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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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9169
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2807386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on September 7, 1999 was $23,769,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
September 7, 1999 Common Stock, $0.01 par value 27,115,907
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 November 17, 1999.
PART I
ITEM 1. BUSINESS.
GENERAL
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(Registered Trademark)
COLLECTION, JOSEPHINE CHAUS(Registered Trademark) STUDIO, JOSEPHINE
CHAUS(Registered Trademark) ESSENTIALS and JOSEPHINE CHAUS(Registered Trademark)
SPORT trademarks. The Company's products are sold nationwide through department
store chains, specialty retailers and other retail outlets. The Company has
positioned its Chaus product line into the opening price points of the "better"
category. Effective in October 1998, the Company and Nautica Apparel Inc. agreed
to terminate the license agreement pursuant to which the Company had
manufactured and marketed a women's apparel line under the Nautica brand name.
In February 1999 the Company announced the introduction of two new brand
names, Josephine Chaus Studio and Josephine Chaus Essentials, as part of an
effort to better serve the lifestyle needs of women today. In addition, the
Company announced the relaunch of its highly successful Chaus career sportswear
and Chaus Sport casual sportswear businesses under the brand names Josephine
Chaus Collection and Josephine Chaus Sport, respectively. The new lines began
shipping in June 1999 to department stores for the Fall 1999 season.
PRODUCTS
The Company markets its products as coordinated groups of jackets, skirts,
pants, blouses, sweaters and related accessories principally under the following
brand names that also include products for women and petites:
JOSEPHINE CHAUS COLLECTION (formerly Chaus) - a collection of better tailored
career clothing that includes tailored suits, dresses, jackets, skirts and
pants.
JOSEPHINE CHAUS STUDIO - a new line of better sportswear featuring contemporary
styling and offering a more casual approach to traditional career dressing.
JOSEPHINE CHAUS ESSENTIALS - a new line of better sportswear separates, also
designed with a contemporary approach. This new line includes jackets, skirts,
pants, blouses and sweaters to be mixed and matched.
JOSEPHINE CHAUS SPORT (formerly Chaus Sport) - designed for more relaxed
dressing. This line includes casual tops, sweaters, pants, skirts, shorts and
other items for "true weekend" wear.
The above products, while sold as separates, are coordinated by styles,
color schemes and fabrics and are designed to be merchandised and worn together.
The Company believes that the target consumers for its products are women aged
24 to 64.
Women's apparel is generally divided into five price categories, namely
(listed from lowest to highest) "mass merchandise", "moderate", "better",
"bridge" and "designer". These categories are distinguished principally by
differences in price and, as a general matter, by differences in quality. The
Company has positioned its Chaus product line into the opening price points of
the "better" category.
During fiscal 1999, the suggested retail prices of the Company's Chaus
products ranged between $24.00 and $280.00. The Company's jackets ranged in
price between $120.00 and $280.00, its blouses and sweaters ranged in price
2
between $40.00 and $140.00, its skirts and pants ranged in price between $28.00
and $120.00, and its knit tops and bottoms ranged in price between $24.00 and
$120.00.
The following table sets forth a breakdown by percentage of the Company's
net sales by brand for fiscal 1997 through fiscal 1999:
Fiscal Year Ended June 30,
1999 1998 1997
---- ---- ----
Josephine Chaus Collection (1) 41% 39% 37%
Josephine Chaus Woman Collection (1) 14 12 11
Josephine Chaus Petite Collection (1) 13 10 6
Josephine Chaus Sport (1) 27 29 30
Josephine Chaus Essentials (1) 0 0 0
Josephine Chaus Studio (1) 2 0 0
Nautica 2 8 15
Other (2) 1 2 1
----- ----- -----
Total 100% 100% 100%
(1) Josephine Chaus Collection and Josephine Chaus Sport were formerly Chaus
Collection and Chaus Sport, respectively. The Josephine Chaus trade names
began shipping in June 1999 to department stores for the Fall 1999 season.
(2) Outlet stores offset by intercompany elimination
- --------------
LICENSE AGREEMENT WITH NAUTICA
In September 1995 the Company entered into a license agreement (the
"Nautica License Agreement") with Nautica Apparel Inc. ("Nautica"), a leading
name in men's apparel, pursuant to which the Company obtained an exclusive
license to design, contract for the manufacture of and market a new women's
apparel line under the Nautica brand name. Effective October 1998, the Company
and Nautica agreed to terminate the Nautica License Agreement.
CUSTOMERS
The Company's products are sold nationwide in an estimated 1,500 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.
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, 1999 and 1998, approximately 87% of the Company's accounts receivable were
due from department store customers owned by four single corporate entities.
During fiscal 1999 and fiscal 1998, approximately 82% of the Company's net sales
were made to department store customers owned by four single corporate entities,
as compared to 63% in fiscal 1997. Sales to Dillard's Department Stores
accounted for 40% of net sales in fiscal 1999, 43% in fiscal 1998 and 33% in
fiscal 1997. Sales to the May Department Stores Company accounted for
approximately 28% of the Company's net sales in fiscal 1999, 29% in fiscal 1998
and 16% in fiscal 1997. Sales to Federated Department Stores accounted for
approximately 7% in fiscal 1999 and fiscal 1998, and 8% in fiscal 1997. Sales to
TJX Companies, Inc. accounted for approximately 7% of net sales in fiscal 1999,
3% in fiscal 1998 and 6% in fiscal 1997. As a result of the Company's dependence
on its major customers, such customers may have the ability to influence the
Company's business decisions. The
3
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. As of June 30, 1999, the Company had an
in-house sales force of 21, all of whom are located in the New York City
showrooms. Senior management, principally Josephine Chaus, Chairwoman of the
Board, Chief Executive Officer and principal stockholder of the Company actively
participates 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.
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 17 person design
staff, headed by Judith Leech, monitors current fashion trends and changes in
consumer preferences. Ms. Chaus, who is instrumental in the design function,
meets regularly with the design staff to create, develop and coordinate the
seasonal collections. The Company believes that its design staff is well
regarded for its distinctive styling and its ability to contemporize fashion
classics. Emphasis is placed on the coordination of outfits and quality of
fabrics to encourage the purchase of more than one garment.
MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its products
are manufactured in accordance with its design specifications and production
schedules through arrangements with independent manufacturers. The Company
believes that outsourcing its manufacturing maximizes its flexibility while
avoiding significant capital expenditures, work-in-process buildup and the costs
of a large workforce. A substantial amount (approximately 85%) of its product is
manufactured by approximately 25 key independent suppliers located primarily in
South Korea, Hong Kong, Taiwan, China, Indonesia and elsewhere in the Far East.
Approximately 15% of the Company's products are manufactured in the
4
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 1999, the Company purchased approximately 54% of its finished goods from
its ten largest manufacturers, including approximately 10% 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, Taiwan and Hong Kong monitor production at each manufacturing facility to
control quality, compliance with the Company's specifications and timely
delivery of finished garments, and arrange for the shipment of finished products
to the Company's New Jersey distribution center. Almost all finished goods are
shipped to the Company's New Jersey distribution center for final inspection,
assembly into collections, allocation and shipment to customers.
The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.
