BERNARD CHAUS, INC.
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------
The Annual Meeting of Shareholders of Bernard Chaus, Inc. (the
"Company"), a New York corporation, will be held on November __, 1995 at 2:00
p.m. at the Grand Hyatt Hotel, 109 East 42nd Street, New York, New York, Regency
Room, mezzanine level for the following purposes:
1. To elect five directors of the Company to serve until the next
Annual Meeting of Shareholders and until their respective successors have been
elected and qualified.
2. To ratify and approve the issuance to Josephine Chaus of
warrants to purchase common stock of the Company (the "Common Stock") in
consideration for her provision of additional credit support to the Company.
3. To ratify and approve the making of a loan by the Company to
Richard Baker, the President and a former director of the Company, in the
aggregate principal amount of $432,500 (with a remaining principal amount of
$117,000 at September 30, 1995), to pay for certain relocation expenses.
4. To consider and act upon a proposal to approve an amendment to
the Company's 1986 Stock Option Plan, as amended, to extend its expiration date
to April 30, 2006.
5. To consider and act upon a proposal to approve an amendment (the
"Amendment") to the Company's Restated Certificate of Incorporation, as
amended, to eliminate preemptive rights of shareholders.
6. To ratify and approve the appointment of Deloitte & Touche as
auditors of the Company to serve for the fiscal year ending June 30, 1996.
7. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Shareholders of record at the close of business on October 12, 1995 are
entitled to notice of and will be entitled to vote at the meeting. Holders of
Common Stock who do not vote in favor of the Amendment will have the right to
dissent and to receive payment for their shares of Common Stock, provided they
comply with the provisions of Section 623 of the Business Corporation Law of the
State of New York.
YOU ARE REQUESTED TO FILL IN, DATE AND SIGN THE ENCLOSED PROXY, WHICH IS
SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY, AND TO MAIL IT PROMPTLY IN
THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
Wayne Miller
Executive Vice President - Finance
and Administration, Chief
Financial Officer and Secretary
New York, New York
October ___, 1995
IMPORTANT: Please sign, date and return your proxy card in the self-addressed,
stamped envelope enclosed for your convenience. No postage is required if
mailed within the United States.
PRELIMINARY
BERNARD CHAUS, INC.
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
November __, 1995
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Bernard Chaus, Inc. (the "Company"), a New
York corporation, to be used at the Annual Meeting of Shareholders which will be
held on November __, 1995 at 2:00 p.m., at the Grand Hyatt Hotel, 109 East 42nd
Street, New York, New York, Regency Room, mezzanine level and any adjournments
or postponements thereof.
Shareholders who execute proxies retain the right to revoke them at any
time by notice in writing to the Chief Financial Officer of the Company or by
revocation in person at the meeting; unless so revoked, the shares represented
by proxies will be voted at the meeting in accordance with the directions given
therein. If no directions are given, proxies will be voted (i) FOR the election
of the nominees named below under the caption "Election of Directors-Nominees
for Election", (ii) FOR the issuance to Josephine Chaus of warrants to purchase
shares of Common Stock of the Company (the "Common Stock") in consideration for
her provision of additional credit support to the Company, (iii) FOR
ratification and approval of a loan (the "Loan") made by the Company to Richard
Baker of $432,500 (with a remaining principal amount of $117,000 at September
30, 1995), (iv) FOR approval of the amendment to the Company's 1986 Stock Option
Plan, as amended, to extend its expiration date to April 30, 2006, (v) FOR
approval of an amendment (the "Amendment") to the Company's Restated Certificate
of Incorporation, as amended, to eliminate preemptive rights of shareholders,
(vi) FOR the appointment of Deloitte & Touche as auditors for the Company's
fiscal year ending June 30, 1996 and (vii) in the discretion of the proxies
named on the proxy card with respect to such other business as may properly come
before the meeting and any adjournments or postponements thereof.
Under the New York Business Corporation Law (the "BCL") and the
Company's By-Laws, the presence, in person or by proxy, of a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum of the
shareholders to take action at the Annual Meeting. For these purposes, shares
which are present, or represented by a proxy, at the Annual Meeting will be
counted for quorum purposes regardless of whether the holder of the shares or
proxy fails to vote on any particular matter or whether a broker with
discretionary authority fails to exercise its discretionary voting authority
with respect to any particular matter. Once a quorum of the shareholders is
established, under the BCL and the Company's By-Laws, the directors standing for
election must be elected by a plurality of the votes cast. Any other action to
be taken must be approved by a majority of the votes cast except that the
approval of the proposal relating to the elimination of preemptive rights and
the ratification of the Loan must be approved by the holders of a majority of
all outstanding shares. For voting purposes, abstentions and broker non-votes
will not be counted in determining whether the directors standing for election
have been elected or whether any other action has been approved. Holders of
Common Stock who do not vote in favor of the Amendment will have the right to
dissent and to receive payment for their shares of Common Stock provided they
comply with the provisions of Section 623 of the BCL.
The principal executive offices of the Company are located at 1410
Broadway, New York, New York 10018. The approximate date on which this Proxy
Statement and the enclosed form of proxy were first sent or given to
shareholders was October ___, 1995.
2
Shareholders of record at the close of business on October 12, 1995 are
entitled to notice of and will be entitled to vote at the meeting. On October
12, 1995 there were outstanding __________ shares of the Common Stock of the
Company. Each share of Common Stock is entitled to one vote.
3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table represents information with respect to the persons
who are known to the Company to be the beneficial owners of more than five
percent of the Common Stock as of September 15, 1995.
<TABLE>
<CAPTION>
AMOUNT BENEFICIALLY
OWNED IF THE
AMOUNT WARRANT PROPOSAL
NAME AND ADDRESS OF BENEFICIALLY PERCENT CONTAINED HEREIN PERCENT
BENEFICIAL OWNER OWNED(1) OF CLASS IS APPROVED(2) OF CLASS
- ------------------- ------------ -------- ------------------- --------
<S> <C> <C> <C> <C>
Josephine Chaus (3).............. 14,706,551 66.0% 16,286,550 68.2%
1410 Broadway
New York, New York 10018
<FN>
___________
(1) Includes 1,216,500 shares of Common Stock purchasable upon the exercise of warrants. See "Certain Transactions" below.
Because of her stock ownership and positions with the Company, Josephine Chaus may be deemed to be a control person of
the Company.
(2) Includes 1,580,000 shares of Common Stock purchasable upon the exercise of warrants. See "Approval of Issuance of
Warrants to Josephine Chaus" below.
(3) All shares listed are owned of record and beneficially, with sole investment and voting power, except that, with respect
to 118,000 shares included in such amount, Josephine Chaus shares power to vote and dispose of such shares with Daniel
Rosenbloom which are held by them as co-trustees for her children.
</TABLE>
The following table presents information as of September 15, 1995 with
respect to the number of shares of Common Stock beneficially owned by each of
the current directors of the Company and each Named Executive Officer (as
defined herein), other than Josephine Chaus whose ownership is shown in the
table above, and all of the directors and officers of the Company as a group.
The information below stating amounts beneficially owned and percent of class
owned includes options exercisable within 60 days.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY PERCENT
NAME OWNED(1) OF CLASS
- ----- ------------- ----------
<S> <C> <C>
DIRECTORS:
Philip G. Barach (2) . . . . 54,300 *
Andrew Grossman (3). . . . . 300,000 1.4%
S. Lee Kling (4) . . . . . . 35,000 *
Harvey M. Krueger (5). . . . 60,000 *
John W. Burden (6). . . . . 60,000 *
NAMED EXECUTIVE OFFICERS:
Richard A. Baker (7) . . . . 240,000 *
Wayne Miller (8) . . . . . . 42,500 *
Michael Root (9) . . . . . . 25,000 *
Marc A. Zuckerman. . . . . . 0 *
Michael Fieman . . . . . . . 0 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (10) 15,523,354 67.5%
4
<FN>
_______________________
* Less than one percent.
(1) Except as otherwise indicated below, the persons listed have advised the
Company that they have sole voting and investment power with respect to
the securities listed as owned by them.
(2) Includes options to purchase 5,000 shares of Common Stock under the
Bernard Chaus, Inc. 1986 Stock Option Plan, as amended (the "Stock Option
Plan").
(3) Includes options to purchase 300,000 shares of Common Stock under the
Grossman Option Plan (as defined herein). See "Executive Compensation
--Employment Arrangements" below.
(4) Includes options to purchase 20,000 shares of Common Stock under the Stock
Option Plan.
(5) Includes options to purchase 50,000 shares of Common Stock under the Stock
Option Plan.
(6) Includes options to purchase 50,000 shares of Common Stock under the Stock
Option Plan.
(7) Includes options to purchase 240,000 shares of Common Stock under the
Stock Option Plan.
(8) Includes (a) 17,500 shares of Common Stock held by Mr. Miller's spouse,
with respect to which he may be deemed a beneficial owner, and (b) options
to purchase 25,000 shares of Common Stock under the Stock Option Plan.
(9) Includes options to purchase 25,000 shares of Common Stock under the Stock
Option Plan.
(10) Includes beneficial ownership of Josephine Chaus; also includes options to
purchase 415,000 shares of Common Stock under the Stock Option Plan.
</TABLE>
ELECTION OF DIRECTORS
NOMINEES FOR ELECTION
Five directors will be elected at the meeting to serve until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified.
EACH PROXY RECEIVED WILL BE VOTED FOR THE ELECTION OF THE NOMINEES NAMED
BELOW UNLESS OTHERWISE SPECIFIED IN THE PROXY.JOSEPHINE CHAUS POSSESSES THE
POWER TO VOTE MORE THAN 50% OF THE OUTSTANDING SHARES OF THE COMMON STOCK.
ACCORDINGLY, THE AFFIRMATIVE VOTE OF JOSEPHINE CHAUS IS SUFFICIENT TO APPROVE
THE ELECTION OF THESE NOMINEES. JOSEPHINE CHAUS HAS ADVISED THE COMPANY THAT
SHE INTENDS TO VOTE ALL OF HER SHARES IN FAVOR OF SUCH ELECTION.
At this time, the Board of Directors of the Company knows of no reason
why any nominee might be unable to serve. Except as indicated below, there are
no arrangements or understandings between any director and any other person
pursuant to which such person was selected as a director or nominee.
5
The following table sets forth certain information with respect to the
nominees for director:
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE DIRECTOR SINCE
- --------------- -------- -----------------
<S> <C> <C>
Josephine Chaus...................... 44 1977
Andrew Grossman...................... 36 1994
S. Lee Kling ........................ 66 1989
Harvey M. Krueger.................... 65 1992
Philip G. Barach .................... 65 1993
</TABLE>
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 to February 1993, Chief Executive Officer from 1991
through September 1994, Chairwoman of the Board since 1991 and member of the
Office of the Chairman since September 1994.
Andrew Grossman was appointed a director of the Company on September 13,
1994. He has been employed by the Company as its Chief Executive Officer and
member of the Office of the Chairman since September 28, 1994 pursuant to a
five-year employment agreement. The agreement provides that Mr. Grossman shall
(a) be nominated to serve as a director of the Company without additional
compensation during each year of the term of his employment agreement, (b) serve
as the Chief Executive Officer and a member of the Office of the Chairman of the
Company, which office also consists of Josephine Chaus and (c) upon expiration
of the term of the agreement, resign as a director of the Company. In
connection with the execution of Mr. Grossman's employment agreement, Josephine
Chaus agreed to vote all her shares of Common Stock at each annual meeting of
shareholders held during the term of the agreement in favor of his re-election
to the Board of Directors of the Company. Prior to November 1994, Mr. Grossman
was President from 1991 to 1994 and Executive Vice President from 1990 to 1991
of Jones Apparel Group, a manufacturer of women's apparel, and Vice President of
Merchandising for Jones New York from 1987 through 1990. Prior to joining
Jones, Mr. Grossman was employed by Willi Wear Ltd., Herbert Grossman
Enterprises, the Ralph Lauren Womens Wear division of Bidermann Industries, Inc.
and the Evan Picone division of Palm Beach Inc.
