compensation:
The Company has a Stock Option Plan and accounts for the plan under FASB ASC 718,
Compensation-Stock Compensation which requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. No option grants were issued in fiscal 2011 and 2010.
Earnings (Loss) Per Share:
Basic earnings (loss) per share has been calculated by dividing the applicable net income
(loss) by the weighted average number of common shares outstanding. Diluted earnings per share has
been calculated by dividing the applicable net income by the weighted-average number of common
shares outstanding and common share equivalents. Options to purchase approximately 689,000 and
814,000 common shares were excluded from the computation of diluted earnings per share for the
years ended July 2, 2011 and July 3, 2010, respectively, because their exercise price was greater
than the average market price.
For the Year Ended | ||||||||
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
Denominator for earnings (loss) per share (in millions): |
||||||||
Denominator
for basic earnings (loss) per share weighted-average shares outstanding |
36.5 | 37.5 | ||||||
Assumed exercise of potential common shares |
| | ||||||
Denominator for diluted earnings (loss) per share |
36.5 | 37.5 | ||||||
F-10
Table of Contents
Advertising Expense:
Advertising costs are expensed when incurred. Advertising expenses (including co-op
advertising) of $1.3 million, and $1.5 million, were included in selling, general and
administrative expenses for the fiscal years ended 2011 and 2010 respectively.
Fixed Assets:
Furniture and equipment are depreciated using the straight-line method over a range of three
to eight years. Leasehold improvements are amortized using the straight-line method over either the
term of the lease or the estimated useful life of the improvement, whichever period is shorter.
Computer hardware and software is depreciated using the straight-line method over three to five
years.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with foreign manufacturers in
United States dollars. The Company considers the United States dollar to be the functional currency
of its overseas subsidiaries. All foreign currency transaction gains and losses are recorded in
the Consolidated Statement of Operations.
Fair Value Measurements:
The Company measures fair value in accordance with FASB ASC 820 Fair Value Measurements and
Disclosures, which provides a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy under ASC 820 are Level 1 inputs which utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to access, Level 2
inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly and may also include quoted prices for similar assets and
liabilities in active markets, as well as inputs that are observable for the asset or liability
(other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals, and Level 3 inputs are unobservable inputs for the
asset or liability, which is typically based on an entitys own assumptions, as there is little, if
any, related market activity. In instances where the determination of the fair value measurement
is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment
and consideration factors specific to the asset or liability.
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.
Deferred Rent Obligations:
The Company accounts for rent expense under non-cancellable operating leases with scheduled
rent increases on a straight-line basis over the lease term. The excess of straight-line rent
expense over scheduled payment amounts is recorded as a deferred liability included in long-term
liabilities. Deferred rent obligations amounted to $1.1 million at July 2, 2011 and $1.0 million at
July 3, 2010.
F-11
Table of Contents
Other Comprehensive Loss:
Other comprehensive loss is reflected in the consolidated statements of stockholders equity
(deficiency) and comprehensive loss. Other comprehensive loss reflects adjustments for pension
liabilities.
Segment Reporting:
The Company has determined that it operates in one segment, womens career and casual
sportswear. In addition, less than 3% of total revenue is derived from customers outside the
United States. Substantially all of the Companys long-lived assets are located in the United
States.
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 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.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, which allows an entity the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present each component of net income along with total net
income, each component of other comprehensive income along with a total for other comprehensive
income. ASU 2011-05 eliminates the option to present the components of other comprehensive income
as part of the statement of changes in stockholders equity. The amendments do not change the
items that must be reported in other comprehensive income or when an item of other comprehensive
income must be classified to net income. ASU 2011-05 should be applied retrospectively and is
effective for fiscal years, and interim periods within those years, beginning after December 31,
2011. The Company does not expect the adoption of ASU 2011-05 to have a material impact on the
Companys consolidated financial statements.
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Table of Contents
3. Inventories net
At July 2, 2011 and July 3, 2010, inventories consisted of the following:
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 184 | $ | 457 | ||||
Work-in-process |
7 | 63 | ||||||
Finished goods |
4,886 | 8,326 | ||||||
Total |
$ | 5,077 | $ | 8,846 | ||||
Inventories are stated at the lower of cost, using the first-in first-out (FIFO) method, or market.