The Company uses a broad range of fabrics in the production of its
clothing, consisting of synthetic fibers (including polyester and acrylic),
natural fibers (including cotton and wool), and blends of natural and synthetic
fibers. The Company does not have any formal, long-term arrangements with any
fabric or other raw material supplier. During fiscal 1999, 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, Hong Kong 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
5
substantial advance commitments to suppliers of such goods, often as much as
seven months prior to the receipt of firm orders from customers for the related
merchandise. Many of these early commitments are made subject to changes in
colors, assortments and/or delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are subject
to the risks attendant to doing business abroad, including the availability of
quota and other requisite customs clearances, the imposition of export duties,
political and social instability, currency revaluations, and restrictions on the
transfer of funds. Bilateral agreements between exporting countries, including
those from which the Company imports substantially all of its products, and the
United States' imposition of quotas, limits the amount of certain categories of
merchandise, including substantially all categories of merchandise manufactured
for the Company, that may be imported into the United States. Furthermore, the
majority of such agreements contain "consultation clauses" which allow the
United States to impose at any time restraints on the importation of categories
of merchandise which, under the terms of the agreements, are not subject to
specified limits. The bilateral agreements through which quotas are imposed have
been negotiated under the framework established by the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Arrangement ("MFA")
which has been in effect since 1974. The United States has concluded
international negotiations known as the "Uruguay Round" in which a variety of
trade matters were reviewed and modified. Quotas established under the MFA will
be gradually phased out over a ten year transition period, after which the
textile and clothing trade will be fully integrated into the General Agreement
on Trade and Tariffs ("GATT") and will be subject to the same disciplines as
other sections. The GATT agreement provides for expanded trade, improved market
access, lower tariffs and improved safeguard mechanisms.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adversely adjust presently prevailing quotas, duty or tariff
levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot now predict the likelihood or frequency of any such
events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise categories
where more quota is available and shifts of production among countries and
manufacturers. The expansion in the past few years of the Company's varied
manufacturing sources and the variety of countries in which it has potential
manufacturing arrangements, although not the result of specific import
restrictions, have had the result of reducing the potential adverse effect of
any increase in such restrictions. In addition, substantially all of the
Company's products are subject to United States customs duties.
RETAIL OUTLET STORES
The Company closed all of its retail outlet stores (other than the retail
outlet located at the Company's Secaucus facility, the space for which is leased
by the Company as part of its warehouse lease) during fiscal 1998 and does not
intend to open any new stores in the foreseeable future.
BACKLOG
As of September 10, 1999 and 1998, the Company's order book reflected
unfilled customer orders for approximately $62.0 and $63.0 million of
merchandise, respectively. Order book data at any date are materially affected
by the timing of the initial showing of collections to the trade, as well as by
the timing of recording of orders and of shipments. The order book represents
customer orders prior to discounts. The Company does not believe that
cancellations, rejections or returns will materially reduce the amount of sales
realized from such backlog.
TRADEMARKS
6
CHAUS(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 has pending applications to register J. CHAUS
and JOSEPHINE CHAUS for ladies garments. The Company considers its trademarks to
be strong and highly recognized, and to have significant value in the marketing
of its products. See "License Agreement with Nautica" for certain information
concerning the Company's Nautica License Agreement.
The Company has also registered its CHAUS(Registered Trademark), CHAUS
SPORT(Registered Trademark), CHAUS WOMAN(Registered Trademark), JOSEPHINE
CHAUS(Registered Trademark) and JOSEPHINE(Registered Trademark) marks for
women's apparel in certain foreign countries and has legal trademark rights in
certain foreign countries for selected women's accessories including handbags,
small leather goods and footwear. The Company has pending applications to
register CHAUS and JOSEPHINE CHAUS in the European Economic Community covering
clothing, accessories and cosmetics.
COMPETITION
The women's apparel industry is highly competitive, both within the United
States and abroad. The Company competes with many apparel companies, some of
which are larger, and have better established brand names and greater resources
than the Company. In some cases the Company also competes with private-label
brands of its department store customers.
The Company believes that an ability to effectively anticipate, gauge and
respond to changing consumer demand and taste relatively far in advance, as well
as an ability to operate within substantial production and delivery constraints
(including obtaining necessary quota allocations), is necessary to compete
successfully in the women's apparel industry. Consumer and customer acceptance
and support, which depend primarily upon styling, pricing, quality (both in
material and production), and 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, 1999, the Company employed 306 employees as compared with 334
employees at June 30, 1998. This total includes 64 in managerial and
administrative positions, approximately 91 in design, production and production
administration, 27 in marketing, merchandising and sales and 69 in distribution.
Of the Company's total employees, 55 were located in the Far East. The Company
is a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 94 full-time employees. This agreement, which has been
recently renegotiated, expires August 31, 2003.
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:
7
NAME AGE POSITION
Josephine Chaus 48 Chairwoman of the Board and Chief Executive Officer
Stuart S. Levy 57 Chief Financial Officer and 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 and again since December 1998, Chairwoman of the
Board since 1991 and member of the Office of the Chairman since September 1994.
Stuart S. Levy joined the Company as Chief Financial Officer on September
8, 1998. He was Vice President, Finance and the Chief Financial Officer of
Donnkenny, Inc., a publicly held company engaged in the manufacturing and
importing of women's apparel, from 1996 to 1998. From January 1993 to July 1996,
Mr. Levy was Vice President, Finance and Chief Financial Officer of Xpedite
Systems, Inc., a publicly-held provider of enhanced fax services. From August
1996 through October 1996, Mr. Levy provided services to Xpedite Systems, Inc.,
in connection with the completion and integration of international acquisitions.
On December 21, 1998, the Company announced the termination of Andrew
Grossman, the Company's President and Chief Executive Officer. Effective as of
such date, Ms. Chaus re-assumed the position of Chief Executive Officer of the
Company.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 1410 Broadway in
New York City, where the Company leases approximately 23,000 square feet. 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 April
2000. Net base rental expense aggregated approximately $0.8 million in fiscal
1999 and $0.7 million in fiscal 1998 and 1997. The Company is in the process of
relocating its executive offices, showrooms, and sales, design, production and
merchandising staffs to a new location at 530 Seventh Avenue under a lease
beginning June 1, 1999. Improvements are currently being made to the new space
and the Company expects to occupy the new space by the end of 1999. The lease
for this facility expires May 2009.
The Company 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 $0.2 million in each of fiscal 1999,
1998 and 1997. The lease for this facility expires in January 2000.
The Company's distribution centers are located in Secaucus, New Jersey
where the Company leases approximately 275,000 square feet. This facility also
houses the Company's administrative and finance personnel, its computer
operations, and one retail outlet store. This space is occupied under a lease
expiring June 30, 2004. Base rental expense for the Secaucus facilities
aggregated approximately $1.1 million in fiscal 1999 and 1998, and $1.3 million
in fiscal 1997.
Office locations are also leased in Hong Kong, Korea and Taiwan, with
annual aggregate rental expense of approximately $0.1 million for fiscal 1999,
$0.2 million for fiscal 1998 and $0.3 million for fiscal 1997.
In prior years the Company leased space for its outlet stores operation,
with the average store utilizing approximately 3,000 square feet in fiscal 1997.
The Company closed all of its retail outlet stores (other than the retail
8
outlet store located at the Company's Secaucus facility, the space for which is
leased by the Company as part of its warehouse lease) during fiscal 1998. The
annual aggregate base rental expense for the outlet stores was approximately
$0.7 million for fiscal 1998 and $1.7 million for fiscal 1997.
ITEM 3. LEGAL PROCEEDINGS.
Without admitting any liability, the Company settled an action in July 1998
brought by the Equal Employment Opportunity Commission on behalf of three former
patternmakers, each of whom was terminated by the Company in late 1995. The
amount of the settlement was not material and was provided for in selling,
general and administrative expenses in the fiscal 1997 financial statements.
By Demand for Arbitration filed on June 9, 1999, the former chief executive
officer of the Company, Andrew Grossman, commenced an arbitration before the
American Arbitration Association in New York alleging breach of his employment
contract. Specifically, Mr. Grossman seeks severance and non-competition
payments for the period April 1, 1999 through September 1, 2000, and his costs,
in an amount allegedly in excess of $1,000,000. The Company has served an answer
dated July 2, 1999 that denies Mr. Grossman's claims on the grounds that (i) he
is not entitled to any further severance and non-competition payments, because,
among other things, he is now chief operating officer of another women's apparel
company; and (ii) even if any such severance and non-competition payments were
due, they are subject to set-off by Mr. Grossman's post-severance salary and
bonuses, pursuant to his employment agreement with Giorgio Armani. The parties
have each appointed an arbitrator and are in the process of selecting a third
and neutral arbitrator. The Company believes that its defenses are meritorious
and intends to vigorously defend this action.