S. Lee Kling was elected a director of the Company on February 22, 1989.
He has served since 1991 as Chairman of the Board of Kling Rechter & Company, a
merchant banking company which operates in partnership with Barclays Bank PLC.
Mr. Kling served as Chairman of the Board of Landmark Bancshares Corporation, a
bank holding company in St. Louis, Missouri until December 1991 when the company
merged with Magna Group, Inc. He had served in such capacity with Landmark
since 1974 and had also served as Chief Executive Officer of Landmark from 1974
through October 1990 except for the period from May 1978 to January 1979 when he
served as Assistant Special Counselor on Inflation for the White House and
Deputy for Ambassador Robert S. Strauss. Mr. Kling serves on the Boards of
Directors of Magna Group, Inc., a multi-bank holding company; Lewis Galoob Toys,
Inc., a toy manufacturer; E-Systems, Inc., an electronic equipment manufacturer;
Falcon Products, Co., a furniture and fixtures manufacturer; Chemfix
Technologies, Inc., an environmental service company; National Beverage Corp., a
beverage manufacturer and Hanover Direct, Inc., a catalog and mail order
company.
Harvey M. Krueger was appointed a director of the Company on January 2,
1992. He has been a Senior Managing Director of Lehman Brothers, an investment
banking firm, since May 1984. From December 1977 to May 1984, he was Managing
Director of Lehman Brothers Kuhn Loeb, Inc. From 1965 to 1977, he was a Partner
of Kuhn Loeb & Co. and in 1977, he served as President and Chief Executive
Officer of Kuhn Loeb & Co.
6
Philip G. Barach was appointed a director of the Company on November 26,
1993. He was, from July 1989 to March 1990 the Chief Executive Officer of U.S.
Shoe Corp., a shoe manufacturer. In addition, Mr. Barach served as Chairman of
the board of directors of U.S. Shoe Corp. from March 1990 to March 1993. Mr.
Barach is currently a director of Union Central Life Insurance Company, an
insurance carrier.
The Board of Directors of the Company has standing Audit and
Compensation Committees. Messrs. Kling, Krueger and John W. Burden served as
members of the Audit Committee during the 1995 fiscal year, and Messrs. Kling
and Krueger will serve as members of the Audit Committee commencing November
1995. Messrs. Barach, Kling and Krueger are members of the Compensation
Committee and served as members of such Committee during the 1995 fiscal year.
None of Messrs. Kling, Krueger, Burden or Barach is an employee of the Company.
The Company does not have a standing Nominating Committee.
The Compensation Committee is charged by the Board of Directors with
administering, reviewing and recommending changes in the Company's incentive
compensation plans for its executives and submitting such plans to the Board of
Directors for approval, allocating bonuses, determining the individuals to whom
stock options are to be granted, the number of shares subject to grant and the
terms of such operations, and recommending to the Board any changes in the
compensation of any employee of the Company whose annual compensation exceeds
$150,000. The Compensation Committee met or acted by written consent on four
occasions during the 1995 fiscal year.
The Audit Committee has such powers as may be assigned to it by the
Board of Directors from time to time and is charged with recommending annually
to the Board of Directors the independent auditors to be retained by the
Company, reviewing the audit plan with the auditors, reviewing the results of
the audit with the officers of the Company and its auditors and reviewing with
the officers and internal auditors of the Company the scope and nature of the
Company's internal auditing system. The Audit Committee met or acted by written
consent on four occasions during the 1995 fiscal year.
During the 1995 fiscal year, the Board of Directors of the Company met,
or acted by unanimous written consent, on seven occasions. While serving as a
director, each of the directors attended at least 75% of the meetings of the
Board of Directors and of the meetings held by all committees of the Board on
which he or she served during the 1995 fiscal year.
COMPLIANCE WITH SECTION 16(A) OF SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers and
persons who own beneficially more than ten percent of the Common Stock to file
with the Securities and Exchange Commission initial reports of beneficial
ownership and reports of changes in beneficial ownership of the Common Stock.
Officers, directors and persons owning more than ten percent of the Common Stock
are required to furnish the Company with copies of all such reports. To the
Company's knowledge, based solely on a review of copies of such reports
furnished to the Company, the Company believes that during the fiscal year ended
June 30, 1995, all Section 16(a) filing requirements applicable to its executive
officers, directors and persons owning beneficially more than ten percent of the
Common Stock were complied with.
7
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or accrued by
the Company for the 1995 fiscal year with respect to (a) Josephine Chaus, who
served as the Company's Chief Executive Officer until Andrew Grossman was hired
in September 1994, and who has served thereafter as a member of the Office of
the Chairman, (b) Andrew Grossman, who has been the Company's Chief Executive
Officer since September 1994, (c) each of the four other most highly compensated
executive officers of the Company and (d) a former executive officer
(collectively, the "Named Executive Officers"), for services rendered by such
persons in all capacities to the Company.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND PRINCIPAL ANNUAL LONG TERM SECURITIES
POSITION HELD DURING COMPENSATION COMPENSATION RESTRICTED UNDERLYING ALL OTHER
FISCAL YEAR 1995 YEAR SALARY BONUS STOCK AWARDS OPTIONS COMPENSATION
- -------------------- ----- ------ ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Andrew Grossman (1)
Chief Executive Officer and 1995 $790,178 $6,200,000(2) -- 1,500,000 --
Member, Office of the Chairman... 1994 --(1) -- -- --
1993 --(1) -- -- --
Josephine Chaus
Chief Executive Officer (until
September 1994), Chairwoman of 1995 $392,000 -- -- -- --
the Board and Member, Office of 1994 392,000 -- -- -- --
the Chairman .................... 1993 392,000 -- -- -- --
Richard Baker 1995 $506,000 -- -- -- --
President 1994 480,000 -- -- 480,000 $35,367(4)
1993 178,000 -- -- -- --
Wayne Miller
Executive Vice President
- Finance and Administration, 1995 $259,408 $25,000 200,000 --
Chief Financial Officer and 1994 --(5) -- -- 100,000 --
Secretary .................... 1993 --(5) -- -- -- --
Michael Root
President - Ms. Chaus Division 1995 $237,000 -- -- 50,000 $24,538(7)
1994 $223,000 -- -- 50,000 --
1993 --(6) -- -- -- --
Marc A. Zuckerman (8)
Treasurer 1995 $161,754 -- -- -- $4,693(3)
1994 130,000 -- -- -- $4,670(3)
1993 121,000 -- -- -- $4,181(3)
Michael Fieman (9)
Executive Vice President 1995 $364,033 -- -- -- --
- Production 1994 358,000 -- -- -- --
1993 358,000 $115,000 -- -- --
8
<FN>
(1) Mr. Grossman's employment with the Company commenced in September 1994.
(2) The Company paid Mr. Grossman a sign-on bonus of $6,200,000, portions of
which must be paid back to the Company if Mr. Grossman's employment is
terminated for cause (as defined in his employment agreement) or if he
leaves the Company without Good Reason (as defined in his employment
agreement). See "Employment Arrangements."
(3) Includes contributions made by the Company pursuant to its 401(k) Plan
for the benefit of the named executive.
(4) Includes payments made by the Company of (a) $29,517 toward the
financing of Mr. Baker's relocation to commence his employment with the
Company, and (b) $5,850 in life insurance premiums.
(5) Mr. Miller's employment with the Company commenced in June 1994.
(6) Mr. Root'S employment with the Company commenced in July 1993.
(7) Includes (a) $23,438 in above-market earnings on the exercise of options
to purchase 12,500 shares of Common Stock and (b) $1,100 in 401(k)
matching contributions.
(8) Mr. Zuckerman's employment with the Company terminated in August 1995.
(9) Mr. Fieman's employment with the Company terminated in June 1995.
</TABLE>
OPTION GRANTS TABLE
The following table sets forth information with respect to the Named
Executive Officers concerning the grant of stock options during the fiscal year
ended June 30, 1995. The Company did not have during such fiscal year, and
currently does not have, any plans providing for the grant of stock appreciation
rights.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL OPTION TERM(2)
GRANTS % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED(#1)(1) FISCAL YEAR BASE PRICE DATE 5% 10%
- -------------- -------------- ------------ ---------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Andrew Grossman. . . . . 1,500,000 68.6% $2.25 9/1/04 $5,497,500 $8,754,000
Josephine Chaus. . . . . -- -- -- -- -- --
Richard Baker. . . . . . -- -- -- -- -- --
Wayne Miller . . . . . . 200,000 9.2% $4.75 11/23/04 $1,474,000 $2,464,000
Michael Root . . . . . . 50,000 2.3% $3.38 7/19/04 $ 274,900 $ 437,650
Marc A. Zuckerman. . . . -- -- -- -- -- --
Michael Fieman . . . . . -- -- -- -- -- --
9
<FN>
(1) All options were granted under the Stock Option Plan, except for those
granted to Mr. Grossman who received his options pursuant to the
Grossman Option Plan. See "Executive Compensation - Employment
Arrangements" below.
(2) Potential pre-tax realizable value is based on the assumption that the
stock appreciates from the market value on the date of grant at the
annual rates of appreciation shown on the table over the option term
(ten years). This is a theoretical value. The actual realized value
depends upon the market value of the Company's stock at the exercise
date.
</TABLE>
10
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides information with respect to the exercise of
stock options during the fiscal year by the Named Executive Officer and the
value of unexercised options at fiscal year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF VALUE OF VALUE OF
SECURITIES SECURITIES UNEXERCISED UNEXERCISED
UNDERLYING UNDERLYING IN-THE-MONEY IN-THE-MONEY
UNEXERCISED UNEXERCISED OPTIONS AT OPTIONS AT
SHARES OPTIONS AT OPTIONS AT JUNE 30, JUNE 30,
ACQUIRED VALUE JUNE 30, 1995 JUNE 30, 1995 1995(1) 1995(1)
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------- --------------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew Grossman ......... -- -- 0 1,500,000 0 $4,125,000
Josephine Chaus ......... -- -- -- -- -- --
Richard Baker............ -- -- 240,000 240,000 $60,000 $60,000
Wayne Miller ............ -- -- 25,000 275,000 $72,563 $279,688
Michael Root ............ 12,500 $65,625 0 87,500 0 0
Marc A. Zuckerman........ -- -- 3,085 0 0 0
Michael Fieman .......... 135,000 $624,375 0 0 0 0
<FN>
- ---------------
(1) The value is based on the excess of the market price of the Company's
Common Stock at the end of the Company's 1995 fiscal year over the
option price of the unexercised options.
</TABLE>
EMPLOYMENT ARRANGEMENTS
Andrew Grossman. The Company has a five-year employment agreement with
Andrew Grossman, Chief Executive Officer and Member of the Office of the
Chairman of the Company, which it entered into in September 1994. The Company
has an option to extend the term of Mr. Grossman's agreement for an additional
five years. On September 13, 1995, the Company exercised the option to renew
his employment agreement which extended the grant of additional options as set
forth in the next succeeding paragraph. The Company paid Mr. Grossman a sign-on
bonus of $6,200,000, portions of which must be paid back to the Company if Mr.
Grossman's employment is terminated for cause (as defined in the employment
agreement) or if he leaves the Company without Good Reason (as defined in the
agreement). Under the employment agreement, Mr. Grossman receives an annual
salary of $1,000,000 and Mr. Grossman is entitled to an annual bonus consisting
of 5% of the Company's Annual Net Profits (as defined below). If the Company
terminates the employment agreement (a) for other than cause or the death or
disability of Mr. Grossman, the Company is required to pay Mr. Grossman his
annual salary and Net Profit Participation, as such term is defined in the
employment agreement, less any compensation and bonuses received by Mr. Grossman
from other employers or (b) due to a "change in control" (as such term is
defined in the employment agreement), the Company is required to pay Mr.
