UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2006
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-9169
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2807386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
530 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 354-1280
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. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark 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 registrant's 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. [_]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as
defined in rule 12b-2 of the Exchange Act). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant on December 31, 2005 was $17,760,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
September 18, 2006 Common Stock, $0.01 par value 37,513,587
LOCATION IN FORM 10-K
DOCUMENTS INCORPORATED BY REFERENCE IN WHICH INCORPORATED
----------------------------------- ---------------------
Portions of registrant's Proxy Statement for the Annual Part III
Meeting of Stockholders to be held November 16, 2006.
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 women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) SPORT, CHAUS(R), CYNTHIA STEFFE(R), and CYNTHIA CYNTHIA STEFFE(R)
trademarks and under private label brand names. The Company's products are sold
nationwide through department store chains, specialty retailers and other retail
outlets. The Company has positioned its JOSEPHINE CHAUS product line sold
through the department store channels into the opening price points of the
"better" category. In November 2002, the Company acquired certain assets of S.L.
Danielle, Inc. ("SL Danielle"). SL Danielle designs, arranges for the
manufacture of and markets women's moderately priced clothing. In January 2004,
the Company acquired certain assets of the Cynthia Steffe division of LF Brands
Marketing, Inc., including inventory and intellectual property. In connection
with such acquisition, the Company also acquired the Cynthia Steffe trademarks
from Cynthia Steffe. The Cynthia Steffe business designs, arranges for the
manufacture of, markets and sells an upscale modern women's apparel line, under
the Cynthia Steffe trademarks. In June 2005, the Company signed a licensing
agreement with Kenneth Cole Productions, Inc. to manufacture and sell women's
sportswear under the Kenneth Cole Reaction (R) label. In December 2005, the
Company began shipping products bearing the Kenneth Cole Reaction label
primarily to retail department stores. The Company is targeting increased doors
for the new line with its existing customers and additional retail department
stores. These Kenneth Cole Reaction products offer high-quality fabrications and
styling at "better" price points. As used herein, fiscal 2006 refers to the
fiscal year ended June 30, 2006, fiscal 2005 refers to the fiscal year ended
June 30, 2005 and fiscal 2004 refers to the fiscal year ended June 30, 2004.
On June 13, 2005, the Company and Kenneth Cole Productions, Inc. (the
"Purchaser") entered into a Stock Purchase Agreement, pursuant to which the
Purchaser purchased from the Company six million shares of newly issued shares
of common stock for an aggregate purchase price of $6.0 million.
PRODUCTS
The Company markets its products as coordinated groups of jackets,
skirts, pants, blouses, sweaters and related accessories principally under the
following brand names that also include products for women and petite sizes:
JOSEPHINE CHAUS- a collection of better tailored career clothing that includes
tailored suits, dresses, jackets, sweaters, skirts and pants.
CHAUS - a line of separate items that includes skirts, pants, sweaters and knit
tops.
CYNTHIA STEFFE AND CYNTHIA CYNTHIA STEFFE - a collection of upscale modern
clothing that includes tailored suits, dresses, jackets, skirts and pants.
KENNETH COLE REACTION - a better sportswear line focused on a contemporary
customer. The Company began initial shipments of this line in December 2005. On
June 13, 2005, the Company entered into a license agreement with Kenneth Cole
Productions (LIC), Inc. (the "Licensor"). The license agreement grants the
Company an exclusive license to design, manufacture, sell and distribute women's
sportswear under the Licensor's trademark "KENNETH COLE REACTION" in the women's
better sportswear and better petite sportswear department of approved department
stores and approved specialty retailers. The licensed territory is the United
States. The initial term of the license expires on December 31, 2010. The
Company has the option to renew the license agreement for an additional term of
three years if it meets specified sales targets and is in compliance with the
agreement. The license agreement provides for the payment to Licensor of
specified royalties on net sales. The license agreement also requires the
Company to achieve certain minimum sales levels, to pay certain minimum
royalties and to maintain a minimum net worth. The Company is also obligated to
pay specified percentages of net sales to support advertising and to expend a
total of approximately $3.6 million (reduced by agreement between the Company
and Kenneth Cole Productions, Inc. from $4.0 million) in the period ending
December 31, 2007 to support the initial launch of the licensed products.
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PRIVATE LABEL - the Company also sells private label apparel manufactured
according to customers' specifications.
The above products, while sold as separates, are coordinated by
styles, color schemes and fabrics and are designed to be merchandised and worn
together. The Company believes that the target consumers for its products are
women aged 25 to 65.
During fiscal 2006, the suggested retail prices of the Company's Chaus
products sold in the department store channels ranged in price between $39.00
and $149.00. The Company's jackets ranged in price between $99.00 and $149.00,
its skirts and pants ranged in price between $54.00 and $89.00, and its knit
tops, blouses and sweaters ranged in price between $39.00 and $99.00.
During fiscal 2006, the suggested retail prices of the Company's
Cynthia Steffe products ranged in price between $120.00 and $660.00. The
Company's Cynthia Steffe jackets ranged in price between $265.00 and $660.00,
its skirts and pants ranged in price between $120.00 and $330.00, its blouses
and sweaters ranged in price between $130.00 and $350.00, and its dresses ranged
in price between $200.00 and $660.00.
During fiscal 2006, the suggested retail prices of the Company's
Kenneth Cole Reaction products ranged in price between $39.00 and $189.00. The
Company's Kenneth Cole Reaction jackets ranged in price between $149.00 and
$189.00, its skirts and pants ranged in price between $74.00 and $129.00, its
knit tops, blouses, and sweaters ranged in price between $39.00 and $99.00 and
dresses ranged in price between $129.00 and $149.00.
The following table sets forth a breakdown by percentage of the
Company's net revenue by class for fiscal 2004 through fiscal 2006:
Fiscal Year Ended June 30,
--------------------------
2006 2005 2004
---- ---- ----
Josephine Chaus and Chaus 46% 49% 67%
Private Labels and licensed products 38 31 28
Cynthia Steffe and Cynthia Cynthia Steffe 16 20 5
--- --- ---
Total 100% 100% 100%
=== === ===
BUSINESS SEGMENTS
The Company operates in one segment, women's career and casual
sportswear. In addition, less than 1% of total revenue is derived from customers
outside the United States. The majority of the Company's long-lived assets are
located in the United States.
CUSTOMERS
The Company's products are sold nationwide in an estimated 5,000
stores operated by approximately 750 department store chains, specialty
retailers and other retail outlets. The Company does not have any long-term
commitments or contracts with any of its customers.
Through March 31, 2004, the Company extended credit to the majority of
its customers through a factoring agreement with The CIT Group/Commercial
Services, Inc. ("CIT"). Effective April 1, 2004, the Company began extending
credit to its customers based on an evaluation of the customer's financial
condition and credit history, except for customers of the Company's wholly owned
subsidiary, Cynthia Steffe Acquisition, LLC ("CS Acquisition"). Effective March
31, 2004, CS Acquisition and CIT entered into a Factoring Agreement pursuant to
which the Company receives payment from CIT as of the earlier of: a) the date
that CIT has been paid by the Company's customers; b) the date of the customer's
longest maturity if the customer is in a bankruptcy or insolvency proceeding; or
c) the last day of the third month following the customer's longest maturity
date if the receivable remains unpaid. CIT assumes only the risk of the
Company's customers' insolvency or non-payment. All other receivable risks for
customer deductions that reduce the customer receivable balances are retained by
the Company, including, but not limited to, allowable customer markdowns,
operational chargebacks, disputes, discounts, and returns.
2
At June 30, 2006 and 2005, approximately 94% and 91%, respectively of
the Company's accounts receivable was non factored. At June 30, 2006 and 2005,
approximately 65 % and 60 % respectively, of the Company's accounts receivable
were due from customers owned by three single corporate entities. During fiscal
2006, approximately 54% of the Company's net revenue was from three corporate
entities - Dillard's Department Stores (23%), Sam's Club (22%) and TJX Companies
(9%). During fiscal 2005, approximately 59% of the Company's net revenue was
from three corporate entities - Dillard's Department Stores (22%), Sam's Club
(20%) and TJX Companies (17%). During fiscal 2004, approximately 70% of the
Company's net revenue was from three corporate entities - Dillards Department
Stores (35%), TJX Companies (22%) and Sam's Club (13%) . As a result of the
Company's dependence on its major customers, such customers may have the ability
to influence the Company's business decisions. The loss of or significant
decrease in business from any of its major customers could have a material
adverse effect on the Company's financial position and results of operations. In
addition, the Company's ability to achieve growth in revenues is dependent, in
part, on its ability to identify new distribution channels.
SALES AND MARKETING
The Company's selling operation is highly centralized. Sales to the
Company's department and specialty store customers are made primarily through
the Company's New York City showrooms. As of June 30, 2006, the Company had an
in-house sales force of 13, all of whom are located in the New York City
showrooms. The Company's Cynthia Steffe division also employs independent sales
representatives to market its products to specialty stores throughout the
country.
Products are marketed to department and specialty store customers
during "market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating their
purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each collection.
During the course of the retail selling seasons, the Company monitors its
product sell-through at retail in order to directly assess consumer response to
its products.
The Company emphasizes the development of long-term customer
relationships by consulting with its 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 the Company's senior management and other sales personnel
and their counterparts at various levels in the buying organizations of the
Company's customers is an essential element of the Company's marketing and sales
efforts. These contacts allow the Company to closely monitor retail sales volume
to maximize sales at acceptable profit margins for both the Company and its
customers. The Company's marketing efforts attempt to build upon the success of
prior selling seasons to encourage existing customers to devote greater selling
space to the Company's product lines and to penetrate additional individual
stores within the Company's existing customers. The Company's largest customers
discuss with the Company retail trends and their plans regarding their
anticipated levels of total purchases of Company products for future seasons.
These discussions are intended to assist the Company in planning the production
and timely delivery of its products.
DESIGN
The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of 32 fashion designers. The Company
believes that its design staff is well regarded for its distinctive styling and
its ability to contemporize fashion classics. Emphasis is placed on the
coordination of outfits and quality of fabrics to encourage the purchase of more
than one garment.
MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and the
costs of a large workforce. Approximately 92% of its product is manufactured by
independent suppliers located primarily in China, Hong Kong and elsewhere in the
Far East and Guatemala. Approximately 8% of the Company's products are
manufactured in the United States. No contractual obligations exist between the
Company and its manufacturers
3
except on an order-by-order basis. During fiscal 2006, the Company purchased
approximately 72% of its finished goods from its ten largest manufacturers,
including approximately 12% of its purchases from its largest manufacturer.
Contracting with foreign manufacturers enables the Company to take advantage of
prevailing lower labor rates and to use a skilled labor force to produce high
quality products.
Generally, each manufacturer agrees to produce finished garments on
the basis of purchase orders from the Company, specifying the price and quantity
of items to be produced and in many cases, supported by a letter of credit
naming the manufacturer as beneficiary to secure payment for the finished
garments.
The Company's technical production support staff, located in New York
City, 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. Branch
offices of the Company's subsidiaries in Korea and Hong Kong monitor production
at each manufacturing facility to control quality, compliance with the Company's
specifications and timely delivery of finished garments, and arrange for the
shipment of finished products to the Company's third party distributors. The
Company utilizes third party distributors in New Jersey, California and Florida
for shipping of its finished goods.
The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.
The Company uses a broad range of fabrics selected by the Company in
the production of its clothing, consisting of synthetic fibers (including
polyester and acrylic), natural fibers (including cotton and wool), and blends
of natural and synthetic fibers. The Company does not have any formal, long-term
arrangements with any fabric or other raw material supplier. During fiscal 2006,
most of the fabrics used in the Company's products manufactured in the Far East
were ordered from a limited number of suppliers located in China, Hong Kong and
Korea. To date, the Company has not experienced any significant difficulty in
obtaining fabrics or other raw materials and considers its sources of supply to
be adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally proceed
the related shipping period by up to four months. In order to make timely
delivery of merchandise which reflects current style trends and tastes, the
Company attempts to schedule a substantial portion of its 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, the Company 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.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its 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. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through
4
which quotas are imposed have been negotiated under the framework established by
the Arrangement Regarding International Trade in Textiles, known as the
Multifiber Arrangement ("MFA"). The United States has concluded international
negotiations known as the "Uruguay Round" in which a variety of trade matters
were reviewed and modified. Quotas established under the MFA were phased out as
of December 2004 for most countries, after which the textile and clothing trade
were fully integrated into the General Agreement on Trade and Tariffs ("GATT")
and are now subject to the same disciplines as other industries. The GATT
agreement provides for expanded trade, improved market access, lower tariffs and
improved safeguard mechanisms.
