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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, 1996
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 September 26, 1996 was $30,294,488.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date
Date Class Shares Outstanding
---- ----- ------------------
September 26, 1996 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 1996.
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(Registered Trademark),
CHAUS SPORT(Registered Trademark) and NAUTICA(Registered Trademark) trademarks.
In late fiscal 1994, the Company initiated a corporate restructuring program
characterized by a strengthened management team, reduced selling, general and
administrative expenses and, in an effort to capitalize on the Company's well-
recognized brand name, a return to its historic product positioning. As a
result, the Company has repositioned its enhanced product line at the high end
of the "upper moderate" through the opening price points of the "better"
categories. 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, under which the Company has 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 addition, in order
to better utilize its management and financial resources, in March 1996 the
Company 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.
PRODUCTS
The Company's products currently are divided into two principal
product categories: (i) career sportswear and (ii) weekend casual sportswear.
As part of its restructuring/repositioning strategy, the Company has 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 with, in certain cases, an increase in price
points to the high end of the "upper moderate" through the opening price points
of the "better" categories. 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 25 to 55.
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. Beginning in fiscal 1996, the Company combined the Spring I and Spring
II seasons into one Spring season, thus reducing the selling seasons from six
to five.
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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
During fiscal 1996, the suggested retail prices of the Company's Chaus
products ranged between $20.00 and $142.00. The Company's jackets ranged in
price between $50.00 and $142.00, its blouses and sweaters ranged in price
between $25.00 and $80.00, its skirts and pants ranged in price between $28.00
and $86.00, and its knit tops and bottoms ranged in price between $20.00 and
$78.00.
The following table sets forth a breakdown by percentage of the
Company's net sales by product category for fiscal 1994 through fiscal 1996:
Fiscal Year Ended June 30,
--------------------------
1994 1995 1996
---- ---- ----
Career Sportswear
Chaus 29% 31% 41%
Chaus Woman 12 13 11
Chaus Petite 6 4 5
----- ----- -----
Total 47 48 57
Weekend Casual
Sportswear 28 35 33
Dresses 13 12 8
Other (1) 12 5 2
----- ----- -----
Total 100% 100% 100%
- ---------------
(1) Includes sales by outlet stores, offset by intercompany
eliminations. Also includes, for fiscal 1994, (a) 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 and (b) a Canadian joint
venture that the Company terminated in June 1994.
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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. In August 1996 the
Company commenced sales of career sportswear under the NAUTICA label. 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. In August 1996, the Company
commenced sales of weekend casual sportswear under the NAUTICA label.
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(Registered Trademark) 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. The
Company plans to have approximately 125 Nautica designed in-store shops built
during fiscal 1997. 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.
The initial term of the Nautica License Agreement runs through
December 31, 1999, and is thereafter renewable 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).
CUSTOMERS
The Company's products are sold nationwide in an estimated 2,200
individual stores operated by approximately 100 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.
During fiscal 1996, approximately 62% of the Company's net sales were
made to its nine largest customers, as compared to 49% in fiscal 1995 and 45%
in fiscal 1994. Except for Dillard's Department Stores, which accounted for 29%
of net sales in fiscal 1996, 23% of net sales in fiscal 1995 and 16% of net
sales in fiscal 1994, no single customer accounted for more than 10% of net
sales during such fiscal years; however, certain of the Company's
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customers are under common ownership. When considered together as a group under
common ownership, sales to two department store customers owned by TJX
Companies, Inc. accounted for approximately 16% of net sales in fiscal 1996, 7%
of net sales in fiscal 1995 and 13% of net sales in fiscal 1994. Sales to nine
department store companies owned by The May Department Stores Company accounted
for approximately 10% of the Company's net sales in fiscal 1996, 15% of net
sales in fiscal 1995 and 14% of net sales in fiscal 1994. Sales to nine
department store companies owned by Federated Department Stores accounted for
approximately 5% of net sales in fiscal 1996, 11% of net sales in fiscal 1995
and 12% in fiscal 1994. The aforementioned percentages of net sales were based
upon the stores owned by the various department store customers at the end of
fiscal 1996. 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 15, all of whom are located in the New York City showrooms. Senior
management, principally Josephine Chaus, Chairwoman of the Board and principal
stockholder of the Company, and Michael Winter, President of the Company's
Nautica division, 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 limited 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. Cooperative advertising expenditures
were approximately $1.6 million in fiscal 1994 and $0.8 million in each of
fiscal 1995 and fiscal 1996.
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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 16 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%) 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 1996, the Company purchased approximately 67% of its finished
goods from its ten largest manufacturers, including approximately 14% 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
5
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 1996, 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. 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
6
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.
OUTLET STORES
At June 30, 1996, the Company had 25 outlet stores as compared to 31
stores at June 30, 1995. The 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. As part of the
Company's continued restructuring, six outlet stores were closed during fiscal
1996. The Company plans to close three more outlet stores during fiscal 1997
and does not intend to open any new stores in the near future. The Company also
has realigned its outlet store business to reflect the changes it has made in
its pricing and product strategy. The Company will seek to utilize its outlet
stores as more of a sale point for current merchandise without negatively
impacting its department store sales.
BACKLOG
At September 20, 1996, the Company's order book reflected unfilled
customer orders for approximately $45.0 million of merchandise as compared to a
backlog of $48.0 million at September 14, 1995. 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.
Accordingly, the Company believes that order book data do not provide
meaningful period to period comparisons as of specific dates, and comparisons
of backlog information with such information as of specific dates for prior
periods are not necessarily indicative of future results. The Company does not
believe that cancellations, rejections or returns will materially reduce the
amount of sales realized from such backlog.
TRADEMARKS
CHAUS(Registered Trademark), CHAUS ESSENTIAL(Registered Trademark),
CHAUS SPORT(Registered Trademark), CHAUS WOMAN(Registered Trademark) and MS.
CHAUS(Registered Trademark) 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(Registered
Trademark) 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 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.
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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.
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, 1996, the Company employed 525 full-time employees as
compared with 595 full-time employees at June 30, 1995. This total includes 68
in managerial and administrative positions, approximately 108 in production,
production administration and design, 214 in marketing, merchandising and sales
(including 199 employees in the retail outlet store operation) and 59 in
distribution. Of the Company's total employees, 76 were located in the Far
East. The Company is a party to a collective bargaining agreement with the
Amalgamated Workers Union, Local 88, covering 94 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 45 Chairwoman of the Board and member, Office of the Chairman
Andrew Grossman 37 Chief Executive Officer and member, Office of the Chairman
Wayne S. Miller 39 Executive Vice President-- Finance and Administration, Chief Financial
Officer and Secretary
Michael Winter 40 President -- Nautica
Barton Heminover 42 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
8
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.
Wayne S. Miller joined the Company as Executive Vice
President--Finance and Administration and Chief Financial Officer of the
Company in June 1994 and was appointed Secretary of the Company in November
1994. From April 1994 to June 1994 Mr. Miller served as Crisis Manager at USA
Classic, Inc., an apparel company. From February 1994 to March 1994 he was a
consultant to various apparel companies. From October 1990 to January 1994 he
was President and Chief Executive Officer of Publix Group, L.P., an apparel
company, which filed a petition for reorganization under chapter 11 of the
federal bankruptcy laws in June 1993. Prior to October 1990, Mr. Miller was
Chief Financial Officer at Basco All-American Sportswear Corp.