Included in finished goods inventories is merchandise in transit of approximately $2.8 million at
July 2, 2011 and $4.3 million at July 3, 2010.
4. Fixed Assets
At July 2, 2011 and July 3, 2010, fixed assets consisted of the following:
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Computer hardware and software |
$ | 4,947 | $ | 4,733 | ||||
Furniture and equipment |
1,969 | 1,567 | ||||||
Leasehold improvements |
3,405 | 3,402 | ||||||
10,321 | 9,702 | |||||||
Less: accumulated depreciation and amortization |
9,162 | 8,817 | ||||||
$ | 1,159 | $ | 885 | |||||
5. Income Taxes
The following are the major components of the provision for income taxes for the fiscal years
ended 2011 and 2010:
Fiscal Year Ended | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Current: |
||||||||
Federal |
$ | | $ | | ||||
State |
(10 | ) | 21 | |||||
(10 | ) | 21 | ||||||
Deferred: |
||||||||
Federal |
23 | 23 | ||||||
State |
4 | 4 | ||||||
27 | 27 | |||||||
Total |
$ | 17 | $ | 48 | ||||
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Table of Contents
The significant components of the Companys net deferred tax assets and deferred tax liabilities at
July 2, 2011 and July 3, 2010 are as follows:
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Net federal, state and local operating loss carryforwards |
$ | 23,800 | $ | 29,300 | ||||
Costs capitalized to inventory for tax purposes |
400 | 900 | ||||||
Inventory valuation |
100 | 200 | ||||||
Excess of book over tax depreciation |
1,300 | 1,500 | ||||||
Sales allowances not currently deductible |
1,000 | 1,100 | ||||||
Reserves and other items not currently deductible |
600 | 600 | ||||||
27,200 | 33,600 | |||||||
Less: valuation allowance for deferred tax assets |
(27,200 | ) | (33,600 | ) | ||||
Net deferred tax asset |
$ | | $ | | ||||
July 2, | July 3, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Deferred tax liability: |
||||||||
Deferred tax liability related to indefinite lived intangibles |
$ | (200 | ) | $ | (173 | ) | ||
As of July 2, 2011 and July 3, 2010, based upon its evaluation of historical and projected
results of operation and the current business environment, the Company recorded a full valuation
allowance on its deferred tax assets. In fiscal 2011, the valuation allowance was decreased by $6.4
million to $27.2 million at July 2, 2011 from $33.6 million at July 3, 2010 primarily due to the
partial expiration of net operating loss carryforwards, offset by the Companys current year net
operating loss and other changes in 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 effective tax rate.
The Companys trademarks are not amortized for book purposes. As the Company continues to
amortize trademarks for tax purposes, it will provide 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. There were no sales or impairments during the years ended July 2, 2011 and July 3, 2010.
At July 2, 2011, the Company has a federal net operating loss carryforward for income tax
purposes of approximately $59.5 million, which will expire between fiscal 2012 and 2031. During
each of the years ended July 2, 2011 and July 3, 2010, the Company had approximately $24.1 million
and $26.3 million, respectively, of federal net operating loss carryforwards that expired.
Approximately 15% of the Companys net operating loss carryforward expires in fiscal 2012.
Approximately $0.8 million of the operating loss carryforwards relate to the exercise of
nonqualified stock options.
The Companys reconciliation (in $s) for the benefit at the effective rate for fiscal years 2011
and 2010 are as follows:
Fiscal Year Ended | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Benefit for federal income taxes at the statutory rate |
$ | (2,660 | ) | $ | (2,035 | ) | ||
State and local taxes, net of federal benefit |
(6 | ) | 14 | |||||
Other |
68 | 73 | ||||||
Changes in valuation allowance |
2,615 | 1,996 | ||||||
Provision for income taxes |
$ | 17 | $ | 48 | ||||
The Company classifies any interest and penalty payments or accruals within operating expenses
on the financial statements. There have been no accruals of interest or penalty payments, nor are
there any unrecognized tax benefits as of July 2, 2011. The Internal Revenue Service has reviewed
the Companys income tax returns through the period ended June 30, 2003 and proposed no changes to
the tax returns filed by the Company.
