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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, 1997
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 number)
incorporation or organization)
1410 Broadway, 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 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on October 6, 1997 was $11,120,002 .
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
---- ----- ------------------
October 6, 1997 Common Stock, $0.01 par value 26,277,274
LOCATION IN FORM 10-K IN
DOCUMENTS INCORPORATED BY REFERENCE WHICH INCORPORATED
----------------------------------- ------------------
Portions of registrant's Proxy Statement for the Annual Part III
Meeting of Stockholders to be held in November 1997.
1
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 which are marketed principally under the CHAUS(R), CHAUS SPORT(R)
and NAUTICA(R) trademarks. Beginning in late fiscal 1994, the Company
repositioned its Chaus product line at the high end of the "upper moderate"
through the opening price points of the "better" categories. See "-- Products."
By August 1997, the Company had successfully repositioned its Chaus product
line into the opening price points of the "better" category. In September 1995
the Company entered into a license agreement (the "Nautica License Agreement")
with Nautica Apparel Inc. ("Nautica"), a leading name in men's apparel,
pursuant to which the Company has obtained an exclusive license to design,
contract for the manufacture of and market a new women's apparel line under the
Nautica brand name. The Company commenced sales of products in its licensed
Nautica product line in August 1996, with such Nautica product line being
positioned in the "better" to "bridge" categories. In March 1996, the Company,
in order to better utilize its management and financial resources, discontinued
its unprofitable dresses product line, which had accounted for a gross margin
loss of $2.2 million for the twelve months ended June 30, 1996.
RESTRUCTURING
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the restructuring
program (the "Restructuring") pursuant to which:
(i) the Company will seek to raise up to $20 million, but not
less than $12.5 million, of equity through a rights offering
(the "Rights Offering");
(ii) approximately $40.5 million of the Company's indebtedness to
Ms. Chaus, consisting of $28 million of existing subordinated
indebtedness (including accrued interest through Janaury 15,
1998) and $12.5 million of indebtedness which will be owed
to Josephine Chaus ("Ms. Chaus" or "J. Chaus"), will be
converted into Common Stock of the Company (the "Conversion
Commitment");
(iii) a new revolving credit facility (the "New Revolving
Facility"), and a new term loan facility (the "New Term
Loan", and together with the New Revolving Facility, the "New
Financing Agreement") was entered into with BNY Financial
Corporation ("BNYF"), the Company's current working capital
lender, on October 10, 1997; and
(iv) the Company will implement a 1-for-10 reverse stock split
(the "Stock Split").
Consummation of the Restructuring is subject to (i) the
approval by the Company's stockholders of (a) the Stock Split, (b) the issuance
of 10,510,910 shares of Common Stock of the Company to J. Chaus in connection
with the Conversion Commitment, (c) the sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase Commitment (as defined below), and
(d) the sale by the Company of up to 1,747,160 shares to J. Chaus in connection
with the Standby Commitment (as defined below), and (ii) the absence of any
litigation or governmental action challenging or seeking to enjoin the Rights
Offering which in the sole judgment of the Company makes it inadvisable to
proceed with the Rights Offering. Accordingly, until such conditions are
satisfied, there can be no assurance that the Restructuring will be
consummated. It is presently contemplated that the Restructuring will be
consummated by January 15, 1998.
2
Ms. Chaus, Chairwoman of the Board, a principal stockholder of the Company, and
the owner of a majority of the Company's Common Stock, has advised the Company
that she intends to vote her shares in favor of all matters relating to the
Restructuring, thereby assuring stockholder approval of such matters.
Although there can be no assurance, the Company believes that the
Company will have adequate resources after consummation of the Restructuring.
The Rights Offering
The Company will offer each of Ms. Chaus, and the Company's other
stockholders, the right (collectively, the "Rights") to subscribe for up to $10
million of newly issued Common Stock, for a total of up to $20 million of
additional equity. The proceeds of the Rights Offering will be used to repay
amounts due under the New Financing Agreement. Subject to stockholder approval,
Ms. Chaus has agreed to exercise her full $10 million subscription (the
"Purchase Commitment") and to subscribe for up to an additional $2.5 million of
Common Stock (the "Standby Commitment"), if and to the extent that the
Company's other stockholders do not purchase at least that amount of stock in
the Rights Offering. As described below, it is anticipated that Ms. Chaus will
satisfy her $10 million Purchase Commitment through the contribution of funds
currently used as credit support for the Company's Bank Debt (as defined
below). The Rights will be distributed, at no cost to the stockholders,
following the effectiveness of a registration statement to be filed with the
Securities and Exchange Commission. The Rights, which will be transferable
(other than those distributed to Ms. Chaus), will entitle the holders to
purchase Common Stock for a period of 45 days after the Rights Offering
commences.
The information contained herein does not constitute an offering, and
no securities, including, without limitation, the Rights, are being offered
hereby. The Rights Offering will only be made by a prospectus filed with the
Securities and Exchange Commission.
Currently, Ms. Chaus beneficially owns approximately 57% of the Common
Stock of the Company. Upon the conversion of indebtedness owed by the Company
to Ms. Chaus, and prior to the Rights Offering, which is described below, she
will beneficially own approximately 90.3% of the Common Stock of the Company.
Depending on the number of Rights exercised by stockholders of the Company,
other than Ms. Chaus, following completion of the Rights Offering, Ms. Chaus
will beneficially own between approximately 69.5% and 94% of the Common Stock
of the Company.
Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity Securities
Pursuant to the terms of the Restructuring, subject to stockholder
approval, approximately $40.5 million of the Company's indebtedness to Ms.
Chaus, consisting of $28 million of existing subordinated indebtedness
(including accrued interest through January 15, 1998) and $12.5 million of
indebtedness which will be owed to Ms. Chaus after the Subrogated Loan (as
defined below) is extended by her, will be converted into 10,510,910 shares of
Common Stock of the Company on a post Stock Split basis.
Restructuring of Bank Debt
The senior secured bank debt owing to BNYF by the Company, as of
September 30, 1997 (the "Bank Debt") consisted of approximately (i) $57.5
million in respect of direct borrowings, and (ii) $17.5 million in respect of
letters of credit.
3
In the Restructuring, the $57.5 million in respect of direct
borrowings by the Company has been and will be refinanced as follows: (i) $15
million has been refinanced by BNYF pursuant to the terms of the New Term Loan;
(ii) approximately $20 million has been refinanced under the terms of the New
Revolving Facility; (iii) $12.5 million in respect of borrowings previously
guaranteed by Ms. Chaus will be satisfied in full out of proceeds from a loan
made by BNYF to Ms. Chaus (the "BNYF--J. Chaus Loan"), and Ms. Chaus shall
become subrogated to the rights of BNYF with respect to such loan amount (the
"Subrogated Loan") until the Subrogated Loan is exchanged for equity, as set
forth above; and (iv) $10 million will be satisfied in full out of proceeds
received from the Rights Offering pursuant to the Purchase Commitment.
Under the terms of the Restructuring, approximately $17.5 million of
Bank Debt owing to BNYF in respect of letters of credit has been refinanced by
BNYF pursuant to the terms of the New Financing Agreement.
The approximately $75 million of Bank Debt that has been refinanced
as part of the Restructuring, has been refinanced under two facilities that are
part of the New Financing Agreement: (i) the New Revolving Facility which is a
$66 million five-year revolving credit line with a $20 million sublimit for
letters of credit, and (ii) the New Term Loan which is a $15 million term loan
facility. Each facility will mature on December 31, 2002. The Company's
obligations under the New Financing Agreement are secured by a first priority
lien on substantially all of the Company's assets, including the Company's
accounts receivable, inventory and trademarks.
Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate and is payable on a monthly basis, in arrears. Interest on the New
Term Loan accrues at an interest rate ranging from 1/2 of 1% above the Prime
Rate to 1 1/2% above the Prime Rate, which interest rate will be determined,
from time to time, based upon the Company's availability under the New
Revolving Facility. With the exception of warrants issued to BNYF (as discussed
below), the Company's execution of the New Financing Agreement did not require
the payment of any commitment, closing, administration or facility fees. The
New Financing Agreement provides for service charges and letter of credit fees
on substantially the same terms as those existing under the Company's Old Bank
Debt Agreement (as defined below) with BNYF.
Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the New Term Loan. The first amortization payment
is due on March 31, 1998. A balloon payment in the amount of $10.25 million is
due on December 31, 2002. In the event of the earlier termination by the
Company of the New Financing Agreement, the Company will be liable for
termination fees initially equal to $2.8 million, and declining to $2.2 million
after October 8, 2000.
BNYF's existing warrants to purchase 125,000 shares of Common Stock
(the "Existing BNYF Warrants") were extinguished, and BNYF received new
warrants (the "New BNYF Warrants") to purchase (i) 375,000 shares of the
Company's Common Stock, with an exercise price of $1.0625 per share, the
closing price per share of the Common Stock on June 26, 1997, the date on which
BNYF and the Company executed a commitment letter (the "Commitment Letter")
describing the terms and conditions of the Restructuring, and (ii) 125,000
shares of the Company's Common Stock, with an exercise price equal to the
thirty day average trading price on the New York Stock Exchange of the
Company's Common Stock beginning on the date of the consummation of the Rights
Offering.
The New Financing Agreement amends certain provisions of the Old Bank
Debt Agreement and provides for maximum availability of $81 million, and
overadvances of up to $12.8 million. The New Financing Agreement also amends
certain financial covenants contained in the Old Bank Debt Agreement. The New
Financing Agreement provides for certain additional events of default, among
which are the default by Ms. Chaus
4
under the Bank Debt Put (as defined below), and the failure by the Company to
close all of its retail outlets by the end of January 1998.
As an inducement to BNYF to enter into the New Financing Agreement,
Ms. Chaus has agreed with BNYF that she will purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement between the
Company and BNYF, in the event that (i) an event of default occurs under the
New Financing Agreement prior to May 15, 1998, or (ii) the Rights Offering
is not consummated prior to May 15, 1998 (the "Bank Debt Put").
Restructuring of Credit Support Provided by Ms. Chaus
On October 10, 1997, in substitution for the personal guaranty of
$12.5 million of Bank Debt (the "$12.5 Million Guarantee") previously provided
by Ms. Chaus, she entered into a deposit letter (the "October Deposit Letter")
pursuant to which she provided $12.5 million in cash collateral to secure the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF--J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of Common Stock of the Company.
Ms. Chaus previously entered into a deposit letter dated July 23, 1997
(the "July Deposit Letter") pursuant to which she provided $10 million in cash
collateral to secure the Bank Debt in substitution for the letter of credit
previously provided by her. The July Deposit Letter was amended on October 10,
1997 to provide that the $10 million in cash collateral shall be held as
collateral to secure indebtedness under the New Financing Agreement.
Immediately prior to the consummation of the Rights Offering, and subject to
the other conditions of the Restructuring being satisfied, such collateral will
be released and used by Ms. Chaus to purchase shares of Common Stock issuable
to her upon the exercise of the Rights, in satisfaction of her Purchase
Commitment in connection with the Rights Offering. The Company will use the
proceeds from the Purchase Commitment to retire $10 million of Bank Debt.
Pursuant to the New Financing Agreement, in the event that the Rights
Offering is not consummated by May 15, 1998, the cash collateral held under the
October Deposit Letter and the July Deposit Letter will be applied by BNYF to
retire $22.5 million of the Bank Debt.
Warrants and Options
In connection with the Restructuring, (i) Andrew Grossman, the
Company's Chief Executive Officer, has agreed in principle to relinquish all of
his rights to his existing options, to the extent that they have not been
exercised prior to the consummation of the Restructuring, and (ii) Ms. Chaus
has agreed in principle to relinquish all of her rights to her existing
warrants, to the extent that they have not been exercised prior to the
consummation of the Restructuring.
The Company currently intends that employees holding options will be
offered the right to exchange such options for new options.
5
Other Creditors of the Company; Other Matters in Connection with Restructuring
Under the proposed Restructuring, the Company's existing trade claims,
which are primarily held by the Company's customers and vendors, would be
unaffected.
The Company and Mr. Grossman are currently negotiating amendments to
his employment agreement and it is anticipated that a restated and amended
employment agreement will be executed in the near term. It is expected that
such amendments will, among other things, include a cash bonus based upon the
Company's performance, the grant of new stock options in substitution for his
existing stock options, and the waiver by Mr. Grossman of his entitlement to
five percent (5%) of the Company's annual net profits, as currently provided
in his employment agreement.
PRODUCTS
The Company's products currently are divided into two principal
product categories: (i) career sportswear and (ii) weekend casual sportswear.
In late fiscal 1994 the Company shifted its product focus from single,
fashion-driven items to full collections with an emphasis on traditional
styling. With this repositioning, the Company also has enhanced its design and
quality and by August 1997, the Company had successfully positioned its Chaus
product line into the opening price points of the "better" category. The
Company's career and weekend casual sportswear are marketed as coordinated
groups of jackets, skirts, pants, blouses, sweaters and related accessories
which, 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 24 to 64.
The Company produces collections of each of these product lines for
each of its five principal selling seasons: Spring, Summer, Fall I, Fall II and
Holiday. Spring and Fall traditionally have been the Company's major selling
seasons.
The Company's major product categories and associated brand names are
summarized in the following table:
WEEKEND CASUAL
CAREER SPORTSWEAR SPORTSWEAR
----------------- --------------
BRAND NAMES Chaus Chaus Sport
Chaus Woman Nautica
Chaus Petite
Nautica
PRODUCT OFFERINGS Jackets, Skirts, Pants, Casual Jackets
Shorts, Blouses, Shirts, Sweaters, Skirts, Pants,
Knit Tops, Sweaters Shirts, Knit Tops, Outerwear
INDUSTRY CATEGORIES Chaus -- Upper Moderate Chaus -- Upper Moderate
and Lower Better and Lower Better
Nautica -- Better and Bridge Nautica -- Better and Bridge
Women's apparel is generally divided into five price categories,
namely (listed from lowest to highest) "mass merchandise," "moderate,"
"better," "bridge" and "designer." These categories are distinguished
principally by differences in price and, as a general matter, by differences in
quality.
During fiscal 1997, the suggested retail prices of the Company's Chaus
products ranged between $20.00 and $280.00. The Company's jackets ranged in
price between $120.00 and $280.00, its blouses and sweaters ranged in
6
price between $48.00 and $130.00, its skirts and pants ranged in price between
$28.00 and $130.00, and its knit tops and bottoms ranged in price between
$24.00 and $120.00.
The following table sets forth a breakdown by percentage of the
Company's net sales by product category for fiscal 1995 through fiscal 1997:
Fiscal Year Ended June 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
Career Sportswear
Chaus 37% 41% 31%
Chaus Woman 11 11 13
Chaus Petite 6 5 4
----- ----- -----
Total 54 57 48
Weekend Casual - Sportswear 30 33 35
Nautica 15 -- --
Dresses -- 8 12
Other (1) 1 2 5
----- ----- -----
Total 100% 100% 100%
- - --------------
(1) Includes sales by outlet stores, offset by intercompany
eliminations. Also includes, for fiscal 1995, the Company's JOSEPHINE
and JEANSWEAR labels, which produced blouses and jeans, respectively,
until the beginning of fiscal 1995 when the Company ceased producing
garments using these labels.
Career Sportswear. The Company markets an extensive line of career
sportswear under the CHAUS label for misses sizes, the CHAUS WOMAN label for
larger sizes and the CHAUS PETITE label for smaller sizes. These product lines
offer a full collection of sportswear geared primarily for the working woman.
Each sportswear collection typically includes a broad selection of jackets,
skirts, pants, blouses and sweaters, as well as more casual apparel such as
shorts, shirts and knit tops.
Weekend Casual Sportswear. The CHAUS SPORT label offers casual
jackets, sweaters, skirts, pants, shirts and knit tops. This product line
offers soft career, weekend and leisure sportswear intended for an informal
working environment as well as for casual wear.
LICENSE AGREEMENT WITH NAUTICA
In September 1995, the Company entered into the Nautica License
Agreement under which the Company has an exclusive license to manufacture,
market, distribute and sell licensed product for women under the Nautica(R)
brand name in the United States and Puerto Rico. The Company currently
distributes its licensed Nautica product line in major department and specialty
stores, at "better" to "bridge" price points. Nautica has developed significant
brand-name recognition with its men's apparel lines. The Company's relationship
with Nautica provides the Company with exposure to "better" to "bridge"
departments, while creating an alliance with a leading company in the apparel
industry. The Company's first sales of its licensed Nautica products occurred
in August 1996. The Company's license from Nautica is limited to women's
sportswear collections including coordinating knits, blouses, wovens, sweaters,
pants, skirts, jackets, and outerwear and sportswear dresses bearing the
Nautica brand names and marks. The Company's license from Nautica excludes
business dresses, suits, coats and raincoats that are not part of a sportswear
collection. The license also excludes shoes, scarves, socks, stockings or
accessories for ladies bearing the Nautica brand names and marks.