The United States and the countries in which the Company's 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 the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot predict the likelihood or frequency of any such
events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise categories
where more quota is available and shifts of production among countries and
manufacturers. The expansion in the past few years of the Company's varied
manufacturing sources and the variety of countries in which it has 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 the
Company's products are subject to United States customs duties. Due to the large
portion of the Company's products, which are produced abroad, any substantial
disruption of its foreign suppliers could have a material adverse effect on the
Company's operations and financial condition.
BACKLOG
As of August 21, 2006 and 2005, the Company's order book reflected
unfilled customer orders for approximately $69.1 million and $58.6 million of
merchandise, respectively. Order book data at any date are materially affected
by the timing of the initial showing of collections to the trade, 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, CYNTHIA STEFFE,
CYNTHIA CYNTHIA STEFFE and FRANCES & RITA are registered trademarks of the
Company for use on ladies' garments. The Company considers its trademarks to be
strong and highly recognized, and to have significant value in the marketing of
its products. The Company has also registered many or its trademarks for use in
other categories such as accessories, cosmetics and in certain foreign
countries, and in the European Economic Community.
The Company has an exclusive license with Kenneth Cole Productions
(LIC), Inc. to design, manufacture and distribute wholesale women's sportswear
bearing the mark Kenneth Cole Reaction (R) for sale on women's better sportswear
and or better petite sportswear of approved department stores and approved
specialty retailers. See "Products-Kenneth Cole Reaction".
COMPETITION
The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies, some
of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers.
The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and
5
product identity, are also important aspects of competition in this industry.
The Company believes that its success will depend upon its ability to remain
competitive in these areas.
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from off-price and discount retailers, mass merchandisers
and specialty stores. The Company believes that its ability to increase its
present levels of sales will depend on such customers' ability to maintain their
competitive position and the Company's ability to increase its market share of
sales to department stores and other retailers.
EMPLOYEES
At June 30, 2006, the Company employed 223 employees as compared with
286 employees at June 30, 2005. The decrease in employees is primarily
attributable to the outsourcing of the Company's distribution function. This
total includes 50 in managerial and administrative positions, approximately 88
in design, production and production administration, and 23 in marketing,
merchandising and sales. Of the Company's total employees, 62 were located in
the Far East. The Company is a party to a collective bargaining agreement with
the Amalgamated Workers Union, Local 88, covering 8 full-time employees located
at our technical production support facility at 519 Eighth Avenue in New York
City. This agreement expires August 31, 2008. The Company is also party to an
agreement with the New York Metropolitan Joint Board Local 89-22-1 and Local 10
Unite here, AFL-CIO covering 9 full-time employees. This agreement expires on
September 1, 2007.
The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
Josephine Chaus 55 Chairwoman of the Board and Chief Executive Officer
David Panitz 38 Chief Operating Officer
Barton Heminover 52 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.
David Panitz was appointed Chief Operating Officer in October 2004.
Prior to joining the Company he served in numerous executive positions from 2002
to 2004 with Marc Ecko Enterprises, an apparel company, initially as its
Executive Vice President, Sales and Operations and last serving as Chief
Operating Officer. From 1999 to 2002, Mr. Panitz served in various executive
positions with C-bridge/eXcelon Corp., a business and technology solutions
company, initially as its Vice President of Operations and last serving as
President, Strategic Business Unit. From 1994 through 1999, he served in various
positions in sales and marketing and last served as director of Retail Analysis
and Planning of Polo Ralph Lauren Corp., an apparel Company.
Barton Heminover was appointed Chief Financial Officer in August 2002
and served as Vice President of Finance from January 2000 through August 2002
and as Vice President - Corporate Controller from July 1996 to January 2000.
From January 1983 to July 1996 he was employed by Petrie Retail, Inc. (formerly
Petrie Stores Corporation), a woman's retail apparel chain, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial Controller
from 1994 to 1996.
6
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" 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 the Company's customers in particular; changes in trends in the market
segments in which the Company competes and the Company's ability to gauge and
respond to changing consumer demands and fashion trends; the level of demand for
the Company's products; the Company's dependence on its major department store
customers; the success of the Kenneth Cole license agreement; the highly
competitive nature of the fashion industry; the Company's ability to satisfy its
cash flow needs, including the cash requirements under the Kenneth Cole license
agreement, by meeting its business plan and satisfying the financial covenants
in its credit facility; the Company's ability to operate within production and
delivery constraints, including the risk of failure of manufacturers to deliver
products in a timely manner or to quality standards; the Company's ability to
meet the requirements of the Kenneth Cole license agreement; the Company's
ability to operate effectively in the new quota environment, including changes
in sourcing patterns resulting from the elimination of quota on apparel
products; the Company's ability to attract and retain qualified personnel; and
changes in economic or political conditions in the markets where the Company
sells or sources its products, including war and terrorist activities and their
effects on shopping patterns, as well as other risks and uncertainties set forth
in the Company's 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. The Company disclaims 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 and the decrease in business
from one or more of these significant customers could have a material adverse
impact on our business. During fiscal 2006, approximately 54% of our net revenue
was from three corporate entities - Dillard's Department Stores (23%), Sam's
Club (22%) and TJX Companies (9%). 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 consumers 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 effected.
We use foreign suppliers for the manufacturing of our products. We do
not own any manufacturing facilities; all of our products are manufactured in
accordance with our design specifications and production schedules through
arrangements with independent manufacturers. Approximately 92% of our products
are manufactured by independent suppliers located primarily in China, Hong Kong
and elsewhere in the Far East and Guatemala. Approximately 8% of our products
are manufactured in the United States. No contractual obligations exist between
us and our manufacturers except on an order-by-order basis. During fiscal 2006,
we purchased approximately 72% of our finished goods from our ten largest
manufacturers, including approximately 12% of our purchases from our largest
manufacturer. The inability of a manufacturer to ship orders on 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 reduction in purchase price or vendors allowances.
7
There are other risks associated with using foreign manufacturers
like:
o Political and labor instability with foreign countries
o Terrorism, military conflict or war
o Changes in quotas, duty rates or other politically imposed
restrictions by foreign countries or the United States
o Delays in the delivery of cargo due to security considerations or
other shipping disruptions
o A decrease in availability or increase in the cost of raw
materials
We view the success of the Kenneth Cole Reaction products as a
significant factor to improving the Company's financial picture. The success of
the Kenneth Cole Reaction products depends on our ability to attract new
customers. In June 2005, we entered into a license agreement with Kenneth Cole
Productions (LIC), Inc. ("Kenneth Cole"), pursuant to which we were granted an
exclusive license to design, manufacture, sell and distribute women's sportswear
under the trademark "KENNETH COLE REACTION" in the United States in the women's
better sportswear and better petite sportswear department of approved department
stores and approved specialty stores. Under the license agreement, we are
required to achieve certain minimum sales levels, to pay certain minimum
royalties and to maintain a minimum net worth. We are also obligated to pay
specified percentages of net sales to support advertising and to expend a total
of approximately $3.6 million in the period ending December 31, 2007 to support
the initial launch of the licensed products. If we fail to make the minimum
payments and we fail to maintain the required minimum sales and net worth
levels, Kenneth Cole will have the right terminate the license agreement. If
Kenneth Cole were to terminate the license agreement, our revenues would
decrease significantly and our ability to attract new customers would be
impaired.
We operate in a highly competitive industry. The apparel business is
highly competitive with numerous apparel designers, manufactures and importers.
Many of our competitors have greater financial and marketing resources than us
and, in some cases, are vertically integrated in that they own and operate
retail stores in addition to manufacturing and distribution operations. The
competition within the industry may result in reduced prices and therefore
reduced sales and profitability 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 June 30,
2006, our Chairwoman and Chief Executive Officer owned approximately 45% 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.
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. Economic downturns, whether
real or perceived, in economic conditions or prospects 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 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.
8
ITEM 2. PROPERTIES.
The Company's principal executive office is located at 530 Seventh
Avenue in New York City where the Company leases approximately 28,000 square
feet. This lease expires in May 2009. This facility also houses the Company's
Chaus, SL Danielle, and Kenneth Cole showrooms and its sales, design, production
and merchandising staffs. Net base rental expense for the executive offices
aggregated approximately $0.9 million in each of fiscal 2006, fiscal 2005 and
fiscal 2004.
The Company's Cynthia Steffe subsidiary is located at 550 Seventh
Avenue in New York City where the Company leases approximately 12,000 square
feet. This lease expires in October 2013 and the net base rental expense is
approximately $0.3 million a year.
The Company's technical production support facility (including its
sample and patternmakers) is located at 519 Eighth Avenue in New York City where
the Company leases approximately 15,000 square feet. This lease expires in
August 2009. Net base rental expense for the technical production support
facilities aggregated approximately $0.3 million in each of fiscal 2006, fiscal
2005, and fiscal 2004.
The lease on the Company's former distribution center located in
Secaucus, New Jersey expired on December 31, 2005. Effective January 1, 2006,
the Company entered into a sublease for approximately 14,000 square feet for its
administrative and finance personnel, and its computer operations which were
located at the former distribution center. The sublease expires in June 2010.
The Company arranged for a third party contractor specializing in logistics to
handle the Company's distribution needs at the Company's former distribution
facility effective September 1, 2005.
Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.1 million for each of fiscal 2006,
fiscal 2005, and fiscal 2004.
ITEM 3. LEGAL PROCEEDINGS.
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
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's 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 Company's 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.
HIGH LOW
----- -----
FISCAL 2005
First Quarter................................... $1.13 $0.86
Second Quarter.................................. 1.01 0.75
Third Quarter................................... 0.92 0.72
Fourth Quarter.................................. 1.11 0.80
FISCAL 2006
First Quarter................................... $1.40 $0.97
Second Quarter.................................. 0.98 0.75
Third Quarter................................... 1.03 0.80
Fourth Quarter.................................. 1.01 0.75
FISCAL 2007
July 01- September 15, 2006..................... $0.75 $0.95
As of September 18, 2006, the Company had approximately 425 stockholders of
record.
The Company has not declared or paid cash dividends or made other
distributions on the Common Stock since prior to its 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 the Company's 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 the Company's
business operations and, accordingly, the Board of Directors does not expect to
declare or pay any dividends in the foreseeable future. In addition, the
Company's Financing Agreement prohibits the Company from declaring dividends or
making other distributions on its capital stock, without the consent of the
lender. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition, Liquidity and Capital Resources."
10
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of the
Company and the notes thereto, as well as Management's Discussion and Analysis
of Financial Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue $136,827 $143,255 $157,107 $140,225 $145,769
Cost of goods sold 99,697 103,661 117,451 104,398 116,951
-------- -------- -------- -------- --------
Gross profit 37,130 39,594 39,656 35,827 28,818
Selling, general and administrative expenses 40,867 39,240 34,894 29,634 30,130
Other income -- -- -- -- (193)
Interest expense, net 914 1,328 1,355 1,091 2,049
-------- -------- -------- -------- --------
Income (loss) before income tax provision
(benefit) (4,651) (974) 3,407 5,102 (3,168)
Income tax provision (benefit) 223 183 303 425 (944)
-------- -------- -------- -------- --------
Net income (loss) (4,874) $ (1,157) $ 3,104 $ 4,677 $ (2,224)
======== ======== ======== ======== ========
Basic earnings (loss) per share (1) $ (0.13) $ (0.04) $ 0.11 $ 0.17 $ (0.08)
======== ======== ======== ======== ========
Diluted earnings (loss) per share (2) $ (0.13) $ (0.04) $ 0.10 $ 0.16 $ (0.08)
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding - basic 37,017 28,363 27,504 27,384 27,216
======== ======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding - diluted 37,017 28,363 30,490 29,912 27,216
======== ======== ======== ======== ========
BALANCE SHEET DATA
AS OF JUNE 30,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Working capital $15,932 $21,456 $17,191 $15,653 $12,404
Total assets 39,914 44,298 46,376 39,847 35,691
Short-term debt, including current portion of
long-term debt 4,079 1,700 10,263 1,500 4,716
Long-term debt 3,925 5,625 7,325 7,875 9,375
Stockholders' equity 17,823 21,639 16,699 13,109 8,213
(1) Computed by dividing the applicable net income(loss) by the weighted
average number of shares of Common Stock outstanding during the year.