Michael Winter joined the Company in December 1995 as President of the
Company's Nautica division. From 1992 to 1995, Mr. Winter served as Executive
Vice President Sales/Marketing at Carol Little, Inc., an apparel company. From
1989 to 1992, Mr. Winter served as Vice President Sales/Merchandising and
Marketing at Ralph Lauren Woman's Division, an apparel company.
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.
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
$2.1 million, $2.2 million and $2.3 million in fiscal 1994, 1995 and 1996,
respectively, and is expected to aggregate approximately $0.7 million in fiscal
1997. 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 $0.4 million in fiscal 1994, $0.3
million in fiscal 1995 and $0.2 million in fiscal 1996. The lease for this
facility expires in January 1997.
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 the
vacant building, and the new lease expires in June 2000. Base rental expense
for the Secaucus facilities aggregated approximately $2.4 million in fiscal
1994, $1.5 million i ;n fiscal 1995 and $1.3 million in fiscal 1996. The base
rental expense is expected to aggregate approximately $1.1 million in fiscal
1997.
Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.3 million for fiscal 1996. 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 $0.7
million in fiscal 1994 and $0.5 million in fiscal 1995.
9
The Company also leases space for its outlet stores operation, with
the average store utilizing approximately 3,000 square feet in fiscal 1996. The
annual aggregate base rental expense for such facilities was approximately $1.7
million in fiscal 1996 and is expected to be approximately $1.3 million for
fiscal 1997. For each of fiscal 1994 and fiscal 1995 the base rental expense
for the outlet stores' operations was $1.9 million.
ITEM 3. LEGAL PROCEEDINGS.
In 1992, Federal Judge Shirley Wohl Kram dismissed with prejudice as
time-barred the Amended Complaint against the Company and others in
consolidated class actions entitled Phifer v. Chaus et al., Goldschlack v.
Chaus et al., Susman v. Chaus et al., and I. Bibcoff Inc. Pension Trust Fund v.
Chaus et al., (which claims had alleged misstatements and omissions in the
Company's July 1986 prospectus delivered in connection with the Company's
initial public offering of Common Stock in 1986 (the "1986 Offering") and its
1986 and 1987 annual reports). On April 19, 1993, a Class Action Complaint was
filed in the Superior Court of New Jersey, Hudson County, against the Company
and others, including the Company's lead underwriter in the 1986 Offering.
Allegations in such complaint were common law fraud and negligent
misrepresentation in the sale of the Company's Common Stock in the 1986
Offering, which allegations were substantially similar to the claims that were
dismissed with prejudice in the federal court. One of the plaintiffs from the
federal action was originally a party in this action in state court. On June
18, 1993, the Company received by mail a copy of Jury Demand Class Action in
the Superior Court of New Jersey, Hudson County entitled Theodore M. Wietecha
and Lisa A. Phifer v. Bernard Chaus, Inc. et al. The Complaint was amended in
September 1993 to delete Lisa Phifer as a plaintiff. On May 27, 1994, the
Company moved to dismiss the Complaint and/or to deny or limit class status. In
a decision rendered in November 1994, the Superior Court denied the plaintiff's
motion for the class certification and dismissed all claims against the
director defendants (Josephine Chaus and the Estate of Bernard Chaus) and all
claims not based upon actual reliance. During fiscal 1996 the Company settled
these claims for approximately $0.3 million, which expense had been provided
for in a prior year.
A claim for indemnification was asserted by the Company's former
underwriters against the Company. The indemnification claim demanded repayment
of the legal fees and expenses incurred by such underwriters in connection with
the consolidated class actions entitled Phifer v. Chaus, et al. During fiscal
1996 the Company settled this matter for approximately $0.8 million, which
expense had been provided for in a prior year.
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.
10
HIGH LOW
---- ---
FISCAL 1995
First Quarter ................. $4.375 $1.750
Second Quarter ................ 6.125 3.625
Third Quarter ................. 5.000 3.625
Fourth Quarter ................ 5.750 2.875
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
As of September 17, 1996, the Company had approximately 1,097 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, pursuant to the Company's amended financing agreement, the
Company currently is prohibited 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.
11
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
--------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ..................................... $254,190 $235,819 $206,332 $181,697 $170,575
Cost of goods sold ............................ 196,415 187,423 186,594 149,097 147,994
-------- -------- -------- -------- --------
Gross profit .................................. 57,775 48,396 19,738 32,600 22,581
Selling, general and administrative expenses .. 50,016 57,410 55,400 44,794 40,162
Restructuring expenses ........................ -- -- 5,300 (1) 1,200 (1) --
Unusual expenses .............................. -- -- 1,900 (2) 8,333 (2) --
Interest expense .............................. 2,474 2,322 3,439 5,976 6,560
Other income (expense), net ................... 479 449 (190) 91 56
-------- --------- ----------- ---------- --------
Income (loss) before income tax (benefit)
provision and extraordinary item ........... 5,757 (10,887) (46,491) (27,612) (24,085)
Income tax provision .......................... 2,245 102 264 301 301
-------- --------- --------- --------- --------
Income (loss) before extraordinary item ....... 3,512 (10,989) (46,755) (27,913) (24,386)
Extraordinary item ............................ 1,957 (3) -- -- -- --
-------- --------- --------- --------- --------
Net income (loss) ............................. $ 5,469 $(10,989) $(46,755) $(27,913) $(24,386)
========= ========= ========= ========= ========
Net income (loss) per share (4) ............... $ 0.30 $ (0.60) $ (2.55) $ (1.40) $ (1.02)
========== ========= ========= ========= ========
Weighted average number of common and
common equivalent shares outstanding ........ 18,363 18,272 18,352 19,910 23,987
========== ========= ========= ========== ========
BALANCE SHEET DATA:
AS OF JUNE 30,
--------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Working capital (deficiency) .................. $51,964 $40,923 $ 3,342 $(13,914) $(19,483)
Total assets .................................. 86,489 90,208 51,619 28,660 32,742
Short-term debt, including current portion
of long-term debt ........................... 9,910 17,504 21,365 18,698 26,077
Long-term debt ................................ 14,820 14,730 18,789 21,066 23,588
Stockholders' equity (deficiency) ............. 43,328 33,147 (13,614) (32,379) (40,610)
- -------------------
(1) Includes, 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, and, in fiscal 1995, $1.2
million of employee severance.
(2) Includes, 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, and 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.
(3) Represents a benefit from the utilization of a net operating loss
carryforward.
(4) 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 1993, 1994, 1995 and 1996, Common
Equivalent Shares were not included in the calculation as their
inclusion would have been antidilutive.
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
In 1992, the Company perceived a shift in demand in the women's retail
apparel industry toward lower price points. In order to sustain sales in a
difficult retail environment, the Company introduced new products at lower
prices to meet this perceived demand, thus altering its historic corporate
strategy of aiming toward the high end of "upper moderate" price points. As a
result of intense competition in this lower priced segment of the market, where
the Company had a limited operating history, sales of the Company's products
slowed, inventory levels increased and the Company was forced to sell a larger
portion of its products through off-price channels.