Grossman his salary and Net Profit Participation for the remaining term of the
employment agreement. If Mr. Grossman terminates the employment agreement prior
to its second anniversary for other than the Company's material breach, then the
Company shall pay Mr. Grossman an annual salary for a two-year period provided
he, among other things, adheres to certain non-solicitation, non-compete and
confidentiality provisions in the employment agreement. In the event of a
change in control of the Company or the termination of Mr. Grossman's employment
for certain specified reasons, any unvested portion of the options shall vest
immediately and shall remain exercisable for a period of six months after such
date, unless the options are earlier terminated pursuant to the terms of the
employment agreement.
11
Pursuant to the terms of the employment agreement with Mr. Grossman and
a stock option agreement dated September 1, 1994 with Mr. Grossman, Mr. Grossman
received options to purchase 1,500,000 shares of Common Stock of the Company,
which options vest over a five-year period commencing on September 1, 1995. Mr.
Grossman received options to purchase an additional 1,500,000 shares of Common
Stock (the "1995 Options") when the Company exercised its option to extend the
employment agreement for an additional five years (the "Grossman Option Plan").
The exercise price of the options to purchase the additional 1,500,000 shares of
Common Stock is $5.625, the closing price of the Company's Common Stock on
September 14, 1995, the date of grant of such options. The 1995 Options vest
over a five-year period commencing on September 1, 2000. The maximum number of
shares of Common Stock which may be granted to Mr. Grossman pursuant to the
Grossman Option Plan, which was approved by the shareholders of the Company at
the 1994 Annual Meeting of Shareholders, is 3,000,000.
The terms of the employment agreement with Mr. Grossman also provide for
Mr. Grossman to be paid bonus compensation of five percent (5%) of the Annual
Net Profits of the Company for each fiscal year of the term of the agreement
(the "Bonus Plan"). Mr. Grossman is the sole participant in the Bonus Plan.
"Annual Net Profits" are defined in the agreement as net income of the Company
for any fiscal year as reflected on the audited financial statements of the
Company for such fiscal year prepared in accordance with generally accepted
accounting principles applied consistent with past practices and certified by
the Company's independent public accountants. No bonus was payable for fiscal
year 1995. The terms of the Bonus Plan were adopted by a committee of three
"outside directors" as such term is used for purposes of Section 162(m) of the
Internal Revenue Code (the "Code") and approved by the shareholders of the
Company at the 1994 Annual Meeting of Shareholders.
Josephine Chaus. The Company's employment agreement with Josephine
Chaus, Chairwoman of the Board and Chief Executive Officer of the Company,
commenced on July 1, 1992 and expired on June 30, 1994. Since such date, she
has been employed on the same terms, although without a written agreement. The
annual base salary under such agreement is $390,000 or such larger amount as the
Compensation Committee of the Board of Directors shall from time to time
determine. As of the date hereof, no such larger amounts have been authorized
or paid. From 1986 to 1992, Josephine Chaus had a similar employment agreement
with the Company at the same base salary.
Richard Baker. The Company has an employment agreement with Richard
Baker, President of the Company, dated as of February 15, 1993 which terminates
on February 14, 1997. Mr. Baker's salary during the first year of the agreement
was $450,000 and will increase by $25,000 annually until the agreement
terminates. The agreement provides for the provision of a cash bonus if the
Company achieves certain financial targets during each fiscal year of the term
of the agreement. No such bonus was payable in fiscal 1995. If during each of
fiscal 1994, 1995 and 1996, while Mr. Baker is employed by the Company, certain
financial objectives are met by the Company, then Mr. Baker will have the right,
pursuant to the Company's Restricted Stock Purchase Plan, to purchase 25,000
shares of the Company's Common Stock at the price of $1.00 per share. The target
was not met for fiscal 1995. In addition, Mr. Baker was granted, pursuant to
the terms and conditions of the Stock Option Plan, ten-year incentive stock
options to purchase 480,000 shares of Common Stock. Ten thousand incentive
options vested on February 14, 1993, 110,000 vested on February 14, 1994,
120,000 vested on February 14, 1995, and 120,000 will vest on each of the next
two anniversaries thereof provided he is employed by the Company. If the
Company terminates Mr. Baker's employment without cause, the Company shall pay
him his base salary for the year of termination plus any cash bonus earned for
the year immediately preceding the termination. In addition, all incentive
stock options which would have vested at the anniversary of the agreement
immediately following such termination shall vest on such termination date. If
Mr. Baker's employment is terminated by him for "Good Reason" or by the Company
in connection with a "change in control" (as such terms are defined in the
agreement), then the Company shall pay Mr. Baker a severance and non-competition
payment equal to two times the sum of his base salary for the year of
termination plus the annual cash bonus earned in the year immediately preceding
the year of termination. In addition, all options would vest immediately upon
such termination referred to in the preceding sentence.
12
Wayne S. Miller. The Company has a two-year employment agreement with
Wayne S. Miller, Executive Vice President - Finance and Administration, Chief
Financial Officer and Secretary, dated as of June 3, 1994, which automatically
shall be extended for additional one year periods unless either party thereto
specifies otherwise. During the term of the agreement, Mr. Miller's salary will
be $250,000 per annum. Pursuant to the terms of the agreement, Mr. Miller was
paid an initial bonus of $25,000. In addition, Mr. Miller was granted, pursuant
to the terms and conditions of his employment agreement, ten-year incentive
stock options to purchase an aggregate of 50,000 shares of the Company's Common
Stock at an exercise price of $1.88 per share, representing the closing price of
the underlying shares of Common Stock on the grant date. If the agreement is
terminated by the Company without cause, the Company shall pay Mr. Miller a
severance and non-competition payment equal to his base salary for a twelve
month period. If the agreement is terminated by the Company or by Mr. Miller
for "Good Reason" in connection with or following a "change in control" (as such
terms are defined in the agreement), the Company shall pay Mr. Miller a
severance and noncompetition payment equal to the sum of (x) two times his base
salary in effect at the time of termination plus (y) an amount equal to two
times the annual cash bonus award earned by Mr. Miller. In addition, all stock
options which have not yet vested shall vest on the date of such termination
referred to in the preceding sentence.
Marc A. Zuckerman. The Company had no employment agreement with Marc A.
Zuckerman, whose employment with the Company terminated in August 1995.
Michael Root. The Company has no employment agreement with Michael
Root, President of the Company's Ms. Chaus Division.
Michael Fieman. Until June 1995, the Company had an employment
agreement with Michael Fieman, who served as the Company's Executive Vice
President-Production. Under the agreement, he received an annual salary of
$350,000. The agreement with Mr. Fieman commenced on November 4, 1991 and was
to expire on November 3, 1995. Mr. Fieman's employment with the Company
terminated on June 9, 1995.
DIRECTORS' COMPENSATION
During the 1995 fiscal year, directors who were not employees of the
Company received an annual fee of $8,000 plus $1,000 for each Board of Directors
or Committee meeting attended. In addition to annual fees, pursuant to the
Formula Plan of the Company's Stock Option Plan, non-employee directors are
granted a one time option to acquire 10,000 shares of Common Stock, exercisable
up to 50% one year after the grant and 50% two years after the grant, provided
the director has been duly elected or re-elected, as the case may be, in the
interim. The per share exercise price of any non-incentive stock option may not
be less than 85% of the fair market value of the Common Stock on the date of the
grant. The Company has purchased and will maintain a $50,000 term life
insurance policy on behalf of each director with the benefits to be paid to each
director's designated beneficiary.
COMPENSATION COMMITTEE INTERLOCKS
Mr. Krueger (who is a member of the Compensation Committee) is Managing
Director of Lehman Brothers, Inc. Lehman Brothers provided certain advisory
services to the Company during the 1995 fiscal year for which it received fees
of $150,000. See "Certain Transactions."
A son of Mr. Kling (who is also a member of the Compensation Committee)
is employed by an insurance broker, Willis Corroon, from which the Company
obtains various insurance policies. See "Certain Transactions."
COMPENSATION COMMITTEE REPORT
Committee. The compensation committee of the Board of Directors (the
"Committee") establishes and reviews the Company's arrangements and programs for
compensating its executive officers, including the Named Executive Officers.
The Committee is composed of Philip Barach, S. Lee Kling and Harvey M. Krueger,
all directors who are neither officers nor employees of the Company.
13
Background, Objectives and Philosophy. The Committee's objective is to
establish an over-all compensation program that rewards executives as the
Company's net income reaches certain targeted levels and, through the grant of
options, as the market price of the Company's Common Stock increases.
The Committee believes that there are three principal components which
should be included in a compensation program:
1) base salary;
2) annual cash incentives; and
3) stock option incentives.
Under this approach, the attainment of yearly earnings and other short-
term targets is compensated through yearly bonuses under the Incentive Award
Plan and long-term performance of the Company is rewarded through the grant of
Stock Options pursuant to the Stock Option Plan. Unless otherwise provided by
the Committee at the time an option is granted, options granted under the Plan
vest ratably over a four year period. This approach is consistent with the
Committee's view that incentive programs should be based upon performance and
that awards of stock options should ally the economic interests of the Company's
officers and other key employees with those of the Company's shareholders.
COMPENSATION PROGRAM COMPONENTS.
Base Salary. Base salaries are set at levels that are competitive
within the apparel industry. An annual salary adjustment within each applicable
position/salary level is determined by evaluating the performance of the
individual, including the achievement of numerate and non-numerate objectives,
in the context of the financial results of the Company.
Annual Cash Incentives. Cash incentive awards are based on performance
as measured by the Company's net income. The Committee believes that net income
is an appropriate measure of performance because it promotes the achievement of
corporate-wide goals. The Company has in effect an Incentive Award Plan (the
"Incentive Award Plan") in which key employees, other than Josephine Chaus, are
eligible to participate. Generally, the Committee establishes corporate-wide
objectives for net earnings each year, the attainment of which serve as the
basis for computing annual bonuses. Individual bonuses for key employees under
the Incentive Award Plan are recommended by management to the Committee who, in
turn, make the final determination. A portion of each executive's bonus is also
dependent on the achievement of written numerate objectives which are jointly
established in advance by each such executive and the Chief Executive Officer.
During fiscal year 1995, the threshold level of net income was not achieved and
no bonuses were awarded under the Incentive Award Plan to executive officers.
Stock Option Plan. The Committee believes that the use of stock options
as the principal basis for creating long-term incentives satisfies the objective
of aligning the interests of executive management with those of the Company's
shareholders. The Company has in effect a Stock Option Plan, pursuant to which
the Committee may grant executives, other than Josephine Chaus, options to
purchase Common Stock of the Company. The Company utilizes vesting periods to
encourage key executives to continue in the employ of the Company. Unless
otherwise provided by the Committee at the time an option is granted, options
granted under the Stock Option Plan vest ratably over a four year period.
Levels of participation in the Stock Option Plan generally vary on the basis of
the recipient's position in the Company.
14
Compensation of the Chief Executive Officer. Josephine Chaus served as
Chief Executive Officer of the Company until Andrew Grossman was hired in
September 1994. Thereafter she served as Chairwoman of the Board and member of
the Office of the Chairman of the Company during the 1995 fiscal year. As
Josephine Chaus is a controlling shareholder of the Company, the Committee did
not believe there was a need for bonus compensation or stock incentives. As a
result, Josephine Chaus did not participate in the Company's bonus program or
Stock Option Plan. The annual base salary provided for in her employment
agreement with the Company, which expired in June 1994, $390,000 or such larger
amount as the Compensation Committee shall determine. Although the agreement is
no longer in effect, the Company continues to compensate her at the same rate.
Josephine Chaus' s annual base salary was not increased above the $390,000 level
which has been the same for the past eight years.