(2) Computed by dividing the applicable net income (loss) by the weighted
average number of common shares outstanding and common stock Common Stock
equivalents outstanding during the year.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company has expanded its product mix over the past few years
mainly through its acquisition of S.L. Danielle and Cynthia Steffe. In November
2002, the Company acquired certain assets of S.L. Danielle. S.L. Danielle
designs, arranges for the manufacture of, markets and sells moderately priced
women's apparel lines. In January 2004, the Company purchased certain assets of
the Cynthia Steffe, a division of LF Brands Marketing, Inc., including inventory
and intellectual property. In connection with the acquisition, the Company also
acquired Cynthia Steffe trademarks from Cynthia Steffe. The Cynthia Steffe
business designs, arranges for the manufacture of, markets and sells an upscale
modern women apparel line, under the Cynthia Steffe trademarks. The results of
Cynthia Steffe's operations are included in the consolidated financial
statements commencing January 2, 2004. In June 2005, the Company signed a
licensing agreement with Kenneth Cole Productions, Inc. to manufacture and sell
women's sportswear under the Kenneth Cole Reaction (R) label. In December 2005,
the Company began shipping products bearing the Kenneth Cole Reaction label
primarily to retail department stores. The Company is targeting increased doors
for the new line with its existing customers and additional retail department
stores. These Kenneth Cole Reaction products offer high-quality fabrications and
styling at "better" price points.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items expressed
as a percentage of net revenue.
Fiscal Year Ended June 30,
--------------------------
2006 2005 2004
---- ---- ----
Net revenue 100.0% 100.0% 100.0%
Gross profit 27.1 27.6 25.2
Selling, general and administrative expenses 29.9 27.4 22.2
Interest expense 0.7 0.9 0.9
Net income (loss) (3.6) (0.8) 1.9
Fiscal 2006 Compared to Fiscal 2005
Net revenues for fiscal 2006 decreased 4.5% or $6.5 million to $136.8
million as compared to $143.3 million for fiscal 2005. Units sold decreased by
5.1% and the overall price per unit increased by approximately 1%. The Company's
net revenues decreased primarily due to a decrease in revenues in the Company's
Chaus product lines ($7.0 million) and Cynthia Steffe product lines ($5.7
million), partially offset by an increase in revenues in the Company's private
label and licensed product lines ($6.4 million). The decrease in revenues in the
Chaus product lines and Cynthia Steffe product lines reflected decreased sales
to department stores and discounters. See table of percentage of net revenue by
class on page 2 for additional information.
Gross profit for fiscal 2006 decreased $2.5 million to $37.1 million
as compared to $39.6 million for fiscal 2005. As a percentage of sales, gross
profit decreased to 27.1% for fiscal 2006 from 27.6% for fiscal 2005. The
decrease in gross profit dollars was primarily attributable to the decrease in
gross profit of the Company's Cynthia Steffe product lines ($4.0 million) and a
decrease in gross profit of the Company's Chaus product lines ($0.4 million),
partially offset by an increase of approximately $2.0 million in gross profit
dollars from the Company's private label and licensed product lines. The
decrease in gross profit percentage was primarily due to the lower gross profit
percentage associated with the Company's Cynthia Steffe product lines and in the
mix of sales between product lines.
Selling, general and administrative ("SG&A") expenses increased by
$1.7 million to $40.9 million for fiscal 2006 as compared to $39.2 million in
fiscal 2005. As a percentage of net revenue, SG&A expenses increased to 29.9% in
fiscal 2006 as compared to 27.4% in fiscal 2005. The increase in SG&A expenses
was primarily due to an increase in marketing related costs ($1.2 million) and
design related costs ($0.6 million) partially offset by a decrease in total
costs associated with warehouse and distribution ($0.4 million). A significant
portion of the increase in SG&A expenses was associated with the launch of the
12
Kenneth Cole Reaction licensed product lines as well as continuing expenditures
associated with maintenance of such product lines. The increase in SG&A expense
as a percentage of net revenue was due to the decrease in sales volume of the
Company's Chaus product lines and Cynthia Steffe product lines which reduced the
Company's leverage on SG&A expenses. The increase in SG&A percentage was also
due to the increase in SG&A expenses predominately due to costs associated with
the Kenneth Cole Reaction licensed products.
Interest expense decreased in fiscal 2006 compared to fiscal 2005
primarily due to lower bank borrowings partially offset by higher interest
rates.
The Company's income tax provision for fiscal 2006, includes
provisions for state and local taxes, and a deferred provision for the temporary
differences associated with the Company's indefinite lived intangibles.
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 June 30, 2006 and
2005, based upon its evaluation of taxable income and the current business
environment, the Company recorded a full valuation allowance on its deferred tax
assets including NOL's. In fiscal 2006, the valuation allowance was increased by
$2.9 million to $43.9 million at June 30, 2006 from $41.0 million at June 30,
2005 primarily to reflect the Company's net operating loss and to reflect
changes in deferred tax assets. If the Company determines that a portion of the
deferred tax assets will be realized in the future, a portion of the valuation
allowance will be reduced and the Company will provide for income tax expense
(benefit) in its Statement of Operations at its estimated effective tax rate.
See discussion below under Critical Accounting Policies and Estimates regarding
income taxes and the Company's federal net operating loss carryforward.
Fiscal 2005 Compared to Fiscal 2004
Net revenues for fiscal 2005 decreased 8.8% or $13.8 million to $143.3
million as compared to $157.1 million for fiscal 2004. Units sold decreased by
13.9% and the overall price per unit increased by approximately 6%. The decrease
in net revenue was primarily due to the decrease in sales associated with Chaus
product lines of approximately $33.5 million partially offset by an increase in
Cynthia Steffe product lines of approximately $20.5 million. The decrease in the
Chaus product lines reflected decreased sales to department stores and
discounters. The increase in Cynthia Steffe net revenues is primarily due to the
inclusion of a full twelve months of sales this year compared to six months last
year. See table of percentage of net revenue by class on page 2 for additional
information.
Gross profit for fiscal 2005 decreased $0.1 million to $39.6 million
as compared to $39.7 million for fiscal 2004. As a percentage of sales, gross
profit increased to 27.6% for fiscal 2005 from 25.2% for fiscal 2004. The
decrease in gross profit dollars was primarily attributable to the decrease of
approximately $9.0 million in gross profit of the Company's Chaus product lines
due to the decrease in net revenues partially offset by an increase in gross
profit of $8.9 million associated with the Cynthia Steffe product lines. The
increase in Cynthia Steffe gross profit dollars was primarily due to the
increase in net revenues. The increase in gross profit percentage was primarily
due to the higher gross profit percentage associated with the Company's Cynthia
Steffe product lines which represented approximately 20% of net revenues this
year as compared to 5% of net revenues last year.
Selling, general and administrative ("SG&A") expenses increased by
$4.3 million to $39.2 million for fiscal 2005 as compared to $34.9 million in
fiscal 2004. As a percentage of net revenue, SG&A expenses increased to 27.4% in
fiscal 2005 as compared to 22.2% in fiscal 2004. These increases were primarily
attributable to the inclusion of a full twelve months of expenses of the Cynthia
Steffe product lines acquired in January 2004 which accounted for a $6.1 million
increase in SG&A expenses. This increase was partially offset by a $1.9 million
decrease in SG&A expenses associated with Chaus products lines and private
label. The increase in SG&A expenses was primarily due to SG&A expenses related
to payroll and payroll related costs ($3.3 million), design related costs ($0.7
million), professional fees ($0.5 million), marketing and advertising costs
($0.2 million) partially offset by a decrease in factoring fees ($0.4 million).
The increase in SG&A expense as a percentage of net revenue was due to the
decrease in sales volume of the Company's Chaus product lines sold to department
stores which reduced
13
the Company's leverage on SG&A expenses and the higher SG&A expenses as a
percentage of net revenue associated with the Cynthia Steffe product lines.
Interest expense was approximately the same for fiscal 2005 as it was
in fiscal 2004. The increase in interest rates was offset by lower bank
borrowings.
The Company's income tax provision for fiscal 2005, includes federal
alternative minimum taxes (AMT) resulting from the use of the Company's net
operating loss (NOL) carryforward from prior years and provisions for state and
local taxes. New Jersey enacted tax legislation temporarily suspending the use
of net operating loss (NOL) carryforwards against income for fiscal 2004 and
allowing 50% use of net operating loss (NOL) carryforwards against income for
fiscal 2005.
The Company periodically reviews its historical and projected taxable
income and considers available information and evidence to determine if it is
more likely than not that a portion of the deferred tax assets will be realized.
A valuation allowance is established to reduce the deferred tax assets to the
amount that is more likely than not to be realized. As of June 30, 2005 and
2004, based upon its evaluation of taxable income and the current business
environment, the Company recorded a full valuation allowance on its deferred tax
assets including NOL's. In fiscal 2005, the valuation allowance was reduced by
$1.8 million to $41.0 million at June 30, 2005 from $42.8 million at June 30,
2004 to primarily reflect the utilization of NOL's to offset taxes otherwise
payable on current taxable income and to reflect changes in deferred tax assets.
If the Company determines that a portion of the deferred tax assets will be
realized in the future, a portion of the valuation allowance will be reduced and
the Company will provide for income tax expense (benefit) in its Statement of
Operations at its estimated effective tax rate. See discussion below under
Critical Accounting Policies and Estimates regarding income taxes and the
Company's federal net operating loss carryforward.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $8.0 million for fiscal 2006
as compared to net cash provided by operating activities of $11.8 million for
fiscal 2005, and net cash used in operating activities of $7.1 million for
fiscal 2004. Net cash used in operating activities for fiscal 2006 resulted
primarily from the Company's net loss ($4.9 million), an increase in accounts
receivable ($5.5 million), partially offset by a decrease in inventory ($1.5
million). The increase in accounts receivable of $5.5 million was predominately
due to the increase in sales during the fourth quarter of fiscal 2006 as
compared to fiscal 2005. The decrease in inventory as of June 30, 2006 compare
to June 30, 2005 is primarily due the timing of inventory receipts. The Company
does not currently anticipate that these changes in accounts receivable or
inventory will adversely affect its cash flows for fiscal 2007.
Net cash provided by operating activities of $11.8 million for fiscal
2005 resulted primarily from a decrease in accounts receivable ($11.8 million),
an increase in accounts payable ($1.6 million), partially offset by an increase
in inventory ($2.0 million). The decrease in accounts receivable of $11.8
million was predominately due to the decrease in sales during the fourth quarter
of fiscal 2005 as compared to fiscal 2004. The increase in accounts payable of
$1.6 million was attributable to the increase in inventory of $2.0 million
offset by an increase of $0.4 million in the timing of payments for inventory.
The change in the mix of suppliers and the Company's purchase of higher levels
of raw materials than in prior periods has required an earlier payment schedule.
Cash used in investing activities was $1.0 million in fiscal 2006
compared to $0.3 million in fiscal 2005 and $3.9 million in fiscal 2004. The
investing activities in fiscal 2006 consisted of $1.0 million for the purchases
of fixed assets in connection with construction of the Kenneth Cole showroom and
management information systems. The investing activities in fiscal 2005
consisted of $0.3 million for the purchase of fixed assets. The investing
activities in fiscal 2004 consisted of $3.0 million primarily for the
acquisition of Cynthia Steffe product lines and $1.0 million for the purchase of
fixed assets. The purchases of fixed assets for fiscal years 2005 and 2004
consisted primarily of purchases of computer hardware and software systems. In
fiscal 2007, the Company anticipates capital expenditures of approximately $1.0
million, primarily for management information system upgrades and store
fixtures.
14
Cash provided by financing activities of $1.3 million for fiscal 2006
resulted from net borrowings of $2.4 million for short-term bank borrowings and
net proceeds of $0.7 million from the issuance of common stock in connection
with the exercise of stock options partially offset by the principal payments of
$1.7 million on the term loan. Cash used in financing activities of $3.8 million
for fiscal 2005 resulted from net payments of $8.6 million for short-term bank
borrowings and principal payments of $1.7 million on the term loan partially
offset by net proceeds of $6.4 million from the issuance of common stock. The
net proceeds from the issuance of common stock consisted of (i) a $6.0 million
equity investment less $0.4 million of transaction fees from the issuance of six
million shares of the Company's common stock to Kenneth Cole Productions, Inc in
June 2005; and (ii) net proceeds of $0.8 million from the exercise of stock
options. Cash used in financing activities of $8.5 million for fiscal 2004
resulted from net borrowing of $8.6 million for short-term bank borrowings and
$0.3 million from net proceeds from the issuance of stock offset by net
principal payments of $0.4 million on the term loan.