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6. 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 has an original maturity of September 30, 2011 with automatic annual extensions
to September 30th (Anniversary Date) unless terminated by CIT with at least sixty days
written notice of the Anniversary Date. No such termination notice has been received by the
Company from CIT.
The borrowings under the New Financing Agreement accrue interest at a rate of 3% above prime.
The interest rate as of July 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 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 July 2, 2011, the Company had $1.2 million of outstanding letters of credit, total
availability of approximately $3.0 million and revolving credit borrowings of $2.6 million under
the New Financing Agreement. On July 3, 2010, the Company had $2.0 million of outstanding letters
of credit, total availability of approximately $3.2 million and revolving credit borrowings of
$11.2 million under the New 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.
7. Deferred Income
In July 2009, the Company entered into an exclusive supply agreement with CTG. Under this
agreement, CTG will act as the exclusive supplier of substantially all merchandise purchased by the
Company in addition to providing sample making and production supervision services. In
consideration for the Company appointing CTG as the sole supplier of its merchandise
F-15
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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 July 2, 2011, $0.4 million of the
premium is included in accrued expenses and approximately $2.8 million is considered long term. The
Company will recognize the premium as income on a straight line basis over the 10 year term of the
agreement. For the years ended July 2, 2011 and July 3, 2010, the Company recognized
approximately $0.4 million in each year which was recorded as a reduction to cost of goods
sold. For the year ended July 3, 2010 the Company also 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 July 2, 2011 and July 3, 2010, amounts owed to CTG for
merchandise approximated $17.4 million and $12.2 million, respectively, and are included in
accounts payable on the accompanying consolidated balance sheet. In May 2011, CTG became a
stockholder of the Company (see Note 9).
8. Employee Benefit Plans
Pension Plan:
Pursuant to a collective bargaining agreement, the Companys union employees are eligible to
participate in the Companys defined benefit pension plan after completion of one year of eligible
service. Pension benefits are based on the number of years of service multiplied by a
predetermined factor. Pension expense amounted to approximately $52,000 and $49,000 in fiscal 2011
and 2010 respectively.
Obligations and Funded Status
The reconciliation of the benefit obligation and funded status of the pension plan as of July 2,
2011 and July 3, 2010 is as follows:
2011 | 2010 | |||||||
(in thousands) | ||||||||
Change in benefit obligation projected and accumulated |
||||||||
Benefit obligation at beginning of year |
$ | 2,106 | $ | 1,945 | ||||
Service cost |
6 | 8 | ||||||
Interest cost |
113 | 114 | ||||||
Actuarial loss |
31 | 11 | ||||||
Change in assumption |
131 | 116 | ||||||
Benefits paid |
(93 | ) | (88 | ) | ||||
Benefit obligation at end of year |
$ | 2,294 | $ | 2,106 | ||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 1,400 | $ | 1,399 | ||||
Actual return on plan assets |
184 | 89 | ||||||
Employer contributions |
| | ||||||
Benefits paid |
(93 | ) | (88 | ) | ||||
Fair value of plan assets at end of year |
$ | 1,491 | $ | 1,400 | ||||
Funded status |
$ | (803 | ) | $ | (706 | ) | ||
Unrecognized net actuarial loss |
1,085 | 1,040 | ||||||
Net amount recognized |
$ | 282 | $ | 334 | ||||
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2011 | 2010 | |||||||
(in thousands) | ||||||||
Amounts recognized in the statement of financial position consist of: |
||||||||
Accrued benefit cost |
$ | (803 | ) | $ | (706 | ) | ||
Accumulated other comprehensive loss |
1,085 | 1,040 | ||||||
Net amount recognized |
$ | 282 | $ | 334 | ||||
The total accrued benefit cost of $803,000 and $706,000 is included in long-term
liabilities on the consolidated balance sheet as of July 2, 2011 and July 3, 2010,
respectively. As of July 2, 2011, the amount in accumulated other comprehensive
loss that has not yet been recognized as a component of net periodic benefit cost is
comprised entirely of net actuarial losses. The changes in assumptions included in
the benefit obligation calculations during fiscal year 2011 reflects a change in the
mortality table used and during fiscal year 2010 reflects a change in the
methodology for amortizing gains and losses based on the life expectancies of
inactive participants. The amount of the net actuarial losses expected to be
recognized as a component of net periodic benefit cost over the next fiscal year is
approximately $38,000.