7
The initial term of the Nautica License Agreement runs through
December 31, 1999, and is thereafter renewable, at the option of the Company,
for up to two periods of three years each, provided that certain conditions are
met (including the successful attainment of certain sales targets and the
requirement that Andrew Grossman continue in his position as Chief Executive
Officer during the term of the Nautica License Agreement). The Company's
obligations include minimum royalty and advertising payments. A separate
showroom was constructed for the display of the Company's licensed Nautica
products and a full operational merchandising and retail development group has
been dedicated to its licensed Nautica product line.
Pursuant to the terms of the Nautica License Agreement, the Company
has granted Nautica a ten-year option to purchase up to 150,000 shares of the
Company's Common Stock at a purchase price of $5.00 per share (the closing
price of the Common Stock on the NYSE on September 6, 1995, the date the
Company entered into the Nautica License Agreement).
In August 1996, the Company commenced sales of its licensed NAUTICA
label. As initially launched, the Nautica product line encompassed both career
sportswear and weekend casual sportswear. In view of the disappointing
performance of the Company's Nautica product line to date, the Company is in
the process of hiring a new executive officer to manage the product line, and
intends to relaunch the Nautica product line. In contrast to the previous
Nautica product line, the relaunched line will have a narrow focus on casual
sportswear items -- a focus that is consistent with the Nautica men's line.
CUSTOMERS
The Company's products are sold nationwide in an estimated 1,900
individual stores operated by approximately 150 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.
The Company extends credit to its customers based upon an evaluation
of the customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. At June 30, 1997 and 1996, approximately 62% and 66%, of the Company's
accounts receivables were due from department store customers owned by four
single corporate entities. During fiscal 1997, approximately 63% of the
Company's net sales were made to department store customers owned by four
single corporate entities, as compared to 60% in fiscal 1996 and 55% in fiscal
1995. Sales to Dillard's Department Stores accounted for 33% of net sales in
fiscal 1997, 29% of net sales in fiscal 1996 and 22% of net sales in fiscal
1995. Sales to nine department store companies owned by The May Department
Stores Company accounted for approximately 16% of the Company's net sales in
fiscal 1997, 10% of net sales in fiscal 1996 and 15% of net sales in fiscal
1995. Sales to eight department store companies owned by Federated Department
Stores accounted for approximately 8% of net sales in fiscal 1997, 5% of net
sales in fiscal 1996 and 11% of net sales in fiscal 1995. Sales to two
department store customers owned by TJX Companies, Inc. accounted for
approximately 6% of net sales in fiscal 1997, 16% of net sales in fiscal 1996
and 7% of net sales in fiscal 1995. The percentages of net sales are based upon
stores owned by the four corporate entities at the end of fiscal 1997. As a
result of the Company's dependence on these customers, they 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 would have a
material adverse effect on the Company's financial position and results of
operations.
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. The Company has an in-house sales force
of 29, all of whom are located in the New York City showrooms. Senior
management, principally Josephine
8
Chaus, Chairwoman of the Board and principal stockholder of the Company, and
Andrew Grossman, Chief Executive Officer, actively participate in the planning
of the Company's marketing and selling efforts. The Company does not employ
independent sales representatives or operate regional sales offices, but it
does participate in various regional merchandise marts. This sales structure
enables management to control the Company's selling operation more effectively,
to limit travel expenses, as well as to deal directly with, and be readily
accessible to, major customers.
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.
The Company maintains a cooperative advertising program under which it
reimburses, in certain circumstances, a portion of a customer's advertising
expenditures promoting the Company's products up to a maximum percentage of the
customer's purchases. Except for this cooperative advertising program, the
Company has not engaged in any direct advertising to the public with respect to
its Chaus product line. There was limited direct advertising for the Company's
Nautica product line. Cooperative advertising expenditures for the Company were
approximately $0.8 million for both fiscal 1995 and fiscal 1996, and $1.1
million in fiscal 1997.
DESIGN
The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The 14 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Josephine Chaus and Andrew Grossman, the
Company's Chief Executive Officer, who are instrumental in the design function,
meet regularly with the design staff to create, develop and coordinate the
seasonal collections. The Company believes that its design staff is known 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. A substantial amount (approximately 80%)
9
of its product is manufactured by approximately 35 key independent suppliers
located primarily in South Korea, Hong Kong, Taiwan, China, Indonesia and
elsewhere in the Far East. Approximately 20% of the Company's products are
manufactured in the United States and the Caribbean Basin. No contractual
obligations exist between the Company and its manufacturers except on an
order-by-order basis. During fiscal 1997, the Company purchased approximately
68% of its finished goods from its ten largest manufacturers, including
approximately 19% 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 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, produces patterns, prepares production samples from the patterns for
modification and approval by the Company's design staff, and marks and grades
the patterns in anticipation of production. While the factories have the
capability to perform these services, the Company believes that its personnel
can best express its design concepts and efficiently supervise production to
better ensure that a quality product is produced. Once production fabric is
shipped to them, the 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 New Jersey distribution center. Almost all finished
goods are shipped to the Company's New Jersey distribution center for final
inspection, assembly into collections, allocation and shipment to customers.
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 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 1997, virtually all of the
fabrics used in the Company's products manufactured in the Far East were
ordered from the Company's five largest suppliers in the Far East, which are
located in Japan, Taiwan and Korea, and virtually all of the fabric used in the
Company's products manufactured in the United States and the Caribbean Basin
were ordered by three major suppliers from these regions. The Company selects
the fabrics to be purchased, which are generally produced for it in accordance
with its own specifications. 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 precede
the related shipping period by up to five months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection.
10
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 substantial
advance commitments to suppliers of such goods, often as much as seven months
prior to the receipt of firm orders from customers for the related merchandise.
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 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") which has been in effect since 1974. 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 will be gradually phased out over a ten year
transition period, after which the textile and clothing trade will be fully
integrated into the General Agreement on Trade and Tariffs ("GATT") and will be
subject to the same disciplines as other sections. 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 now 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.
Substantially all of the Company's products are subject to United
States customs duties. In the ordinary course of business, the Company, from
time to time, is subject to claims by the United States Customs Service
("Customs") for duties and other charges, is entitled to refunds from Customs
due to overpayment of duties by the Company and may be required to pay
penalties with respect to underpayment of duties.
11
RETAIL OUTLET STORES
At June 30, 1997, the Company had 22 retail outlet stores, as compared
to 25 stores at June 30, 1996. The retail outlet stores operate throughout the
country in traditional factory outlet centers in locations intended to minimize
conflict with the Company's major retail department store customers. The
Company plans to close all of its retail outlet stores (other than the retail
outlet store located at the Company's Secaucus facility, the space for which is
leased by the Company as part of its warehouse lease) by the end of January
1998, and does not intend to open any new stores in the foreseeable future.
Failure to close such retail stores by the end of January 1998, is an event of
default under the New Financing Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- New Financing
Agreement" and "-- Fiscal 1997 Compared to Fiscal 1996."
BACKLOG
As of October 13, 1997, the Company's order book reflected unfilled
customer orders for approximately $92 million of merchandise. As of September
20, 1996 (as disclosed in the prior year) the backlog was $45.0 million.
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. This year's backlog includes unfilled
customer orders for the upcoming spring season. The Company does not believe
that cancellations, rejections or returns will materially reduce the amount of
sales realized from such backlog.
TRADEMARKS
CHAUS(R), CHAUS ESSENTIAL(R), CHAUS SPORT(R), CHAUS WOMAN(R) and MS.
CHAUS(R) are registered trademarks of the Company in the United States for use
on ladies' garments. These trademarks are renewable in the years 2004, 2008,
2002, 2004 and 2005, respectively. JOSEPHINE(R) is also a registered trademark
of the Company in the United States, renewable in the year 2001, for use on
ladies' blouses and sweaters. The Company considers its trademarks to be strong
and highly recognized and, to have significant value in the marketing of its
products. See " -- License Agreement with Nautica" for certain information
concerning the Company's Nautica License Agreement.