Kenneth Cole License Agreement
The Company entered into a license agreement with Kenneth Cole
Productions (LIC) in June 2005. Under the license agreement the Company is
required to achieve certain minimum sales levels, to pay certain minimum
royalties and to maintain a minimum net worth. The Company is also obligated to
pay specified percentages of net sales to support advertising and to expend a
total of approximately $3.6 million (reduced by agreement between the Company
and Kenneth Cole Productions, Inc from $4.0 million) in the period ending
December 31, 2007 to support the initial launch of the licensed products. The
Company has recorded in the Statement of Operations an expense of approximately
$0.6 million for the year ended June 30, 2006.
Contractual Obligations and Commercial Commitments
The following table summarizes as of June 30, 2006, the Company's
contractual obligations and commercial commitments by future period:
Payments due by Period
(in thousands)
--------------------------------------------------------
Contractual obligations and Commercial Commitments Total Less than 1 year 2-3 years 4-5 years After 5 years
- -------------------------------------------------------- ------- ---------------- --------- --------- -------------
Operating leases $ 7,126 $ 1,931 $ 3,530 $ 930 $735
Kenneth Cole license agreement 15,935 3,525 6,750 5,660 --
Letters of Credit commitments 5,134 5,134 -- -- --
Inventory purchase commitments 12,385 12,385 -- -- --
Revolving credit borrowings 2,379 2,379 -- -- --
Term loan (including interest of $728) (1) 6,353 2,122 4,231 -- --
------- ------- ------- ------ ----
Total contractual obligations and commercial commitments $49,312 $27,476 $14,511 $6,590 $735
(1) Interest is estimated based upon rate charged at June 30, 2006 of 9.25%
Financing Agreement
The Company has a financing agreement (the "Financing Agreement") with
the CIT Group/Commercial Services, Inc. ("CIT") which provides the Company with
a $40 million revolving line of credit (the "Revolving Facility"), a $25 million
sublimit for letters of credit, and as of June 30, 2006 a $5.6 million term loan
(the "Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JP Morgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the Prime
Rate, the interest (i) on the Revolving Facility accrues at a rate of 1/2 of 1%
above the Prime Rate and (ii) on the Term Loan accrues at a rate of 1% above the
Prime Rate. If the Company chooses LIBOR, the interest (i) on the Revolving
Facility accrues at a rate of 2 3/4% above LIBOR and (ii) on the Term Loan
accrues at a rate of
15
2 3/4% above LIBOR. The Company had elected the Prime Rate option from the
inception of the Financing Agreement through June 30, 2006. Each of the
foregoing interest rates is subject to an annual upward or downward adjustment
by 1/4 of 1%, commencing with the month following delivery of the Company's
consolidated financial statements to CIT for fiscal 2006 and fiscal 2007 based
upon the Company's borrowing availability, fixed charge coverage ratio and
leverage ratio as in effect at each such adjustment period. The interest rate as
of June 30, 2006 on the Revolving Facility was 8.75% and on the Term Loan was
9.25%.
The Term loan is paid down in quarterly installments of $425,000 with
a balloon payment of $1.8 million due on October 1, 2008. The Company's
obligations under the Financing Agreement are secured by a first priority lien
on substantially all of the Company's assets, including the Company's accounts
receivable, inventory, intangibles, equipment, and trademarks, and a pledge of
the Company's interest in its subsidiaries.
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) minimum EBITDA
(earnings before interest, taxes, depreciation and amortization), (iii) certain
fixed charge coverage ratios, (iv) certain leverage ratios, and (v) specified
levels of minimum borrowing availability under the Revolving Facility. In the
event of the early termination by the Company of the Financing Agreement, the
Company will be liable for termination fees of $150,000 if termination occurs
prior to November 11, 2007. The Company may prepay at any time, in whole or in
part, the Term Loan without penalty. The expiration of the Financing Agreement
is October 1, 2008. As of June 30, 2006 the Company was in compliance with all
covenants.
On January 30, 2004, the Company and CIT agreed to an amendment to the
Financing Agreement primarily to (i) increase the amount of the Term Loan by
$1.2 million to cover a portion of the purchase price of Cynthia Steffe (see
Note 7) and (ii) to increase the quarterly amortization payments on the Term
Loan from $375,000 to $425,000.
At various times since the inception of the Financing Agreement with
CIT in September 2002, the Company and CIT have amended the Financing Agreement
to assure compliance with financial covenants, to facilitate the Company's
acquisitions, and to modify other terms of the Financing Agreement.
On September 21, 2006 the Company and CIT agreed to further amend the
Financing Agreement to modify the financial covenants to be consistent with the
Company's then latest business plan for fiscal 2007.
On June 30, 2006, the Company had $5.1 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$16.6 million under the amended Financing Agreement, a balance of $5.6 million
on the Term Loan and $2.4 million in revolving credit borrowings. At June 30,
2005, the Company had $6.2 million of outstanding letters of credit under the
Revolving Facility, total availability of approximately $20.9 million under the
Financing Agreement, a balance of $7.3 million on the Term Loan and no revolving
credit borrowings.
Factoring Agreement
One of the Company's subsidiaries, CS Acquisition, has a factoring
agreement with CIT (the "Factoring Agreement") which provides for a factoring
commission equal to 6/10 of 1% of the gross face amount of all accounts factored
by CIT up to $10 million ratably declining to a commission between .55% and .45%
of the gross amount of the receivables in excess of $10 million. Such agreement
has an annual minimum factoring fee of $50,000. The Factoring Agreement which
would have expired by its terms on March 31, 2006 was extended to March 31,
2007. The Company is obligated to pay to CIT a collateral management fee of
$5,000 a month.
Future Financing Requirements
At June 30, 2006, the Company had working capital of $15.9 million as
compared with working capital of $21.5 million at June 30, 2005. On June 13,
2005, the Company and Kenneth Cole Productions, Inc. ("Purchaser") entered into
a Stock Purchase Agreement, pursuant to which the Purchaser purchased from the
Company six million (6,000,000) shares of
16
Common Stock of the Company for an aggregate purchase price of six million
dollars ($6,000,000). The Company's business plan requires the availability of
sufficient cash flow and borrowing capacity to finance its product lines and to
meet its cash needs for the launch and support of the Kenneth Cole product
lines. The Company expects to satisfy such requirements through cash on hand,
cash flow from operations and borrowings under its financing agreements. The
Company believes that it has adequate resources to meet its needs for the
foreseeable future assuming that it meets its business plan and satisfies the
covenants set forth in the Financing Agreement.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties, including
the Company's ability to maintain its borrowing capabilities under the Financing
Agreement, retail market conditions, and consumer acceptance of the Company's
products.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements except
for inventory purchase orders and letters of credit under the Financing
Agreement. See "Financing Agreement".
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net revenue or profitability.
SEASONALITY OF BUSINESS AND FASHION RISK
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Fall and Holiday Seasons.
Typically, the Company's 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 the Company's products is often
dependent on the ability 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, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's 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.
FOREIGN OPERATIONS
The Company's foreign sourcing operations are subject to various risks
of doing business abroad and any substantial disruption of its relationships
with its foreign suppliers could adversely affect the Company's operations. Any
material increase in duty levels, material decrease in quota levels or material
decrease in available quota allocation could adversely affect the Company's
operations. Approximately 92% of the products sold by the Company in fiscal 2006
were manufactured in Asia and Central America.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are more fully described
in Note 2 to the consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, observation of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate. Significant accounting
policies include:
17
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers since title and risk of loss passes upon shipment.
Provisions for estimated uncollectible accounts, discounts and returns and
allowances are provided when sales are recorded based upon historical experience
and current trends. While such amounts have been within expectations and the
provisions established, the Company cannot guarantee that it will continue to
experience the same rates as in the past. Design revenue for fiscal 2005 and
fiscal 2004 represented less than 1% of total revenue, was recognized when
designs were manufactured and shipped. There was no design revenue in fiscal
2006.
Accounts Receivable - Accounts Receivable are net of allowances and
anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial
statements, assessments of collectibility based on historical trends and an
evaluation of the impact of economic conditions. This amount is not significant
primarily due to the Company's history of minimal bad debts. An allowance for
discounts is based on those discounts relating to open invoices where trade
discounts have been extended to customers. Costs associated with potential
returns of products as well as allowable customer markdowns and operational
charge backs, net of expected recoveries, are included as a reduction to net
revenue and are part of the provision for allowances included in Accounts
Receivable. These provisions result from seasonal negotiations as well as
historic deduction trends, net expected recoveries and the evaluation of current
market conditions. As of June 30, 2006 and June 30, 2005, Account Receivable was
net of allowances of $2.7 million, and $1.8 million, respectively.
Inventories - Inventories are stated at the lower of cost or market,
cost being determined on the first-in, first-out method. The majority of the
Company's inventory purchases are shipped FOB shipping point from the Company's
suppliers. The Company takes title and assumes the risk of loss when the
merchandise is received at the boat or airplane overseas. The Company records
inventory at the point of such receipt at the boat or airplane overseas.
Reserves for slow moving and aged merchandise are provided to adjust inventory
costs based on historical experience and current product demand. Inventory
reserves were $1.4 million at June 30, 2006, and $1.5 million at June 30, 2005.
Inventory reserves are based upon the level of excess and aged inventory and the
Company's estimated recoveries on the sale of the inventory. While markdowns
have been within expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same level of markdowns as in
the past.
Valuation of Long-Lived Assets, Trademarks and Goodwill - The Company
periodically reviews the carrying value of its long-lived assets for continued
appropriateness. This review is based upon projections of anticipated future
undiscounted cash flows. While the Company believes that its estimates of future
cash flows are reasonable, different assumptions regarding such cash flows could
materially affect evaluations. The Company evaluates goodwill and trademarks at
least annually or whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable from its estimated future cash flows. To
the extent these future projections or the Company's strategies change, the
conclusion regarding impairment may differ from the current estimates.
Income Taxes- The Company's results of operations have generated a
federal tax net operating loss ("NOL") carryforward of approximately $99.5
million as of June 30, 2006. Generally accepted accounting principles require
that the Company record a valuation allowance against the deferred tax asset
associated with this NOL if it is "more likely than not" that the Company will
not be able to utilize it to offset future taxable income. As of June 30, 2006,
based upon its evaluation of the Company's historical and projected results of
operations, the current business environment and the magnitude of the NOL, the
Company recorded a full valuation allowance on its deferred tax assets including
NOL's. The provision for income taxes primarily relates to state and local taxes
and deferred provision for temporary differences associated with the Company's
indefinite lived intangibles. It is possible, however, that the Company could be
profitable in the future at levels which cause management to conclude that it is
more likely than not that the Company will realize all or a portion of the NOL
carryforward. Upon reaching such a conclusion, the Company would record the
estimated net realizable value of the deferred tax asset at that time and would
then provide for income taxes at a rate equal to its combined federal and state
effective rates. Subsequent revisions to the estimated net realizable value of
the deferred tax asset could cause the Company's provision for income taxes to
vary from period to period, although its cash tax payments would remain
unaffected until the benefit of the NOL is utilized.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk- The Company is subject to market risk from
exposure to changes in interest rates based primarily on its financing
activities. The market risk inherent in the financial instruments represents the
potential loss in earnings or cash flows arising from adverse changes in
interest rates. These debt obligations with interest rates tied to the prime
rate are described in "Liquidity and Capital Resources", as well as Note 6 of
the Notes to the Consolidated Financial Statements. The Company manages these
exposures through regular operating and financing activities. The Company has
not entered into any derivative financial instruments for hedging or other
purposes. The following quantitative disclosures are based on the prevailing
prime rate. These quantitative disclosures do not represent the maximum possible
loss or any expected loss that may occur, since actual results may differ from
these estimates.
At June 30, 2006 and 2005, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of June
30, 2006, the Company's revolving credit interest rate was 8.75 % and the term
loan bore interest at 9.25%. As of June 30, 2006, a hypothetical immediate 10%
adverse change in prime interest rates relating to the Company's revolving
credit borrowings and term loan would have a $0.1 million unfavorable impact on
its earnings and cash flows over a one-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 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.