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.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "CHS." The following table sets forth for each of the Company's
fiscal periods indicated the high and low sales prices for the Common Stock as
reported on the NYSE.
HIGH LOW
---- ---
Fiscal 1998
First Quarter........................... $21.250 $8.125
Second Quarter.......................... 11.250 6.250
Third Quarter........................... 5.250 1.625
Fourth Quarter.......................... 5.750 3.348
FISCAL 1999
First Quarter........................... $3.875 $2.625
Second Quarter.......................... 4.125 2.188
Third Quarter........................... 2.625 1.688
Fourth Quarter.......................... 3.313 1.875
All share and per share data reflect the 1 for 10 reverse stock split, which was
effected December 9, 1997.
As of September 7, 1999, the Company had approximately 432 stockholders of
record.
The Company has not declared or paid cash dividends or made other
distributions on its Common Stock since prior to its 1986 initial public
offering. The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on the Company's earnings,
its capital requirements and financial condition. It is the present intention of
the Board of Directors to retain all earnings, if any, for use in the Company's
business operations and, accordingly, the Board of Directors does not expect to
declare or pay any dividends in the foreseeable future. In addition, the New
Financing Agreement prohibits the Company from declaring dividends or making
other distributions on its capital stock, subject to certain exceptions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
10
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Financial Statements of the Company and
the notes thereto, as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 187,875 $ 191,546 $ 160,100 $ 170,575 $ 181,697
Cost of goods sold 137,958 142,175 125,422(4) 147,994 149,097
----------- ----------- -------------- ------------- --------------
Gross profit 49,917 49,371 34,678 22,581 32,600
Selling, general and administrative expenses 36,512 38,462 40,924 40,162 44,794
Restructuring expenses -- -- 2,250(3) -- 1,200(1)
Unusual expenses -- -- -- -- 8,333(2)
Interest expense, net 2,360 6,353 7,917 6,504 5,885
----------- ----------- -------------- ------------- --------------
Income (loss) before income tax provision $ 11,045 4,556 (16,413) (24,085) (27,612)
Income tax provision 200 245 50 301 301
----------- ----------- -------------- ------------- --------------
Net income (loss) $ 10,845 $ 4,311 $ (16,463) $ (24,386) $ (27,913)
=========== =========== ============== ============= ==============
Basic earnings (loss) per share (5) $ 0.40 $ 0.28 $ (2.46) $ (3.91) $ (5.17)
=========== =========== ============== ============= ==============
Diluted earnings (loss) per share (6) $ 0.40 $ 0.28 $ (2.46) $ (3.91) $ (5.17)
=========== =========== ============== ============= ==============
Weighted average number of common shares
outstanding - basic (7) 27,116 15,296 6,687 6,239 5,399
=========== =========== ============== ============= ==============
Weighted average number of common and common
equivalent shares outstanding - diluted (7) 27,191 15,296 6,687 6,239 5,399
=========== =========== ============== ============= ==============
BALANCE SHEET DATA
AS OF JUNE 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital (deficiency) $ 29,330 $ 18,679 $ (32,729) $ (19,483) $ (13,914)
Total assets 53,484 39,012 34,138 32,742 28,660
Short-term debt, including current portion of
long-term debt 1,000 1,000 37,756 26,077 18,698
Long-term debt 12,500 13,500 26,374 23,588 21,066
Stockholders' equity (deficiency) 17,860 7,015 (57,060) (40,610) (32,379)
(1) Includes, in fiscal 1995, $1.2 million of employee severance.
(2) Includes, in fiscal 1995, $7.8 million primarily relating to the costs
associated with the signing of the Company's Chief Executive Officer and
$0.5 million related to certain legal matters
(3) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate
to the closing of the Company's outlet stores (such as professional fees,
lease termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of
the Company's restructuring program which was completed on January 29,
1998. Refer to Note 7 to the Consolidated Financial Statements.
(4) Includes $1.1 million for liquidation of inventory as a result of closing
the Company's outlet stores.
(5) Computed by dividing the applicable net income by the weighted average
number of shares of common stock outstanding during the years.
(6) Computed by dividing the applicable net income by the weighted average
number of common shares outstanding and common stock equivalents
outstanding during the years.
(7) All share data reflects the 1 for 10 reverse stock split which was effected
December 9, 1997 and reflects the retroactive adjustment for the bonus
element of the Rights Offering, which was consummated on January 26, 1998.
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
11
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
expressed as a percentage of net sales.
Fiscal Year Ended June 30,
--------------------------------------
1999 1998 1997
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Gross profit 26.6 25.8 21.7
Selling, general and administrative expenses 19.4 20.0 25.6
Restructuring expenses -- -- 1.4
Interest expense 1.3 3.3 5.0
Net income (loss) 5.8 2.3 (10.3)
Fiscal 1999 Compared to Fiscal 1998
In fiscal 1999, net sales decreased by $3.7 million, or 1.9%, compared to
the prior year. The decrease in net sales was primarily due to a decrease in
sales of the Company's retail outlet stores ($10.7 million) resulting from the
closing of all but one of the Company's retail outlet stores in January 1998 and
a decrease in sales associated with the Company's Nautica licensed product line
($10.8 million) which was terminated in October 1998. These decreases were
offset in large part by increased sales of the Company's Chaus product lines
through department store channels, which increased $17.8 million as a result of
an increase in units shipped. Average selling prices of the Chaus product lines
decreased in the fiscal year as compared to last fiscal year, primarily as a
result of lower product costs. These lower product costs were reflected in lower
average selling prices while maintaining the Chaus product lines' gross profit
margins.
Gross profit as a percentage of net sales was 26.6% as compared to 25.8% in
the prior year. This increase was primarily due to the elimination of the
Company's retail outlet stores in January 1998 and the termination of the
Nautica License Agreement in October 1998, both of which carried lower gross
profit margins than sales of the Company's Chaus product lines sold through
department store channels and, to a lesser extent, improved gross profit margin
for the Chaus product lines.
Selling, general and administrative expenses ("SG&A") decreased by $2.0
million compared to the prior year. This decrease was primarily due to the
termination of the Nautica licensed product line during the second quarter of
fiscal 1999 ($3.2 million) and the closing of all but one of the Company's
retail outlet stores in January 1998 ($2.7 million). These decreases were
partially offset by an increase in operating expenses ($3.9 million) primarily
related to the increase in sales of the Company's Chaus product lines sold
through department store channels and expenses incurred in support of sales
growth planned for fiscal year 2000. SG&A expenses as a percentage of net sales
decreased from 20.0% in fiscal 1998 to 19.4% in fiscal 1999. This decrease was
primarily due to the elimination of the Company's retail outlet stores which
carried a higher SG&A expense as a percentage of net sales.
In connection with the termination of employment of the Company's former
Chief Executive Officer, Andrew Grossman, the Company became obligated to pay up
to $1.66 million over a period of 20 months in consideration of Mr. Grossman's
agreement not to compete for twelve months. Such amounts are charged to expense
ratably over the twelve-month non-competition period. In addition, the Company
became obligated to make bonus payments in an amount equal to 2 1/2% of net
profits for fiscal years 1999 and 2000, and the pro rated portion of fiscal year
2001 (i.e. 1/6 of such year). Such bonus payments are being expensed over the
respective fiscal years. The Company continued such payments until April 1999
when Mr. Grossman commenced employment with another company. The Company is
12
currently involved in an arbitration proceeding with Mr. Grossman in connection
with a dispute as to the amount, if any, of the remaining payments due to Mr.