Fiscal Year | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Components of Net Periodic Benefit Cost: |
||||||||
Service cost |
$ | 7 | $ | 8 | ||||
Interest cost |
113 | 114 | ||||||
Expected return on plan assets |
(105 | ) | (105 | ) | ||||
Amortization of accumulated unrecognized net loss |
37 | 32 | ||||||
Net periodic benefit cost |
$ | 52 | $ | 49 | ||||
Additional Information
The adjustment to the funded status included in other comprehensive loss was $45,000 and
$111,000, for the years ended July 2, 2011 and July 3, 2010, respectively.
Assumptions | ||||||||
Weighted average assumptions used to determine: | ||||||||
Net periodic benefit cost for the fiscal years ended: | 2011 | 2010 | ||||||
Discount Rate |
5.50 | % | 6.00 | % | ||||
Expected Long Term Rate of Return on plan assets |
7.75 | % | 7.75 | % |
Benefit Obligation at end of year: | 2011 | 2010 | ||||||
Discount Rate |
5.50 | % | 5.50 | % | ||||
Expected Long Term Rate of Return on plan assets |
7.75 | % | 7.75 | % |
The expected long-term rate of return on plan assets was determined based on long-term return
analysis for equity, debt and other securities as well as historical returns. Long-term trends are
evaluated relative to market factors such as inflation and interest rates.
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Plan Assets
The Companys pension plan weighted-average asset allocations at July 2, 2011 and July 3, 2010, by
asset category are as follows:
Plan Assets | Plan Assets | |||||||
at July 2, | at July 3, | |||||||
Asset Category | 2011 | 2010 | ||||||
Equity securities |
50 | % | 40 | % | ||||
Debt securities |
36 | % | 37 | % | ||||
Cash equivalents |
14 | % | 23 | % | ||||
Total |
100 | % | 100 | % | ||||
The Companys investment strategy for the pension plan is to invest
in a diversified portfolio of assets managed by an outside
portfolio manager. The Companys goal is to provide for steady
growth in the pension plan assets, exceeding the Companys expected
return on plan assets of 7.75%. The portfolio is balanced to
maintain the Companys targeted allocation percentage by type of
investment. See table below. Investments are made by the portfolio
manager based upon guidelines of the Company.
The guidelines to be maintained by the portfolio manager are as follows:
Percentage of | Asset | |
Total Portfolio | Category | |
25-35%
|
Cash and short term investments | |
25-35%
|
Long-term fixed income / debt securities | |
25-40%
|
Common stock / equity securities |
The following sets forth by level, within the fair value hierarchy, pension plan investments at
fair value as of July 2, 2011 and July 3, 2010:
Investments at Fair Value as of July 2, 2011 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Pooled separate accounts |
|||||||||||||||||
Large US Equity |
$ | 535 | $ | 535 | |||||||||||||
Small US Equity |
74 | 74 | |||||||||||||||
International Equity |
130 | 130 | |||||||||||||||
Money Market |
221 | 221 | |||||||||||||||
Fixed Income |
531 | 531 | |||||||||||||||
Total investments at Fair Value |
| $ | 1,491 | | $ | 1,491 | |||||||||||
Investments at Fair Value as of July 3, 2010 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Pooled separate accounts |
|||||||||||||||||
Large US Equity |
$ | 414 | $ | 414 | |||||||||||||
Small US Equity |
54 | 54 | |||||||||||||||
International Equity |
97 | 97 | |||||||||||||||
Money Market |
318 | 318 | |||||||||||||||
Fixed Income |
517 | 517 | |||||||||||||||
Total investments at Fair Value |
| $ | 1,400 | | $ | 1,400 | |||||||||||
The plans assets are held in pooled separate accounts which are valued at the net fair value
of the underlying assets as determined generally by using quotation services.
