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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9169
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2807386
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1410 Broadway, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 354-1280
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on October 6, 1997 was $11,120,002 .
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
October 6, 1997 Common Stock, $0.01 par value 26,277,274
LOCATION IN FORM 10-K IN
DOCUMENTS INCORPORATED BY REFERENCE WHICH INCORPORATED
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Portions of registrant's Proxy Statement for the Annual Part III
Meeting of Stockholders to be held in November 1997.
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PART I
ITEM 1. BUSINESS.
GENERAL
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear which are marketed principally under the CHAUS(R), CHAUS SPORT(R)
and NAUTICA(R) trademarks. Beginning in late fiscal 1994, the Company
repositioned its Chaus product line at the high end of the "upper moderate"
through the opening price points of the "better" categories. See "-- Products."
By August 1997, the Company had successfully repositioned its Chaus product
line into the opening price points of the "better" category. In September 1995
the Company entered into a license agreement (the "Nautica License Agreement")
with Nautica Apparel Inc. ("Nautica"), a leading name in men's apparel,
pursuant to which the Company has obtained an exclusive license to design,
contract for the manufacture of and market a new women's apparel line under the
Nautica brand name. The Company commenced sales of products in its licensed
Nautica product line in August 1996, with such Nautica product line being
positioned in the "better" to "bridge" categories. In March 1996, the Company,
in order to better utilize its management and financial resources, discontinued
its unprofitable dresses product line, which had accounted for a gross margin
loss of $2.2 million for the twelve months ended June 30, 1996.
RESTRUCTURING
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the restructuring
program (the "Restructuring") pursuant to which:
(i) the Company will seek to raise up to $20 million, but not
less than $12.5 million, of equity through a rights offering
(the "Rights Offering");
(ii) approximately $40.5 million of the Company's indebtedness to
Ms. Chaus, consisting of $28 million of existing subordinated
indebtedness (including accrued interest through Janaury 15,
1998) and $12.5 million of indebtedness which will be owed
to Josephine Chaus ("Ms. Chaus" or "J. Chaus"), will be
converted into Common Stock of the Company (the "Conversion
Commitment");
(iii) a new revolving credit facility (the "New Revolving
Facility"), and a new term loan facility (the "New Term
Loan", and together with the New Revolving Facility, the "New
Financing Agreement") was entered into with BNY Financial
Corporation ("BNYF"), the Company's current working capital
lender, on October 10, 1997; and
(iv) the Company will implement a 1-for-10 reverse stock split
(the "Stock Split").
Consummation of the Restructuring is subject to (i) the
approval by the Company's stockholders of (a) the Stock Split, (b) the issuance
of 10,510,910 shares of Common Stock of the Company to J. Chaus in connection
with the Conversion Commitment, (c) the sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase Commitment (as defined below), and
(d) the sale by the Company of up to 1,747,160 shares to J. Chaus in connection
with the Standby Commitment (as defined below), and (ii) the absence of any
litigation or governmental action challenging or seeking to enjoin the Rights
Offering which in the sole judgment of the Company makes it inadvisable to
proceed with the Rights Offering. Accordingly, until such conditions are
satisfied, there can be no assurance that the Restructuring will be
consummated. It is presently contemplated that the Restructuring will be
consummated by January 15, 1998.
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Ms. Chaus, Chairwoman of the Board, a principal stockholder of the Company, and
the owner of a majority of the Company's Common Stock, has advised the Company
that she intends to vote her shares in favor of all matters relating to the
Restructuring, thereby assuring stockholder approval of such matters.
Although there can be no assurance, the Company believes that the
Company will have adequate resources after consummation of the Restructuring.
The Rights Offering
The Company will offer each of Ms. Chaus, and the Company's other
stockholders, the right (collectively, the "Rights") to subscribe for up to $10
million of newly issued Common Stock, for a total of up to $20 million of
additional equity. The proceeds of the Rights Offering will be used to repay
amounts due under the New Financing Agreement. Subject to stockholder approval,
Ms. Chaus has agreed to exercise her full $10 million subscription (the
"Purchase Commitment") and to subscribe for up to an additional $2.5 million of
Common Stock (the "Standby Commitment"), if and to the extent that the
Company's other stockholders do not purchase at least that amount of stock in
the Rights Offering. As described below, it is anticipated that Ms. Chaus will
satisfy her $10 million Purchase Commitment through the contribution of funds
currently used as credit support for the Company's Bank Debt (as defined
below). The Rights will be distributed, at no cost to the stockholders,
following the effectiveness of a registration statement to be filed with the
Securities and Exchange Commission. The Rights, which will be transferable
(other than those distributed to Ms. Chaus), will entitle the holders to
purchase Common Stock for a period of 45 days after the Rights Offering
commences.
The information contained herein does not constitute an offering, and
no securities, including, without limitation, the Rights, are being offered
hereby. The Rights Offering will only be made by a prospectus filed with the
Securities and Exchange Commission.
Currently, Ms. Chaus beneficially owns approximately 57% of the Common
Stock of the Company. Upon the conversion of indebtedness owed by the Company
to Ms. Chaus, and prior to the Rights Offering, which is described below, she
will beneficially own approximately 90.3% of the Common Stock of the Company.