Grossman. The Company is seeking a determination in such proceedings that Mr.
Grossman is not entitled to any further payments by reason of his having taken a
position with another women's apparel company and that, even if payments are
due, they are subject to offset by an amount equal to his post-severance salary
and bonus. See "Item 3. Legal Proceedings".
Interest expense decreased by $4.0 million as compared to the prior year as
a result of the conversion of subordinated debt to equity in connection with the
Company's Restructuring which was completed on January 29, 1998. To a lesser
extent, decreases in bank borrowings and lower interest rates on bank borrowings
also contributed to the decrease in interest expense.
Net income increased $6.5 million for fiscal 1999, up 152% over the prior
year. This includes a net loss of $2.9 million, or $0.11 per diluted share,
associated with the licensed Nautica business which was discontinued in the
second quarter of fiscal 1999.
Fiscal 1998 Compared to Fiscal 1997
In fiscal 1998, net sales increased by $31.4 million, or 19.6%, compared to
the prior year. The increase in net sales was primarily due to increased sales
at regular and incentive prices of the Company's Chaus product lines partially
offset by a decrease in sales associated with the Company's Nautica licensed
product line and lower retail store sales. Retail store sales decreased as a
result of the liquidation of the Company's retail outlet stores during the
second quarter of fiscal 1998. In fiscal 1998, exclusive of sales associated
with the retail outlet stores, units shipped increased by 11.6% with a 14.3%
increase in average selling prices from the prior year. The increase in average
selling prices resulted from the Company's ability to increase its selling price
per unit and decrease its sales to off-price customers.
Gross profit as a percentage of net sales was 25.8% as compared to 21.7% in
the previous year. The increase in gross profit as a percentage of net sales was
primarily due to improved gross margins on the Company's Chaus product lines,
partially offset by a decrease in gross margins associated with the Company's
Nautica licensed product line.
SG&A expenses decreased by $2.5 million compared to the prior year.
Approximately $2.2 million of this decrease was attributable to the closing of
the Company's retail outlet stores in January 1998. SG&A expenses as a percent
of net sales decreased from 25.6% in fiscal 1997 to 20.0% in fiscal 1998. The
decrease in SG&A expenses as a percent of net sales was primarily the result of
the Company's ability to keep its expenses, exclusive of the retail operations,
relatively constant as its net sales, exclusive of the retail operations,
increased.
The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the Company's
restructuring program, which was announced in June 1997. The costs incurred
relate to the closing of the Company's outlet stores (such as professional fees,
lease termination expenses and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's restructuring program. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory. The restructuring was completed in the third quarter of
fiscal 1998.
At the end of fiscal 1997, the remaining balance of the restructuring
reserve was $1.9 million. During fiscal 1998, $1.9 million was charged against
such remaining reserve, consisting of outlet store closing costs and
professional fees related to the Company's restructuring. Costs relating to the
liquidation of the retail outlet store inventory totaled $1.2 million, of which
$1.1 million was provided for in fiscal 1997.
13
Interest expense decreased by $1.6 million as compared to the prior year as
a result of the conversion of subordinated debt to equity in connection with the
Company's Restructuring which was completed on January 29, 1998.
Net income was $4.3 million as compared to a loss of $16.5 million in the
prior year. The increase in net income of $20.8 million is due to the
improvements in operations as discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash provided by operating activities was $5.6 million for fiscal 1999
as compared to net cash used in operating activities of $5.8 million for fiscal
1998 and $11.0 million in fiscal 1997. Net cash provided by operating activities
for fiscal 1999 resulted primarily from net income of $10.8 million, increases
in accounts payable of $4.5 million, partially offset by an increase in accounts
receivable of $9.6 million.
Historically, the Company has not required major capital expenditures. In
fiscal 1999 and 1998, purchases of fixed assets were $0.2 and $0.3 million,
respectively, consisting primarily of purchases of computer hardware and
software systems. In fiscal 1999 and 1998, the Company incurred expenditures of
$0.1 million and $0.4 million, respectively, for "in store" fixtures and signs
purchased in connection with the Company's Nautica licensed product line. In
fiscal 2000, the Company anticipates capital expenditures of approximately $3.5
million consisting primarily of leasehold improvements and furniture and fixture
expenditures for the new 530 Seventh Avenue facility, computer hardware and
software for the Company's New Jersey warehouse facility and expenditures
related to PC hardware and software upgrades.
Financing Agreement
The Company and BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of General Motors Acceptance Corp. ("GMAC") entered into a financing
agreement in July 1991, which was amended and restated on several occasions. See
Note 6 to Consolidated Financial Statements.
On October 10, 1997, the Company and BNYF entered into a new revolving
credit facility (the "New Revolving Facility") and a new term loan facility (the
"New Term Loan" and, together with the new revolving Facility, the "New
Financing Agreement"). The New Financing Agreement consisted of two facilities:
(i) the New Revolving Facility which was a $66.0 million five-year revolving
credit line with a $20.0 million sublimit for letters of credit, and (ii) the
New Term Loan which was a $15.0 million term loan facility. On June 3, 1998, the
Company and BNYF amended the New Revolving Facility to provide for a $45.5
million five-year revolving credit line with $34.0 million sublimit for letters
of credit and amended the New Term Loan to provide for a $14.5 million term loan
facility. Each facility matures on December 31, 2002. See Note 6 to Consolidated
Financial Statements. At June 30, 1999, the Company had availability of
approximately $8.8 million (inclusive of overadvance availability) under the New
Financing Agreement.
The New Financing Agreement contains financial covenants requiring, among
other things, the maintenance of minimum levels of tangible net worth, working
capital and minimum permitted profit (maximum permitted loss). The New Financing
Agreement also contains certain restrictive covenants which, among other things,
limits the Company's ability to incur additional indebtedness or liens and to
pay dividends.
Future Financing Requirements
14
At June 30, 1999, the Company had working capital of $29.3 million. The
Company's business plan requires the availability of sufficient cash flow and
borrowing capacity to finance its product lines. The Company expects to satisfy
such requirements through cash flow from operations and borrowings under the New
Financing Agreement. The Company believes that it has adequate resources to meet
its needs for the foreseeable future.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties, including
the Company's ability to maintain its borrowing capabilities under the New
Financing Agreement, retail market conditions, and consumer acceptance of the
Company's products.
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.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS 130 establishes
standards for reporting comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in a financial
statement, and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Currently, the Company has no
items of other comprehensive income.
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending June 30, 1999. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes Financial
Accounting Standards Board ("FASB") Statement No. 14 Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. In accordance with SFAS No. 131, the Company
currently operates in one business segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999; however, it may be adopted earlier. It cannot be applied
retroactively to financial statements of prior periods. The Company currently
has no derivative financial instruments.
15
YEAR 2000 COMPLIANCE
The Company has prepared a plan to become Year 2000 compliant. Pursuant to
the Company's Year 2000 Plan, major segments (approximately 95%) of the
Company's information technology ("IT") and non-IT systems have been upgraded
and tested for Year 2000 compliance. With the exception of the telephone
switches, the Company anticipates that the remaining IT and non-IT systems will
be upgraded and tested to be Year 2000 compliant by October 15, 1999. The
Company has a contingency plan in place applicable to the telephone switches to
limit the effect of any Year 2000 issues. The telephone switches are planned to
be replaced with a Year 2000 compliant system in December 1999 in conjunction
with the Company's relocation to its new facility at 530 Seventh Avenue. Given
that the Company expects to be Year 2000 compliant on all other systems by
October 15, 1999, the Company has not prepared a contingency plan for the other
systems and does not currently believe that a contingency plan is necessary. The
total costs of these system upgrades are projected to approximate $0.5 million.