Andrew Grossman served as the Chief Executive Officer of the Company
commencing September 1994. Mr. Grossman was compensated pursuant to the terms
of his employment agreement which provides for an annual salary of $1,000,000
and an annual bonus of 5% of the Annual Net Profits (as defined above) of the
Company. No bonus was payable for fiscal year 1995. During the 1995 fiscal
year, Mr. Grossman also was awarded options for 1,500,000 shares of Common Stock
under his employment agreement, which options vest over a five year period
commencing September 1995. The terms of the bonus plan and options were
approved by the shareholders of the Company at the 1994 Annual Meeting of
Shareholders.
COMPENSATION COMMITTEE
Philip Barach
S. Lee Kling
Harvey M. Krueger
15
PERFORMANCE GRAPH
The following Performance Graph compares the total cumulative return
(assuming dividends are reinvested) on the Company's Common Stock during the
five fiscal years ended June 30, 1995 with the cumulative return on the Standard
& Poor's 500 Index and the Standard & Poor's Textile-Apparel Manufacture Index,
assuming investment of $100 in each of the above at their closing stock prices
on June 30, 1990.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG BERNARD CHAUS, INC., THE S&P 500 INDEX
AND THE S&P TEXTILE APPAREL MANUFACTURER INDEX
<TABLE>
<CAPTION>
RESEARCH DATA GROUP
TOTAL RETURN-- DATA SUMMARY
CUMULATIVE TOTAL RETURN
-----------------------------------------------------------
CHS 6/90 6/91 6/92 6/93 6/94 6/95 0656HCHS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chaus Bernard Inc. ........... CHS 100 57 146 76 41 108 09/25/95
S & P 500 .................... I500 100 107 122 138 140 177 06566500
S & P Textiles ............... ITXA 100 124 123 119 104 108 06566TXA
</TABLE>
<TABLE>
<CAPTION>
RESEARCH DATA GROUP Company Total Return Worksheet
BEGIN: 06/30/90
FYE: 06/30/95
END: 06/30/95
CHAUS BERNARD INC CHS
BEGIN CUM
TYPE NO. OF DIV DIV DIV ENDING TOTAL
OF CLOSE SHARES $ PER $.$$ SHARES NO. OF SHRHLDR
DATE* LINE PRICE** *** SHARE** PAID REINVD SHARES RETURN
- ----- ---- ------- ------ ------- ---- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
06/30/90.... BEGIN 4.625 21.622 21.622 100
06/30/91.... YE 2.625 21.622 21.622 57
06/30/92.... YE 6.750 21.622 21.622 146
06/30/93.... YE 3.500 21.622 21.622 76
06/30/94.... YE 1.875 21.622 21.622 41
06/30/95.... YE 5.000 21.622 21.622 108
<FN>
- ---------------
* Fiscal year end and ex-dividend dates.
** All Closing Prices and Dividends are adjusted for stock splits.
*** Begin No. of Shares based on $100 investment.
</TABLE>
16
APPROVAL OF ISSUANCE OF WARRANTS TO
JOSEPHINE CHAUS
During the 1994 fiscal year, the Company had required availability under
its working capital credit line with BNY Financial Corporation (the "Bank") in
excess of the amount available under its borrowing base formula. To assist the
Company, Josephine Chaus agreed to provide credit support in the form of a
letter of credit. She initially provided a letter of credit in the amount of
$3 million on April 15, 1994 which was increased to $5 million on June 14, 1994
and further increased to $7.2 million on September 13, 1994 (the "Letter of
Credit"). The expiration date of the Letter of Credit, initially in effect
through October 15, 1994, was extended to April 15, 1995. The Bank increased
the Company's borrowing availability by various amounts as the amount and
expiration date of the Letter of Credit was increased and extended.
During the 1995 fiscal year, the Company required additional
availability under its working capital credit line with the Bank. To further
assist the Company, Josephine Chaus agreed to provide additional credit support
in the form of an increase in the amount of the Letter of Credit from $7.2
million to $10.0 million and an extension of the Letter of Credit's expiration
date from April 15, 1995 to October 31, 1995 (the Letter of Credit, as so
increased and extended, the "Increased Letter of Credit"). In addition, Ms.
Chaus agreed to guarantee (the "Guarantee") personally $5.0 million of the
Company's indebtedness to the Bank, with the Guarantee to be in effect during
the credit facility's three-year term (unless the term of the facility is
earlier terminated). On September 14, 1995, Ms. Chaus agreed to extend the
expiration date of the Increased Letter of Credit to January 31, 1996 (the
"Additional Extension"; together with the Increased Letter of Credit and the
Guarantee, the "Credit Support").
In consideration for her provision of the Credit Support, a special
committee of independent members of the Board of Directors of the Company (the
"Special Committee"), has authorized the issuance to Josephine Chaus, subject to
shareholder approval, of (a) warrants (the "Letter of Credit Warrants") to
purchase 815,000 shares of Common Stock at an exercise price of $4.05 per share
for the Increased Letter of Credit; (b) warrants (the "Guarantee Warrants") to
purchase 535,000 shares of Common Stock at an exercise price of $4.05 per share
for the Guarantee; and (c) warrants (the "Extension Warrants"; together with the
Letter of Credit Warrants and the Guarantee Warrants, the "Warrants") to
purchase 230,000 shares of Common Stock at an exercise price of $6.75 per share
for the Additional Extension. The exercise prices of the Letter of Credit
Warrants and the Guarantee Warrants represent a 20% premium over the closing
price of the Common Stock on the New York Stock Exchange (the "NYSE") on May
17, 1995, the day immediately prior to the date when the Special Committee
approved the issuance of such warrants; and the exercise price of the Extension
Warrants represents a 20% premium over the closing price of the Common Stock on
the NYSE on September 14, 1995, the date when the Special Committee approved the
issuance of the Extension Warrants. Ms. Chaus has received warrant compensation
for her provision of the Guarantee only through October 31, 1995. Thereafter,
for each three month period of the Guarantee, she will receive cash compensation
of $50,000.
The Warrants will be exercisable upon issuance, will expire five years
from the date of issuance and will contain customary antidilution provisions.
The Letter of Credit Warrants and the Guarantee Warrants will be transferable
(subject to restrictions imposed by applicable securities laws) and the
Extension Warrants will not be transferable. The Company has borne all out-of-
pocket expenses incurred by Josephine Chaus in providing the Credit Support.
Josephine Chaus has agreed to forfeit a pro rata portion of the Letter of Credit
Warrants and the Guarantee Warrants if the Increased Letter of Credit or the
Guarantee, as applicable, terminate before October 31, 1995, and has agreed to
forfeit a pro rata portion of the Extension Warrants if the Increased Letter of
Credit, as extended by the Additional Extension, terminates before January 31,
1996.
In approving the Warrants, the Special Committee sought the advice of
Lehman Brothers, which provided its views as to the commercial reasonableness of
the transaction. A copy of the Lehman Brothers letter with respect to the
Letter of Credit Warrants and
17
the Guarantee Warrants is annexed to this proxy statement as Exhibit A, and a
copy of the Lehman Brothers letter with respect to the Extension Warranties is
annexed to this proxy statement as Exhibit B. Harvey Krueger, a Senior Managing
Director of Lehman Brothers, is a director of the Company. Mr. Krueger was not
a member of the Special Committee and did not act on behalf of Lehman Brothers
in rendering the opinion.
See "Security Ownership of Certain Beneficial Owners and Management" for
information concerning the share ownership of Josephine Chaus before and after
giving effect to the issuance of the Warrants discussed herein and the resulting
dilutive impact upon the other shareholders of the Company from the issuance of
the Warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION AND
APPROVAL OF THE ISSUANCE TO JOSEPHINE CHAUS OF THE WARRANTS IN CONSIDERATION FOR
HER PROVISION OF ADDITIONAL CREDIT SUPPORT TO THE COMPANY.
EACH PROXY RECEIVED WILL BE VOTED FOR RATIFICATION AND APPROVAL OF THE
ISSUANCE TO JOSEPHINE CHAUS OF THE WARRANTS UNLESS OTHERWISE SPECIFIED IN THE
PROXY.
JOSEPHINE CHAUS POSSESSES THE POWER TO VOTE MORE THAN 50% OF THE
OUTSTANDING SHARES OF THE COMMON STOCK. ACCORDINGLY, THE AFFIRMATIVE VOTE OF
JOSEPHINE CHAUS IS SUFFICIENT TO APPROVE THE ISSUANCE OF THE WARRANTS WITHOUT
THE VOTE OF ANY OTHER SHAREHOLDERS. JOSEPHINE CHAUS HAS ADVISED THE COMPANY
THAT SHE INTENDS TO VOTE ALL OF HER SHARES IN FAVOR OF SUCH ISSUANCE.
RATIFICATION AND APPROVAL OF LOAN TO RICHARD BAKER
In 1993, in connection with the Company's hiring of Richard A. Baker as
the President of the Company, the Company loaned (the "Loan") an aggregate of
$432,500 to Mr. Baker in two installments to help him finance his relocation,
including the purchase of a home. Mr. Baker also was a director of the Company
at that time. The loan is evidenced by a promissory note dated July 9, 1993
(the "Note") bearing interest at an annual rate of 7%. Pursuant to the terms of
the Note, Mr. Baker must repay principal and interest on a monthly basis over a
60-month period commencing October 15, 1994. At September 30, 1995, the
remaining principal amount outstanding under the Note was $117,000.
Section 714 of the BCL provides that loans made by corporations to their
directors must be authorized by shareholder vote. At the time of the making of
the Loan, Mr. Baker was a director of the Company. Mr. Baker subsequently
resigned as a director in 1994, but continues to serve as President of the
Company. The Loan was agreed to in principle with Mr. Baker prior to the
commencement of his employment, and before he was elected as a director, in
order to induce him to join the Company. However, the Loan was not actually
extended until Mr. Baker required the funds some months later. At that time the
Loan was specifically authorized by Josephine Chaus, the then and still majority
shareholder of the Company, but was inadvertently not put to a formal vote of
all of the Company's shareholders.
Although shareholder ratification of the Loan is not required in order
to render the Loan valid, the Board of Directors desires to have the Loan
formally ratified by the Company's shareholders in view of the provision
contained in Section 714 of the BCL that the extension of a loan to a director
without shareholder approval is a violation of the directors' duty to a
corporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION AND
APPROVAL OF THE LOAN TO RICHARD BAKER.
EACH PROXY RECEIVED WILL BE VOTED FOR RATIFICATION AND APPROVAL OF THE
LOAN TO RICHARD BAKER UNLESS OTHERWISE SPECIFIED IN THE PROXY.
18
JOSEPHINE CHAUS POSSESSES THE POWER TO VOTE MORE THAN 50% OF THE
OUTSTANDING SHARES OF THE COMMON STOCK. ACCORDINGLY, THE AFFIRMATIVE VOTE OF
JOSEPHINE CHAUS IS SUFFICIENT TO APPROVE THE LOAN TO RICHARD BAKER WITHOUT THE
VOTE OF ANY OTHER SHAREHOLDERS. JOSEPHINE CHAUS HAS ADVISED THE COMPANY THAT
SHE INTENDS TO VOTE ALL OF HER SHARES IN FAVOR OF THE RATIFICATION AND APPROVAL
OF THE LOAN.
APPROVAL OF STOCK OPTION PLAN AMENDMENT
The Company has in effect the Stock Option Plan, as amended and restated
as of January 1, 1987, as further amended by Amendment No. 1 thereto, effective
July 1, 1989, Amendment No. 2 thereto, effective July 1, 1990, Amendment No. 3
thereto, effective July 1, 1991, and Amendment No. 4 thereto, effective as of
July 1, 1993. Under the Stock Option Plan, the Company may grant incentive
stock options, as defined in Section 422(b) of the Code, and non-incentive stock
options to eligible individuals. All employees, consultants and non-employee
directors of the Company and its subsidiaries, other than Josephine Chaus, are
eligible to receive options under the Stock Option Plan. The number of shares
of Common Stock with respect to which options may be granted is 2,500,000 under
the Stock Option Plan. As of June 30, 1995, options granted to employees to
purchase an aggregate of 1,391,899 shares of Common Stock were outstanding.