Toward the end of fiscal 1994, the Company initiated a major
restructuring of its operations in order to return to its historic product
positioning and regain profitability. The focus of the Company's restructuring
has been to strengthen its management team, reduce selling, general and
administrative expenses and reposition its product line. Andrew Grossman joined
the Company in September 1994 and implemented a product and pricing
repositioning strategy, most of the financial benefits of which the Company
expects to be realized in future periods. In anticipation of the repositioned
product lines and as a result of continued weak product demand, the Company has
limited the production of its product lines pending the return of adequate
demand. The impact of the restructuring on the Company's selling, general and
administrative expenses has been more immediate: selling, general and
administrative expenses decreased from $55.4 million in fiscal 1994 to $44.8 in
fiscal 1995 to $40.2 in fiscal 1996. Nearly half of this decrease resulted from
staff reductions throughout the Company from a high point of 1,009 in fiscal
1993 to 525 at the end of fiscal 1996. In addition, the Company decided to
close a number of its unprofitable outlet stores and does not intend to open
any new stores in the foreseeable future. In order to support the development
and growth of the Company's licensed Nautica product line, however, selling,
general and administrative expenses are expected to increase in subsequent
years as sales volume of the Company's licensed Nautica product line increases.
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
-------------------------
1994 1995 1996
---- ---- ----
Net sales ...................................... 100.0% 100.0% 100.0%
Gross profit ................................... 9.6 17.9 13.2
Selling, general and administrative expenses ... 26.9 24.7 23.5
Restructuring expenses ......................... 2.6 0.7 --
Unusual expenses ............................... 0.9 4.6 --
Interest expense ............................... 1.7 3.3 3.8
Net loss ....................................... (22.7) (15.4) (14.3)
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.
13
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 $0.5 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.
Fiscal 1995 Compared to Fiscal 1994
In fiscal 1995, net sales decreased by $24.6 million, or 11.9%,
compared to the prior year. The decrease was primarily due to a general
reduction in production levels in most of the Company's product lines, in
addition to the elimination of its jeans line and curtailed international
operations. Net sales for fiscal 1995 included sales to off-price channels of
$40.4 million, compared to $91.3 million in fiscal 1994. Off-price sales as a
percentage of net sales declined from 44.3% in fiscal 1994 to 22.2% in fiscal
1995.
Sales by the Company's outlet stores increased by $1.1 million
compared to the prior year. The increase was primarily due to the impact of
full year sales by four outlet stores opened in fiscal 1994 and the incremental
impact of one store opened early in fiscal 1995, partially offset by the
closing of four outlet stores in fiscal 1995 and a 2.0% decline in same store
sales.
Gross profit as a percentage of net sales increased to 17.9% from 9.6%
as compared to the prior fiscal year. As discussed above, the increase, as a
percentage of net sales, resulted primarily from a lower percentage of
clearance and off-price sales in fiscal 1995 and also from the product
repositioning, which was partially offset by continued higher levels of
promotional allowances.
Selling, general and administrative expenses decreased by $10.6
million, from 26.9% of net sales in fiscal 1994 to 24.7% of net sales in fiscal
1995. This decrease was primarily attributable to the implementation of cost
reduction programs throughout the organization. Payroll and related costs
accounted for almost half of the decrease. Other areas with significant
decreases included freight, rent, cooperative advertising, professional fees,
and travel and entertainment.
In connection with the corporate restructuring program discussed
above, during the first quarter of fiscal 1995 the Company recorded
restructuring expenses of $1.2 million. These costs primarily related to
employee severance as the Company continued to reduce overhead costs. In
January 1995, the Company signed favorable early termination
14
agreements with the landlords of certain retail outlet stores, for which the
Company had taken a reserve as part of its restructuring expenses at June 30,
1994. As a result, the Company was able to reduce the restructuring reserve,
accrued in 1994, by approximately $1.3 million. The benefit of this reduction
was offset by certain additional expenses provided for by the Company relating
to prospective continued restructuring of its retail and overseas operations.
During the first quarter of fiscal 1995, the Company recorded unusual
expenses of $7.8 million primarily related to the costs associated with the
signing of the Company's new Chief Executive Officer. During the fourth quarter
of fiscal 1995, the Company recorded $0.5 million in unusual expenses related
to certain legal matters.
Interest expense increased compared with the prior year, primarily due
to higher average bank borrowings at higher rates. In addition, in the third
and fourth quarters of fiscal 1995, the Company recorded non-cash charges of
$0.5 and $0.7 million, respectively, for the warrants issued for credit support
received from its principal stockholder. See "-- Financial Condition, Liquidity
and Capital Resources."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $5.0 million in fiscal 1994,
$4.8 million in fiscal 1995, and $22.7 million in fiscal 1996. The net cash
used in operating activities in fiscal 1996 resulted primarily from the net
loss of $24.4 million, inclusive of $3.9 million of non-cash charges, increases
in inventory of $5.1 million and a decrease in accrued restructuring expenses
of $2.6 million, partially offset by an increase in accounts payable of $4.5
million. The increase in inventory and accounts payable is predominantly due to
an increase in merchandise in transit.
Historically, the Company has not required major capital expenditures.
In fiscal 1995 and 1996, purchases of fixed assets were $0.4 million and $0.5
million, respectively, consisting primarily of improvements in the Company's
New Jersey warehouse facilities, New York design and showroom facilities, and
additional computer and telecommunications equipment. In fiscal 1997, the
Company anticipates capital expenditures of approximately $0.5 million,
consisting primarily of expenditures for warehouse and New York City
facilities. The Company also anticipates expenditures of approximately $1.0
million for its Nautica designed in store shops.
Amended Financing Agreement
The Company and BNY Financial Corporation ("BNYF") 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") and
September 17, 1996 (the "September 1996 Amendment") (collectively, the "Amended
Financing Agreement"). The Amended Financing Agreement provides the Company
with a $70 million credit facility for letters of credit and direct borrowings,
with a sublimit for loans and advances ranging between $40.0 and $56.0 million.
The amount of financing available is based upon a formula incorporating
eligible receivables and inventory, cash balances, other collateral and
permitted overadvances, all as defined in the Amended Financing Agreement. At
June 30, 1996, the Company had availability of approximately $0.2 million under
the Amended Financing Agreement. The Amended Financing Agreement is
collateralized by substantially all of the Company's assets, including accounts
receivable and inventory.
The Amended Financing Agreement contains certain financial covenants
including covenants limiting the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company is also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions.
15
Interest on direct borrowings is payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.25% at June 30,
1996) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeds the allowable overadvances) or (ii) the
Federal Funds Rate in effect plus 1% (Federal Funds Rate in effect plus 2% in
the event the Company's overadvance position exceeds the allowable
overadvances). There is a 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 Amended Financing
Agreement requires 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 September 1996
Amendment, BNYF has agreed to provide overadvances of up to $15.0 million
through June 1997. The Company may terminate the Amended Financing Agreement
upon 90 days' prior written notice at any time, subject to termination fees.
BNYF may terminate after February 20, 1999, upon 60 days' written notice to the
Company.