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports filed or submitted by it under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the
Company's Chairwoman and Chief Executive Officer and the Company's Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Each fiscal quarter the Company carries out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chairwoman and Chief Executive Officer along with the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon the foregoing, the Company's Chairwoman and Chief Executive
Officer along with the Company's Chief Financial Officer, concluded that, as of
June 30, 2006, the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's Exchange
Act reports.
During the fiscal year ended June 30, 2006, there was no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
NONE
19
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.
Information with respect to the directors of the Company is
incorporated by reference to the information to be set forth under the heading
"Election of Directors" in the Company's definitive proxy statement relating to
its 2006 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
(the "2006 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
Company's 2006 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 Company's 2006 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 Company's
2006 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 Company's 2006 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 Company's 2006 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 Company's
Registration Statement on Form S-1, Registration No. 33-5954 (the "1986
Registration Statement")).
20
3.2 Amendment dated November 18, 1987 to the Restated Certificate
(incorporated by reference to Exhibit 3.11 of the Company's 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 Company's 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 Company's Form 10-Q for the quarter ended December 31, 1987).
3.6 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's 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 Company's 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 Company's 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 Company's 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 Company's technical support
facilities at 519 Eighth Avenue, New York City (incorporated by
reference to Exhibit of the Company's Form 10-K for the year ended June
30, 2000 (the "2000 Form 10-K")).
+10.87 Employment Agreement dated January 10, 2001 between the Company and
Nicholas DiPaolo (incorporated by reference to Exhibit 10.87 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.90 Lease modification agreement between the Company and Hartz Mountain
Industries, Inc., dated August 30, 1999 with respect to the Company's
distribution and office facilities in Secaucus, NJ. (incorporated by
reference to Exhibit 10.90 of the Company's 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 Company's 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 Company's Form 10-Q for the
quarter ended December 31, 2002).
21
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 Company's 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 Company's 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 Company's Form 10-Q
for the quarter ended December 31, 2003).
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 Company's 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 Company's 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 Company's Form 10-Q for the
quarter ended December 31, 2003).
10.111 Amendment to Employment Agreement between Nicholas DiPaolo and Bernard
Chaus, Inc., effective as of December 1, 2003. (incorporated by
reference to Exhibit 10.111 of the Company's Form 10-Q for the quarter
ended March 31, 2004).
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
Company's 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
Company's 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).
+10.115 Amendment to Employment Agreement dated October 18, 2004 between the
Company and Nicholas DiPaolo. (incorporated by reference to Exhibit
10.115 of the Company's form 10-Q the quarter ended December 31, 2004).
+10.116 Employment Agreement dated October 18, 2004 between the Company and
David Panitz. (incorporated by reference to Exhibit 10.116 of the
Company's form 10-Q the quarter ended December 31, 2004).
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 Company's form 10-Q the quarter ended December 31,
2004).
22
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
Company's 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 246-2 for certain
portions thereof). (incorporated by reference to Exhibit 10.120 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
10.120 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.
*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.
*21 List of Subsidiaries of the Company.
*23.1 Consent of Mahoney Cohen & Company, CPA,P.C., Independent Registered
Public Accounting Firm.
*23.2 Consent of Deloitte & Touche LLP, 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 Barton Heminover.
*32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Josephine Chaus.
*32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Barton Heminover.
+ Management agreement or compensatory plan or arrangement required to be
filed as an exhibit.
* Filed herewith.
23
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
Chairwoman of the Board and
Chief Executive Officer
Date: September 28, 2006
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 September 28, 2006
- ------------------------- Chief Executive Officer
Josephine Chaus
/s/ David Panitz Chief Operating Officer September 28, 2006
- -------------------------
David Panitz
/s/ Barton Heminover Chief Financial Officer September 28, 2006
- -------------------------
Barton Heminover
/s/ Philip G. Barach Director September 28, 2006
- -------------------------
Philip G. Barach
/s/ S. Lee Kling Director September 28, 2006
- -------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director September 28, 2006
- -------------------------
Harvey M. Krueger
24
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:
Reports of Independent Registered Public Accounting Firms................. F-2
Consolidated Balance Sheets -- June 30, 2006 and 2005 .................... F-4
Consolidated Statements of Operations -- Years Ended June 30, 2006, 2005
and 2004............................................................... F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) -- Years Ended June 30, 2006, 2005 and 2004..................... F-6
Consolidated Statements of Cash Flows -- Years Ended June 30, 2006, 2005
and 2004............................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 15:
Schedule II -- Valuation and Qualifying Accounts....................... 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for the years then ended. Our audit also included the financial
statement schedule listed in the Index at item 15 for the years ended June 30,
2006 and 2005. These financial statements and financial statement schedule are
the responsibility of the Company's 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 has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 June 30, 2006 and 2005, 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/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
August 11, 2006, except with respect to the matter
discussed in Note 6 as to which the date is September 21, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Bernard Chaus, Inc. and subsidiaries for
the year ended June 30, 2004. Our audit also included the financial statement
schedule listed in the Index at item 15 for the year ended June 30, 2004. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Bernard Chaus,
Inc. and subsidiaries for the year ended June 30, 2004 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/ Deloitte & Touche LLP
Parsippany, New Jersey
September 28, 2004
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
June 30, June 30,
ASSETS 2006 2005
--------- ---------
Current Assets
Cash and cash equivalents $ 120 $ 7,732
Accounts receivable - net 21,864 16,331
Accounts receivable - due from factor 1,390 1,689
Inventories - net 9,139 10,667
Prepaid expenses and other current assets 643 898
--------- ---------
Total current assets 33,156 37,317
Fixed assets - net 3,154 3,353
Other assets - net 347 371
Trademarks 1,000 1,000
Goodwill 2,257 2,257
--------- ---------
Total assets $ 39,914 $ 44,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 2,379 $ --
Accounts payable 9,304 9,479
Accrued expenses 3,841 4,682
Term loan - current 1,700 1,700
--------- ---------
Total current liabilities 17,224 15,861
Term loan 3,925 5,625
Long term liabilities 660 994
Deferred income taxes 282 179
--------- ---------
Total liabilities 22,091 22,659
Commitments and Contingencies (Notes 6, 9, and 11)
STOCKHOLDERS' EQUITY
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; 376 360
issued shares - 37,590,085 at June 30,2006 and 36,004,359 at
June 30,2005
Additional paid-in capital 133,449 132,621
Deficit (114,061) (109,187)
Accumulated other comprehensive loss (461) (675)
Less: Treasury stock at cost - 62,270 shares at June 30, 2006 and 2005 (1,480) (1,480)
--------- ---------
Total stockholders' equity 17,823 21,639
--------- ---------
Total liabilities and stockholders' equity $ 39,914 $ 44,298
========= =========
See accompanying notes to consolidated financial statements.
F-4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Fiscal Year Ended June 30,
---------------------------------------
2006 2005 2004
----------- ----------- -----------
Net revenue $ 136,827 $ 143,255 $ 157,107
Cost of goods sold 99,697 103,661 117,451
----------- ----------- -----------
Gross profit 37,130 39,594 39,656
Selling, general and administrative expenses 40,867 39,240 34,894
----------- ----------- -----------
Income (loss) from operations (3,737) 354 4,762
Interest expense, net 914 1,328 1,355
----------- ----------- -----------
Income (loss) before income tax provision (4,651) (974) 3,407
Income tax provision 223 183 303
----------- ----------- -----------
Net income (loss) $ (4,874) $ (1,157) $ 3,104
=========== =========== ===========
Basic earnings (loss) per share $ (0.13) $ (0.04) $ 0.11
=========== =========== ===========
Diluted earnings (loss) per share $ (0.13) $ (0.04) $ 0.10
=========== =========== ===========
Weighted average number of common shares
outstanding - basic 37,017,000 28,363,000 27,504,000
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding - diluted 37,017,000 28,363,000 30,490,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except number of shares)
Common Stock Treasury Stock Accumulated
------------------- Additional ------------------- Other
Number Paid-in Number Comprehensive
of Shares Amount Capital (Deficit) of Shares Amount Loss Total
---------- ------ ---------- --------- --------- ------- ------------- -------
Balance at July 1, 2003 27,384,358 $274 $125,943 ($111,134) 62,270 ($1,480) ($494) $13,109
Issuance of common stock
upon exercise of stock options 595,001 6 291 -- -- -- -- 297
Minimum pension liability
adjustment -- -- -- -- -- -- 189 189
Net income -- -- -- 3,104 -- -- -- 3,104
-------
Comprehensive income 3,293
---------- ---- -------- --------- ------ ------- ----- -------
Balance at June 30, 2004 27,979,359 280 126,234 (108,030) 62,270 (1,480) (305) 16,699
Issuance of common stock, net of
expenses 6,000,000 60 5,578 -- -- -- -- 5,638
Issuance of common stock
upon exercise of stock options 2,025,000 20 757 -- -- -- -- 777
Tax benefit from exercise of
stock options -- -- 52 -- -- -- -- 52
Minimum pension liability
adjustment -- -- -- -- -- -- (370) (370)
Net loss -- -- -- (1,157) -- -- -- (1,157)
-------
Comprehensive loss (1,527)
---------- ---- -------- --------- ------ ------- ----- -------
Balance at June 30, 2005 36,004,359 360 132,621 (109,187) 62,270 (1,480) (675) 21,639
Issuance of common stock upon
exercise of stock options 1,607,500 16 650 -- -- -- -- 666
Repurchase and retirement
of common stock (21,774) -- (21) -- -- -- -- (21)
Stock option compensation
expense -- -- 199 -- -- -- -- 199
Minimum pension liability
adjustment -- -- -- -- -- -- 214 214
Net loss -- -- -- (4,874) -- -- -- (4,874)
-------
Comprehensive loss (4,660)
---------- ---- -------- --------- ------ ------- ----- -------
Balance at June 30, 2006 37,590,085 $376 $133,449 ($114,061) 62,270 ($1,480) ($461) $17,823
========== ==== ======== ========= ====== ======= ===== =======
See accompanying notes to consolidated financial statements
F-6
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
----------------------------
2006 2005 2004
------- ------- --------
OPERATING ACTIVITIES
Net income (loss) $(4,874) $(1,157) $ 3,104
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,213 1,257 1,273
Stock compensation expense 199 -- --
Deferred income taxes 103 98 --
Provision for losses on accounts receivable -- -- 180
Changes in operating assets and liabilities:
Accounts receivable (5,533) 11,777 (27,811)
Accounts receivable due from factor 299 (994) 18,824
Inventories 1,528 (1,994) 2,601
Prepaid expenses and other current assets 227 (7) (176)
Accounts payable (175) 1,566 (4,834)
Accrued expenses and long term liabilities (961) 1,211 (251)
------- ------- --------
Net Cash Provided By (Used In) Operating Activities (7,974) 11,757 (7,090)
------- ------- --------
INVESTING ACTIVITIES
Acquisition of business -- -- (2,960)
Purchases of fixed assets (962) (314) (973)
------- ------- --------
Net Cash Used In Investing Activities (962) (314) (3,933)
------- ------- --------
FINANCING ACTIVITIES
Net proceeds (repayments)from revolving credit borrowings 2,379 (8,563) 8,563
Principal payments on term loan (1,700) (1,700) (1,550)
Borrowings on term loan -- -- 1,200
Repurchases and retirement of Common Stock (21) -- --
Net proceeds from issuance of stock 666 6,415 297
------- ------- --------
Net Cash Provided By (Used In) Financing Activities 1,324 (3,848) 8,510
------- ------- --------
Increase (Decrease) in Cash and Cash Equivalents (7,612) 7,595 (2,513)
Cash and Cash Equivalents, Beginning of Year 7,732 137 2,650
Cash and Cash Equivalents, End of Year $ 120 $ 7,732 $ 137
======= ======= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Taxes $ 74 $ 136 $ 283
======= ======= ========
Interest $ 839 $ 1,137 $ 1,222
======= ======= ========
Supplemental Disclosure of Non-Cash Financing Activities:
Tax benefit from exercise of employee stock options $ -- $ 52 $ --
======= ======= ========
See accompanying notes to consolidated financial statements.