The Board of Directors desires that the Company continue to grant
options under the Stock Option Plan in order to provide incentives to management
and align their interest with those of the Company's shareholders, and is,
therefore, seeking shareholder approval of an amendment to the Stock Option Plan
to extend the expiration date of the Stock Option Plan from April 30, 1996 to
April 30, 2006.
There will be no federal income tax consequences to the directors, the
employees or the Company as a result of adopting Amendment No. 5 to the Stock
Option Plan.
The Board of Directors has given due consideration to and has adopted,
subject to approval by the holders of a majority of the Common Stock voting at
the Annual Meeting of Shareholders, Amendment No. 5 to the Stock Option Plan,
consisting of the extension of the expiration date described above (a copy of
which Amendment is annexed hereto as Exhibit C), which would be effective as of
the date of approval.
If Amendment No. 5 to the Company's Stock Option Plan is not approved,
it will be without further notice and effect; in such event, however, the Stock
Option Plan will otherwise remain in full force and effect until its scheduled
expiration date.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF AMENDMENT NO.
5 TO THE STOCK OPTION PLAN.
EACH PROXY RECEIVED WILL BE VOTED FOR APPROVAL OF AMENDMENT NO. 5 TO
THE STOCK OPTION PLAN UNLESS OTHERWISE SPECIFIED IN THE PROXY.
JOSEPHINE CHAUS POSSESSES THE POWER TO VOTE MORE THAN 50% OF THE
OUTSTANDING SHARES OF THE COMMON STOCK. ACCORDINGLY, THE AFFIRMATIVE VOTE OF
JOSEPHINE CHAUS IS SUFFICIENT TO APPROVE AMENDMENT NO. 5 TO THE STOCK OPTION
PLAN. JOSEPHINE CHAUS HAS ADVISED THE COMPANY THAT SHE INTENDS TO VOTE ALL OF
HER SHARES IN FAVOR OF SUCH AMENDMENT. MS. CHAUS IS NOT ELIGIBLE TO PARTICIPATE
IN THE STOCK OPTION PLAN.
STOCK OPTION PLAN
Nature and Purpose of the Stock Option Plan
The purpose of the Stock Option Plan is to attract employees, directors
and consultants of the Company and the Company's subsidiaries and induce such
persons to remain in the service of the Company and its subsidiaries and to
encourage stock ownership by such
19
persons in order to increase their proprietary interest in the Company's
success. The Board of Directors believes that the Stock Option Plan will
promote continuity of management and increased incentive and personal interest
in the welfare of the Company.
Duration and Modification
No stock options currently may be granted under the Stock Option Plan
after April 30, 1996. Amendment No. 5 to the Stock Option Plan, which is the
subject of this proposal, would extend such expiration date until April 30,
2006. The Board of Directors may at any time terminate the Stock Option Plan or
make such modifications to the Stock Option Plan as it may deem advisable. The
Board of Directors may not, however, without the approval of shareholders
representing a majority of the voting power present in person or by proxy at any
annual or special meeting of shareholders of the Company, increase the number of
shares of Common Stock as to which options may be granted under the Stock Option
Plan, change the manner of determining option prices which would result in a
decrease in the option price, change the class of employees eligible to
participate in the Stock Option Plan or extend the period during which an option
may be granted or exercised. No termination or amendment of the Stock Option
Plan may, without consent of the respective optionees, adversely affect the
rights of any optionee under any option prior to any such termination or
amendment.
Administration of the Plan
The Stock Option Plan, other than the formula plan described below (the
"Formula Plan") is to be administered by a committee (the "Committee") which
consists of at least three persons appointed by the Board of Directors, all of
whom are "disinterested persons" within the meaning of Rule 16b-3 of the
Exchange Act. If the Committee is not so established, the Board of Directors
is required to perform the Committee's duties. The present members of the
Committee are Philip Barach, S. Lee Kling and Harvey M. Krueger. Subject to
the provisions of the Stock Option Plan and, except with respect to the Formula
Plan, the Committee has power to interpret the Stock Option Plan, to prescribe,
amend and rescind rules and regulations relating to the Stock Option Plan, to
determine the terms and provisions of option agreements and to determine to whom
and the times and prices at which options will be granted, the period during
which options will be exercisable, the number of shares to each option and
whether an option shall be an incentive stock option, a non-incentive stock
option or a combination thereof.
Formula Plan
The Formula Plan allows the Company to make non-discretionary grants of
nonqualified options to its non-employee directors. The Formula Plan provides
that each person who is currently a director or is elected as a director of the
Company in the future who is not an employee, shall be entitled to a grant of a
nonqualified option to purchase 10,000 shares of Common Stock of the Company.
Any outside director who serves on the Committee and renders services as a
consultant to the Company is not eligible for a grant except under the Formula
Plan. The per share exercise price of such options shall not be less than 85%
of the fair market value of the Common Stock on the date of the grant. Up to
50% of the options granted under the Formula Plan become exercisable one year
after the date of the grant, provided that a non-employee director is elected or
re-elected to the Board of Directors of the Company in the interim. The
remaining 50% are exercisable two years after the date of the grant upon such
non-employee director's re-election to the Board of Directors of the Company.
If a non-employee director's services as a director terminate because of
his or her death, permanent disability or retirement with the consent of the
Company, the participant, beneficiary or legal representative has the right to
exercise all of his or her vested options for a period of two (2) years
following the date of death or disability or in the case of retirement, one year
from the date of retirement, or the expiration date (ten years from date of the
grant), whichever is earlier. If a non-employee director's services shall
terminate for any reason other than death, disability or retirement as
aforesaid, all rights to exercise his or her options shall terminate on the
20
expiration date or three (3) months after termination of services, whichever
date is earlier. If a participant is terminated for "cause" (as defined in the
Stock Option Plan), each option theretofore granted to him or her shall no
longer be exercisable.
Description of Options Other Than Formula Plan Options
Under the Stock Option Plan, the prices at which options may be
exercised are determined by the Committee at the time an option is granted.
However, the per share exercise price of an incentive stock option may not be
less than 100% of the fair market value of a share of the Common Stock on the
date of the grant. The per share exercise price of any non-incentive stock
option may not be less than 85% of the fair market value of the Common Stock on
the date of the grant.
The grant of options pursuant to the Stock Option Plan is subject to
certain conditions and limitations. For example, an employee of or consultant
to the Company or a subsidiary of the Company may not be granted an option
unless he or she either enters into an agreement with the Company or a Company
subsidiary which provides that he or she will remain in the service of the
Company or a Company subsidiary which employs him or her for a period of at
least two years after the date of the grant of the option, or is employed by the
Company or a Company subsidiary pursuant to a written agreement which does not
expire and may not be terminated by the employee earlier than two years after
the date of the grant of the option. Unless otherwise provided by the Committee
at the time an option is granted, options granted under the Stock Option Plan
vest ratably over a four year period. Upon the exercise of an option, the
option price must be paid in cash, or if the Committee so determines at the time
an option is granted, in shares of Common Stock valued at their fair market
value on the date of delivery.
TAX CONSEQUENCES
The following discussion of the Federal income tax consequences of the
granting and exercise of options under the Stock Option Plan, and the sale of
Common Stock acquired as a result thereof, is based on an analysis of the
Internal Revenue Code (the "Code") as in effect on the date hereof, existing
laws, judicial decisions and administrative rulings and regulations, all of
which are subject to change. In addition to being subject to the Federal income
tax consequences described below, a optionee may also be subject to state and/or
local income tax consequences in the jurisdiction in which he or she works
and/or resides. Each optionee must consult his or her personal tax advisor to
determine the taxes applicable to the issuance, exercise and sale of options.
Non-Incentive Stock Options:
No income will be recognized by an optionee at the time a non-incentive
stock option is granted. Except with respect to certain options held by
officers and directors of the Company, as discussed below, ordinary income will
be recognized by an optionee at the time a non-incentive stock option is
exercised, in an amount equal to the excess of the fair market value on the
exercise date of the shares issued to the optionee over the option price. This
ordinary income will also constitute wages subject to the withholding of income
tax and the Company will be required to make whatever arrangements are necessary
to ensure that the proper amount required to be withheld is available for
withholding, in cash. An optionee's holding period with respect to the shares
acquired will begin on the date of exercise of the non-incentive stock option.
With respect to non-incentive stock options exercised by officers and
directors, unless the optionee elects, within thirty days after the exercise of
a non-incentive stock option, under the provisions of Section 83(b) of the Code,
to be taxed at the time of exercise (in which case he or she will be required to
include as ordinary income in the taxable year in which such exercise occurs an
amount equal to the excess of the fair market value of such shares at the time
of such exercise over the option price), the optionee will recognize ordinary
income on the first day that sale at a profit of the stock acquired pursuant to
the exercise of the non-incentive stock option would not create liability under
the so-called "short swing" profits provisions of Section 16(b) of the Exchange
Act. The ordinary income in such case will be the excess, if any, of the fair
market value of the shares
21
an such later day over option price. The optionee's holding period will begin
on the day on which he or she recognized ordinary income as a result of the
exercise of the non-incentive stock option.
The tax basis of the stock acquired upon the exercise of an Non-
incentive stock option will be equal to the sum of (a) the exercise price of
such non-incentive stock option and (b) the amount included in income on the
exercise of such non-incentive stock option. Gain or loss on a subsequent sale
or other disposition the stock will be measured by the difference between the
amount realized on the disposition and the tax basis of such shares. Such gain
or loss will be capital gain or loss assuming that the stock is held as a
capital asset (i.e., generally for investment purposes) and any such capital
gain or loss will be long-term capital gain or loss if the shares are held for
more than one year.
If an optionee is permitted to, and does, make the required payment of
the option price by delivering shares of Common Stock, the optionee generally
will not recognize any gain as a result of such delivery, but the amount of
gain, if any, which is not so recognized will be excluded from his or her basis
in the new shares received. In such a case, an optionee's holding period in the
shares received will be determined by reference to his or her holding period in
the shares of Common Stock exchanged therefor.
The Company will be entitled to a deduction for federal income tax
purposes in the same amount as the amount included in income by the optionee
with respect to his non-incentive stock option, subject to the usual rules as to
reasonableness of compensation and provided that the Company satisfies certain
withholding and/or reporting obligations. The deduction will be allowed for the
taxable year of the Company within which the taxable year of the optionee in
which such ordinary income is recognized by the optionee ends.
Section 162(m) of the Code generally limits the annual deduction
available to a publicly held corporation for applicable renumeration paid to the
Chief Executive Officer and certain other highly compensated individuals
("covered employees") to $1,000,000 per year. It is not expected that
employees receiving options exercised under the Stock Option Plan will derive
renumeration in any single year (including the compensation element of any
option under the Stock Option Plan) in excess of $1,000,000, although there can
be no assurance that this always will be the case.
Incentive Stock Options:
In general, neither the grant nor the exercise of an Incentive stock
option will result in taxable income to an optionee or a deduction to the
Company. Unless there is a disqualifying disposition of Common Stock received
pursuant to the exercise of an incentive stock option (see below) and unless
such disqualifying disposition occurs in the same year as the year of exercise
of such incentive stock option, however, the exercise of an incentive stock
option will give rise to income includible by the optionee in his alternative
minimum taxable income solely for purposes of the alternative minimum tax in an
amount equal to the excess of the fair market value of the stock acquired upon
the exercise of the incentive stock option over the option price.
The sale of Common Stock received pursuant to the exercise an incentive
stock option which satisfies all the requirements of an incentive stock option,
as well as the holding period requirement, will result in the entire gain being
treated as gain to an optionee and will not result in a tax deduction to the
Company. To receive incentive stock option treatment as to the stock acquired
upon exercise an incentive stock option, an optionee must neither dispose of
such stock within two years after such incentive stock option is granted nor
within one year after the exercise of such incentive stock option. In addition,
an optionee generally must be an employee of the Company (or of a subsidiary of
the Company) at all times between the date of grant and the date three months
before exercise of such incentive stock option.