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Table of Contents
Contributions
The Company will be required to contribute approximately $62,000 to the pension plan in fiscal
2012.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid (in thousands):
Fiscal | Pension | |||
Year | Benefits | |||
2012 |
$ | 111 | ||
2013 |
122 | |||
2014 |
129 | |||
2015 |
138 | |||
2016 |
147 | |||
2017-2021 |
818 |
Savings Plan:
The Company has a savings plan (the Savings Plan) under which eligible employees may
contribute a percentage of their compensation. The Company (subject to certain limitations) had
contributed 10% of the employees contribution until July 2009 when the Company suspended its
contribution. The Company contributions are invested in investment funds selected by the
participants and were subject to vesting provisions of the Savings Plan. There were no
contributions to the Savings Plan in fiscal 2011 and in fiscal 2010 the contributions were funded
by the plans forfeiture account.
9. Stockholders Equity:
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
for $0.3 million and in May 2011, the Company sold the remaining 3 million repurchased shares to
CTG for $0.3 million. The proceeds of these sales were used to repay the short term extension of
credit by CIT.
Stock Based Compensation:
Stock Option Plan
The Company has a shareholder-approved Stock Option Plan (the Option Plan). Pursuant to the
Option Plan, the Company may grant to eligible individuals incentive stock options, as defined in
the Internal Revenue Code of 1986, and non-incentive stock options. Generally, vesting periods
range from two to five years with a maximum term of ten years. Under the Option Plan, 7,750,000
shares of Common Stock are reserved for issuance. The maximum number of Shares that any one
Eligible Individual may be granted in respect of options may not exceed 4,000,000 shares of Common
Stock. No stock options may be granted subsequent to October 29, 2007. The exercise price may not
be less than 100% of the fair market value on the date of grant for incentive stock options.
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Table of Contents
Information regarding the Companys stock options is summarized below:
Stock Options | ||||||||||||
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Number | Average | Contractual | ||||||||||
of Shares | Exercise Price | Life (Years) | ||||||||||
Outstanding at July 4, 2010 |
813,604 | $ | .59 | |||||||||
Options forfeited/expired |
(125,000 | ) | $ | .75 | ||||||||
Outstanding at July 2, 2011 |
688,604 | $ | .56 | 0.49 | ||||||||
Vested and exercisable at July 2, 2011 |
688,604 | $ | .56 | 0.56 | ||||||||
There were no options exercised during fiscal 2011 and 2010. The total fair value of shares
vested during the fiscal years ended 2011 and 2010 was $4,000 and $9,000, respectively. There was
no aggregate intrinsic value of options outstanding or options currently exercisable at July 2,
2011 and July 3, 2010.
A summary of the status of the Companys nonvested shares as of July 2, 2011, and changes
during the year ended July 2, 2011, is presented below:
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Nonvested Shares: | Shares | Value | ||||||
Nonvested, July 4, 2010 |
5,000 | $ | 0.81 | |||||
Vested |
(5,000 | ) | 0.81 | |||||
Nonvested, July 2, 2011 |
| |||||||
All stock options are granted at fair market value of the Common Stock at grant date. The
outstanding stock options have a weighted average contractual life of 0.49 years and 1.72 years in
2011 and 2010, respectively. The number of stock options exercisable at July 2, 2011 and July 3,
2010 were 688,604 and 808,604 respectively. As of July 2, 2011, all of the compensation cost has
been recognized related to share-based compensation arrangements granted under the Option Plan.
Restricted Stock Inducement Plan
The Company also has the Bernard Chaus, Inc. 2007 Restricted Stock Inducement Plan (the
Plan). The maximum number of shares of the Companys common stock that may be granted under the
Plan is 100,000, which may consist of authorized and unissued shares or treasury shares. The
number and kind of shares available under the Plan are subject to adjustment upon changes in
capitalization of the Company affecting the shares. Whenever any outstanding award is forfeited,
cancelled or terminated, the underlying shares will be available for future issuance, to the extent
of the forfeiture, cancellation or termination. The Plan will remain in effect until the earlier of
ten years from the date of its adoption by the Board or the date it is terminated by the Board. The
Board has discretion to amend and/or terminate the Plan without the consent of participants,
provided that no amendment may impair any rights previously granted to a participant under the Plan
without such participants consent. In January 2008, the Company granted to its then Chief
Operating Officer, 100,000 shares of restricted stock which vested in two annual installments of
50,000 shares. The Restricted stock was issued at the fair market value at date of grant. The
fair market value of approximately $59,000 was recognized over the two year vesting period with
approximately $15,000 during the fiscal year ended 2010.