F-7
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
1. BUSINESS
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges
for the manufacture of and markets an extensive range of women's career and
casual sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) SPORT, CHAUS(R), CYNTHIA STEFFE(R), and CYNTHIA CYNTHIA STEFFE(R)
trademarks and under private label brand names. The Company's products are sold
nationwide through department store chains, specialty retailers and other retail
outlets. The Company has positioned its JOSEPHINE CHAUS product line sold
through department store channels into the opening price points of the "better"
category. In November 2002, the Company acquired certain assets of S.L.
Danielle, Inc. ("SL Danielle"). SL Danielle designs, arranges for the
manufacture of and markets women's moderately priced clothing. In January 2004,
the Company acquired certain assets of the Cynthia Steffe division of LF Brands
Marketing, Inc., including inventory and intellectual property. In connection
with such acquisition, the Company also acquired the Cynthia Steffe trademarks
from Cynthia Steffe. The Cynthia Steffe business designs, arranges for the
manufacture of, markets and sells an upscale modern women's apparel line, under
the Cynthia Steffe trademarks. In June 2005 the Company signed a licensing
agreement with Kenneth Cole Productions, Inc. to manufacture and sell women's
sportswear under the Kenneth Cole Reaction label. In December 2005, the Company
began shipping products bearing the Kenneth Cole Reaction label primarily to
retail department stores. These Kenneth Cole Reaction products offer
high-quality fabrications and styling at "better" price points. As used herein,
fiscal 2006 refers to the fiscal year ended June 30, 2006, fiscal 2005 refers to
the fiscal year ended June 30, 2005 and fiscal 2004 refers to the fiscal year
ended June 30, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 passes upon shipment. Provisions for estimated
uncollectible accounts, discounts and returns and allowances are provided when
sales are recorded based upon historical experience and current trends. While
such amounts have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same rates as
in the past. Design revenue for fiscal 2005 and fiscal 2004, which represented
less than 1% of total revenue, was recognized when designs were manufactured and
shipped. There was no design revenue in the fiscal 2006.
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 2006, 2005 and 2004 shipping and handling costs
approximated $3.2 million, $0.6 million and $0.7 million, respectively. Shipping
and handling costs for fiscal 2006 increased relative to fiscal 2005 and fiscal
2004 because it includes the costs of the Company's new third party distribution
providers, an arrangement that
F-8
became effective September 1, 2005. This arrangement enabled the Company to
reduce its payroll and lease expenses formerly associated with the Company's
warehouse and distribution facility. Shipping and handling costs charged to
customers is recorded as a component of net revenue. For all periods presented
shipping and handling costs charged to customers was less than $0.2 million.
Cooperative Advertising:
Cooperative advertising allowances are recorded in selling, general
and administrative expenses in the period in which the costs are incurred. In
fiscal years ended June 30, 2006, June 2005 and June 2004 cooperative
advertising expenses were approximately $0.7 million, $0.5 million, and $0.3
million respectively.
Credit Terms:
Through March 31, 2004, the Company extended credit to the
majority of its customers through a factoring agreement with The CIT
Group/Commercial Services, Inc. ("CIT"). Effective April 1, 2004 the Company
began extending credit to its customers based on an evaluation of the customer's
financial condition and credit history, except for customers of the Company's
wholly owned subsidiary, Cynthia Steffe Acquisition, LLC ("CS Acquisition").
Effective March 31, 2004 CS Acquisition and CIT entered into a Factoring
Agreement pursuant to which the Company receives payment from CIT as of the
earlier of: a) the date that CIT has been paid by the Company's customers; b)
the date of the customer's longest maturity if the customer is in a bankruptcy
or insolvency proceeding; or c) the last day of the third month following the
customer's longest maturity date if the receivable remains unpaid. CIT assumes
only the risk of the Company's customers' insolvency or non-payment. All other
receivable risks for customer deductions that reduce the customer receivable
balances are retained by the Company, including, but not limited to, allowable
customer markdowns, operational chargebacks, disputes, discounts, and returns.
At June 30, 2006 and 2005 approximately 94% and 91%, respectively of
the Company's accounts receivable was non factored. At June 30, 2006 and 2005,
approximately 65 % and 60 % respectively, of the Company's accounts receivable
were due from customers owned by three single corporate entities. During fiscal
2006, approximately 54% of the Company's net revenue was from three corporate
entities - Dillard's Department Stores 23%, Sam's Club 22% and TJX Companies 9%.
During fiscal 2005 approximately 59% of the Company's net revenue was from three
corporate entities - Dillard's Department Stores 22%, Sam's Club 20% and TJX
Companies 17%. During fiscal 2004 approximately 70% of the Company's net revenue
was from three corporate entities - Dillards Department Stores 35%, TJX
Companies 22% and Sam's Club 13% . As a result of the Company's dependence on
its major customers, such customers may have the ability to influence the
Company's business decisions. The loss of or significant decrease in business
from any of its major customers could have a material adverse effect on the
Company's financial position and results of operations.
Accounts Receivable:
Accounts Receivable are net of allowances and anticipated discounts.
An allowance for doubtful accounts is determined through analysis of the aging
of accounts receivable at the date of the financial statements, assessments of
collectibility based on historical trends and an evaluation of the impact of
economic conditions. This amount is not significant primarily due to the
Company's history of minimal bad debts. An allowance for discounts is based on
those discounts relating to open invoices where trade discounts have been
extended to customers. Costs associated with potential returns of products as
well as allowable customer markdowns and operational charge backs, net of
expected recoveries, are included as a reduction to net revenue and are part of
the provision for allowances included in Accounts Receivable. These provisions
result from seasonal negotiations as well as historic deduction trends, net
expected recoveries and the evaluation of current market conditions. As of June
30, 2006 and June 30, 2005, Account Receivable was net of allowances of $2.7
million, and $1.8 million, respectively.
F-9
Inventories:
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. The majority of the Company's
inventory purchases are shipped FOB shipping point from the Company's suppliers.
The Company takes title and assumes the risk of loss when the merchandise is
received at the boat or airplane overseas. The Company records inventory at the
point of such receipt at the boat or airplane overseas. Reserves for slow moving
and aged merchandise are provided to write-down inventory costs to net
realizable value based on historical experience and current product demand.
Inventory reserves were $1.4 million at June 30, 2006, and $1.5 million at June
30, 2005. Inventory reserves are based upon the level of excess and aged
inventory and the Company's estimated recoveries on the sale of the inventory.
While markdowns have been within expectations and the provisions established,
the Company cannot guarantee that it will continue to experience the same level
of markdowns as in the past.
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 2006, the Company
purchased approximately 72% of its finished goods from its ten largest
manufacturers, including approximately 12% of its purchases from its largest
manufacturer. The Company believes that the number and geographical diversity of
its manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's 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.
Goodwill and Trademarks:
Goodwill represents the excess of purchase price over the fair value
of net assets acquired in business combinations accounted for under the purchase
method of accounting. Goodwill relates to the acquisition of SL Danielle and
Cynthia Steffe. Trademarks relate to the Cynthia Steffe trademarks and were
determined to have an indefinite life. Pursuant to the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets" 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. No amortization expense or impairment charges related to
goodwill and trademarks have been recorded for the fiscal years ended June 30,
2006, 2005, and 2004.
Long-Lived Assets:
The Company reviews certain long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. In that regard, the Company assesses the recoverability of such
assets based upon estimated undiscounted cash flow forecasts. 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 Company's strategies change, the
conclusion regarding impairment may differ from the current estimates. As of
June 30, 2006 and 2005, no impairments of long-lived assets have been
recognized.
F-10
Income Taxes:
The Company accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at year-end. The Company periodically
reviews its historical and projected taxable income and considers available
information and evidence to determine if it is more likely than not that a
portion of the deferred tax assets will be realized. A valuation allowance is
established to reduce the deferred tax assets to the amount that is more likely
than not to be realized. As of June 30, 2006 and 2005, based upon its
evaluation, the Company recorded a full valuation allowance on its deferred tax
assets. See Note 5. If the Company determines that a portion of the deferred tax
assets will be realized in the future, a portion of the valuation allowance will
be reduced and the Company will provide for income tax expense (benefit) in its
Statement of Operations at its estimated effective tax rate.
Stock-based Compensation:
The Company has a Stock Option Plan and previously accounted for the
plan under the recognition and measurement principles of APB 25, "Accounting for
Stock Issued to Employees", and related interpretations. Under this method,
compensation cost was the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. No stock-based employee compensation cost was
reflected in net income in fiscal 2005 and fiscal 2004because options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant.
Effective July 1, 2005 the Company adopted SFAS No. 123 (R) (revised
2004), "Share Based Payment" ("SFAS No. 123R") which eliminates the use of APB
25 and the intrinsic value method of accounting, and 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. The Company has adopted the modified prospective method
whereby compensation cost is recognized in the financial statements beginning
with the effective date based on the requirements of SFAS No. 123R for all
share-based payments granted after that date and for all unvested awards granted
prior to that date. Accordingly the prior period amounts have not been restated.
The Company's net income and earnings per share would have been
reduced for the fiscal years 2005 and 2004 had compensation costs for the
Company's stock option grants been determined based on the fair value at the
grant dates for awards under these plans in accordance with SFAS No. 123R. The
pro forma amounts have been as follows (Dollars in thousands, except share
data):
For the Year Ended
------------------------------
June 30, June 30, June 30,
2006 2005 2004
-------- -------- --------
Net income (loss), as reported $(4,874) $(1,157) $3,104
Add: Total stock-based employee compensation expense determined
included in reported net income (loss), net of tax effects of $0 199 -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax effects of $0 (199) (255) (300)
------- ------- ------
Proforma net income(loss) $(4,874) $(1,412) $2,804
======= ======= ======
F-11
For the Year Ended
------------------------------
June 30, June 30, June 30,
2006 2005 2004
-------- -------- --------
Earnings (Loss) per share:
Basic-as reported $(0.13) $(0.04) $0.11
====== ====== =====
Basic-proforma $(0.13) $(0.05) $0.10
====== ====== =====
Diluted-as reported $(0.13) $(0.04) $0.10
====== ====== =====
Diluted-proforma $(0.13) $(0.05) $0.09
====== ====== =====
The following assumptions were used in the Black Scholes option pricing model
that was utilized to determine stock-based employee compensation expense under
the fair value based method:
For the Year Ended
-----------------------------------------------
June 30, 2006 June 30, 2005 June 30, 2004
------------- ------------- ---------------
Weighted average fair value of
stock options granted $0.90 $0.74 $0.84
Risk-free interest rate 3.97% 4.17% 4.24%
Expected dividend yield 0% 0% 0%
Expected life of options 10.0 years 10.0 years 10.0 years
Expected volatility 86% 86% 87%
Earnings Per Share:
Basic earnings (loss) per share has been computed by dividing the
applicable net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by dividing the
applicable net income by the weighted average number of common shares
outstanding and common share equivalents. Potentially dilutive shares of 556,883
and 1,384,994 were not included in the calculation of diluted loss per share for
the years ended June 30, 2006 and 2005 respectively, as their inclusion would
have been antidilutive.
For the Year Ended
------------------------------
Denominator for earnings(loss) June 30, June 30, June 30,
per share (in millions): 2006 2005 2004
-------- -------- --------
Denominator for basic earnings (loss) per share
weighted-average shares outstanding 37.0 28.4 27.5
Assumed exercise of potential common shares -- -- 3.0
---- ---- ----
Denominator for diluted earnings (loss) per share 37.0 28.4 30.5
==== ==== ====
F-12
Advertising Expense:
Advertising costs are expensed when incurred. Advertising expenses
including coop advertising of $1.6 million, $0.6 million and $0.4 million, were
included in selling, general and administrative expenses for the years ended
June 30, 2006, 2005 and 2004 respectively.
Fixed Assets:
Furniture and equipment are depreciated principally 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.
Other Assets:
Other assets primarily consist of security deposits for real estate
leases and deferred financing costs, which are being amortized over the
remaining life of the finance agreement.
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 gains and losses are recorded in the Consolidated Statement of
Operations.
Fair Value of Financial Instruments:
For financial instruments, including accounts receivable, accounts
payable, revolving credit borrowings and term loans, the carrying amounts
approximated fair value due to their short-term maturity or variable interest
rate.
Deferred Rent Obligations:
The Company accounts for rent expense under noncancelable 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 $0.4 million at June 30, 2006 and $0.5 million at
June 30, 2005.