If all the requirements for incentive stock option treatment other than
the holding period rules are satisfied, the recognition of income by an optionee
will be deferred until disposition of the stock, but the portion of any gain
recognized on such disposition that is equal
22
to the lesser of (a) the fair market value of the stock on the date of exercise
minus the option price or (b) the amount realized on the disposition minus the
option price, will be treated as ordinary income (with any remaining gain being
treated as capital gain). The Company will be entitled to a deduction equal to
the amount of such ordinary income, subject to the general rules discussed
earlier. The deduction will be allowed for the taxable year of the Company in
which such ordinary income is recognized.
If an incentive stock option is exercised by an officer or director of
the Company who is subject to the provisions of Section 16(b) of the Exchange
Act, such shares of Common Stock will be treated as being subject to a
substantial risk of forfeiture within the meaning of Section 83(a) of the Code
for the period (if any) after exercise during which Section 16(b) applied.
Accordingly, the amount of income includible by the optionee for alternative
minimum tax purposes and the amount of ordinary income recognized by the
optionee on a disposition of the shares prior to the satisfaction of the holding
period rules, discussed earlier, will be determined (and the holding period in
such shares will commence) on the date that the Section 16(b) restriction
lapses, unless an election is made under Section 83(b) of the Code with respect
to such shares.
If an optionee is permitted to, and does, make the required payment of
the option price by delivering shares of Common Stock, the optionee generally
will not recognize any gain as a result of such delivery, but the amount of
gain, if any, which is not so recognized will be excluded from his basis in the
new shares received. However, the use by an optionee of shares previously
acquired pursuant to the exercise of an incentive stock option to exercise an
incentive stock option will be treated as a taxable disposition if the
transferred shares have not been held by the optionee for the requisite holding
period described above.
Securities Available for Issuance Upon the Exercise of Options
A total of approximately 2,500,000 authorized but unissued shares of
Common Stock were reserved for issuance under the Stock Option Plan. The number
of shares so reserved would be reduced from time to time to the extent that a
corresponding amount of issued and outstanding shares is purchased by the
Company and set aside for issuance upon the exercise of options granted under
the Stock Option Plan. If any options expire or terminate for any reason
without having been exercised in full, the unpurchased option shares would again
become available to be granted under the Stock Option Plan.
Certain Information With Respect to Options Granted
As of June 30, 1995, options to purchase an aggregate of 1,391,899
shares had been granted and were outstanding under the Stock Option Plan at an
average exercise price of $3.22 per share. All options granted during the past
three fiscal years were granted at an exercise price equal to the market price
of the Company's Common Stock on the date of the grant of such options. On
September 27, 1995, the closing sales price of the Company's Common Stock on the
New York Stock Exchange was $5.625. For a description of options owned by the
Named Executive Officers as of June 30, 1995 and options received by such Named
Executive Officers during the fiscal year ended June 30, 1995, see "Executive
Compensation" above. As of June 30, 1995, the current executive officers as a
group had received options to purchase an aggregate of 880,000 shares pursuant
to the Stock Option Plan, and the current non-employee directors as a group had
received options to purchase 130,000 shares pursuant to the Stock Option Plan.
ELIMINATION OF PREEMPTIVE RIGHTS
The Board of Directors has adopted an Amendment to the Company's
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), subject to shareholder approval, which would eliminate
preemptive rights currently available to shareholders. The Amendment states:
23
"To accomplish said amendment, a new Article TENTH
is added to the Certificate of Incorporation as follows:
TENTH: No holder of any capital stock of the Corporation shall be entitled to
any preemptive rights to purchase any capital stock of the Corporation or to
acquire any option, warrant, right or other instruments (including debt
instruments) entitling the holder thereof to acquire any capital stock of the
Corporation upon the exercise, conversion or exchange thereof or otherwise,
which may at any time be issued, sold or offered for sale by the Corporation."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED.
EACH PROXY RECEIVED WILL BE VOTED FOR APPROVAL OF THE AMENDMENT TO THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED.
JOSEPHINE CHAUS POSSESSES THE POWER TO VOTE MORE THAN 50% OF THE
OUTSTANDING SHARES OF THE COMMON STOCK. ACCORDINGLY, THE AFFIRMATIVE VOTE OF
JOSEPHINE CHAUS IS SUFFICIENT TO APPROVE THE AMENDMENT TO THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION, AS AMENDED. JOSEPHINE CHAUS HAS ADVISED THE
COMPANY THAT SHE INTENDS TO VOTE ALL OF HER SHARES IN FAVOR OF SUCH AMENDMENT.
Existing Preemptive Rights
Under Section 622 of the BCL, unless a corporation's Certificate of
Incorporation provides otherwise, holders of that corporation's outstanding
equity shares (i.e., shares having unlimited dividend rights) or voting shares
(i.e., shares having the right to vote for the election of one or more
directors) have, respectively, the preemptive right to subscribe for any new or
increased shares of any class of equity shares or voting shares of the
corporation, or any rights or options to purchase such shares or any securities
convertible into such shares, which may be issued by the Board of Directors for
any purpose, except that such preemptive rights do not apply to any shares,
rights, options or convertible securities (i) issued to effect any merger or
consolidation or offered or subjected to rights or options for consideration
other than cash, (ii) granted or issued to directors, officers or employees
after authorization by a vote of the holders of a majority of the outstanding
shares entitled to vote thereon or granted pursuant to a plan authorized by such
shareholder vote, (iii) issued to satisfy conversion or option rights
theretofore granted by the corporation, (iv) issued from the treasury of the
corporation, or (v) issued by the corporation pursuant to a plan of
reorganization under federal law. Holders of the Common Stock have the
foregoing preemptive rights. These preemptive rights afford the holders of
Common Stock (except in the five situations described above) the opportunity to
purchase shares of Common Stock on a pro rata basis upon terms not less
favorable than the terms upon which such shares would otherwise be sold to
others, whether as shares of Common Stock, rights or options to purchase such
shares or any securities convertible into such shares.
Reason for the Proposal
The Board of Directors has determined that amending the Certificate of
Incorporation to eliminate preemptive rights in all circumstances is in the best
interests of the Company.
The existing preemptive rights do not, in the judgment of the Board of
Directors, serve the best interests of the Company's shareholders. Preemptive
rights procedures are administratively burdensome and would involve substantial
delay and expense to the Company in effecting any public offering or private
placement of new shares of dividend-bearing or voting stock (subject to certain
exceptions) or certain rights or options to purchase such stock or debt
instruments or other securities convertible into such stock. In addition, the
existence of preemptive rights could limit the Company's ability to pursue
expeditiously certain financial opportunities that may become available from
time to time. Subsequent to the Company's initial public offering of Common
Stock the Company has not sought to raise capital through any public offering or
private placement. However, the Company is currently
24
planning a public equity offering in the first quarter of fiscal 1996. If the
Amendment is adopted, the Company would be able to issue, without burdensome
restrictions, Common Stock, other equity securities or convertible debt
instruments, as the Board of Directors deems advisable.
Shareholders should also be aware that, after the elimination of
preemptive rights, the shareholders' only method to maintain their proportionate
ownership interests in the Company will be through market purchases and there
can be no assurance that they will, in fact, have the ability to maintain a
proportionate interest in the voting power or equity ownership of the Company
through such market purchases or that any such purchases can be made on as
favorable terms and conditions as may be afforded by the Company to others.
Appraisal Rights
Holders of Common Stock who do not vote for the proposal to amend the
Certificate of Incorporation to eliminate preemptive rights will have the right
to dissent and to receive payment for their shares of Common Stock provided they
comply with the provisions of Section 623 of the BCL. Attached hereto as
Exhibit D is a general summary of shareholders' Statutory Rights of Appraisal
under Section 623 and the provisions thereof with which they must be in strict
compliance in order to effectively exercise such right.
CERTAIN TRANSACTIONS
The Company has outstanding at June 30, 1995, $21.1 million of
subordinated promissory notes payable to Josephine Chaus certain of which were
originally issued on June 30, 1986 and the remainder of which were issued in
February and March 1991 (the "Subordinated Notes"). In September 1995,
Josephine Chaus extended the maturity date of the Subordinated Notes (which were
to mature on April 1, 1996) to July 1, 1996.
Because during the 1994 fiscal year, the Company had required
availability under its working capital credit line with the Bank in excess of
the amount available under its borrowing base formula, Josephine Chaus agreed to
provide credit support in the form of the Letter of Credit. See "Approval of
Issuance of Warrants to Josephine Chaus" above. The Bank increased the
Company's borrowing availability by various amounts as the amount and expiration
date of the Letter of Credit was increased and extended. In return for such
credit support, the Company issued to Ms. Chaus, upon shareholder approval,
warrants to purchase an aggregate of 1,216,500 shares of Common Stock of the
Company. See "Approval of Issuance of Warrants to Josephine Chaus" above for
information relating to the Company's proposed issuance to Josephine Chaus of
additional warrants to purchase Common Stock of the Company in consideration for
credit support provided to the Company. In addition, Ms. Chaus has provided the
Company with an option to further extend the Increased Letter of Credit (as
defined in "Approval of Issuance of Warrants to Josephine Chaus" above) to July
31, 1996. If the Company exercises such option, Ms. Chaus will be entitled to
certain additional warrants.
In September 1994, Josephine Chaus loaned the Company $7.2 million in
exchange for which she received demand notes bearing interest at 12%. In order
to provide additional equity to the Company, to enhance the Company's balance
sheet and to accommodate the Bank, Josephine Chaus subsequently agreed to
exchange such notes for shares of Common Stock of the Company on terms
determined by a Special Committee of the Board of Directors. In November 1994,
following shareholder approval, Josephine Chaus exchanged such notes, including
accrued interest thereon, for 1,914,500 shares of Common Stock (based upon a
purchase price of $3.85 per share). In approving the issuance of shares to Ms.
Chaus in exchange for such notes, the Special Committee sought the advice of
Lehman Brothers, which provided its view as to the commercial reasonableness of
the transaction.
Jeffrey Chaus (son of the late Bernard Chaus) and his spouse own a
company which operates one retail clothing store located in Fort Lee, New
Jersey. During the 1995 fiscal year, the Company sold its products to this
store at the same prices and on terms similar to the terms applicable to sales
of the
25
products to such stores at the same prices and on terms similar to the terms
applicable to sales by the Company of its products to its other retail
customers. During the 1995 fiscal year, the Company's gross sales to the store
owned by Jeffrey Chaus aggregated approximately $72,000. At June 30, 1995, the
store owned by Jeffrey Chaus owed the Company approximately $8,000 for
merchandise sold by the Company to his store through such date.
A son of S. Lee Kling is employed by an insurance broker, Willis Corroon
Corp., from which the Company obtains various insurance policies (i.e., travel,
directors and officers liability, and life insurance). The total aggregate
premium payments paid to the insurance broker in respect of such insurance
during fiscal year 1995 was approximately $327,000.
Harvey Krueger, a director of the Company, is managing director of
Lehman Brothers. Lehman Brothers provided certain advisory services to the
Company during the 1995 fiscal year for which it received fees of $150,000. In
addition, Lehman Brothers has recently been engaged by the Company in connection
with a proposed equity offering by the Company.
For a discussion of a loan to Richard A. Baker, President of the
Company, see "Ratification and Approval of Loan to Richard Baker" above.
On April 19, 1993, a Class Action Complaint was filed in the Superior
Court of New Jersey, Hudson County, against the Company and the others,
including the lead underwriter of the Company's 1986 initial public offering,
alleging common law fraud and negligent misrepresentation in the sale of the
Company's stock in its initial public offering, allegations that are
substantially similar to the claims that were dismissed with prejudice in the
federal court. One of the plaintiffs from the federal action was originally a
party in this action in state court. On June 18, 1993, the Company received by
mail, a copy of Jury Demand Class Action in the Superior Court of New Jersey,
Hudson County, entitled Theodore M. Wietecha and Lisa A. Phifer v. Bernard
Chaus, Inc. et al. The complaint was amended in September 1993 to delete Lisa
Phifer as a Plaintiff. On May 27, 1994, the Company moved to dismiss the
complaint and/or to deny or limit class status. In a decision rendered in
November, 1994, the Superior Court denied the plaintiff's motion for the class
certification and dismissed all claims against the director defendants
(Josephine Chaus and the Estate of Bernard Chaus) and all claims not based upon
actual reliance.