As of June 30, 1999, the Company has incurred approximately $0.2 million of
these costs. The remaining costs will be funded out of existing cash flows from
operations.
In some cases, the Company's computer systems are linked to its major
customers. The Company has had correspondence with its customers regarding Year
2000 compliance. Although certain customers have not responded, the Company's
major customers have advised the Company that they generally comply with VICS
(Voluntary Interindustry Commerce Standards) standards. VICS establishes
standards that simplify the flow of product and information in the general
merchandise retail industry for retailers and suppliers alike. The Company is
compliant with VICS Year 2000 Electronic Data Interchange standards and has
completed testing with its major customers. The Company has virtually no
computer interfaces with its vendors; however, it does not know the extent to
which its vendors or its customers would be impaired by their own Year 2000
issues and the impact of such impairment on the Company. The costs of assessing
compliance have been minimal. Although the Company believes it is adequately
addressing its Year 2000 issues, the failure to correct a material Year 2000
problem or the failure of a customer or vendor to achieve compliance could
result in an interruption in, or a failure of, certain normal business
activities or operations. Such failure could materially adversely affect the
Company's results of operations, liquidity and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
16
Description
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 1999
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 1999 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 1999 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 1999 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 1999 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, 1999.
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").
3.2 Amendment dated November 18, 1987 to the Restated Certificate incorporated
by reference to Exhibit 3.11 of the Company's Registration Statement on
Form S-2, Registration No. 33-63317 (the "1995 Registration Statement").
3.3 Amendment dated November 15, 1995 to the Restated Certificate (incorporated
by reference to Exhibit 3.12 of Amendment No. 1 to the 1995 Registration
Statement).
17
Description
3.4 Amendment dated December 9, 1998 to the Restated Certificate
(incorporated by reference to Exhibit 3.13 of the Company's Form 10-K
for the year ended June 30, 1998 (the "1998 Form 10-K").
3.5 By-Laws of the Company, as amended (incorporated by reference to exhibit
3.1 of the Company's Form 10-Q for the quarter ended December 31, 1987).
3.6 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's Form 10-Q for the quarter
ended September 30, 1994).
10.9 Agreement dated December 3, 1990 among the Company, Bernard Chaus,
Josephine Chaus and National Union Fire Insurance Company of Pittsburgh,
PA, the Company's directors and officers liability carrier (incorporated
by reference to Exhibit 10.31 of the Company's Form 10-Q for the quarter
ended December 31, 1990)
+10.10 Employment Agreement, dated July 1, 1991, between the Company and
Josephine Chaus (incorporated by reference to Exhibit 10.39 of the
Company's Form 10-K for the year ended June 30, 1991).
+10.11 Employment Agreement, dated September 1, 1994, between the Company and
Andrew Grossman (incorporated by reference to Exhibit 10.90 of the
Company's Form 10-K for the year ended June 30, 1994).
10.47 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).
10.55 Lease dated June 12, 1996 between the Company and L. H. Charney
Associates, relating to the Company's facility at 1410 Broadway, New
York, New York (incorporated by reference to Exhibit 10.66 of the
Company's Form 10-K for the year ended June 30, 1996).
10.68 Second Restated and Amended Financing Agreement dated as of October 10,
1997, between the Company and BNY Financial Corp. (incorporated by
reference to Exhibit 10.79 of the Company's Form 10-K for the year ended
June 30, 1997).
10.69 Agreement dated October 10, 1997, between the Company and BNY Financial
Corp. issuing 125,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.80 of the Company's Form 10-Q
for the quarter ended September 30, 1997).
10.70 Agreement dated October 10, 1997, between the Company and BNY Financial
Corp. issuing 375,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.81 of the Company's Form 10-Q
for the quarter ended September 30, 1997).
+10.71 Executive Employment Agreement dated October 28, 1997, between the
Company and Lynn Buechner (incorporated by reference to Exhibit 10.82 of
the Company's Form 10-Q for the quarter ended September 30, 1997).
18
Description
10.72 Letter Agreement dated December 9, 1997 between Josephine Chaus and the
Company (incorporated by reference to Exhibit 10.83 of the Company's
Form 10-Q for the quarter ended December 31, 1997).
10.73 Cash Collateral Deposit Release Letter Agreement dated as of January 29,
1998 Agreement among Josephine Chaus, the Company and BNY Financial
Corporation (incorporated by reference to Exhibit 10.84 of the Company's
Form 10-Q for the quarter ended December 31, 1997).
10.74 Subrogated Subordinated Promissory Note dated as of January 29, 1998
from the Company to Josephine Chaus in the principal amount of $12.5
million (incorporated by reference to Exhibit 10.85 of the Company's
Form 10-Q for the quarter ended December 31, 1997).
10.75 Conversion Agreement dated as of January 29, 1998 between Josephine
Chaus and the Company (incorporated by to reference Exhibit 10.86 of the
Company's Form 10-Q for the quarter ended December 31, 1997).
+10.76 Letter Agreement between the Company and Andrew Grossman dated as of
January 1, 1998 (incorporated by reference to Exhibit 10.76 of the
Company's 1998 Form 10-K).
+10.77 1998 Stock Option Plan, including form of related stock option agreement
(incorporated by reference to Exhibit 10.77 of the Company's 1998 Form
10-K).
10.78 Amendment No. 1 dated June 3, 1998 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.78 of the
Company's 1998 Form 10-K).
+10.79 Letter Agreement between the Company and Stuart S. Levy dated as of July
22, 1998 (incorporated by reference to Exhibit 10.79 of the Company's
1998 Form 10-K).
+*10.80 Letter Agreement between the Company and Stuart S. Levy dated February
23, 1999.
*10.81 Collective Bargaining Agreement between the Company and Amalgamated
Workers Union, Local 88 effective as of September 1, 1999.
*10.82 Lease between the Company and Adler Realty Company, dated June 1, 1999
with respect to the Company's executive offices and showroom at
530 Seventh Avenue, New York City.
21 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's 1998 10-K).
*23 Consent of Deloitte & Touche LLP dated September 24, 1999.
*27 Financial Data Schedule.
+ Management agreement or compensatory plan or arrangement required to be filed
as an exhibit.
* Filed herewith.
19
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 21, 1999.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
--------------------
Josephine Chaus
Chairwoman of the Board and
Chief Executive Officer
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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Josephine Chaus Chairwoman of the Board and September 21, 1999
- ----------------------------- Chief Executive Officer
Josephine Chaus
/s/ Stuart S. Levy Chief Financial Officer and Secretary September 21, 1999
- ----------------------------- (Principal Financial and Accounting Officer)
Stuart S. Levy
/s/ Philip G. Barach Director September 21, 1999
- -----------------------------
Philip G. Barach
/s/ Nicholas DiPaolo Director September 21, 1999
- -----------------------------
Nicholas DiPaolo
/s/ Terri Kabachnick Director September 21, 1999
- -----------------------------
Terri Kabachnick
/s/ S. Lee Kling Director September 21, 1999
- -----------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director September 21, 1999
- -----------------------------
Harvey M. Krueger
20
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, 1999 and 1998 ..................................F-3
Consolidated Statements of Operations -- Years Ended June 30, 1999, 1998 and 1997.......F-4
Consolidated Statements of Stockholders' Equity (Deficiency) --
Years Ended June 30, 1999, 1998 and 1997.............................................F-5
Consolidated Statements of Cash Flows -- Years Ended June 30, 1999, 1998 and 1997.......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, 1999 and June 30, 1998 and the related
consolidated statements of operations, stockholders' equity/(deficiency), and
cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and June 30, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999 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.