Other Comprehensive Income (Loss):
Other comprehensive income (loss) is reflected in the consolidated
statements of stockholders' equity. Other comprehensive income(loss) reflects
adjustments for minimum pension liability.
Segment Reporting:
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information requires enterprises to report certain information about products
and services, activities in different geographic areas and reliance on major
customers and to disclose certain segment information in their financial
statements. The basis for determining an enterprise's operating segments is the
manner in which financial information is used internally by the enterprise's
chief operating decision maker. The Company has determined that it operates in
one segment, women's career and casual sportswear. In addition, less than 1% of
total revenue is derived from customers outside the United States. The majority
of the Company's long-lived assets are located in the United States.
F-13
New Accounting Pronouncements:
In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109" ("FIN 48").
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The Company first will be required
to determine whether it is more-likely-than-not that a tax position, if any,
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. A tax
position that meets the "more- likely-than-not" recognition threshold will then
be measured to determine the amount of benefit to recognize in the financial
statements based upon the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company currently is
evaluating the effect of FIN 48 on its financial statements, if any.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measures"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. This
statement applies under other accounting pronouncements that require or permit
fair value measurements, however it does not apply to SFAS 123R. This Statement
shall be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including any financial statements
for an interim period within that fiscal year. The provisions of this statement
should be applied prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except in some circumstances where the
statement shall be applied retrospectively. The Company is currently evaluating
the effect, if any, of SFAS 157 on its financial statements.
3. INVENTORIES - NET
June 30, June 30,
2006 2005
-------- --------
(In thousands)
Raw materials $ 534 $ 1,119
Work-in-process 101 299
Finished goods 8,504 9,249
------ -------
Total $9,139 $10,667
====== =======
Inventories are stated at the lower of cost, using the first-in first-out (FIFO)
method, or market. Included in inventories is merchandise in transit of
approximately $6.5 million at June 30, 2006 and $5.1 million at June 30, 2005.
4. FIXED ASSETS
June 30, June 30,
2006 2005
-------- --------
(In thousands)
Computer hardware and software $ 4,866 $ 4,420
Furniture and equipment 10,311 10,244
Leasehold improvements 10,943 10,494
------- -------
26,120 25,158
Less: accumulated depreciation
and amortization 22,966 21,805
------- -------
$ 3,154 $ 3,353
======= =======
F-14
5. INCOME TAXES
The following are the major components of the provision for income taxes (In
thousands):
Fiscal Year Ended June 30,
--------------------------
2006 2005 2004
---- ---- ----
Current:
Federal $ 28 $ 16 $ 72
State 91 69 150
---- ---- ----
$119 $ 85 $222
Deferred:
Federal $ 88 $ 76 $ 63
State 15 22 18
---- ---- ----
$103 $ 98 $ 81
---- ---- ----
Total $222 $183 $303
==== ==== ====
Significant components of the Company's net deferred tax assets and deferred tax
liabilities are as follows:
June 30, June 30,
2006 2005
-------- --------
(In thousands)
Deferred tax assets:
Net federal, state and local operating loss carryforwards $ 39,200 $ 37,400
Costs capitalized to inventory for tax purposes 900 800
Inventory valuation 600 600
Excess of book over tax depreciation 1,500 1,300
Sales allowances not currently deductible 1,000 600
Reserves and other items not currently deductible 700 300
-------- --------
43,900 41,000
Less: valuation allowance for deferred tax assets (43,900) (41,000)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
June 30, June 30,
2006 2005
-------- --------
(In thousands)
Deferred tax liability:
Deferred tax liability related to indefinite lived intangibles $ (282) $ (179)
======== ========
The Company accounts for income taxes under the asset and liability
method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred
income taxes reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts at
year-end. The Company periodically reviews its historical and projected taxable
income and considers available information and evidence to determine if it is
more likely than not that a portion of the deferred tax assets will be realized.
A valuation allowance is established to reduce the deferred tax assets to the
amount that is more likely than not to be realized. As of June 30, 2006 and
2005, 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 2006, the valuation allowance
was increased by $2.9 million to $43.9 million at June 30, 2006 from $41.0
F-15
million at June 30, 2005 to primarily reflect the net operating loss and to
reflect 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 with a
corresponding decrease in income tax expense. At such time that the valuation
allowance is eliminated and the Company has operating income, the Company will
provide for income tax expense in its Statement of Operations at its effective
tax rate.
The Company has provided a deferred tax liability in the amount of
$282,000 on the temporary differences associated with its indefinite-lived
intangibles. The Company's indefinite lived intangibles are not amortized for
book purposes. As the Company continues to amortize these intangible assets 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
Company's net operating loss carryforward is uncertain. There were no sales or
impairments during the years ended June 30, 2006 and 2005.
At June 30, 2006, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $99.5 million, which will
expire between fiscal 2010 and 2026. Approximately $0.7 million of the operating
loss carryforwards relate to the exercise of nonqualified stock options.
Fiscal Year Ended June 30,
--------------------------
2006 2005 2004
------- ------ -------
(In thousands)
(Benefit) expense for federal income taxes at
the statutory rate of 35.0% $(1,645) $(306) $1,193
State and local taxes, net of federal benefit 29 51 207
Other 40 73 116
Effects of tax loss carryforwards 1,798 365 (1,213)
------- ----- ------
Provision for income taxes $ 222 $ 183 $ 303
======= ===== ======
6. FINANCING AGREEMENTS
The Company has a financing agreement (the "Financing Agreement") with
the CIT Group/Commercial Services, Inc. ("CIT") which provides the Company with
a $40 million revolving line of credit (the "Revolving Facility") with a $25
million sublimit for letters of credit, and a term loan (the "Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JP Morgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the Prime
Rate, the interest (i) on the Revolving Facility accrues at a rate of 1/2 of 1%
above the Prime Rate (ii) on the Term Loan accrues at a rate of 1% above the
Prime Rate. If the Company chooses LIBOR, the interest (i) on the Revolving
Facility accrues at a rate of 2 3/4% above LIBOR (ii) on the Term Loan accrues
at a rate of 3 3/4% above LIBOR. The Company has elected the Prime Rate option
from the inception of the financing agreement through June 30, 2006. Each of the
foregoing interest rates is subject to an annual upward or downward adjustment
by 1/4 of 1%, commencing with the month following delivery of the Company's
consolidated financial statements to CIT for fiscal 2006 and fiscal 2007 based
upon the Company's borrowing availability, fixed charge coverage ratio and
leverage ratio as in effect at each such adjustment period. The interest rate as
of June 30, 2006 on the Revolving Facility was 8.75% and on the Term Loan was
9.25%.
The Term loan is paid down in quarterly installments of $425,000 with
a balloon payment of $1.8 million due on October 1, 2008. The Company's
obligations under the Financing Agreement are secured by a first priority lien
on substantially all of the Company's assets, including the Company's accounts
receivable, inventory, intangibles, equipment, and trademarks, and a pledge of
the Company's interest in its subsidiaries.
F-16
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) minimum EBITDA
(earnings before interest, taxes, depreciation and amortization), (iii) certain
fixed charge coverage ratios, (iv) certain leverage ratios, and (v) specified
levels of minimum borrowing availability under the Revolving Facility. In the
event of the early termination by the Company of the Financing Agreement, the
Company will be liable for termination fees of $150,000 if termination occurs
prior to November 11, 2007. The Company may prepay at any time, in whole or in
part, the Term Loan without penalty. The expiration of the Financing Agreement
is October 1, 2008. As of June 30, 2006 the Company was in compliance with all
covenants.
On January 30, 2004, the Company and CIT agreed to an amendment to the
Financing Agreement primarily to (i) increase the amount of the Term Loan by
$1.2 million to cover a portion of the purchase price of the Cynthia Steffe (see
Note 7) (ii) to increase the quarterly amortization payments on the Term Loan
from $375,000 to $425,000.
At various times since the inception of the Financing Agreement with
CIT in September 2002, the Company and CIT have amended the Financing Agreement
to assure compliance with financial covenants, to facilitate the Company's
acquisitions and to modify other terms of the Financing Agreement.
On September 21, 2006, the Company and CIT agreed to further amend the
Financing Agreement to modify the financial covenants to be consistent with the
Company's then latest business plan for fiscal 2007.
On June 30, 2006, the Company had $5.1 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$16.6 million under the Amended Financing Agreement, a balance of $5.6 million
on the Term Loan and $2.4 million in revolving credit borrowings. On June 30,
2005, the Company had $6.2 million of outstanding letters of credit under the
Revolving Facility, total availability of approximately $20.9 million under the
Amended Financing Agreement, a balance of $7.3 million on the Term Loan and no
revolving credit borrowings.
Factoring Agreement
One of the Company's subsidiaries, CS Acquisition has a factoring
agreement with CIT which provides for a factoring commission equal to 6/10 of 1%
of the gross face amount of all accounts factored by CIT up to $10 million
ratably declining to a commission between .55% and .45% of the gross amount of
the receivables in excess of $10 million. Such agreement has an annual minimum
factoring fee of $50,000. The Factoring Agreement which would have expired by
its terms on March 31, 2006 was extended to March 31, 2007. The Company is
obligated to pay to CIT a collateral management fee of $5,000 a month.
Future Financing Requirements
At June 30, 2006, the Company had working capital of $15.9 million as
compared with working capital of $21.5 million at June 30, 2005. On June 13,
2005, the Company and Kenneth Cole Productions, Inc. ("Purchaser") entered into
a Stock Purchase Agreement, pursuant to which the Purchaser purchased from the
Company six million (6,000,000) shares of common stock of the Company for an
aggregate purchase price of six million dollars ($6,000,000). The Company's
business plan requires the availability of sufficient cash flow and borrowing
capacity to finance its product lines and to meet its cash needs for the launch
and support of the Kenneth Cole product lines. The Company expects to satisfy
such requirements through cash on hand, cash flow from operations and borrowings
under its financing agreements. The Company believes that it has adequate
resources to meet its needs for the foreseeable future assuming that it meets
its business plan and satisfies the covenants set forth in the Financing
Agreement.
7. CYNTHIA STEFFE ACQUISITION
On January 2, 2004, CS Acquisition, a newly formed subsidiary of the
Company acquired certain assets of the Cynthia Steffe division of LF Brands
Marketing, Inc., including inventory and showroom fixtures. The Company also
acquired the Cynthia Steffe trademarks from Cynthia Steffe for consideration
equal to $1.0 million under a separate agreement. The Cynthia Steffe business
designs, arranges for the manufacture of, markets and sells a women's apparel
line, under the Cynthia Steffe trademarks. As a result of the acquisition, the
Company expects to increase its sales volume through the sale of Cynthia Steffe
F-17
product lines. The results of Cynthia Steffe's operations have been included in
the consolidated financial statements commencing January 2, 2004. The aggregate
purchase price was approximately $2.2 million, plus the payment of $0.5 million
in satisfaction of certain liabilities, plus transaction fees and related
acquisition costs of $0.2 million. The acquisition was initially funded out of
borrowings under the Revolving Facility of which $1.2 million was subsequently
rolled into the Term Loan.
The following table summarizes the fair values of the net assets acquired and
liabilities assumed at the date of acquisition.
At January 2, 2004
------------------
(in thousands)
Inventory $ 578
Property, plant, and equipment 458
Intangible assets 1,062
Goodwill 820
------
Total assets acquired $2,918
Current liabilities (457)
------
Net assets acquired $2,461
======
Intangible assets include i) $1.0 million related to the Cynthia
Steffe trademark, which was determined to be an indefinite lived intangible
asset and thus not subject to amortization, and ii) $62,000 related to the sales
order backlog which was amortized over the sales period of four months.
The following unaudited pro forma information presents financial
information of the Company as though the acquisitions had been completed as of
the beginning of the periods set forth below.
For the Year Ended
June 30, 2004
---------------------------------------
(Unaudited)
(In thousands except per share amounts)
Net revenue $162,796
Net income 3,232
Basic income per share $ 0.12
Diluted income per share $ 0.11
8. TRADEMARKS
Intangible assets were as follows:
June 30, June 30,
2006 2005
-------- --------
Indefinite lived intangible assets:
Trademarks $1,000 $1,000
====== ======
The Company owns the Cynthia Steffe and related trademarks, therefore they are
classified as indefinite lived intangibles and at June 30, 2006 and 2005 and not
amortized.