The Company has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,
and JOSEPHINE marks for women's apparel in certain foreign countries and has
legal trademarks in certain foreign countries for selected women's accessories
including handbags, small leather goods and footwear.
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's Nautica
product line has experienced intense competition from other designer labels.
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 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.
12
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from so-called "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.
EMPLOYEES
At June 30, 1997, the Company employed 482 employees as compared with
525 employees at June 30, 1996. This total includes 67 in managerial and
administrative positions, approximately 92 in production, production
administration and design, 207 in marketing, merchandising and sales (including
178 employees in the retail outlet store operation) and 61 in distribution. Of
the Company's total employees, 55 were located in the Far East. The Company is
a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 83 full-time employees. This agreement expires in
August 1999.
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 46 Chairwoman of the Board and member,
Office of the Chairman
Andrew Grossman 38 Chief Executive Officer and member,
Office of the Chairman
Barton Heminover 43 Vice President-- Corporate Controller and
Assistant Secretary
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus has been an employee of the Company in various
capacities 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, Chairwoman of the Board since 1991 and member
of the Office of the Chairman since September 1994.
Andrew Grossman was appointed a director of the Company on September
13, 1994. He has been employed by the Company as its Chief Executive Officer
and member of the Office of the Chairman since September 28, 1994. Prior to
September 1994, Mr. Grossman was President from 1991 to 1994 and Executive Vice
President from 1990 to 1991 of Jones Apparel Group, a manufacturer of women's
apparel, and Vice President of Merchandising for Jones New York from 1987 to
1990. Prior to joining Jones, Mr. Grossman was employed by Willie Wear Ltd.,
Herbert Grossman Enterprises, the Ralph Lauren Womenswear division of Bidermann
Industries, Corp., and the Evan Picone division of Palm Beach, Inc.
Barton Heminover joined the Company as Vice President -- Corporate
Controller and Assistant Secretary in July 1996. From January 1983 to July 1996
he was employed by Petrie Retail, Inc. (formerly Petrie Stores Corporation), a
woman's retail apparel chain, in various capacities, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial
Controller from 1994 to 1996.
13
On September 15, 1997, the Company announced the resignation of Wayne
Miller, the Company's Chief Financial Officer. Pending the appointment of a
successor to Mr. Miller, Mr. Heminover, together with the Company's financial
advisors, will be responsible for all of Mr. Miller's duties.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 1410 Broadway
in New York City, where the Company currently leases approximately 29,000
square feet, which represents a reduction of approximately 12,000 square feet
from the aggregate space occupied under several leases that terminated in July
1996. These facilities also house the Company's showrooms and its sales,
design, production and merchandising staffs. This space is occupied under a
lease expiring in July 1998. Net base rental expense aggregated approximately
$0.7 million, $2.3 million and $2.2 million in fiscal 1997, 1996 and 1995,
respectively. Chaus also leases approximately 19,000 square feet of space at
520 Eighth Avenue in New York City, which houses its technical production
support facilities (including its sample and pattern makers). Net base rental
expense for this space aggregated approximately $0.3 million in fiscal 1995,
and $0.2 million in each of fiscal 1996 and fiscal 1997. The lease for this
facility expires in January 1998.
During fiscal 1995, the Company consolidated its warehouse and
distribution centers located in Secaucus, New Jersey into one building,
reducing the leased square footage from approximately 390,000 square feet to
approximately 275,000 square feet. This facility houses the Company
administrative and finance personnel, its computer operations, one retail
outlet store and its warehouse and distribution center. In September 1995 the
Company renegotiated its Secaucus leases in order to terminate the lease on a
vacant building, and the new lease expires in June 2000. Base rental expense
for the Secaucus facilities aggregated approximately $1.5 million in fiscal
1995, and $1.3 million in each of fiscal 1996 and fiscal 1997.
Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.3 million for each of fiscal 1996
and fiscal 1997. In July 1995, the Company closed its Taiwan office and in
prior years, terminated its leases as to foreign office locations in the
Philippines and Italy. The aggregate rental payments, including the closed
locations, approximated $0.5 million in fiscal 1995.
The Company also leases space for its outlet stores operation, with
the average store utilizing approximately 3,000 square feet in fiscal 1997. The
annual aggregate base rental expense for such facilities was approximately $1.9
million for 1995 and $1.7 million for each of fiscal 1996 and 1997. The Company
plans to close all of its retail outlet stores (other than the retail outlet
store located at the Company's Secaucus facility, the space for which is leased
by the Company as part of its warehouse lease) by the end of January 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in an action which was commenced in federal
district court in New York by the Equal Employment Opportunity Commission
("EEOC") on behalf of three patternmakers, each of whom was terminated by the
Company in late 1995. The complaint alleges discrimination on the basis of age
and national origin. The Company was served with the complaint on April 7,
1997. The complaint seeks equitable relief, including (i) reinstatement of the
three individuals at issue, (ii) an injunction against the Company engaging in
age or national-origin discrimination, and (iii) an order that the Company
carry out an affirmative action program for individuals over 40 and for
individuals of Italian and/or non-Asian origin. The complaint also seeks back
pay, front pay, liquidated damages, compensatory damages, punitive damages,
and the EEOC's costs in the action. The Company will answer the complaint and
deny the material allegations of the complaint and intends to vigorously oppose
the action.
14
There are no other material pending legal proceedings to which the
Company is a party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CHS." The following table sets forth for each of the
Company's fiscal periods indicated the high and low sales prices for the Common
Stock as reported on the NYSE.
HIGH LOW
---- ---
FISCAL 1996
First Quarter .......... $6.125 $4.750
Second Quarter ......... 5.625 3.125
Third Quarter .......... 5.000 2.875
Fourth Quarter ......... 4.625 3.000
FISCAL 1997
First Quarter .......... $3.625 $2.000
Second Quarter ......... 2.875 1.625
Third Quarter .......... 1.750 0.500
Fourth Quarter ......... 1.500 0.687
As of September 26, 1997, the Company had approximately 1,045 stockholders of
record.
The Company has not declared or paid cash dividends or made other
distributions on its Common Stock since prior to its initial public offering of
Common Stock in the 1986 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, its 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 New Financing Agreement prohibits the Company from
declaring dividends or making other distributions on its capital stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the 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.
15
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ....................................... $160,100 $170,575 $181,697 $206,332 $235,819
Cost of goods sold .............................. 125,422 (4) 147,994 149,097 186,594 187,423
------- -------- -------- -------- --------
Gross profit .................................... 34,678 22,581 32,600 19,738 48,396
Selling, general and administrative expenses .... 40,924 40,162 44,794 55,400 57,410
Restructuring expenses .......................... 2,250 (3) -- 1,200 (1) 5,300 (1) --
Unusual expenses ................................ -- -- 8,333 (2) 1,900 (2) --
Interest expense ................................ 8,030 6,560 5,976 3,439 2,322
Other income (expense), net ..................... 113 56 91 (190) 449
---------- --------- --------- --------- ----------
Loss before income tax
provision .................................... (16,413) (24,085) (27,612) (46,491) (10,887)
Income tax provision ............................ 50 301 301 264 102
---------- --------- --------- --------- ----------
Net loss ........................................ $ (16,463) $(24,386) $(27,913) $(46,755) $(10,989)
=========== ========= ========= ========= ==========
Net loss per share (5) .......................... $ (0.63) $ (1.02) $ (1.40) $ (2.55) $ (0.60)
========== ========= ========= ========= ==========
Weighted average number of common and
common equivalent shares outstanding .......... 26,277 23,987 19,910 18,352 18,272
========== ========= ========== ========= ==========
BALANCE SHEET DATA:
AS OF JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital (deficiency) .................... $(32,729) $ (19,483) $(13,914) $ 3,342 $40,923
Total assets .................................... 34,138 32,742 28,660 51,619 90 208
Short-term debt, including current portion
of long-term debt ............................. 37,756 26,077 18,698 21,365 17,504
Long-term debt .................................. 26,374 23,588 21,066 18,789 14,730
Stockholders' equity (deficiency) ............... (57,060) (40,610) (32,379) (13,614) 33,147
- - -------------------
(1) Includes, in fiscal 1995, $1.2 million of employee severance, and in
fiscal 1994, $2.1 million for closing selected outlet stores, $2.5
million for consolidation of office and warehouse space, and $0.7
million for employee severance.