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 Amended Financing 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 to $4.62
per share. As part of the negotiations with BNYF in connection with the Amended
Financing 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, Mrs. Chaus provided a
$5.0 million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Amended Financing 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 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
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 were
recorded in fiscal 1995 at a value of $1.1 million, 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, 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 the July 1996 Extension, the
Special Committee authorized the issuance, subject to approval of the
stockholders of the Company at its November 14, 1996 Annual Meeting of
Stockholders, of warrants (the "1996 Warrants") to purchase an aggregate of
682,012 shares of Common Stock at a price of $4.20 per share. Because Ms. Chaus
possesses the power to vote more than 50% of the outstanding shares of Common
Stock, Ms. Chaus's affirmative vote in favor of the issuance of the 1996
Warrants to her is sufficient to approve such issuance without the vote of any
other stockholders. Ms. Chaus has advised the Company that she intends to vote
all of her shares in favor of such issuance. As a result, the Company reflected
the issuance of the 1996 Warrants at March 31, 1996. The value of the 1996
Warrants 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.
16
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
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") and
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.
Issuance of Stock in Exchange for Debt
In September 1994, Josephine Chaus loaned $7.2 million to the Company
in exchange for subordinated promissory notes bearing interest at 12% per
annum. Proceeds of such cash infusion were used for costs and associated
expenses related to the signing of the Company's new Chief Executive Officer.
In November 1994, upon the request of the Special Committee, in order to
provide additional equity to the Company, to enhance the Company's balance
sheet and to accommodate BNYF, Josephine Chaus exchanged such subordinated
promissory notes, including accrued interest thereon of $0.2 million, for
1,914,500 shares of Common Stock (based upon a purchase price of $3.85 per
share). See Note 7 to Notes to the Company's Consolidated Financial Statements.
Subordinated Debt
The Company has outstanding at June 30, 1996, $23.6 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 Amended Financing Agreement. See Note 7 to Notes to the
Company's Consolidated Financial Statements.
Letter of Credit Financing
In June 1995, the Company and a major trading company entered into a
sales and letter of credit financing agreement (the "S&F Agreement") providing
the Company with up to $2.0 million in short-term financing (subject to various
terms and conditions as defined in the S&F Agreement) for the production of its
products overseas and secured by such products and related intangible assets.
The S&F Agreement was terminated as of June 1996.
Nautica License Agreement
In September 1995, the Company entered into the Nautica License
Agreement, pursuant to which the Company will arrange for the manufacture of,
market, distribute and sell a new women's career and casual sportswear line
under the Nautica name. The Nautica License Agreement runs through December 31,
1999. The Company is required to devote at least $7.0 million to the
fulfillment of the Company's obligations under the Nautica License Agreement,
17
including related capital expenditures. The Company's obligations also include
minimum royalty and advertising payments.
Under the Nautica License Agreement the Company was obligated to raise
$10.0 million in equity capital. On November 22, 1995, the Company consummated
an underwritten public offering of 5,750,000 shares of Common Stock at a price
of $3.00 per share. Net proceeds, after expenses and commissions of $1.8
million, were $15.4 million.
Future Financing Requirements
At June 30, 1996, the Company had a working capital deficiency of
$19.5 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, its line of credit under the
Amended Financing Agreement, and, in the near term, continued credit support
from Josephine Chaus. The Company anticipates that its future operations will
be financed in the same manner, but may also explore additional sources of
financing.
The Company will seek to satisfy its operating requirements without
utilizing additional credit support from Ms. Chaus, although there can be no
assurance that it will be successful in doing so. In September 1996, Ms. Chaus
increased her credit support by providing the July 1997 Extension and the $12.5
Million Guarantee. In consideration for her credit support, BNYF has provided
the Company with specified levels of overadvances up to a maximum of $15.0
million through June 30, 1997. The Company has no understanding with Ms. Chaus
pursuant to which Ms. Chaus would extend the Letter of Credit beyond July 31,
1997. In addition, although BNYF historically has waived compliance with
certain covenants and permitted certain overadvances and has, pursuant to the
September 1996 Amendment, agreed to relax such covenants and permit specified
levels of overadvances through June 30, 1997, there can be no assurance that it
will continue to do so in the future. Moreover, growth of the Company's
existing product lines and/or the development of the Company's licensed Nautica
product line could increase the amount of the potential shortfall in borrowing
availability after the current fiscal year.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is
set forth in Part I of this Annual Report on Form 10-K.
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 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
(the "Company's 1996 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 1996 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 1996 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 1996 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, 1996.
(c) Exhibits filed herewith are denoted by an (*):
19
SEQUENTIALLY
NUMBERED
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").
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 Number 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
20
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- ----------- -----
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).
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).
21
SEQUENTIALLY
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EXHIBIT NO. PAGES
- ----------- -----
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).
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
22
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- ----------- -----
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).
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).
23
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- ----------- -----
10.41 Agreement, dated December 31, 1993, between the Company and the Estate
of Bernard Chaus, reflecting amendments to subordinated promissory
notes, in the 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).
24
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EXHIBIT NO. PAGES
- ----------- -----
10.52 Agreement effective February 21, 1995 (the "Amended Financing
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 Amended Financing 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 Amended
Financing 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).
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).
25
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- ----------- -----
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.
*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.
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.
26
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
September 27, 1996.
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 September 27,
1996.
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/ Wayne S. Miller Executive Vice President -- Finance and Administration,
- --------------------------
Wayne S. Miller Chief Financial Officer & Secretary
/S/ Barton Heminover Vice President -- Corporate Controller and Assistant
- --------------------------
Barton Heminover Secretary
/S/ Philip G. Barach Director
- --------------------------
Philip G. Barach
/S/ S. Lee Kling Director
- --------------------------
S. Lee Kling
/S/ Harvey M. Krueger Director
- --------------------------
Harvey M. Krueger
27
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, 1995 and 1996 .............................................. F-3
Consolidated Statements of Operations--Years Ended June 30, 1994, 1995 and 1996 .................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency)---
Years Ended June 30, 1994, 1995 and 1996 ...................................................... F-5
Consolidated Statements of Cash Flows--Years Ended June 30, 1994, 1995 and 1996 .................. F-6
Notes to Consolidated Financial Statements ....................................................... F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc. and subsidiaries is included
in Item 14(a)(2):
Schedule II -- Valuation and Qualifying Accounts ............................................... S-1
The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 1995 and June 30, 1996 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for each of the three years in the period ended June 30, 1996. Our audits also
included the financial statement schedule listed in the Index at item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bernard Chaus, Inc. and
subsidiaries at June 30, 1995 and June 30, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
September 6, 1996
(September 17, 1996 as to Note 6)
F-2
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
June 30, June 30,
1995 1996
---- ----
ASSETS
Current Assets
Cash and cash equivalents .................................................. $ 418 $ 247
Accounts receivable, less allowances of $4,226 and $5,070 .................. 7,646 7,995
Inventories ................................................................ 16,203 21,256
Prepaid expenses ........................................................... 1,523 783
--------- ---------
Total current assets .................................................... 25,790 30,281
Fixed assets -- net .......................................................... 2,392 1,898
Other assets ................................................................. 478 563
--------- ---------
$ 28,660 $ 32,742
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Notes payable -- bank ...................................................... $ 18,698 $ 26,077
Accounts payable ........................................................... 12,922 17,435
Accrued expenses ........................................................... 5,549 6,056
Accrued restructuring expenses ............................................. 2,535 196
--------- ---------
Total current liabilities ............................................... 39,704 49,764
Subordinated promissory notes ................................................ 21,066 23,588
Accrued restructuring expenses ............................................... 269 --
--------- ---------
61,039 73,352
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.01 par value, authorized shares -- 1,000,000; outstanding
shares -- none
Common stock, $.01 par value; authorized shares -- 50,000,000; issued shares
-- 21,073,081 at June 30, 1995 and 26,893,724 at June 30, 1996 .......... 211 269
Additional paid-in capital ................................................. 49,353 65,450
Deficit .................................................................... (80,463) (104,849)
Less: Treasury stock, at cost -- 622,700 shares ........................... (1,480) (1,480)
--------- ---------
Total stockholders' deficiency .......................................... (32,379) (40,610)
--------- ---------
$ 28,660 $ 32,742
========= =========
See accompanying notes to consolidated financial statements.