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10. Commitments, Contingencies and Other Matters
Lease Obligations:
The Company leases showroom, distribution and office facilities, and equipment under various
non-cancellable operating lease agreements which expire through fiscal 2019. Rental expense for
the fiscal years ended 2011 and 2010 was approximately $2.0 million and $2.1 million, respectively.
The minimum aggregate rental commitments at July 2, 2011 are as follows (in thousands):
Fiscal year ending:
2012 |
$ | 1,954 | ||
2013 |
1,964 | |||
2014 |
1,776 | |||
2015 |
1,804 | |||
2016 |
1,858 | |||
Thereafter |
5,574 | |||
$ | 14,930 | |||
Letters of Credit:
The Company was contingently liable for standby letters of credit issued by banks of
approximately $1.2 million as of July 2, 2011.
Inventory purchase commitments:
The Company was contingently liable for contractual commitments for merchandise purchases of
approximately $15.1 million at July 2, 2011
Camuto License Agreement:
On November 18, 2010, the Company entered into the Camuto License Agreement, which 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 and in February 2011,
Camuto became a stockholder in the Company (see Note 9). The Company began shipping Camuto licensed
products in June 2011. 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. Royalty and advertising expense recorded in fiscal 2011
was approximately $0.1 million and is included in accrued expenses at July 2, 2011 on the
accompanying consolidated balance sheet.
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Future minimum commitments are as follows:
Fiscal year ending: | Amount | |||
(in thousands) | ||||
2012 |
$ | 2,140 | ||
2013 |
1,350 | |||
2014 |
1,635 | |||
2015 |
1,860 | |||
2016 |
975 | |||
Total |
$ | 7,960 | ||
Litigation:
The Company is involved in legal proceedings from time to time arising out of the ordinary
conduct of its business. The Company believes that the outcome of these proceedings will not have
a material adverse effect on the Companys financial
condition, results of operations or cash flows.
11. Subsequent Events
On September 15, 2011, the Company received a cash merger proposal from Camuto pursuant to
which shareholders other than members of the Chaus family, CTG and Camuto would receive $0.13 per
share. The proposal is subject to a number of conditions including, among other things, the
negotiation and execution of definitive agreements, the approval of the transaction by Chaus Board
and shareholders, the receipt of a fairness opinion, the approval of the transaction by the Boards
of Camuto and CTG, the conversion of certain amounts owed by Chaus to CTG into term loans and the
entry by Chaus into a new financing agreement with CIT on terms satisfactory to all parties. The
proposal from Camuto must be approved by 2/3 of the Companys shareholders and is currently being
considered by the Companys independent directors, assisted by legal and financial advisers.
On September 29, 2011, the
Company was served with a summons and complaint in connection with a purported shareholder class action lawsuit relating
to the Camuto proposal. The lawsuit was filed in the Supreme Court of the State of New York and alleges, among other
things, breach of fiduciary duties by certain current and prior directors of the Company. The Company has not yet
responded to the complaint.
In addition, the Company is currently in negotiations with CTG to convert approximately $12
million of debt owed by the Company to CTG from accounts payable into two interest-bearing term
loans with initial terms of two years and five years. Additionally, the Company is currently in
discussions with CIT about a new or amended financing agreement that would, among other things,
permit the conversion of the CTG accounts payable into a secured term obligation.
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Table of Contents
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
(In thousands)
Additions | ||||||||||||||||
Balance at | Charged to | |||||||||||||||
Beginning of | Costs and | Balance at | ||||||||||||||
Description | Year | Expenses | Deductions | End of Year | ||||||||||||
Year ended July 2, 2011 |
||||||||||||||||
Reserve for customer allowances and deductions |
$ | 2,244 | $ | 10,318 | $ | 10,298 | 2 | $ | 2,264 | |||||||
Year ended July 3, 2010 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 11 | $ | 0 | $ | 11 | 1 | $ | 0 | |||||||
Reserve for customer allowances and deductions |
$ | 3,404 | $ | 10,940 | $ | 12,100 | 2 | $ | 2,244 | |||||||
1 | Uncollectible accounts written off | |
2 | Allowances charged to reserve and granted to customers |
S-1