(2) Includes, in fiscal 1995, $7.8 million primarily relating to the costs
associated with the signing of the Company's new Chief Executive
Officer and $0.5 million related to certain legal matters, and in
fiscal 1994, expenses relating primarily to abandonment of fixed
assets, certain legal matters and the winding down of the Company's
Canadian joint venture.
(3) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred
relate to the closing of the Company's outlet stores (such as
professional fees, lease termination expenses, and write-off of fixed
assets), in addition to professional fees and other expenses
associated with the implementation of the Company's proposed
Restructuring.
(4) Includes $1.1 million for liquidation of inventory as a result of
closing the Company's outlet stores.
(5) Computed by dividing net income (loss) by the weighted average number
of Common and Common Equivalent Shares outstanding during the years.
For the fiscal years ended 1997, 1996, 1995, 1994 and 1993, Common
Equivalent Shares were not included in the calculation as their
inclusion would have been antidilutive.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
expressed as a percentage of net sales.
Fiscal Year Ended June 30
---------------------------
1997 1996 1995
---- ---- ----
Net sales ...................................... 100.0% 100.0% 100.0%
Gross profit ................................... 21.7 13.2 17.9
Selling, general and administrative expenses ... 25.6 23.5 24.7
Restructuring expenses ......................... 1.4 -- 0.7
Unusual expenses ............................... -- -- 4.6
Interest expense ............................... 5.0 3.8 3.3
Net loss ....................................... (10.3) (14.3) (15.4)
Fiscal 1997 Compared to Fiscal 1996
In fiscal 1997, net sales decreased by $10.5 million, or 6.1%,
compared to the prior year. The decrease in net sales was due predominately to
a reduction in off-price sales, and the discontinuation of dresses as a product
category in March 1996. The decrease in net sales was partially offset by sales
of the Company's licensed Nautica product of approximately $25.0 million, which
commenced in August 1996. Sales by the Company's outlet stores decreased by
$1.2 million, or 6.5%, as compared to the prior year. This decrease was due to
the closing of nine outlet stores during the past two years.
Gross profit as a percentage of net sales was 21.7% as compared to
13.2% in the previous year. The increase in gross profit as a percentage of net
sales is primarily the result of a decrease in off-price sales volume and the
impact of eliminating dresses as a product category in February 1996.
Selling, general and administrative expenses increased by $0.8
million, to 25.6% of net sales in fiscal 1997 from 23.5% of net sales in fiscal
1996. This increase is primarily due to costs associated with the licensed
Nautica product line such as payroll, advertising, sample expense, and royalty
fees. The increase in such expenses was partially offset by a decrease in
payroll expenses throughout other areas of the Company, and a decrease in
occupancy costs. The decrease in occupancy costs was due to a decrease in
occupancy costs at the corporate headquarters which resulted from a decrease in
the space leased and the reduction in the number of outlet stores and the
attendant leases.
The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate to
the closing of the Company's outlet stores (such as professional fees, lease
termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's proposed Restructuring. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory.
17
Fiscal 1996 Compared to Fiscal 1995
In fiscal 1996, net sales decreased by $11.2 million, or 6.1%,
compared to the prior year. Approximately $8.6 million is due to the decrease
in dress sales as a result of the discontinuation of dresses as a product
category. The sales decrease is also the result of lower sales at regular and
incentive prices combined with an increase in off-price sales at deeper
discounts than the prior year.
Sales by the Company's outlet stores decreased by $5.7 million
compared to the prior year. This decrease is largely due to the closing of six
outlet stores in fiscal 1996 and a decline in same-store sales of approximately
$2.2 million.
Gross profit as a percentage of net sales was 13.2% as compared to
17.9% for the previous year. The decrease in gross profit as a percentage of
net sales reflects the impact of increased off-price sales volume at deeper
discounts. The Company's dress division realized a negative gross margin of
$2.2 million for fiscal 1996 which adversely impacted gross profit as a
percentage of net sales.
Selling, general and administrative expenses decreased by $4.6
million, from 24.7% of net sales in fiscal 1995 to 23.5% of net sales in fiscal
1996. This decrease is due to a decrease in payroll and payroll related items
of approximately $2.7 million, a decrease in occupancy costs of $1.2 million
and a decrease in other expenses of $0.7 million. The decrease in payroll and
payroll related items was predominately due to a decrease of approximately $0.7
million as a result of the closing of six stores in fiscal 1996 and a decrease
of approximately $2.0 million due to employee reductions as the Company
continues to improve the efficiency of its operations. The decrease in
occupancy costs was primarily due to a $1 million decrease associated with the
consolidation of the distribution facility and a $0.5 million decrease due to
the reduction in outlet stores.
At the end of fiscal 1995 the balance of the restructuring reserve was
$2.8 million. During fiscal 1996 $2.6 million was charged against the
restructuring reserve, consisting of charges relating to consolidation of
warehouse and office space ($1.3 million), severance related costs ($0.8
million) and outlet store closing costs ($0.5 million). At June 30, 1996 the
balance in the restructuring reserve was $0.2 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $11.0 million in fiscal
1997, $22.7 million in fiscal 1996, and $4.8 million in fiscal 1995. The net
cash used in operating activities in fiscal 1997 resulted primarily from the
net loss of $16.5 million, inclusive of $3.6 million of non-cash charges, and
increases in inventory of $2.5 million, partially offset by an increase in
accrued restructuring expenses of $1.7 million and an increase in accounts
payable of $2.4 million.
Historically, the Company has not required major capital expenditures.
In fiscal 1997 and 1996, purchases of fixed assets were $0.2 million and $0.5
million, respectively, consisting primarily of improvements in the Company's
New Jersey warehouse facilities, and New York design and showroom facilities.
In fiscal 1997, the Company incurred expenditures of $0.4 million for "in
store" fixtures and signs purchased in connection with the Nautica product
line. These "in store" fixtures and signs were placed in approximately 120
department stores. In fiscal 1998, the Company anticipates capital expenditures
of approximately $0.5 million, consisting primarily of expenditures for the
Company's New Jersey warehouse facility, and New York design and showroom
facilities. The Company also anticipates expenditures of approximately $1
million for "in store" fixtures and signs purchased in connection with the
Nautica product line.
18
Old Bank Debt Agreement
The Company and BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of The Bank of New York, entered into a financing agreement in July
1991, which was amended and restated effective as of February 21, 1995 and
further amended, effective as of September 28, 1995 (the "September 1995
Amendment"), May 9, 1996 (the "May 1996 Amendment"), September 17, 1996 (the
"September 1996 Amendment"), January 31, 1997 (the "January 1997 Amendment"),
March 21, 1997 (the "March 1997 Amendment"), and April 1, 1997 (the "April 1,
1997 Amendment") and April 29, 1997 (the "April 29, 1997 Amendment")
(collectively, the "Old Bank Debt Agreement"). The Old Bank Debt Agreement
provided the Company with a $72 million credit facility for letters of credit
and direct borrowings, with a sublimit for loans and advances ranging between
$40.0 and $58.0 million. The amount of financing available was based upon a
formula incorporating eligible receivables and inventory, cash balances, other
collateral and permitted overadvances, all as defined in the Old Bank Debt
Agreement. At June 30, 1997, the Company had availability of approximately $2.1
million (inclusive of overadvance availability) under the Old Bank Debt
Agreement. The Company's obligations under the Old Bank Debt Agreement were
secured by the Company's accounts receivable, inventory and trademarks.
The Old Bank Debt Agreement contained certain financial covenants
including covenants regarding the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company was also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. In a Waiver,
dated May 5, 1997 (the "Waiver"), BNYF waived covenant compliance with net
worth, working capital and quarterly minimum profit requirement for the period
ended March 31, 1997.
Interest on direct borrowings was payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.50% at June 30,
1997) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeded the allowable overadvances) or (ii) the
Federal Funds Rate (8.50% at June 30, 1997) in effect plus 1% (Federal Funds
Rate in effect plus 2% in the event the Company's overadvance position exceeded
the allowable overadvances). There was an annual commitment fee of 0.375% of
the unused portion of the line, payable monthly, and letter of credit fees
equal to 0.125% of the outstanding letter of credit balance, payable monthly.