/s/ Deloitte & Touche LLP
New York, New York
August 30, 1999
F-2
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
June 30, June 30,
1999 1998
---------------- ----------------
ASSETS
Current Assets
Cash and cash equivalents $ 6,208 $ 2,039
Accounts receivable 26,756 17,289
Inventories 18,806 17,486
Prepaid expenses 684 362
---------------- ----------------
Total current assets 52,454 37,176
Fixed assets - net 760 960
Other assets 270 876
---------------- ----------------
$ 53,484 $ 39,012
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 17,499 $ 13,005
Accrued expenses 4,625 4,492
Term loan - current 1,000 1,000
---------------- ----------------
Total current liabilities 23,124 18,497
Term loan 12,500 13,500
---------------- ----------------
35,624 31,997
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized shares - 1,000,000;
outstanding shares - none
Common stock, $.01 par value, authorized shares - 50,000,000; 272 272
issued shares - 27,178,177 at June 30, 1999 and 1998
Additional paid-in capital 125,224 125,224
Deficit (106,156) (117,001)
Less: Treasury stock at cost - 62,270 shares at June 30, 1999 and 1998 (1,480) (1,480)
---------------- ----------------
Total stockholders' equity 17,860 7,015
---------------- ----------------
$ 53,484 $ 39,012
================ ================
See accompanying notes to consolidated financial statements
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Fiscal Year Ended June 30,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales $ 187,875 $ 191,546 $ 160,100
Cost of goods sold 137,958 142,175 125,422
----------- ----------- -----------
Gross profit 49,917 49,371 34,678
Selling, general and administrative expenses 36,512 38,462 40,924
Restructuring expenses -- -- 2,250
----------- ----------- -----------
13,405 10,909 (8,496)
Interest expense, net 2,360 6,353 7,917
----------- ----------- -----------
Income (loss) before provision for income taxes 11,045 4,556 (16,413)
Provision for income taxes 200 245 50
----------- ----------- -----------
Net income (loss) $ 10,845 $ 4,311 $ (16,463)
=========== =========== ===========
Basic earnings (loss) per share $ 0.40 $ 0.28 $ (2.46)
=========== =========== ===========
Diluted earnings (loss) per share $ 0.40 $ 0.28 $ (2.46)
=========== =========== ===========
Weighted average number of common shares
outstanding - basic
27,116,000 15,296,000 6,687,000
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding - diluted 27,191,000 15,296,000 6,687,000
=========== =========== ===========
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
Number Of Paid-in Number
Shares Amount Capital Deficit of Shares Amount Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at July 1, 1996 26,893,724 $ 269 $ 65,450 $ (104,849) 622,700 $ (1,480) $ (40,610)
Net loss (16,463) (16,463)
Exercise of stock options 6,250 -- 13 13
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 26,899,974 269 65,463 (121,312) 622,700 (1,480) (57,060)
Net income 4,311 4,311
Exchange of notes for
common stock 10,510,910 105 40,520 -- -- -- 40,625
Net proceeds from issuance
of common stock 13,977,270 140 18,861 -- -- -- 19,001
Issuance of warrants -- -- 138 -- -- -- 138
Reverse stock split (24,209,977) (242) 242 -- (560,430) -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at July 1, 1998 27,178,177 272 125,224 (117,001) 62,270 (1,480) 7,015
Net income 10,845 10,845
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 27,178,177 $ 272 $ 125,224 $ (106,156) 62,270 $ (1,480) $ 17,860
============ ============ ============ ============ ============ ============ ============
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,
---------------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 10,845 $ 4,311 $ (16,463)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,280 630 865
Provision for losses (recovery) on accounts receivable 138 (65) (20)
Deferred interest on subordinated promissory notes -- 1,751 2,786
Non-cash interest expense 30 27 --
Changes in operating assets and liabilities:
Accounts receivable (9,605) (9,773) 564
Inventories (1,320) 6,260 (2,490)
Prepaid expenses and other assets (435) 432 372
Accounts payable 4,494 (6,820) 2,390
Accrued expenses 133 (901) (663)
Accrued restructuring expenses -- (1,619) 1,654
--------- --------- ---------
Net Cash Provided By (Used In) Operating Activities 5,560 (5,767) (11,005)
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of fixed assets (247) (348) (186)
Purchases of other assets (144) (421) (418)
--------- --------- ---------
Net Cash Used In Investing Activities (391) (769) (604)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds (payments) on short-term bank borrowings -- (25,256) 11,679
Net proceeds from issuance of term loan -- 15,000 --
Principal payments on term loan (1,000) (500) --
Net proceeds from issuance of stock -- 19,001 --
Net proceeds from exercise of options -- -- 13
--------- --------- ---------
Net Cash (Used In) Provided By Financing Activities (1,000) 8,245 11,692
--------- --------- ---------
Increase in Cash and Cash Equivalents 4,169 1,709 83
Cash and Cash Equivalents, Beginning of Year 2,039 330 247
--------- --------- ---------
Cash and Cash Equivalents, End of Year $ 6,208 $ 2,039 $ 330
========= ========= =========
Cash paid for:
Taxes $ 336 $ 8 $ 13
Interest $ 2,167 $ 4,670 $ 4,822
Supplemental schedule of non-cash financing activities:
Bank debt assumed by principal stockholder and converted
to subordinated promissory notes -- $ 12,500 --
Exchange of subordinated promissory notes for common stock -- $ 40,625 --
Issuance of warrants related to new financing agreement -- $ 138 --
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" or "Chaus") designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(Registered Trademark)
COLLECTION, JOSEPHINE CHAUS(Registered Trademark) STUDIO, JOSEPHINE
CHAUS(Registered Trademark) ESSENTIALS, and JOSEPHINE CHAUS(Registered
Trademark) SPORT trademarks. The Company's products are sold nationwide through
department store chains, specialty retailers and other retail outlets.
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 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.
Earnings Per Share:
All share and per share data reflects the 1 for 10 reverse stock split
which was effected December 9, 1997. Basic earnings per share has been computed
by dividing the applicable net income by the weighted average number of common
shares outstanding. Diluted earnings per share has been computed by dividing the
applicable net income by the weighted average number of common shares
outstanding and common stock equivalents. The calculation of basic and diluted
earnings per share for fiscal 1998 reflects the retroactive adjustment for the
bonus element of the Rights Offering, which was consummated on January 26, 1998.
At June 30, 1999, 1998 and 1997, 1,237,000, 2,779,000 and 7,673,000 common stock
equivalents, respectively, were not included in the computation of earnings per
share as they were antidilutive.
Revenue Recognition
Revenues are recorded at the time merchandise is shipped, and with regard
to the outlet store 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, 1999 and 1998, approximately 87% of the Company's accounts receivable were
due from department store customers owned by four single corporate entities.
During fiscal 1999 and fiscal 1998, approximately 82% of the Company's net sales
were made to department store customers owned by four single corporate entities,
as compared to 63% in fiscal 1997. Sales to Dillard's Department Stores
accounted for 40% of net sales in fiscal 1999, 43% in fiscal 1998 and 33% in
fiscal 1997. Sales to The May Department Stores Company accounted for
approximately 28% of the Company's net sales in fiscal 1999, 29% in fiscal 1998
and 16% in fiscal 1997. Sales to Federated Department Stores accounted for
approximately 7% of net sales in fiscal 1999 and fiscal 1998, and 8% in fiscal
1997. Sales to TJX Companies, Inc. accounted for approximately 7% of net sales
in fiscal 1999, 3% in fiscal 1998 and 6% in fiscal 1997. The
F-7
percentages of net sales are based upon stores owned by the four corporate
entities at the end of fiscal 1999. As a result of the Company's dependence on
its major 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. As of June 30, 1999 and June 30,
1998, Accounts Receivable was net of allowances of $1.6 million and $3.2
million, respectively.
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.
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). The Company records a valuation allowance to reduce its deferred tax
assets to that amount which it believes will more likely than not be realized.