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Fiscal Year Ended June 30,
--------------------------
1994 1995 1996
---- ---- ----
Net sales .................................. $ 206,332 $ 181,697 $ 170,575
Cost of goods sold ......................... 186,594 149,097 147,994
------------ ------------ ------------
Gross profit ............................... 19,738 32,600 22,581
Selling, general and administrative expenses 55,400 44,794 40,162
Restructuring expenses ..................... 5,300 1,200 --
Unusual expenses ........................... 1,900 8,333 --
------------ ------------ ------------
(42,862) (21,727) (17,581)
Interest expense ........................... (3,439) (5,976) (6,560)
Other income (expense), net ................ (190) 91 56
------------ ------------ ------------
Loss before provision for income taxes ..... (46,491) (27,612) (24,085)
Provision for income taxes ................. 264 301 301
------------ ------------ ------------
Net loss ................................... $ (46,755) $ (27,913) $ (24,386)
============ ============ ============
Net loss per share ......................... $ (2.55) $ (1.40) $ (1.02)
============ ============ ============
Weighted average number of common shares
outstanding .............................. 18,352,000 19,910,000 23,987,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands, except number of shares)
Common Stock Treasury Stock
----------------------- Additional Retained -------------------------
Number of Paid-in Earnings Number of
Shares Amount Capital (Deficit) Shares Amount Total
------- ------ --------- ----------- ------------ ---------- -----
Balance at July 1,1993 18,975,031 $190 $40,232 $ (5,795) 622,700 $(1,480) $ 33,147
Net loss ................ -- -- -- (46,755) -- -- (46,755)
Restricted stock purchase
and retirement-- net... -- -- (6) -- -- -- (6)
------------ ---- ------- -------- -------- ------ ---------
Balance at June 30, 1994 18,975,031 190 40,226 (52,550) 622,700 (1,480) (13,614)
Net loss ................ (27,913) (27,913)
Exchange of notes for
common stock .......... 1,914,500 19 7,352 -- -- -- 7,371
Issuance of warrants .... -- -- 1,136 -- -- -- 1,136
Exercise of stock options 183,550 2 639 -- -- -- 641
---------- ------ ------- ------- ------- ------ --------
Balance at June 30, 1995.. 21,073,081 211 49,353 (80,463) 622,700 (1,480) (32,379)
Net loss .................. (24,386) (24,386)
Net proceeds from issuance
of common stock.......... 5,750,000 57 15,366 -- -- -- 15,423
Issuance of warrants ...... -- -- 520 -- -- -- 520
Exercise of stock options . 70,643 1 211 212
------------ ----- --------- ---------- ---------- --------- --------
Balance at June 30, 1996 26,893,724 $269 $65,450 $(104,849) 622,700 $(1,480) $(40,610)
========== ==== ======= ========= ======= ======= ========
See accompanying notes to consolidated financial statements.
F-5
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended June 30,
--------------------------------
1994 1995 1996
-------- -------- --------
Operating Activities
Net loss ............................................................................. $(46,755) $(27,913) $(24,386)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ...................................................... 2,485 1,305 974
Loss on disposal of fixed assets ................................................... 1,192 358 --
Provision for (recovery of) losses on accounts
receivable ....................................................................... 117 225 (69)
Deferred interest on subordinated promissory
notes ............................................................................ 2,436 2,277 2,522
Non-cash interest expense .......................................................... -- 1,307 520
Changes in operating assets and liabilities:
Accounts receivable .............................................................. 12,688 9,886 (280)
Inventories ...................................................................... 20,471 9,300 (5,053)
Prepaid expenses and other assets ................................................ 2,094 2,278 655
Accounts payable ................................................................. (5,199) (1,368) 4,513
Accrued expenses ................................................................. 1,372 (1,161) 507
Accrued restructuring expenses ................................................... 4,079 (1,275) (2,608)
-------- -------- --------
Net Cash Used In Operating Activities .................................................. (5,020) (4,781) (22,705)
-------- -------- --------
Investing Activities
Purchases of fixed assets ............................................................ (1,357) (443) (480)
-------- -------- --------
Net Cash Used In Investing Activities .................................................. (1,357) (443) (480)
Financing Activities
Net proceeds from (repayments of) short-term bank
borrowings ......................................................................... 6,234 (2,417) 7,379
Net proceeds from issuance of stock .................................................. -- -- 15,423
Principal payments on subordinated promissory
notes .............................................................................. (750) (250) --
Proceeds from issuance of subordinated promissory
notes .............................................................................. -- 7,200 --
Purchase and retirement of restricted stock .......................................... (6) -- --
Net proceeds from exercise of options ................................................ -- 641 212
-------- -------- --------
Net Cash Provided by Financing Activities .............................................. 5,478 5,174 23,014
-------- -------- --------
Decrease In Cash And Cash Equivalents .................................................. (899) (50) (171)
Cash and Cash Equivalents, Beginning of Year ........................................... 1,367 468 418
-------- -------- --------
Cash and Cash Equivalents, End of Year ................................................. $ 468 $ 418 $ 247
======== ======== ========
Cash paid for:
Taxes ................................................................................ 61 7 14
Interest ............................................................................. 1,413 2,283 3,809
Supplemental schedule of non-cash financing activities:
Exchange of subordinated promissory notes for
common stock ..................................................................... -- 7,200 --
Issuance of warrants for credit support by
principal stockholder ............................................................ -- 1,136 520
See accompanying notes to consolidated financial statements.
F-6
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Bernard Chaus, Inc. (the Company) designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear and dresses which are marketed principally under the CHAUS(Registered
Trademark), CHAUS SPORT(Registered Trademark), and NAUTICA(Registered Trademark)
trademarks. The Company's products are sold nationwide through department store
chains, specialty retailers and other retail outlets.
In the latter part of fiscal 1994, the Company initiated a
restructuring plan which entailed several initiatives to improve its financial
position. These initiatives included, among other things, a $7.2 million cash
infusion from Josephine Chaus to fund the costs associated with hiring Andrew
Grossman as its new Chief Executive Officer, negotiation of a new bank
financing agreement (the Amended Financing Agreement--see Note 6) with BNY
Financial Corporation, a wholly owned subsidiary of The Bank of New York
(BNYF), expiring in February 1999, overhead reductions, centralization of
certain functions, closing of selected outlet stores.
In conjunction with the Amended Financing Agreement, Josephine Chaus
has provided BNYF with collateral in the form of a $10 million letter of credit
(the Letter of Credit) which expires on July 31, 1997, and a $12.5 million
personal guarantee for the duration of the Amended Financing Agreement.
On November 22, 1995, the Company issued 5,750,000 shares of Common
Stock at a price of $3.00 per share in an underwritten public offering.