The Old Bank Debt Agreement required the payment of minimum service charges of
$0.6 million per annum. In connection with the May 1996 Amendment, BNYF was
paid a fee of $25,000, and additional fees of $10,000 per month through
December 1996 were provided for, with BNYF agreeing to provide specified levels
of overadvances up to $10.0 million through the same period. In connection with
the Waiver, BNYF was paid a fee of $25,000 and the Company issued the Existing
BNYF Warrants. In connection with the Restructuring, the Existing BNYF Warrants
were extinguished, and BNYF received the New BNYF Warrants. See "Business --
Restructuring -- Restructuring of Bank Debt." BNYF could have terminated the
Old Bank Debt Agreement after February 20, 1999, upon 60 days' written notice
to the Company.
On October 10, 1997, the Company and BNYF entered into the New
Financing Agreement which amended and restated in its entirety the Old Bank
Debt Agreement. The New Financing Agreement amends certain provisions of the
Old Bank Debt Agreement and provides for maximum availability of $81 million,
and overadvances of up to $12.8 million. The New Financing Agreement also
amends certain financial covenants contained in the Old Bank Debt Agreement.
The New Financing Agreement provides for certain additional events of default,
among which are the default by Ms. Chaus under the Bank Debt Put (as defined
below), and the failure by the Company to close all of its retail outlets by
the end of January 1998. See "Business -- Restructuring -- Restructuring of
Bank Debt".
19
New Financing Agreement
The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66 million five-year revolving credit line with
a $20 million sublimit for letters of credit, and (ii) the New Term Loan which
is a $15 million term loan facility. Each facility matures on December 31,
2002. See "Business -- Restructuring -- Restructuring of Bank Debt".
The New Financing Agreement contains financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and maximum permitted loss (minimum permitted profit).
Credit Support
Josephine Chaus has arranged for a letter of credit (the "Letter of
Credit") in various amounts since April 1994 in return for which BNYF has
increased the availability under the Old Bank Debt Agreement. In consideration
for credit support provided by Ms. Chaus to the Company prior to February 1995,
Ms. Chaus was granted 1,216,500 warrants (the "1994 Warrants"), exercisable
through November 22, 1999, at prices ranging between $2.25 and $4.62 per share.
As part of the negotiations with BNYF in connection with the Old Bank Debt
Agreement, in February 1995 Josephine Chaus increased the Letter of Credit to
$10.0 million and extended its term to October 31, 1995 (the "February 1995
Increase/Extension"). In addition, in February 1995, Ms. Chaus provided a $5.0
million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Old Bank Debt Agreement's term. In September 1995, Ms. Chaus further
extended the term of the Letter of Credit to January 31, 1996 (the "September
1995 Extension"). In consideration of her provision of the February 1995
Increase/Extension, the $5.0 Million Guarantee and the September 1995
Extension, a special committee consisting of disinterested members of the Board
of Directors of the Company (the "Special Committee") authorized the issuance
to Ms. Chaus of warrants (the "1995 Warrants") to purchase an aggregate of
1,580,000 shares of Common Stock at prices ranging between $4.05 and $6.75 per
share. The issuance of the 1995 Warrants was approved at the 1995 Annual
Meeting of Stockholders. The issuance of the 1994 Warrants, the warrants for
the February 1995 Increase/Extension and the warrants for the $5.0 Million
Guarantee was recorded in fiscal 1995 at a value of $1.1 million, and was
included as a charge to interest expense with a corresponding increase to
additional paid-in capital. The issuance of the warrants for the September 1995
Extension was recorded in the second quarter of fiscal 1996 at a value of $0.2
million, and was included as a charge to interest expense with a corresponding
increase to additional paid-in capital. Ms. Chaus received warrant compensation
for her provision of the $5.0 Million Guarantee only through October 31, 1995.
Thereafter, for each three month period of the $5.0 Million Guarantee, she has
received cash compensation of $50,000, as authorized by the Special Committee.
In connection with the September 1995 Amendment, Ms. Chaus provided
the Company with an option to further extend the Letter of Credit to July 31,
1996 (the "July 1996 Option"), subject to the consummation of the Company's
November 1995 public offering of Common Stock. In January 1996, the Company
exercised the July 1996 Option to extend the Letter of Credit to July 31, 1996
(the "July 1996 Extension"). In consideration of her provision of the July 1996
Extension, the Special Committee authorized the issuance to Ms. Chaus, of
warrants (the "1996 Warrants") to purchase an aggregate of 682,012 shares of
Common Stock at a price of $4.20 per share. The issuance of the 1996 Warrants
was approved by the stockholders of the Company at the 1996 Annual Meeting of
Stockholders. The issuance of the 1996 Warrants ($0.3 million) was recorded in
the third quarter of fiscal 1996, at a value of $0.3 million and was included
as a charge to interest expense with a corresponding increase to additional
paid-in capital.
In connection with the May 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month
20
period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus
for her guaranty, to $100,000 for each three month period of the $10.0 Million
Guarantee.
In connection with the September 1996 Amendment, Ms. Chaus agreed to
extend the Letter of Credit to July 31, 1997 (the "July 1997 Extension"),
increase the amount of the $10.0 Million Guarantee by $2.5 million to $12.5
million (the "$12.5 Million Guarantee") and fully collateralize the $12.5
Million Guarantee. In connection with the July 1997 Extension, the Special
Committee approved the payment of cash compensation to Ms. Chaus of $100,000
for each additional three month period of the Letter of Credit as extended from
January 31, 1997 to July 31, 1997. For her provision of the $12.5 Million
Guarantee, the Special Committee approved an increase in the amount of cash
compensation payable to Ms. Chaus for her guaranty, to $125,000 for each three
month period of the $12.5 Million Guarantee.
Ms. Chaus previously entered into the July Deposit Letter pursuant to
which she provided $10 million in cash collateral to secure the Bank Debt in
substitution for the letter of credit previously provided by her. The July
Deposit Letter was amended on October 10, 1997 to provide that the $10 million
in cash collateral shall be held as collateral to secure indebtedness under the
New Financing Agreement. Immediately prior to the consummation of the Rights
Offering, and subject to the other conditions of the Restructuring being
satisfied, such collateral will be released and used by Ms. Chaus to purchase
shares of Common Stock issuable to her upon the exercise of the Rights, in
satisfaction of her Purchase Commitment in connection with the Rights Offering.
See "Business -- Restructuring -- Restructuring of Credit Support Provided by
Ms. Chaus."
On October 10, 1997, in substitution for the $12.5 Million Guarantee
previously provided by Ms. Chaus, she entered into the October Deposit Letter
pursuant to which she provided $12.5 million in cash collateral and secured the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF-J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of common stock of the Company. See "Business
- - -- Restructuring -- Restructuring of Credit Support Provided by Ms. Chaus," and
"Business -- Restructuring -- Exchange of the Company's Indebtedness Owed to
Ms. Chaus for Equity Securities."
Subordinated Debt
The Company has outstanding at June 30, 1997, $26.4 million of
subordinated notes payable to Josephine Chaus (the "Subordinated Notes"). In
connection with the Company's November 1995 public offering (see "--Nautica
License Agreement and Future Financing Requirements"), Josephine Chaus extended
the maturity date of the Subordinated Notes (which were to mature on July 1,
1996) to July 1, 1998. The Company has been unable to pay principal or
interest, with certain exceptions, under the Subordinated Notes as a result of
covenants in the Old Bank Debt Agreement. See Note 7 to Notes to the Company's
Consolidated Financial Statements. The Subordinated Notes will, as part of the
Restructuring, be exchanged for equity. See "Business - Restructuring -
Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity
Securities."
21
Proposed Restructuring of Indebtedness
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the Restructuring
pursuant to which: (i) the Company will seek to raise up to $20 million, but
not less than $12.5 million, of equity through the Rights Offering; (ii)
approximately $40.5 million of the Company's indebtedness to Ms. Chaus,
consisting of $28 million of existing subordinated indebtedness (including
accrued interest through January 15, 1998) and $12.5 million of indebtedness
which will be owed to Ms. Chaus, will be converted into Common Stock of the
Company; (iii) the New Financing Agreement (entered into on October 10, 1997);
and (iv) the Company will implement the Stock Split. In connection with the
Restructuring, BNYF has agreed that the credit support, described above,
heretofore provided by Ms. Chaus, will be terminated once the New Financing
Agreement becomes effective. Consummation of the Restructuring is subject to
the approval of certain aspects of the Restructuring by the stockholders of
the Company. Accordingly, until such approval is obtained, there can be no
assurances that the Restructuring will occur or be consummated. It is presently
contemplated that the Restructuring will be consummated by January 15, 1998.