Fair Value of Financial Instruments:
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, accruals and term loans, it was assumed that the
carrying amounts approximated fair value due to their short maturity or variable
interest rate.
Comprehensive Income:
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
130, Reporting Comprehensive Income during the current fiscal year. SFAS 130
establishes standards for reporting comprehensive income and its components in
financial statements. Currently, the Company has no items of other comprehensive
income.
Business Segment Reporting:
F-8
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending June 30, 1999. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes Financial
Accounting Standards Board ("FASB") Statement No. 14 Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. In accordance with SFAS No. 131, the Company
currently operates in one business segment.
New Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999; however, it may be adopted earlier. It cannot be applied
retroactively to financial statements of prior periods. The Company currently
has no derivative financial instruments.
3. INVENTORIES
June 30, 1999 June 30, 1998
------------- -------------
(In thousands)
Finished goods $15,512 $12,278
Work-in-process 1,000 3,051
Raw materials 2,294 2,157
----------- ------------
$18,806 $17,486
=========== ============
Inventories include merchandise in transit (principally finished goods) of
approximately $10.6 million at June 30, 1999 and $7.2 million at June 30, 1998.
4. FIXED ASSETS
June 30, 1999 June 30, 1998
------------- -------------
(In thousands)
Furniture and equipment $10,456 $10,233
Leasehold improvements 6,507 6,501
----------- -----------
16,963 16,734
Less accumulated depreciation and amortization 16,203 15,774
----------- -----------
$ 760 $ 960
=========== ===========
F-9
5. INCOME TAXES
Significant components of the Company's net deferred tax assets are as follows:
June 30, June 30,
1999 1998
-------------- --------------
(In thousands)
Deferred tax assets:
Net federal, state and local operating loss carryforwards $ 37,200 $ 40,100
Costs capitalized to inventory for tax purposes 1,100 1,000
Accrued interest, subordinated debt/warrants -- 4,900
Book over tax depreciation 2,300 2,200
Sales allowances not currently deductible 1,000 3,500
Reserves and other items not currently deductible 1,800 1,500
-------------- --------------
43,400 53,200
Valuation allowance for deferred tax assets (43,400) (53,200)
-------------- --------------
Net deferred tax asset $ 0 $ 0
============== ==============
There was a change in the valuation allowance of $9.8 million.
Fiscal Year Ended June 30,
1999 1998 1997
------------- --------------- -------------
(In thousands)
Expense (benefit) for federal income taxes at the statutory
rate of 35.0% $ 3,866 $ 1,542 $ (5,694)
State and local income taxes net of federal tax benefit 0 95 50
Other 43 51 51
------------- --------------- -------------
Effects of unrecognized federal tax loss carryforwards (3,709) (1,443) 5,643
Provision for income taxes $ 200 $ 245 $ 50
============= =============== =============
At June 30, 1999, the Company has a federal net operating loss carryforward for
income tax purposes of approximately $ 88.7 million, which will expire between
2008 and 2012.
F-10
6. FINANCING AGREEMENTS
The Company and BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of General Motors Acceptance Corp. ("GMAC") entered into a financing
agreement in July 1991, which was amended and restated on several occasions.
On October 10, 1997, the Company and BNYF entered into a new revolving
credit facility (the "New Revolving Facility") and a new term loan facility (the
"New term Loan" and, together with the new revolving Facility, the "New
Financing Agreement"). The New Financing Agreement consisted of two facilities:
(i) the New Revolving Facility which was a $66.0 million five-year revolving
credit line with a $20.0 million sublimit for letters of credit, and (ii) the
New Term Loan which was a $15.0 million term loan facility. On June 3, 1998, the
Company and BNYF amended the New Revolving Facility to provide for a $45.5
million five-year revolving credit line with $34.0 million sublimit for letters
of credit and amended the New Term Loan to provide for a $14.5 million term loan
facility. Each facility matures on December 31, 2002. At June 30, 1999, the
Company had availability of approximately $8.8 million (inclusive of overadvance
availability) under the New Financing Agreement.
Interest on the New Revolving Facility accrues at 1/2 of 1% above the Prime
Rate (7.75% at June 30, 1999) and is payable on a monthly basis, in arrears.
Interest on the New Term Loan accrues at an interest rate ranging from 1/2 of 1%
above the Prime Rate to 1 1/2% above the Prime Rate, which interest rate will be
determined, from time to time, based upon the Company's availability under the
New Revolving Facility. With the exception of warrants issued to BNYF (as
discussed below), the Company's execution of the New Financing Agreement did not
require the payment of any commitment, closing, administration or facility fees.
The New Financing Agreement provides for a fee of .375% on the unused portion of
the line and letter of credit fees equal to .125% of the outstanding letter of
credit balance. As part of the New Financing Agreement, BNYF's existing warrants
were extinguished, and BNYF received new warrants (the "BNYF Warrants") to
purchase an aggregate of 162,500 shares of the Company's Common Stock. The
issuance of the BNYF Warrants was recorded in the third quarter of fiscal 1998
at a value of $0.1 million and was included as an increase in additional paid-in
capital and will be charged to interest expense over the term of the New
Financing Agreement.
Amortization payments in the amount of $250,000 are payable quarterly in
arrears in connection with the New Term Loan. Four amortization payments have
been made resulting in a balance of $13.5 million at June 30, 1999. A balloon
payment in the amount of $10.25 million is due on December 31, 2002. In the
event of the earlier termination by the Company of the New Financing Agreement,
the Company will be liable for termination fees initially equal to $2.8 million,
and declining to $2.2 million after October 8, 2000. The Company's obligations
under the New Financing Agreement are secured by a first priority lien on
substantially all of the Company's assets, including the Company's accounts
receivable, inventory and trademarks.
The New Financing Agreement contains financial covenants requiring, among
other things, the maintenance of minimum levels of tangible net worth, working
capital and minimum permitted profit (maximum permitted loss). The New Financing
Agreement also contains certain restrictive covenants which, among other things,
limits the Company's ability to incur additional indebtedness or liens and to
pay dividends.
7. RESTRUCTURING
In June 1997, the Company announced a proposed restructuring program to be
implemented by the Company. In September 1997, the disinterested members of the
Board of Directors of the Company unanimously approved the Restructuring which
provided for the following: (i) the Company would raise, through an offer of
rights to subscribe ("Rights"), up to $20.0 million, but not less than $12.5
million, of equity through a rights offering to all shares of Common Stock of
the Company (the "Rights Offering") of up to 13,977,270 shares of Common Stock
of the Company (on a post stock split basis); (ii) the conversion of
approximately $40.6 million of the Company's indebtedness
F-11
to Ms. Chaus, consisting of $28.1 million of then existing subordinated
indebtedness (including accrued interest through January 28, 1998) and $12.5
million of additional indebtedness owed to Ms. Chaus, into 10,510,910 shares of
Common Stock of the Company; (iii) entering into the New Financing Agreement;
(iv) the implementation of a reverse stock split of the Company's Common Stock
such that every ten (10) shares of Common Stock would be converted into one (1)
share of Common Stock; and (v) the liquidation of the Company's retail outlet
stores. On October 10, 1997, the Company entered into the New Financing
Agreement referred to in (iii) above. On December 9, 1997, the reverse stock
split described in (iv) above became effective. By mid-January 1998, the Company
closed all of its retail outlet stores as referenced in (v) above. On January
26, 1998, the Rights Offering described in (i) above was consummated. On January
29, 1998, the conversion of indebtedness into equity described in (ii) above was
completed.
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 $122,000, $40,000 and $69,000 in fiscal 1999, 1998 and
1997, respectively. As of December 31, 1998, the actuarial present value of the
accumulated vested and non-vested plan benefits amounted to $0.6 million and net
assets available for benefits amounted to $0.8 million. Actuarial assumptions
related to weighted average interest rate were 8.5% for 1999, 1998 and 1997.