Proceeds from the offering, net of commissions and other expenses were $15.4
million.
During fiscal 1996, operating expenses were reduced by $4.6 million.
The Company closed six outlet stores during fiscal 1996 and plans to close
three additional outlet stores during fiscal 1997.
The Company's business plan requires the availability of sufficient
cash flow and borrowing capacity to finance its existing product lines and the
development and marketing of its new licensed Nautica lines. The Company
expects to satisfy such requirements through cash flow from operations, its
line of credit under the Amended Financing Agreement, and, in the near term,
continued credit support from Josephine Chaus. The Company will seek to satisfy
its operating requirements without utilizing additional credit support from Ms.
Chaus, although there can be no assurance that it will be successful in doing
so. The Company has no understanding with Ms. Chaus pursuant to which she would
extend the Letter of Credit beyond July 31, 1997.
Although there can be no assurance that the plans set forth above will
provide the Company with adequate resources, the Company believes that these
initiatives will have a positive impact on future operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material intercompany accounts and transactions
have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure
F-7
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net Loss Per Share:
Net loss per share has been computed by dividing the applicable net
loss by the weighted average number of common shares outstanding during the
year. Common equivalent shares were not included as their inclusion would have
been antidilutive.
Revenue Recognition:
Revenues are recorded at the time merchandise is shipped, and with
regard to the outlet stores, at the time when goods are sold to the customer.
Credit Terms:
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, 1995 and 1996, approximately 44.7% and 59.4%, respectively,
of the Company's accounts receivable balances were due from department store
customers owned by three single corporate entities. Sales to these three
entities comprised approximately 16%, 14%, and 9%, respectively, of the
Company's net sales for fiscal 1994, approximately 23%, 13% and 7%,
respectively, of the Company's net sales for fiscal 1995, and approximately
29%, 16% and 10%, respectively, of the Company's net sales for fiscal 1996.
Cash Equivalents:
Cash equivalents are short-term, highly liquid investments purchased
with an original maturity of three months or less.
Inventories:
Inventories are stated at the lower of cost, using the first-in,
first-out method, or market.
Fixed Assets:
Furniture and equipment are depreciated principally using the
straight-line method over eight years. Leasehold improvements are amortized
using the straight-line method over either the term of the lease or the
estimated useful life of the improvement, whichever period is shorter. Computer
software is depreciated using the straight-line method over three years.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the
United States dollar to be the functional currency of its overseas
subsidiaries. All foreign currency gains and losses are recorded in the
Consolidated Statement of Operations.
F-8
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes:
The Company records income taxes in accordance with Financial
Accounting Standards Board Statement SFAS No. 109, "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to enter into the determination of
taxable income (loss).
Fair Value of Financial Instruments
For financial instruments, including cash and cash equivalents,
accounts receivable and payable, accruals and notes payable -- bank, it was
assumed that the carrying amounts approximated fair value due to their short
maturity.
It is not practicable to determine the fair value of the subordinated
debt with the principal shareholder as alternative sources of financing have
not been evaluated by the Company.
Effect of Accounting Pronouncements Not Yet Adopted:
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of". Adoption of this statement, which is effective for
years beginning after December 15, 1995, is not expected to have a material
impact on the Company's consolidated financial condition or results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". The statement, which is
effective for years beginning after December 15, 1995, requires expanded
disclosures of stock-based compensation arrangements and encourages, but does
not require, compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply the provisions of APB Opinion No 25, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company has
not yet determined if it will adopt the accounting provisions of SFAS No. 123
or only the disclosure provision. Additionally, the Company has not yet
determined what the impact of adopting the accounting provisions of SFAS No.
123 would be on the consolidated results of operations of the Company.
3. INVENTORIES
Inventories consist of: JUNE 30, JUNE 30,
1995 1996
------- -------
(IN THOUSANDS)
Finished goods ............ $13,248 $18,151
Work-in-process ........... 2,034 1,471
Raw materials ............. 921 1,634
------- -------
$16,203 $21,256
======= =======
Inventories include merchandise in transit (principally finished goods) of
approximately $4.8 million at June 30, 1995 and $9.0 million at June 30, 1996.
F-9
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS
Fixed assets at cost, net of accumulated depreciation and amortization, consist
of:
JUNE 30, JUNE 30,
1995 1996
-------- -------
(IN THOUSANDS)
Furniture and equipment ......................... $11,878 $10,234
Leasehold improvements .......................... 8,251 8,118
------- -------
$20,129 $18,352
Less accumulated depreciation and amortization .. 17,737 16,454
------- -------
$ 2,392 $ 1,898
======= =======
5. INCOME TAXES
Significant components of the Company's net deferred tax assets are as follows:
JUNE 30, JUNE 30,
1995 1996
---------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ................ $ 25,700 $ 38,200
Costs capitalized to inventory for tax purposes . 1,200 900
Accrued interest, subordinated debt/warrants .... 2,400 3,000
Book over tax depreciation ...................... 2,100 1,900
Sales allowances not currently deductible ....... 2,200 1,600
Reserves and other items not currently deductible 600 1,200
-------- --------
34,200 46,800
Valuation allowance for deferred tax assets ....... (34,200) (46,800)
-------- --------
Net deferred tax asset ............................ $ 0 $ 0
======== ========
There was a change in the valuation allowance for the year ended June 30, 1996
of $12.6 million.
FISCAL YEAR ENDED JUNE 30,
--------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Benefit for federal
income taxes at the statutory rate of
35.0% in each of 1994, 1995 and 1996 ($16,272) ($ 9,665) ($ 8,430)
State and local income taxes
net of federal tax benefit .......... 264 301 301
Executive compensation in excess of
amount deductible for tax purposes .. -- 2,100 --
Other ................................. -- 35 35
Effect of unrecognized tax loss
carryforwards ....................... 16,272 7,530 8,395
-------- -------- --------
Provision for income taxes ............ $ 264 $ 301 $ 301
======== ======== ========
At June 30, 1996, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $ 91 million, which will
expire between 2006 and 2011.
F-10
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL 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) and September 17, 1996 (the
September 1996 Amendment), (collectively, the Amended Financing Agreement). The
Amended Financing Agreement provides the Company with a $70.0 million ($60.0
million through June 30, 1996) credit facility for letters of credit and direct
borrowings, with a sublimit for loans and advances ranging between of $40.0 and
$56.0 million. The amount of financing available is based upon a formula
incorporating eligible receivables and inventory, cash balances, other
collateral and permitted overadvances, all as defined in the Amended Financing
Agreement. At June 30, 1996, the Company had availability of approximately $0.2
million under the Amended Financing Agreement. The Amended Financing Agreement
is collateralized by substantially all of the Company's assets, including
accounts receivable and inventory.
The Amended Financing Agreement contains certain financial covenants
including covenants limiting the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company is also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. During the
third quarter of fiscal year 1996, the Company was not in compliance with
certain financial covenants. BNYF has waived such noncompliance.
Interest on direct borrowings is payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.25% at June 30,
1996) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeds the allowable overadvances) or (ii) the
Federal Funds Rate in effect plus 1% (Federal Funds Rate in effect plus 2% in
the event the Company's overadvance position exceeds the allowable
overadvances). There is a 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 Amended Financing
Agreement requires 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 September 1996
Amendment, BNYF has agreed to provide overadvances of up to $15.0 million
through June 1997. The Company may terminate the Amended Financing Agreement
upon 90 days' prior written notice at any time, subject to termination fees.