See "Business -- Restructuring".
Future Financing Requirements
At June 30, 1997, the Company had a working capital deficiency of
$32.7 million. The Company requires the availability of sufficient cash flow
and borrowing capacity to finance its existing product lines and to develop and
market its licensed Nautica product lines. The Company expects to satisfy such
requirements through cash flow from operations, borrowings under the New
Financing Agreement and proceeds from the Rights Offering.
Although there can be no assurance, the Company believes that if the
Restructuring is consummated, the Company will have sufficient cash flow and
credit availability to meet its needs at least through the end of the fiscal
1998.
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 obtain additional financing, retail market
conditions, consumer acceptance of the Company's products, shareholder approval
of certain matters related to the Restructuring and consummation of the
Restructuring.
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 sales or profitability.
SEASONALITY
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 generally being 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.
22
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS. For
the year ended February 1, 1997, the adoption of SFAS No. 128 would not have
had a material effect on the calculation of EPS.
SFAS No. 129, Disclosure of Information about Capital Structure,
effective for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. This statement
requires disclosure of the pertinent rights and privileges of various
securities outstanding (stocks, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of this statement will have no effect on the
Company as it currently discloses the information required.
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal periods beginning after December 15, 1997. The Company has not yet
determined the impact, if any, of adopting this standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
23
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 1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
(the "Company's 1997 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 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
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 1997 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 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Financial Statements and Financial Statement Schedule: See List of
Financial Statements and Financial Statement Schedule on page F-1.
(b) The Company did not file a Form 8-K during the last quarter of its
fiscal year ended June 30, 1997.
(c) Exhibits filed herewith are denoted by an (*):
SEQUENTIALLY
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EXHIBIT NO. PAGES
- - ----------- -----
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").
3.11 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").
24
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EXHIBIT NO. PAGES
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3.12 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).
3.2 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).
3.3 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).
10.1 Restricted Stock Purchase Plan (incorporated by reference to Exhibit
10.1 of the Company's Form 10-K for the year ended June 30, 1987).
10.2 1986 Stock Option Plan, as amended and restated as of January 1, 1987
(the "1986 Stock Option Plan") (incorporated by reference to Exhibit
10.2 of the Company's Form 10-K for the year ended July 1, 1989 (the
"1989 Form 10-K")).
10.3 Amendment No. 1 to the 1986 Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the 1989 Form 10-K).
10.4 Amendment No. 2 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1990 Annual Meeting
of Stockholders).
10.5 Amendment No. 3 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1991 Annual Meeting
of Stockholders).
10.6 Amendment No. 4 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1993 Annual Meeting
of Stockholders).
10.7 Amendment No. 5 to the 1986 Stock Option Plan as amended (incorporated
by reference to the Company's Proxy Statement for its 1995 Annual
Meeting of Stockholders).
10.8 Incentive Award Plan (incorporated by reference to Exhibit 10.6 of the
1986 Registration Statement).
10.9 Agreement dated December 3, 1990 among the Company, Bernard Chaus,
Josephine Chaus and National Union Fire Insurance Company of
Pittsburgh, Pa., the Company's directors and officers liability
carrier (incorporated by reference to Exhibit 10.31 of the Company's
Form 10-Q for the quarter ended December 31, 1990).
10.10 Employment Agreement, dated July 1, 1991, between the Company and
Josephine Chaus (incorporated by reference to Exhibit 10.39 of the
Company's Form 10-K for the year ended June 30, 1991).
25
SEQUENTIALLY
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EXHIBIT NO. PAGES
- - ----------- -----
10.11 Employment Agreement dated June 3, 1994 between the Company and Wayne
Miller (incorporated by reference to Exhibit 10.89 of the Company's
Form 10-K for the year ended June 30, 1994 (the "1994 Form 10-K")).
10.12 Employment Agreement dated September 1, 1994 between the Company and
Andrew Grossman with Stock Option Agreement dated as of September 1,
1994 by and between the Company and Andrew Grossman (incorporated by
reference to Exhibit 10.90 of the 1994 Form 10-K).
10.13 Employment Agreement dated December 14, 1996 between the Company and
Michael Winter (incorporated by reference to Exhibit 10.68 of the
Company's Form 10-Q for the quarter ended December 31, 1995 (the
"December 1995 Form 10-Q").
10.14 Waiver dated September 23, 1993 to the Restated and Amended Financing
Agreement between the Company and BNY Financial Corporation (the
"Financing Agreement") effective July 1, 1992 (incorporated by
reference to Exhibit 10.82 of the Company's Form 10-K for the year
ended June 30, 1993 (the "1993 form 10-K).
10.15 Waiver dated November 5, 1993 to the Financing Agreement (incorporated
by reference to Exhibit 10.83 of the Company's Form 10-Q for the
quarter ended September 30, 1993).
10.16 Amendment, effective October 1, 1993, to the Financing Agreement
(incorporated by reference to Exhibit 10-84 of the Company's Form 10-Q
for the quarter ended December 31, 1993 (the "December 1993 Form
10-Q")).
10.17 Waiver dated January 13, 1994 to the Financing Agreement (incorporated
by reference to Exhibit 10.85 of the December 1993 Form 10-Q).
10.18 Waiver dated February 10, 1994 to the Financing Agreement
(incorporated by reference to Exhibit 10.86 of the December 1993 Form
10-Q).
10.19 Waiver dated May 4, 1994 to the Financing Agreement (incorporated by
reference to Exhibit 10.87 of the Company's Form 10-Q for the quarter
ended March 31, 1994).
10.20 Waiver dated September 20, 1994 to the Financing Agreement
(incorporated by reference to Exhibit 10.93 of the 1994 Form 10-K).
10.21 Agreement, dated June 15, 1988, between the Company and Bernard Chaus
and Josephine Chaus, amending the terms of the Company's subordinated
promissory notes to each of them, each in the principal amount of
$7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
Registration Statement (incorporated by reference to Exhibit 10.11 of
the Company's Form 10-K for the year ended July 2, 1988).
26
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
10.22 Agreement, dated May 17, 1990, between the Company and Bernard Chaus
and Josephine Chaus amending the terms of the Company's subordinated
promissory notes to each of them, each in the principal amount of
$7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
Registration Statement.
10.23 Agreement, dated February 21, 1991, between the Company and Bernard
Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.74 of
the 1993 Form 10-K).
10.24 Subordinated promissory notes, dated March 12, 1991, between the
Company and Bernard Chaus and Josephine Chaus, separately, each in the
amount of $5,000,000 (incorporated by reference to Exhibit 10.75 of
the 1993 Form 10-K).
10.25 Agreement, dated July 31, 1991, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.76 of
the 1993 Form 10-K).
10.26 Agreement, dated July 31, 1991, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.77 of
the 1993 Form 10-K).
10.27 Agreement, dated July 15, 1992, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.78 of
the 1993 Form 10-K).
10.28 Agreement, dated October 30, 1992, between the Company and the Estate
of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in the
principal amount of $7,365,000 (incorporated by reference to Exhibit
10.79 of the 1993 Form 10-K).
10.29 Demand Notes, dated June 30, 1993, between the Company and the Estate
of Bernard Chaus and Josephine Chaus, each in the principal amount of
$1,520,216 (incorporated by reference to Exhibit 10.80 of the 1993
Form 10-K).
10.30 Agreement, dated September 21, 1993, between the Company and the
Estate of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in the
principal amount of $7,365,000 (incorporated by reference to Exhibit
10.81 of the 1993 Form 10-K).
27
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EXHIBIT NO. PAGES
- - ----------- -----
10.31 Subordinated promissory notes, dated August 1, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $208,716 (incorporated by reference
to Exhibit 10.94 of the 1994 Form 10-K).
10.32 Subordinated promissory note, dated August 1, 1993, between the
Company and Josephine Chaus in the amount of $1,311,500 (incorporated
by reference to Exhibit 10.95 of the 1994 Form 10-K.)
10.33 Subordinated Promissory Note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus in the amount of $1,000,000
(incorporated by reference to Exhibit 10.96 of the 1994 Form 10-K).