With the denial of class certification, absent a successful appeal, the
plaintiff's claims would not have a material adverse affect on the Company. In
any event, management believes, based on the advice of counsel, that such action
is without merit.
A claim of indemnification has been asserted by the Company's former
Underwriters against the Company. The indemnification claim demands repayment
of the legal fees and expenses incurred by the Underwriters in connection with
the consolidated class actions entitled Phifer v. Chaus, et al. Discussions are
ongoing with counsel for the Underwriters to resolve this claim.
Nicole Eskenazi, a former Executive Vice President-Product Development
with the Company, filed suit on June 8, 1994 in the Supreme Court of the State
of New York against the Company, Josephine Chaus and Richard Baker alleging,
among other things, breach of her employment contract by the Company. Ms.
Eskenazi's claim arose out of a dispute concerning her entitlement to severance
payments under her employment agreement. The Company asserted counterclaims.
In September 1994 such litigation was settled pursuant to an agreement in which
the Company paid Ms. Eskenazi an aggregate of $350,000 and mutual releases were
exchanged.
The Company is also involved in various other legal proceedings arising
out of the conduct of its business.
26
SELECTION OF AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee,
has appointed Deloitte & Touche, independent auditors, as the Company's auditors
for the fiscal year ending June 30, 1996. Deloitte & Touche has served as the
Company's independent auditors since June 10, 1994. Although shareholder
ratification of the selection of Deloitte & Touche is not required, the Board
considers it desirable for shareholders to pass upon the selection of auditors.
It is expected that representatives of Deloitte & Touche will be present
at the meeting and will have the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions of
shareholders.
Prior to June 1994, Ernst & Young served as the Company's independent
auditors. By letter dated June 3, 1994, the Company dismissed Ernst & Young as
the Company's certifying accountant pursuant to the recommendation of the
Company's Audit Committee. In connection with the audits of the two fiscal
years ended June 30, 1993 and the subsequent interim period, there were no
disagreements with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. In
addition, neither of the reports of Ernst & Young during the two fiscal years
ended June 30, 1993 contained an adverse opinion or a disclaimer of opinion, or
was qualified or modified as to uncertainty, audit scope, or accounting
principles.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL
OF THE APPOINTMENT OF THE AUDITORS.
EACH PROXY RECEIVED WILL BE VOTED FOR RATIFICATION AND APPROVAL OF THE
APPOINTMENT OF THE AUDITORS UNLESS OTHERWISE SPECIFIED IN THE PROXY.
JOSEPHINE CHAUS POSSESSES THE POWER TO VOTE MORE THAN 50% OF THE
OUTSTANDING SHARES OF THE COMMON STOCK. ACCORDINGLY, THE AFFIRMATIVE VOTE OF
JOSEPHINE CHAUS IS SUFFICIENT TO RATIFY AND APPROVE THE APPOINTMENT OF THE
AUDITORS. JOSEPHINE CHAUS HAS ADVISED THE COMPANY THAT SHE INTENDS TO VOTE ALL
OF HER SHARES IN FAVOR OF SUCH APPOINTMENT.
PROPOSALS FOR NEXT YEAR'S MEETING
Any proposal by a shareholder who intends to be present at the next
Annual Meeting of Shareholders must be received by the Company for inclusion in
its proxy statement and form of proxy relating to that Annual Meeting no later
than June __, 1996.
MISCELLANEOUS
The Board of Directors of the Company does not intend to present, and
does not have any reason to believe that others intend to present, any matter of
business at the meeting other than as set forth in the accompanying Notice of
Annual Meeting of Shareholders. However, if other matters properly come before
the meeting, it is the intention of the persons named in the enclosed form of
proxy to vote any proxies in accordance with their judgment.
The Company will bear the cost of preparing, assembling and mailing the
enclosed form of proxy, this Proxy Statement and other material which may be
sent to shareholders in connection with this solicitation. The Board of
Directors may use the services of the Company's directors, officers and other
regular employees to solicit proxies. In addition, the Company has retained
Chemical Bank, Corporate Trust Group as stock transfer agent to aid in the
solicitation of proxies at an anticipated fee of approximately $10,000 plus
reasonable expenses. The Company may reimburse persons holding shares in
27
their names or in the names of nominees for their expenses in sending proxies
and proxy material to their principals.
Copies of the 1995 Annual Report to Shareholders, including financial
statements for the fiscal year ended June 30, 1995, are being mailed to the
shareholders prior to or simultaneously with this Proxy Statement.
THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION (FORM 10-K) FOR THE FISCAL YEAR ENDED JUNE 30, 1995 TO
EACH SHAREHOLDER WITHOUT CHARGE (OTHER THAN A REASONABLE CHARGE FOR ANY EXHIBIT
REQUESTED) UPON WRITTEN REQUEST TO:
Bernard Chaus, Inc.
800 Secaucus Road
Secaucus, New Jersey 07094
Attention: Wayne Miller
Executive Vice President-Finance and
Administration, Chief Financial Officer
and Secretary
28
EXHIBIT A
LEHMAN BROTHERS
July 11, 1995
Special Committee of the
Board of Directors
Bernard Chaus, Inc.
1410 Broadway
New York, N.Y. 10018
Dear Members of the Board:
We understand that Bernard Chaus, Inc. (the "Company") has entered into a
transaction with its Chairwoman of the Board and principal shareholder,
Josephine Chaus, pursuant to which Josephine Chaus has increased the amount and
extended the maturity of a letter of credit to the Company's lender, BNY
Financial Corporation ("BNY"), as credit support for the Company's working
capital line. Josephine Chaus also has provided a personal guarantee to support
the Company's working capital line.
Josephine Chaus had initially provided a $3 million line of credit to BNY on
April 15, 1994, which was increased to $5.0 million on June 14, 1994, and to 7.2
million on September 13, 1994 (the "Initial Letter of Credit"). The Initial
Letter of Credit was to remain in effect until April 15, 1995. Josephine Chaus
has agreed to increase the amount of the Initial Letter of Credit from $7.2
million to $10.0 million as of February 15, 1995 and to have it remain in effect
until October 31, 1995 (the "New Letter of Credit"). Josephine Chaus also has
provided a $5.0 million personal guarantee (the "Personal Guarantee") to support
the Company's working capital line, which is to be in effect for the three year
term of the credit facility unless terminated earlier. In consideration for the
Initial Letter of Credit, the New Letter of Credit and the Personal Guarantee,
BNY has increased the Company's credit availability by various amounts above the
amount determined by formulas and covenants set forth in its financing agreement
with the Company.
In consideration for her providing the New Letter of Credit and the Personal
Guarantee, a Special Committee of the Board of Directors of the Company (the
"Special Committee"), subject to shareholder approval and the receipt of this
opinion, has authorized the issuance to Josephine Chaus of (i) warrants to
purchase 815,000 shares of common stock of the Company at an exercise price of
$4.05 per share for the New Letter of Credit (the "Letter of Credit Warrants");
and (ii) warrants to purchase 535,000 shares of common stock of the Company at
an exercise price of $4.05 per share for the Personal Guarantee, assuming that
it is in effect through October 31, 1995 (the "Personal Guarantee Warrants").
Josephine Chaus will be entitled to additional compensation if the Personal
Guarantee remains outstanding after October 31, 1995. The exercise price of the
warrants represents a 20% premium to the closing price of the Company's common
stock on the New York Stock Exchange on May 17, 1995, the day immediately
preceding the date that the Special Committee approved the issuance of such
warrants pursuant to the Warrants Transaction (as defined below). The Letter of
Credit Warrants give effect to offset for warrants previously granted for the
Old Letter of Credit which was to have been in effect through April 15, 1995.
The Warrants will be exercisable upon issuance, will expire five years from the
date of issuance and will be fully transferable. In addition, the Company has
borne all out-of-pocket expenses to be incurred by Josephine Chaus in providing
the Letter of Credit, which thereby reduced the number of warrants received
accordingly. We further understand that Josephine Chaus will forfeit a pro rata
portion of the Letter of Credit Warrants and/or Personal Guarantee Warrants if
the New Letter of Credit and/or Personal Guarantee is terminated before October
31, 1995. The issuance of the warrants to Josephine Chaus in exchange for the
Letter of Credit and the Personal Guarantee is hereafter referred to as the
"Warrants Transaction."
29
You have asked our view, as investment bankers, as to the commercial
reasonableness of the financial terms of the Warrants Transaction in view of
the Company's present circumstances.
In connection with our analysis, we have:
(1) reviewed the financial statements of the Company as set forth in the most
recent Forms 10-K and 10-Q of the Company filed with the Securities and
Exchange Commission for the fiscal year ended June 30, 1994 and the quarter
ended March 31, 1995, respectively;
(2) reviewed certain financial information furnished to us by the management of
the Company, including selected financial projections of the Company;
(3) analyzed the trading history (price and volume) of the Company's common
stock over the past few years; and
(4) conducted discussions with Josephine Chaus as well as the Company's Chief
Financial Officer concerning the business, operations and prospects of the
Company as well as its efforts to secure, and prospects for securing,
alternative financing.
We have assumed and relied upon the accuracy and completeness of the information
used by us in our analysis without assuming responsibility for independent
verification of such information and have further relied upon the assurances of
management of the Company that they are not aware of any facts that would make
such information inaccurate or misleading or of any materially positive
developments pending at the time that the Warrants Transaction was being
considered by the Special Committee. With respect to the financial projections
of the Company, upon advice of the Company we have assumed that such projections
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company. In performing our analysis, we have not
conducted a physical inspection of the properties and facilities of the Company
and have not made nor obtained any evaluation or appraisals of the assets or
liabilities of the Company. In addition, you have not authorized us to solicit,
and we have not solicited, any indications of interest from any third parties
with respect to providing any financing to, or guarantees on behalf of, the
Company. Our analysis is necessarily based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date hereof.
Based upon and subject to the foregoing, we are of the view that, given the
Company's present circumstances, the financial terms of the Warrants Transaction
were, at the time such transaction was entered into, commercially reasonable
from the Company's perspective.
This letter is solely for the use and benefit of the Special Committee of the
Board of Directors of the Company and shall not be discussed publicly or made
available to, or relied upon by, any third party without our prior approval.
Sincerely,
LEHMAN BROTHERS
30
EXHIBIT B
LEHMAN BROTHERS
September 28, 1995
Special Committee of the Board of Directors
Bernard Chaus, Inc.
1410 Broadway
New York, N.Y. 10018
Dear Members of the Board:
We understand that Bernard Chaus, Inc. (the "Company") has entered into a
transaction with its Chairwoman of the Board and principal shareholder,
Josephine Chaus, pursuant to which Josephine Chaus has extended the maturity of
a letter of credit to the Company's lender, BNY Financial Corporation ("BNY"),
as credit support for the Company's working capital line.
Josephine Chaus had initially provided a $3.0 million line of credit to BNY on
April 15, 1994, which was increased to $5.0 million on June 14, 1994, and to 7.2
million on September 13, 1994 (the "Initial Letter of Credit"). The Initial
Letter of Credit was to remain in effect until April 15, 1995. Josephine Chaus
has agreed to increase the amount of the Initial Letter of Credit from $7.2
million to $10.0 million as of February 15, 1995 and to have it remain in effect
until October 31, 1995 (the "New Letter of Credit"). Josephine Chaus also has
provided a $5.0 million personal guarantee (the "Personal Guarantee") to support
the Company's working capital line, which is to be in effect for the three year
term of the credit facility unless terminated earlier. In consideration for the
Initial Letter of Credit, the New Letter of Credit and the Personal Guarantee,
BNY has increased the Company's credit availability by various amounts above the
amount determined by formulas and covenants set forth in its financing agreement
with the Company.