BNYF may terminate after February 20, 1999, upon 60 days' written notice to the
Company. The weighted average interest rate was 6.7%, 8.9% and 9.0% for the
years ended June 30, 1994, 1995, and 1996, respectively.
Josephine Chaus has arranged for the Letter of Credit in various
amounts since April 1994 in return for which BNYF has increased the
availability under the Amended Financing 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 to $4.62 per share. 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, Mrs. Chaus provided a $5.0 million personal guarantee (the $5.0
Million Guarantee), to be in effect during the Amended Financing 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
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 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. 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.
The issuance of the 1994 Warrants, the warrants for the February 1995
Increase/Extension and the warrants for the $5.0 Million Guarantee were recorded
in fiscal 1995 at a value of $1.1
F-11
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million, 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, included as a charge to interest expense with a corresponding
increase to additional paid-in capital.
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 the July 1996 Extension, the
Special Committee authorized the issuance, subject to approval of the
stockholders of the Company at its November 14, 1996 Annual Meeting of
Stockholders, of warrants (the 1996 Warrants) to purchase an aggregate of
682,012 shares of Common Stock at a price of $4.20 per share. Because Ms. Chaus
possesses the power to vote more than 50% of the outstanding shares of Common
Stock, Ms. Chaus's affirmative vote in favor of the issuance of the 1996
Warrants to her is sufficient to approve such issuance without the vote of any
other stockholders. Ms. Chaus has advised the Company that she intends to vote
all of her shares in favor of such issuance. As a result, the Company reflected
the issuance of the 1996 Warrants 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 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) and
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 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.
7. SUBORDINATED PROMISSORY NOTES
The Company has outstanding at June 30, 1996, $23.6 million, including
accrued interest at 12% per annum, of subordinated promissory notes payable to
Josephine Chaus, certain of which were originally issued on June 30, 1986 and
the remainder of which were issued in February and March 1991 (the Subordinated
Notes). The Company has been prohibited from making payments of principal or
interest on the Subordinated Notes since 1993 (with the exception of principal
payments of approximately $0.5 million, $0.3 million and $0.3 million in
November 1993, February 1994 and August 1994, respectively) as a result of
restrictive covenants under the Amended Financing Agreement. In connection with
the public offering, Ms. Chaus extended the maturity date of the Subordinated
Notes (which were to mature on July 1, 1996) to July 1, 1998.
In September 1994, Josephine Chaus loaned $7.2 million to the Company
in exchange for subordinated promissory notes bearing interest at 12% per
annum. Proceeds of such cash infusion were used for costs and associated
expenses related to the signing of the Company's new chief executive officer.
In November 1994, in order to provide additional equity to the Company, to
enhance the Company's balance sheet and to accommodate the bank, Josephine
Chaus subsequently agreed, at the request of the Special Committee, to exchange
such notes for shares of Common Stock
F-12
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Company on terms determined by a Special Committee of the Board of
Directors. In November 1994, following stockholder approval, Josephine Chaus
exchanged such notes, including accrued interest thereon ($.2 million), for
1,914,500 shares of Common Stock (based upon a purchase price of $3.85 per
share). The purchase price was determined by the Special Committee and the
purchase was approved by the Company's stockholders at the November 22, 1994
Annual Meeting of Stockholders.
8. EMPLOYEE BENEFIT PLANS
Pension Plan:
Pursuant to a collective bargaining agreement, all of the Company's
union employees are covered by a defined benefit pension plan. Pension expense
amounted to approximately $61,000, $53,000 and $105,000 in fiscal 1994, 1995
and 1996, respectively. As of December 31, 1995, the actuarial present value of
the accumulated vested and non-vested plan benefits amounted to $0.5 million
and net assets available for benefits amounted to $0.4 million. Actuarial
assumptions related to weighted average interest rate and weighted average rate
of return were 8.0% and 8.5%, respectively, for each of fiscal 1994, 1995 and
1996.
Savings Plan:
The Company has a savings plan (the Savings Plan) under which eligible
employees may contribute a percentage of their compensation and the Company
(subject to certain limitations) will match 50% of the employee's contribution.
Company contributions will be invested half in the Common Stock of the Company
and half in investment funds selected by the participant and are subject to
vesting provisions of the Savings Plan. Expense under the Savings Plan was
approximately $0.3 million in fiscal 1994, and $0.2 in each of fiscal 1995 and
1996. An aggregate of 100,000 shares of Common Stock has been reserved for
issuance under the Savings Plan.
Restricted Stock Plan:
In November 1987, the Company's stockholders approved the adoption of
a restricted stock plan (the Restricted Plan). Pursuant to the Restricted Plan,
250,000 restricted shares of the Company's Common Stock were reserved for
allocation to key employees of the Company. The restrictions on the shares
terminate as to 25 percent of such shares on each anniversary of their date of
allocation. As of June 30, 1996, no restricted shares have been granted under
this plan.
Stock Option Plan:
Pursuant to the Stock Option Plan (the Option Plan), the Company may
grant to eligible individuals incentive stock options, as defined in the
Internal Revenue Code, and non-incentive stock options. At the annual meeting
of stockholders in November 1993, the stockholders approved the increase in the
number of shares of Common Stock with respect to which options may be granted
from 1,500,000 shares to 2,500,000 shares. No stock options may be granted
subsequent to 2006 and the exercise price may not be less than 100% of the fair
market value on the date of grant for incentive stock options and 85% of the
fair market value on the date of grant for non-incentive stock options.
Grossman Option Plan:
At the annual meeting of stockholders in November 1994, the
stockholders approved the issuance of options for the Company's new Chief
Executive Officer (the Grossman Option Plan) to purchase 3,000,000 shares of
Common Stock. Of this amount, 1,500,000 options were granted in September 1994
(and included in the following table), and the balance were granted in
September 1995 in connection with the extension of the term of his employment
agreement.
F-13
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NON-INCENTIVE
STOCK OPTIONS
--------------------------------------
NUMBER EXERCISE
OF SHARES PRICE RANGE
--------- --------------
Outstanding at July 1, 1993 1,112,464 $2.375--$9.375
Options granted in fiscal 1994 630,000 $1.875--$4.750
Options canceled (323,316) $2.875--$6.500
-----------
Outstanding at June 30, 1994 1,419,148 $1.875--$9.375
Options granted in fiscal 1995 2,186,688 $2.250--$4.750
Options canceled (555,428) $2.000--$9.375
Options exercised (183,550) $2.000--$4.750
----------
Outstanding at June 30, 1995 2,866,858 $1.875--$4.875
Options granted in fiscal 1996 2,064,000 $3.625--$5.875
Options cancelled (687,201) $1.875--$5.875
Options exercised ( 70,643) $1.875--$4.880
-----------
Outstanding at June 30, 1996 4,173,014 $1.875--$5.625
========= ==============
The stock options become exercisable in annual 25% increments
commencing one year after issuance. As of June 30, 1996 options to purchase
approximately 610,000 shares were exercisable.
At June 30, 1996, a total of approximately 5,042,000 shares of Common
Stock were reserved for issuance under the Stock Option, Savings and Grossman
Option Plans.