10.34 Subordinated promissory note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus, in the amount of $311,500
(incorporated by reference to Exhibit 10.97 of the 1994 Form 10-K).
10.35 Subordinated promissory notes, dated December 31, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $181,056 (incorporated by reference
to Exhibit 10.98 of the 1994 Form 10-K).
10.36 Subordinated promissory notes, dated December 31, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $412,950 (incorporated by reference
to Exhibit 10.99 of the 1994 Form 10-K).
10.37 Agreements, dated September 9, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.100 of
the 1994 Form 10-K).
10.38 Agreements, dated October 18, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $1,520,216 (incorporated by reference to Exhibit 10.101 of
the 1994 Form 10-K).
10.39 Agreements, dated October 18, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.102 of
the 1994 Form 10-K).
10.40 Agreement, dated December 31, 1993, between the Company and Josephine
Chaus reflecting amendments to a subordinated promissory note in the
principal amount of $1,311,500 (incorporated by reference to Exhibit
10.103 of the 1994 Form 10-K).
10.41 Agreement, dated December 31, 1993, between the Company and the Estate
of Bernard Chaus, reflecting amendments to subordinated promissory
notes, in the
28
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
principal amounts of $1,000,000 and $311,500 (incorporated by
reference to Exhibit 10.104 of the 1994 Form 10-K).
10.42 Agreement, dated November 9, 1994, between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.107 of the Company's Form
10-Q for the quarter ended September 30, 1994 (the "September 1994
Form 10-Q")).
10.43 Agreement, dated November 9, 1994, between the Company and the Estate
of Bernard Chaus extending the due dates on subordinated promissory
notes (incorporated by reference to Exhibit 10.108 of the September
1994 Form 10-Q).
10.44 Agreement, dated December 19, 1994, assigning the subordinated notes
from the Estate of Bernard Chaus to Josephine Chaus (incorporated by
reference to Exhibit 10.110 of the Company's Form 10-Q for the quarter
ended December 30, 1994 (the "December 1994 Form 10-Q").
10.45 Agreement, dated January 11, 1995, between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.111 of the December 1994 Form
10-Q).
10.46 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 32,500 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.112 of the Company's Form
10-Q for the quarter ended March 31, 1995 (the "March 1995 Form
10-Q")).
10.47 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 206,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.113 of the March 1995 Form
10-Q).
10.48 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 338,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.114 of the March 1995 Form
10-Q).
10.49 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 640,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.115 of the March 1995 Form
10-Q).
10.50 Waiver dated November 7, 1994, to the Financing Agreement
(incorporated by reference to Exhibit 10.106 of the September 1994
Form 10-Q).
10.51 Waiver dated February 10, 1995 to the Financing Agreement
(incorporated by reference to Exhibit 10.109 of the December 1994 Form
10-Q).
29
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EXHIBIT NO. PAGES
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10.52 Agreement effective February 21, 1995 (the "Old Bank Debt Agreement")
between the Company and BNY Financial Corporation restating and
amending the Financing Agreement (incorporated by reference to Exhibit
10.116 of the March 1995 Form 10-Q).
10.53 Waiver dated September 14, 1995 to the Old Bank Debt Agreement
(incorporated by reference to Exhibit 10.5 of the 1995 Registration
Statement).
10.54 Agreement effective as of September 28, 1995 relating to the Old Bank
Debt Agreement (incorporated by reference to Exhibit 10.58 of the 1995
Registration Statement).
10.55 Agreement dated April 28, 1995 between the Company and Josephine Chaus
extending the due dates on subordinated promissory notes (incorporated
by reference to Exhibit 10.117 of the March 1995 Form 10-Q).
10.56 Agreement dated September 8, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.60 of the 1995 Registration
Statement).
10.57 License Agreement dated as of September 6, 1995 between the Company
and Nautica Apparel Inc. (incorporated by reference to Exhibit 10.61
of the 1995 Registration Statement, confidential portions of which
have been omitted and filed separately with the Commission subject to
an order granting confidential treatment).
10.58 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, extending the due dates on subordinated promissory notes and
clarifying the subordination provision (incorporated by reference to
Exhibit 10.65 of the 1995 Registration Statement).
10.59 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, providing the Company with an option to extend the Letter of
Credit to July 31, 1996 (incorporated by reference to Exhibit 10.66 of
the 1995 Registration Statement).
10.60 Agreement dated October 27, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q
for the quarter ended September 30, 1995).
10.61 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 815,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.69 of the December 1995 Form
10-Q).
30
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
10.62 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 535,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.70 of the December 1995 Form
10-Q).
10.63 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 230,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.71 of the December 1995 Form
10-Q).
10.64 Amendment and waiver dated May 9, 1996 to the Financing Agreement
(incorporated by reference to Exhibit 10.73 of the Company's Form 10-Q
for the quarter ended March 31, 1996).
10.65 Amendment No. 4 dated September 17, 1996 to the Financing Agreement
(incorporated by reference to Exhibit 10.65 of the Company's Form 10-K
for the year ended June 30, 1996).
10.66 Lease dated June 12, 1996 between the Company and L. H. Charney
Associates, relating to the Company's facility at 1410 Broadway, New
York, New York (incorporated by reference to Exhibit 10.66 of the
Company's Form 10-K for the year ended June 30, 1996).
10.67 Amendment No. 5 dated January 31, 1997 to the Financing Agreement
(incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q
for the quarter ended December 31, 1996).
10.68 Waiver dated February 4, 1997 to the Financing Agreement (incorporated
by reference to Exhibit 10.68 of the Company's Form 10-Q for the
quarter ended December 31, 1996).
10.69 Consulting Agreement dated as of December 31, 1996 between the Company
and Michael Winter (incorporated by reference to Exhibit 10.69 of the
Company's Form 10-Q for the quarter ended December 31, 1996).
10.70 Agreement dated February 19, 1997, between the Company and BNY
Financial Corp. issuing 125,000 warrants to purchase Common Stock of
the Company (incorporated by reference to Exhibit 10.70 of the
Company's Form 10-Q for the quarter ended March 31, 1997).
10.71 Amendment No. 6 dated March 21, 1997, to the Financing Agreement
(incorporated by reference to Exhibit 10.71 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
10.72 Amendment No. 7 dated April 1, 1997, to the Financing Agreement
(incorporated by reference Exhibit 10.72 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
31
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
10.73 Amendment No. 8 dated April 29, 1997, to the Financing Agreement
(incorporated by reference Exhibit 10.73 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
10.74 Waiver dated May 5, 1997, to the Financing Agreement (incorporated by
reference Exhibit 10.74 of the Company's Form 10-Q for the quarter
ended March 31, 1997).
*10.75 Commitment Letter dated as of June 26, 1997, between the Company and
BNY Financial Corp.
*10.76 Cash Collateral Deposit Letter dated as of July 23, 1997, between
Josephine Chaus and BNY Financial Corp.
*10.77 Cash Collateral Deposit Letter dated as of October 10, 1997, between
Josephine Chaus and BNY Financial Corp.
*10.78 Amended and Restated Cash Collateral Deposit Letter dated as of
October 10, 1997, between Josephine Chaus and BNY Financial Corp.
*10.79 Second Restated and Amended Financing Agreement dated as of October
10, 1997, between the Company and BNY Financial Corp.
21 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's Form 10-K for the year ended June 30,
1995).
*27 Financial Data Schedule.
- - --------------
* Filed herewith.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on
October 14, 1997.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
-------------------------------
Josephine Chaus
Chairwoman of the Board and
Office of the Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on October 14, 1997.
SIGNATURE TITLE
--------- -----
/s/ Josephine Chaus Chairwoman of the Board and Office of the Chairman
- - -----------------------
Josephine Chaus
/s/ Andrew Grossman Chief Executive Officer and Office of the Chairman
- - -----------------------
Andrew Grossman
/s/ Barton Heminover Vice President -- Corporate Controller and Assistant
- - ----------------------- Secretary
Barton Heminover
/s/ Philip G. Barach Director
- - -----------------------
Philip G. Barach
/s/ S. Lee Kling Director
- - -----------------------
S. Lee Kling
/s/ Harvey M. Krueger Director
- - -----------------------
Harvey M. Krueger
33
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:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets -- June 30, 1997 and 1996 ................. F-3
Consolidated Statements of Operations -- Years Ended
June 30, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) --
Years Ended June 30, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Cash Flows -- Years
Ended June 30, 1