We understand that Josephine Chaus has agreed to extend the $10.0 million New
Letter of Credit for an additional three months period from October 31, 1995
until January 31, 1996. In consideration for her extending the New Letter of
Credit, the Special Committee, subject to shareholder approval and the receipt
of this letter, has authorized the issuance to Josephine Chaus of warrants to
purchase 230,000 shares of common stock of the Company at an exercise price of
$6.75 per share (the "Extension Warrants"). The exercise price of the Extension
Warrants represents a 20% premium to the closing price of the Company's common
stock on the New York Stock Exchange on September 14, 1995, the date that the
Special Committee approved the issuance of such Extension Warrants.
The Extension Warrants will be exercisable upon issuance, will expire five years
from the date of issuance and will not be transferable. In addition, the
Company has borne all out-of-pocket expenses incurred by Josephine Chaus in
providing the New Letter of Credit, which thereby reduced the number of warrants
received accordingly. We further understand that Josephine Chaus will forfeit a
pro rata portion of the Extension Warrants if the New Letter of Credit is
terminated before January 31, 1996. The issuance of the Extension Warrants to
Josephine Chaus in exchange for her extension of the New Letter of Credit is
hereafter referred to as the "Warrants Transaction."
You have asked our view, as investment bankers, as to the commercial
reasonableness of the financial terms of the Warrants Transaction in view of
the Company's present circumstances.
31
In connection with our analysis, we have:
(1) reviewed the financial statements of the Company as set forth in the most
recent Forms 10-K and 10-Q of the Company filed with the Securities and
Exchange Commission for the fiscal year ended June 30, 1994, the quarter
ended March 31, 1995 and the draft Form 10-K for the fiscal year ended June
30, 1995;
(2) reviewed certain financial information furnished to us by the management of
the Company, including selected financial projections of the Company;
(3) analyzed the trading history (price and volume) of the Company's common
stock over the past few years; and
(4) conducted discussions with Josephine Chaus as well as the Company's Chief
Financial Officer concerning the business, operations and prospects of the
Company as well as its efforts to secure, and prospects for securing,
alternative financing.
We have assumed and relied upon the accuracy and completeness of the information
used by us in our analysis without assuming responsibility for independent
verification of such information and have further relied upon the assurances of
management of the Company that they are not aware of any facts that would make
such information inaccurate or misleading or of any materially positive
developments pending at the time that the Warrants Transaction was being
considered by the Special Committee. With respect to the financial projections
of the Company, upon advice of the Company we have assumed that such projections
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company. In performing our analysis, we have not
conducted a physical inspection of the properties and facilities of the Company
and have not made nor obtained any evaluation or appraisals of the assets or
liabilities of the Company. In addition, you have not authorized us to solicit,
and we have not solicited, any indications of interest from any third parties
with respect to providing any financing to, or guarantees on behalf of, the
Company. Our analysis is necessarily based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date hereof.
Based upon and subject to the foregoing, we are of the view that, given the
Company's present circumstances, the financial terms of the Warrants Transaction
were, at the time such transaction was entered into, commercially reasonable
from the Company's perspective.
This letter is solely for the use and benefit of the Special Committee of the
Board of Directors of the Company and shall not be discussed publicly or made
available to, or relied upon by, any third party without our prior approval.
Please be advised that Lehman Brothers has been retained to act as lead manager
in connection with a proposed equity offering of shares of common stock of the
Company.
Sincerely,
LEHMAN BROTHERS
32
EXHIBIT C
BERNARD CHAUS, INC.
BERNARD CHAUS, INC. 1986 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JULY 1, 1993)
AMENDMENT NO. 5
The Bernard Chaus, Inc. 1986 Stock Option Plan, as amended and restated
(the "Plan"), is hereby amended, effective as of November __, 1995, as follows:
FIRST: Section 2 of the Plan is amended to read as follows:
2. Effective Date of the Plan. The Plan, as amended hereby,
shall become effective as of November __, 1995, by resolution of the Board.
SECOND: Section 16 of the Plan is hereby amended by deleting the date
"April 30, 1996" and by inserting in its place the date "April 30, 2006."
THIRD: Except as hereby expressly amended, the Plan shall remain in full
force and effect.
33
EXHIBIT D
STATUTORY RIGHT OF APPRAISAL
Any holder of Common Stock who does not vote for the proposal to amend
the Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to eliminate preemptive rights, will have the right to dissent
and to receive payment for his, her or its shares, provided he, she or it
complies with the provisions of Section 623 of the New York Business Corporation
Law (the "BCL"). According to Section 623, a shareholder intending to enforce
this right must file with the Company, before the Annual Meeting of
Shareholders, or at that meeting but before the vote, written objection to the
action. The objection must include a statement that the shareholder intends to
demand payment for his, her or its shares if the Certificate of Incorporation is
amended as proposed, the name and address of the shareholder and the number and
class of shares. A vote against, or a direction in a proxy to vote against, the
adoption of this proposal will not constitute the written objection required by
Section 623. Shareholders may not dissent as to less than all of the shares as
to which they have a right to dissent, held by them of record, that they own
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, held of record
by such nominee or fiduciary. Written objections may be filed with the Company
at 800 Secaucus Road, Secaucus, New Jersey 07094, Attention: Secretary.
If the amendment is authorized at the meeting, the Company will give
written notice of such authorization within ten days after the meeting to any
shareholder who has filed such written objection and who has not voted for the
amendment. Within 20 days thereafter, any such shareholder who still elects to
dissent must file with the Company a written notice of such election and a
demand for payment of the fair market value of his shares, along with certain
other information. Upon filing of that notice of election, the shareholder will
cease to have any of the rights of a shareholder, except the right to be paid
for the fair market value of his shares determined as of the close of business
on the day prior to the Annual Meeting of Shareholders. The notice of election
may be withdrawn by the shareholder or at any time before the shareholder
accepts an offer of the Company to pay for his, her or its shares, but in no
case later than 60 days subsequent to the making of such offer. After the
expiration of such 60 day period, a withdrawal will require the Company's
written consent. At the time of the filing of the notice of election to
dissent, or within one month thereafter, the shareholder must submit the
certificates representing his, her or its shares to the Company's transfer
agent, and the transfer agent shall note such demand for appraisal rights on the
certificates and return them to the shareholder. Failure to submit shares in a
timely fashion may result in loss of dissenters rights of the option of the
Company, exercised within 45 days of the date of filing of the notice of
election to dissent.
If an election to dissent is filed, the Company will, within 15 days
after the end of the period for filing the notice of election, make a written
offer to pay for the dissenting shareholder's shares at the price the Company
considers to be the fair value. If the amendment has been effected, the offer
shall be accompanied by an advance payment of an amount equal to eighty percent
(80%) of the offer (the "Advance Payment") to each dissenting shareholder who
has submitted their shares for the notation reflecting their election for
appraisal. Dissenting shareholders who have not submitted their certificates
for said notation at the time of the offer, shall receive a statement that an
Advance Payment shall be made to them at the time that their certificates are
submitted for notation. If the amendment has not been effected at the time of
the offer, such Advance Payment or statement as to Advance Payment shall be sent
to each shareholder entitled thereto forthwith upon effectiveness of the
amendment.
If within 30 days after the Company's written offer, the Company and the
shareholder agree upon the price to be paid for the shareholder's shares,
payment must be made within 60 days after the making of the offer, provided the
certificates for the shares are surrendered. In the event of disagreement as to
fair value, the Company is required to institute a special court proceeding for
determination of the fair value within 20 days of the expiration of such 30 day
period. If the Company fails to institute such a proceeding, any dissenting
shareholder may do so within 30 days after the expiration of the time period for
the Company to do so. If such proceeding is not instituted within such 30 day
period, all dissenter's rights shall be lost, unless the New York Supreme Court,
for good cause shown, shall otherwise direct.
For income tax purposes, a dissenting shareholder obtaining payment for
his shares may recognize a capital gain or loss measured by the difference
between such payment and his tax basis.
This description is only a general summary of the procedures to be
followed by dissenting shareholders and is not a complete recital of all
provisions of Section 623 of the BCL. Shareholders who desire to exercise
dissenter's rights are urged to review Section 623 carefully and/or to consult
counsel of their choice.
[front]
PROXY COMMON STOCK
BERNARD CHAUS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER __, 1995
The undersigned hereby constitutes and appoints Josephine Chaus
and Wayne Miller, and each of them, with full power of substitution, attorneys
and proxies to represent and to vote all of the shares of Common Stock which the
undersigned would be entitled to vote, with all powers the undersigned would
possess if personally present, at the Annual Meeting of the Shareholders of
BERNARD CHAUS, INC., to be held on November __, 1995 at 2:00 p.m. at the Grand
Hyatt Hotel, 109 East 42nd Street, New York, New York, Regency Room, mezzanine
level and at any adjournment or postponement thereof, on all matters coming
before said meeting.
1. TO ELECT DIRECTORS.
Nominees: Philip G. Barach, Josephine Chaus, Andrew Grossman,
S. Lee Kling and Harvey M. Krueger. (Mark only one of the following boxes.)
VOTE FOR all nominees listed above, except vote withheld
as to the following nominees (if any):
--------------------------------------------------------
VOTE WITHHELD from all nominees.
2. To ratify and approve the issuance to Josephine Chaus of
warrants to purchase shares of Common Stock of the Company in consideration for
her provision of additional credit support to the Company:
VOTE FOR VOTE AGAINST ABSTAIN
3. To ratify and approve the loan by the Company to Richard Baker,
the President and a former director of the Company, in the aggregate principal
amount of $432,500 (with a remaining principal amount of $117,000 at September
30, 1995), to pay for certain relocation expenses.
VOTE FOR VOTE AGAINST ABSTAIN
4. To approve the amendment to the Company's 1986 Stock Option
Plan, as amended, to extend its expiration date until April 30, 2006:
VOTE FOR VOTE AGAINST ABSTAIN
5. To approve the amendment to the Company's Restated Certificate
of Incorporation, as amended, to eliminate preemptive rights of shareholders.
VOTE FOR VOTE AGAINST ABSTAIN
6. To ratify and approve the appointment of Deloitte & Touche LLP
as the Company's Auditors:
VOTE FOR VOTE AGAINST ABSTAIN
7. At their discretion, upon any other business which may properly
come before the meeting or any adjournment thereof.
[back]
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will vote (i)
FOR the election as directors of the nominees of the Board of Directors, (ii)
FOR the ratification and approval of the issuance to Josephine Chaus of warrants
to purchase common stock of the Company in consideration for her provision of
additional credit support to the Company, (iii) FOR the ratification and
approval of a loan made by the Company to Richard Baker, the President and a
former director of the Company, in the aggregate principal amount of $432,500
(with a remaining principal amount of $117,000 at September 30, 1995), to pay
for certain relocation expenses, (iv) FOR the approval of the amendment of the
Company's 1986 Stock Option Plan, as amended, to extend its expiration date to
April 30, 2006, (v) FOR the approval of the amendment of the Company's Restated
Certificate of Incorporation, as amended, to eliminate preemptive rights of
shareholders and (vi) FOR the ratification and approval of the appointment of
Deloitte & Touche as the Company's auditors.
The undersigned acknowledges receipt of the accompanying Proxy
Statement dated October __, 1995.
Date:________________________________, 1995
-------------------------------------------
-------------------------------------------
Signature of Shareholder(s)
(When signing as attorney, trustee, executor,
administrator, guardian, corporate officer,
etc., please give full title. If more than
one trustee, all should sign. Joint owners
must each sign.)
PLEASE DATE AND SIGN EXACTLY AS NAME APPEARS ABOVE.
I plan I do not plan
to attend the 1995 Annual Meeting of Shareholders.