F-18
9. EMPLOYEE BENEFIT PLANS
Pension Plan:
Pursuant to a collective bargaining agreement, the Company's union
employees are eligible to participate in the Company's defined benefit pension
plan after completion of one year of eligible service. Pension benefits are
based on the number of years of service times a predetermined factor. The
Company uses June 30, 2006 as its measurement date for the pension plan.
Pension expense amounted to approximately $76,000, $102,000, and
$123,000 in fiscal 2006, 2005, and 2004, respectively.
OBLIGATIONS AND FUNDED STATUS
The reconciliation of the benefit obligation and funded status of the
pension plan as of June 30, 2006 and 2005 is as follows:
2006 2005
------ ------
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $1,821 $1,348
Service cost 40 71
Interest cost 95 87
Change in assumption (discount rate) (117) 277
Actuarial (gain)/loss (78) 75
Benefits paid (53) (37)
Curtailment (4) --
------ ------
Benefit obligation at end of year $1,704 $1,821
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 996 $ 855
Actual return on plan assets 74 45
Employer contributions 330 142
Benefits paid (53) (37)
Expenses paid -- (9)
------ ------
Fair value of plan assets at end of year $1,347 $ 996
------ ------
Funded status $ (357) $ (825)
Unrecognized net actuarial loss 461 675
------ ------
Net amount recognized $ 104 $ (150)
====== ======
Amounts recognized in the statement of financial position consist of:
Accrued benefit cost $ (357) $ (825)
Accumulated other comprehensive loss 461 675
------ ------
Net amount recognized $ 104 $ (150)
====== ======
F-19
The accumulated benefit obligation for the pension plan was $1,704,000 and
$1,821,000 at June 30, 2006 and 2005, respectively.
(In thousands) June 30, 2006 June 30, 2005
------------- -------------
Projected benefit obligation $1,704 $1,821
Accumulated benefit obligation $1,704 $1,821
Fair value of plan assets $1,347 $ 996
Fiscal Year
-------------------
(In thousands) 2006 2005 2004
----- ---- ----
Components of Net Periodic Benefit Cost:
Service cost $ 40 $ 71 $ 71
Interest cost 95 87 78
Expected return on plan assets (104) (75) (67)
Amortization of accumulated unrecognized net loss 45 19 41
----- ---- ----
Net periodic benefit cost $ 76 $102 $123
===== ==== ====
Additional Information
Increase (decrease) in minimum liability included in other comprehensive
(income) loss was ($214,000), $370,000, and ($189,000) for the years ended June
30, 2006, 2005 and 2004, respectively.
Assumptions
Weighted average assumptions used to determine:
Net periodic benefit cost for the
years ended June 30, 2006 2005 2004
---- ---- ----
Discount Rate 5.25% 6.50% 6.50%
Expected Long Term Rate of Return on plan assets 8.50% 8.50% 8.50%
Benefit Obligation at June 30, 2006 2005
---- ----
Discount Rate 6.25% 5.25%
Expected Long Term Rate of Return on plan assets 8.25% 8.50%
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.
F-20
Plan Assets
The Company's pension plan weighted-average asset allocations at June 30, 2006
and 2005, by asset category are as follows:
Plan Assets Plan Assets
at June 30 at June 30
Asset Category 2006 2005
----------- -----------
Equity securities 61% 64%
Debt securities 31% 33%
Other 8% 3%
--- ---
Total 100% 100%
=== ===
The Company's investment strategy for the pension plan is to invest in a
diversified portfolio of assets managed by an outside portfolio manager. The
Company's goal is to provide for steady growth in the pension plan assets,
exceeding the Company's expected return on plan assets of 8.25%. The portfolio
is balanced to maintain the Company's targeted allocation percentage by type of
investment. See table below. Investments are made by the portfolio manager based
upon guidelines of the Company. The parameters maintained by the portfolio
manager are as follows:
Percentage of Asset
Total Portfolio Category
-------------------------------
5-15% Cash and short term investments
25-35% Long-term fixed income
50-65% Common stock
Contributions
The Company expects to contribute $87,000 to the pension plan in fiscal 2007.
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
- --------- --------
2007 $ 68
2008 74
2009 82
2010 91
2011 97
2012-2016 632
SAVINGS PLAN:
The Company has a savings plan (the "Savings Plan") under which eligible
employees may contribute a percentage of their compensation and the Company
(subject to certain limitations) contributes 10% of the employee's contribution.
The Company contributions are invested in investment funds selected by the
participants and are subject to vesting provisions of the Savings Plan. Expense
under the Savings Plan was approximately $68,000 in fiscal 2006, $72,000 in
fiscal 2005 and $68,000 in fiscal 2004.
F-21
10. STOCK BASED COMPENSATION:
The Company has a 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.
Information regarding the Company's stock options is summarized below:
Stock Options
------------------------------------
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
---------- ------------ --------
Outstanding at June 30, 2003 6,119,594 $.38 - $3.50 $ .49
Options granted 690,000 $.94 - $1.12 $ .97
Options exercised (595,001) $.86 - $1.42 $ .50
Options canceled (227,766) $.50 - $ .84 $ .58
----------
Outstanding at June 30, 2004 5,986,827 $.38 - $3.50 $ .55
Options granted 330,000 $.85 - $0.95 $ .86
Options exercised (2,025,000) $.38 - $0.69 $ .38
Options canceled (120,300) $.50 - $1.12 $ .98
----------
Outstanding at June 30, 2005 4,171,527 $.38 - $3.50 $ .64
Options granted 30,000 $1.06 $1.06
Options exercised (1,607,500) $.38 - $ .50 $ .41
Options canceled (65,000) $.75 - $3.00 $1.07
----------
Outstanding at June 30, 2006 2,529,027 $.50 - $3.50 $ .77
========== ============ =====
F-22
The following table summarizes information about the Company's outstanding and
exercisable stock options at June 30, 2006:
Outstanding Exercisable
----------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Yrs.) Price Shares Price
- ----------------------- --------- ----------- --------- --------- ---------
$0.50 794,027 5.11 $0.50 794,027 $0.50
$0.69 5,000 4.00 $0.69 5,000 $0.69
$0.75 260,000 6.16 $0.75 195,000 $0.75
$0.84 500,000 1.41 $0.84 500,000 $0.84
$0.85 300,000 8.36 $0.85 100,000 $0.85
$0.94 560,000 7.51 $0.94 332,500 $0.94
$0.95 30,000 8.00 $0.95 7,500 $0.95
$0.98 30,000 7.00 $0.98 15,000 $0.98
$1.06 30,000 9.00 $1.06 0 $0.00
$3.00 5,000 3.00 $3.00 5,000 $3.00
$3.11 10,000 1.65 $3.11 10,000 $3.11
$3.50 5,000 2.00 $3.50 5,000 $3.50
--------- ---- ----- --------- -----
2,529,027 5.48 $0.77 1,969,027 $0.74
--------- ---- ----- --------- -----
The total intrinsic value of options exercised during the years ended
June 30, 2006, 2005, and 2004, was $.7 million, $1.3 million, and $.3 million,
respectively. The total fair value of shares vested during the years ended June
30, 2006, 2005, and 2004, was $.2 million, $.3 million, and $.3 million,
respectively. The aggregate intrinsic value of options outstanding and options
currently exercisable at June 30, 2006 was $.4 million each.
A summary of the status of the Company's nonvested shares as of June
30, 2006, and changes during the year ended June 30, 2006, is presented below:
Weighted-Average
Grant Date
NONVESTED SHARES: Shares Fair Value
- ------------------------ --------- ----------------
Nonvested, July 1, 2005 843,750 $0.76
Granted 30,000 0.90
Vested (313,750) 0.76
-------- -----
Nonvested, June 30, 2006 560,000 $0.78
-------- -----
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 5.48 years, 4.39 years and 3.94 years in 2006, 2005 and 2004,
respectively. The number of stock options exercisable at June 30, 2006, 2005 and
2004 were 1,969,027, 3,327,777 and 4,884,327 respectively. As of June 30, 2006,
there was $.2 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Option Plan.
That cost is expected to be recognized over a weighted-average period of 1.4
years.
F-23
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities, and
equipment under various noncancellable operating lease agreements which expire
through fiscal 2014. Rental expense for the years ended June 30, 2006, 2005 and
2004 was approximately $2.3 million, $2.9 million and $2.7 million,
respectively.
The minimum aggregate rental commitments at June 30, 2006 are as
follows (in thousands):
Fiscal year ending:
2007................. $1,931
2008................. 1,827
2009................. 1,703
2010................. 609
2011................. 321
Subsequent to 2012... 735
------
$7,126
======
Letters of Credit:
The Company was contingently liable under letters of credit issued by
banks to cover primarily contractual commitments for merchandise purchases of
approximately $4.9 million and $6.2 million at June 30, 2006 and June 30, 2005,
respectively. . The Company also was contingently liable for stand by letters of
credit issued by banks of approximately $0.2 million as June 30, 2006 and 2005.
Inventory purchase commitments:
The Company was contingently liable for contractual commitments for
merchandise purchases of approximately $17.3 million and $10.2 million at June
30, 2006 and June 30, 2005, respectively. The contractual commitments for
merchandise purchases includes the letters of credits shown above.
Kenneth Cole License Agreement:
The Company entered into a license agreement with Kenneth Cole
Productions (LIC) in June 2005. Under the license agreement the Company is
required to achieve certain minimum sales levels, to pay certain minimum
royalties and to maintain a minimum net worth. The Company is also obligated to
pay specified percentages of net sales to support advertising and to expend a
total of $3.6 million (reduced by agreement between the Company and Kenneth Cole
Productions, Inc. from $4.0 million), in the period ending December 31, 2007 to
support the initial launch of the licensed products. The Company has recorded in
the Statement of Operations an expense of approximately $0.6 million as of June
30, 2006.
F-24
The following table summarizes as of June 30, 2006, the Company's Kenneth Cole
License Agreement Commitments by future period:
Payments due by Period
(in thousands)
---------------------------------------
Less than 1 2-3 4-5
Contractual obligations (in thousands) Total year years years
- -------------------------------------- ------- ----------- ------ ------
Kenneth Cole License Agreement
Contractual obligations $15,935 $3,525 $6,750 $5,660
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
Company's financial condition, results of operations or cash flows.
12. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly financial information for fiscal 2006 and fiscal 2005 is set
forth in the table below:
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2006
Net revenue $37,718 $23,002 $39,731 $36,376
Gross profit 10,584 4,774 12,389 9,383
Net income (loss) 96 (4,871) 951 (1,050)
Basic earnings (loss) per share -- (0.13) 0.03 (0.03)
Diluted earnings (loss) per share -- (0.13) 0.03 (0.03)
FISCAL 2005
Net revenue $34,434 $38,569 $41,553 $28,699
Gross profit 10,195 10,638 12,239 6,522
Net income (loss) 721 372 1,024 (3,274)
Basic earnings (loss) per share 0.03 0.01 0.04 (0.11)
Diluted earnings (loss) per share 0.02 0.01 0.03 (0.11)
The sum of the quarterly net earnings per share amounts may not equal the
full-year amount since the computations of the weighted average number of
common-equivalent shares outstanding for each quarter and the full year are made
independently.
F-25
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Deductions of Year
- ------------------------------------------------- ------------ ---------- ---------- --------------
Year ended June 30, 2006
Allowance for doubtful accounts $ 150 $ 0 $ 13(1) $ 137
Reserve for customer allowances and deductions $1,675 $10,303 $9,462(2) $2,516
------ ------- ------ ------
Year ended June 30, 2005
Allowance for doubtful accounts $ 193 $ 0 $ 43(1) $ 150
Reserve for customer allowances and deductions $ 972 $ 5,967 $5,264(2) $1,675
------ ------- ------ ------
Year ended June 30, 2004
Allowance for doubtful accounts $ 80 $ 180 $ 67(1) $ 193
Reserve for customer allowances and deductions $ 835 $ 5,539 $5,402(2) $ 972
------ ------- ------ ------
- ----------
(1) Uncollectible accounts written off
(2) Allowances charged to reserve and granted to customers
S-1
INDEX TO EXHIBITS
Exhibit Number Exhibit Title
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.
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.
21 List of Subsidiaries of the Company.
23.1 Consent of Mahoney Cohen & Company, CPA,P.C., Independent
Registered Public Accounting Firm.
23.2 Consent of Deloitte & Touche LLP., 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 Barton Heminover.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Josephine Chaus.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Barton Heminover.