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 $0.1 in fiscal 1999, $0.2 in each of fiscal 1998 and 1997. An
aggregate of 10,000 shares of Common Stock has been reserved for issuance under
the Savings Plan.
Stock Option Plan:
On February 23,1998, the Company cancelled all options granted under the
Company's 1986 stock option plan and reissued the holders of such options with
an equivalent number of options (at fair market value) under the Company's 1998
Stock Option Plan (the "Option Plan"). Pursuant to the Option Plan, the Company
may grant to eligible individuals incentive stock options, as defined in the
Internal Revenue Code, and non-incentive stock options. Under the Option Plan,
2,711,591 shares of Common Stock were reserved for issuance. No stock options
may be granted subsequent to November 2007 and the exercise price may not be
less than 100% of the fair market value on the date of grant for 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 Chief Executive Officer (the
"Grossman Option Plan") to purchase 300,000 shares of Common Stock (the "1994
Options"). Of this amount, 150,000 options were granted, at fair market value,
in September 1994, and the balance were granted in September 1995, at fair
market value, in connection with the extension of the term of his employment
agreement. In connection with the Restructuring, the 1994 Options were cancelled
and as part of Mr. Grossman's amended employment agreement, 1,375,157 additional
options were granted under the Company's Option
F-12
Plan in February 1998. See Note 9. In connection with the termination of
employment of Mr. Grossman, all of the foregoing options were cancelled
effective June 21, 1999.
Total Options Reserved for Issuance
At June 30, 1999, a total of approximately 2,721,591 shares of Common Stock
were reserved for issuance under the Stock Option Plan and the Savings Plan.
Non-Incentive Stock Options
-------------------------------------------------------
Weighted
Number Exercise Average
of Shares Price Range Exercise Price
------------- --------------------- --------------
Outstanding at July 1, 1996 417,302 $18.75 - $56.25 $38.34
Options granted 9,500 $23.75 - $31.25 $30.07
Options canceled (6,701) $20.00 - $48.80 $26.02
Options exercised (625) $20.00 - $20.00 $20.00
-------------
Outstanding at June 30, 1997
419,476 $18.75 - $56.25 $38.40
Options granted 2,616,407 $ 3.11 - $3.11 $ 3.11
Options canceled (419,476) $18.75 - $56.25 $38.40
-------------
Outstanding at June 30, 1998 2,616,407 $ 3.11 - $ 3.11 $ 3.11
Options granted 775,000 $ 2.13 - $ 3.50 $ 2.20
Options canceled (1,557,069) $ 3.11 - $ 3.11 $ 3.11
-------------
Outstanding at June 30, 1999 1,834,338 $ 2.13 - $ 3.50 $ 2.73
============= =============== ==========
Certain stock options issued on February 11, 1999 (700,000) are fully
exercisable on June 30, 2000. All other outstanding stock options are
exercisable over four years in annual 25% increments. As of June 30, 1999
options to purchase approximately 285,000 shares were exercisable.
Stock Based Compensation:
All stock options are granted at fair market value of the Common Stock at
grant date. The weighted average fair value of stock options granted during
1999, 1998 and 1997 was $2.04, $2.76 and $19.30 respectively. The fair value of
each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for the
grants: risk-free interest rate of 5.59%, 5.49% and 6.38% in 1999, 1998 and 1997
respectively; expected dividend yield of 0% in 1999, 1998 and 1997; expected
life of 2.33, 2.40 and 3.05 years in 1999, 1998 and 1997, respectively; and
expected volatility of 232.13%, 237.06% and 97.25% in 1999, 1998 and 1997,
respectively. The outstanding stock options have a weighted average contractual
life of 8.98 years, 9.60 years and 7.68 years in 1999, 1998 and 1997,
respectively. The number of stock options exercisable at June 30, 1999, 1998 and
1997 were 285,000, 714,000 and 350,000, respectively.
The Company accounts for the stock option plans in accordance with the
Accounting Principles Board Opinion No. 25, under which no compensation cost is
recognized for stock option awards. Had compensation cost been determined
consistent with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company's pro forma net income
(loss) for 1999, 1998 and 1997 would have been $8,564, $2,318 and ($19,658),
respectively. The Company's pro forma net income (loss) per share for 1999, 1998
and 1997 would have been $0.31, $0.15 and ($2.94), respectively. Because the
SFAS 123 method of accounting has not been
F-13
applied to options granted prior to 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities, and
equipment under various noncancellable operating lease agreements which expire
through 2009. Rental expense for the years ended June 30, 1999, 1998 and 1997
was approximately $2.4 million, $3.2 million and $4.7 million, respectively.
The minimum aggregate rental commitments at June 30, 1999 are as follows
(in thousands):
Fiscal year ending:
2000................................ $ 2,339
2001................................ 2,007
2002................................ 1,928
Subsequent to 2002.................. 8,291
--------
$ 14,565
========
Letters of Credit:
The Company is contingently liable under letters of credit issued by banks
to cover contractual commitments for merchandise purchases of approximately
$25.6 million at June 30, 1999.
Litigation:
Without admitting any liability, the Company settled, in July 1998, an
action brought by the Equal Employment Opportunity Commission on behalf of three
former patternmakers, each of whom was terminated by the Company in late 1995.
The amount of the settlement was not material and was provided for in fiscal
1997.
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:
In connection with the termination of employment of the Company's former Chief
Executive Officer, Andrew Grossman, the Company became obligated to pay up to
$1.66 million over a period of 20 months in consideration of Mr. Grossman's
agreement not to compete for twelve months. Such amounts are charged to expense
ratably over the twelve-month non-competition period. In addition, the Company
became obligated to make bonus payments in an amount equal to 2 1/2 % of net
profits for fiscal years 1999 and 2000, and the pro rated portion of fiscal year
2001 (i.e. 1/6 of such year). Such bonus payments are being expensed over the
respective fiscal years. The Company continued such payments until April 1999
when Mr. Grossman commenced employment with another company. The Company is
currently involved in an arbitration proceeding with Mr. Grossman in connection
with a dispute as to the amount, if any, of the remaining payments due to Mr.
Grossman. The Company is seeking a determination in such proceedings that Mr.
Grossman is not entitled to any further payments by reason of his having taken a
position with another women's apparel company and that, even if payments are
due, they are subject to offset by an amount equal to his post-severance salary
and bonus. See "Item
F-14
3. Legal Proceedings".
Nautica License Agreement:
On October 23, 1998, the Company discontinued its license agreement with
Nautica Enterprises, Inc. under which it had an exclusive license to
manufacture, market, distribute and sell licensed product for women under the
Nautica brand name.
F-15
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions End of Year
Year ended June 30, 1999
Allowance for doubtful accounts $ 368 $ 68 $ 70 (1) $ 366
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Reserve for customer allowances and deductions $ 2,834 $ 12,074 $ 13,663 (2) $ 1,245
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Year ended June 30, 1998
Allowance for doubtful accounts $ 341 $ (65) $ (92)(1) $ 368
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Reserve for customer allowances and deductions $ 1,751 $ 8,054 $ 6,971 (2) $ 2,834
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Accrued restructuring expenses $ 1,850 $ -- $ 1,850 (3) $ --
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Year ended June 30, 1997
Allowance for doubtful accounts $ 378 $ (20) $ 17 (1) $ 341
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Reserve for customer allowances and deductions $ 2,576 $ 3,723 $ 4,548 (2) $ 1,751
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Accrued restructuring expenses $ 196 $ 1,850 $ 196 (3) $ 1,850
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(1) Uncollectible accounts written off
(2) Allowances charged to reserve and granted to customers
(3) Expenses charged to reserve
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