9. RESTRUCTURING AND UNUSUAL EXPENSES
Relative to the restructuring program discussed in Note 1, during the
first fiscal quarter of 1995 the Company recorded restructuring expenses of
$1.2 million. These costs primarily related to employee severance as the
Company continued to reduce overhead costs.
In January 1995, the Company signed favorable early termination
agreements with the landlords of certain outlet stores, for which the Company
had previously provided a reserve as part of its restructuring expenses at June
30, 1994. As a result, the Company was able to reduce its restructuring
expenses by approximately $1.3 million. The benefit of this reduction was
offset, however, by certain additional expenses provided by the Company related
to its retail and overseas operations.
In fiscal 1994, the Company recorded restructuring expenses of $5.3
million. These expenses included $2.1 million for closing selected outlet
stores, $2.5 million for the consolidation and closing of office and warehouse
space and $0.7 million for employee severance.
During the first fiscal quarter of 1995, the Company recorded unusual
expenses of $7.8 million primarily related to costs associated with the signing
of the Company's new Chief Executive Officer. In the fourth quarter of fiscal
1995, the Company recorded an additional $0.5 million related to certain legal
matters. During the fourth quarter of fiscal 1994, the Company recorded $1.9
million of unusual expense consisting primarily of expenses arising from the
abandonment of fixed assets, certain legal matters and the winding down of the
Company's Canadian joint venture.
F-14
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities,
retail outlet facilities and equipment under various noncancellable operating
lease agreements which expire through 2006. Rental expense for the years ended
June 30, 1994, 1995 and 1996 was approximately $11.2 million (approximately
$3.7 million of which is included in restructuring expenses), $7.0 million, and
$5.8 million, respectively.
The minimum aggregate rental commitments at June 30, 1996 are as
follows (in thousands):
Fiscal year ending:
1997 .............................. $3,711
1998 .............................. 3,260
1999 .............................. 2,309
2000 .............................. 2,000
2001 .............................. 610
Subsequent to 2001 ..................... 1,012
--------
$12,902
========
Letters of Credit:
The Company is contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $13.6 million at June 30, 1996.
Litigation:
By order dated September 1, 1992, Federal Judge Shirley Wohl Kram
dismissed with prejudice as time-barred the Amended Complaint against the
Company and others, in the previously reported consolidated class actions
entitled Phifer v. Chaus et al., Goldschlack v. Chaus et al., Susman v. Chaus
et al. and I. Bibcoff Inc. Pension Trust Fund v. Chaus et al. In such actions,
claims were asserted against the Company and others, including the Company's
lead underwriters, for alleged misstatements and omissions contained in the
Company's July 1986 Prospectus delivered in connection with the Company's
initial public offering and its 1986 and 1987 Annual Reports. Plaintiffs's
attorneys filed a notice of appeal, which they subsequently withdrew subject to
the right to restore the appeal by January 8, 1993. No such appeal was made and
the action was automatically deemed dismissed with prejudice. On April 19,
1993, a Class Action Complaint was filed in the Superior Court of New Jersey,
Hudson County, against the Company and others, including the lead underwriter
of the Company's 1986 initial public offering, alleging common law fraud and
negligent misrepresentation in the sale of the Company's stock in its initial
public offering, allegations that are substantially similar to the claims that
were dismissed with prejudice in the federal court. One of the plaintiffs from
the federal action was originally a party in this action in state court. On
June 18, 1993, the Company received by mail, a copy of Jury Demand Class Action
in the Superior Court of New Jersey, Hudson County, entitled Theodore M.
Wietecha and Lisa A. Phifer v. Bernard Chaus, Inc. et al. The complaint was
amended in September 1993 to delete Lisa Phifer as a plaintiff. On May 27,
1994, the Company moved to dismiss the complaint and/or to deny or limit class
status. On May 27, 1994, the Company moved to dismiss the complaint and/or to
deny or limit class status. In a decision rendered in November, 1994, the
Superior Court denied the plaintiff's motion for the class certification and
dismissed all claims against the director defendants (Josephine Chaus and the
Estate of Bernard Chaus) and all claims not based upon actual reliance. During
fiscal 1996 the Company reached settlement regarding these claims for
approximately $0.3 million, which expense had been provided for in a prior
year.
F-15
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A claim for indemnification has been asserted by the Company's former
Underwriters against the Company. The indemnification claim demands repayment
of the legal fees and expenses incurred by the Underwriters in connection with
the consolidated class actions entitled Phifer v. Chaus, et al. During fiscal
1996 the Company reached settlement regarding this matter for approximately
$0.8 million, which expense had been provided for in a prior year.
The Company is also involved in various other legal proceedings
arising out of the conduct of its business. The Company believes that the
eventual outcome of the proceedings referred to above will not have a material
adverse effect on the Company's financial condition or results of operations.
Employment Agreement:
The Company has entered into a number of employment agreements with
various senior executives. In addition to his $1 million salary, Mr. Grossman
is entitled to a bonus equal to 5% of the Company's annual net profits, as
defined, for the duration of his agreement, which expires in 2004.
Nautica License Agreement
In September 1995, the Company entered into a license agreement (the
"Nautica License Agreement") with Nautica Apparel Inc. ("Nautica"), pursuant to
which the Company will arrange for the manufacture of, market, distribute and
sell a new women's career and casual sportswear line under the Nautica name.
The initial term of the Nautica License Agreement runs through December 31,
1999, and is thereafter renewable 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.
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).
11. COMMON STOCK OFFERING
On November 22, 1995, pursuant to a Registration Statement on Form S-2
filed on October 10, 1995, the Company issued 5,750,000 shares of Common Stock
at a price of $3.00 per share in an underwritten public offering. Proceeds from
the offering, net of commissions and other expenses totaling $1.8 million, were
$15.4 million.
F-16
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------- ------- -------- ---------- -------
(IN THOUSANDS)
Year ended June 30, 1996
Allowance for doubtful accounts .......................... $ 619 $ (70) $ 171 1 $ 378
====== ======== ======== ======
Reserve for sales discounts and
customer allowances and deductions ..................... $3,607 $ 17,519 $ 16,434 2 $4,692
------ -------- -------- ------
Accrued restructuring expenses ........................... $2,804 $ 0 $ 2,608 4 $ 196
------ -------- -------- ------
Year ended June 30, 1995
Allowance for doubtful accounts .......................... $ 355 $ 225 $ (39) 1 $ 619
------ -------- -------- ------
Reserve for sales discounts and
customer allowances and deductions ..................... $5,985 $ 33,695 $ 36,073 2 $3,607
------ -------- -------- ------
Accrued restructuring expenses ........................... $4,079 $ 1,200 $ 2,475 3 $2,804
------ -------- -------- ------
Year ended June 30, 1994
Allowance for doubtful accounts .......................... $ 412 $ 117 $ 174 1 $ 355
------ -------- -------- ------
Reserve for sales discounts and
customer allowances and deductions ..................... $3,929 $ 33,955 $ 31,899 2 $5,985
------ -------- -------- ------
Accrued restructuring expenses ........................... $ 0 $ 5,300 $ 1,221 4 $4,079
====== ======== ======== ======
- --------------
1 Uncollectible accounts written off.
2 Allowances charged to reserve and granted to customers.
3 Reversal of provision no longer required and expenses charged to reserve.
4 Expenses charged to reserve.
S1