Depending on the number of Rights exercised by stockholders of the Company,
other than Ms. Chaus, following completion of the Rights Offering, Ms. Chaus
will beneficially own between approximately 69.5% and 94% of the Common Stock
of the Company.
Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity Securities
Pursuant to the terms of the Restructuring, subject to stockholder
approval, approximately $40.5 million of the Company's indebtedness to Ms.
Chaus, consisting of $28 million of existing subordinated indebtedness
(including accrued interest through January 15, 1998) and $12.5 million of
indebtedness which will be owed to Ms. Chaus after the Subrogated Loan (as
defined below) is extended by her, will be converted into 10,510,910 shares of
Common Stock of the Company on a post Stock Split basis.
Restructuring of Bank Debt
The senior secured bank debt owing to BNYF by the Company, as of
September 30, 1997 (the "Bank Debt") consisted of approximately (i) $57.5
million in respect of direct borrowings, and (ii) $17.5 million in respect of
letters of credit.
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In the Restructuring, the $57.5 million in respect of direct
borrowings by the Company has been and will be refinanced as follows: (i) $15
million has been refinanced by BNYF pursuant to the terms of the New Term Loan;
(ii) approximately $20 million has been refinanced under the terms of the New
Revolving Facility; (iii) $12.5 million in respect of borrowings previously
guaranteed by Ms. Chaus will be satisfied in full out of proceeds from a loan
made by BNYF to Ms. Chaus (the "BNYF--J. Chaus Loan"), and Ms. Chaus shall
become subrogated to the rights of BNYF with respect to such loan amount (the
"Subrogated Loan") until the Subrogated Loan is exchanged for equity, as set
forth above; and (iv) $10 million will be satisfied in full out of proceeds
received from the Rights Offering pursuant to the Purchase Commitment.
Under the terms of the Restructuring, approximately $17.5 million of
Bank Debt owing to BNYF in respect of letters of credit has been refinanced by
BNYF pursuant to the terms of the New Financing Agreement.
The approximately $75 million of Bank Debt that has been refinanced
as part of the Restructuring, has been refinanced under two facilities that are
part of the New Financing Agreement: (i) the New Revolving Facility which is a
$66 million five-year revolving credit line with a $20 million sublimit for
letters of credit, and (ii) the New Term Loan which is a $15 million term loan
facility. Each facility will mature on December 31, 2002. The Company's
obligations under the New Financing Agreement are secured by a first priority
lien on substantially all of the Company's assets, including the Company's
accounts receivable, inventory and trademarks.
Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate and is payable on a monthly basis, in arrears. Interest on the New
Term Loan accrues at an interest rate ranging from 1/2 of 1% above the Prime
Rate to 1 1/2% above the Prime Rate, which interest rate will be determined,
from time to time, based upon the Company's availability under the New
Revolving Facility. With the exception of warrants issued to BNYF (as discussed
below), the Company's execution of the New Financing Agreement did not require
the payment of any commitment, closing, administration or facility fees. The
New Financing Agreement provides for service charges and letter of credit fees
on substantially the same terms as those existing under the Company's Old Bank
Debt Agreement (as defined below) with BNYF.
Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the New Term Loan. The first amortization payment
is due on March 31, 1998. A balloon payment in the amount of $10.25 million is
due on December 31, 2002. In the event of the earlier termination by the
Company of the New Financing Agreement, the Company will be liable for
termination fees initially equal to $2.8 million, and declining to $2.2 million
after October 8, 2000.
BNYF's existing warrants to purchase 125,000 shares of Common Stock
(the "Existing BNYF Warrants") were extinguished, and BNYF received new
warrants (the "New BNYF Warrants") to purchase (i) 375,000 shares of the
Company's Common Stock, with an exercise price of $1.0625 per share, the
closing price per share of the Common Stock on June 26, 1997, the date on which
BNYF and the Company executed a commitment letter (the "Commitment Letter")
describing the terms and conditions of the Restructuring, and (ii) 125,000
shares of the Company's Common Stock, with an exercise price equal to the
thirty day average trading price on the New York Stock Exchange of the
Company's Common Stock beginning on the date of the consummation of the Rights
Offering.
The New Financing Agreement amends certain provisions of the Old Bank
Debt Agreement and provides for maximum availability of $81 million, and
overadvances of up to $12.8 million. The New Financing Agreement also amends
certain financial covenants contained in the Old Bank Debt Agreement. The New
Financing Agreement provides for certain additional events of default, among
which are the default by Ms. Chaus
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under the Bank Debt Put (as defined below), and the failure by the Company to
close all of its retail outlets by the end of January 1998.
As an inducement to BNYF to enter into the New Financing Agreement,
Ms. Chaus has agreed with BNYF that she will purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement between the
Company and BNYF, in the event that (i) an event of default occurs under the
New Financing Agreement prior to May 15, 1998, or (ii) the Rights Offering
is not consummated prior to May 15, 1998 (the "Bank Debt Put").
Restructuring of Credit Support Provided by Ms. Chaus
On October 10, 1997, in substitution for the personal guaranty of
$12.5 million of Bank Debt (the "$12.5 Million Guarantee") previously provided
by Ms. Chaus, she entered into a deposit letter (the "October Deposit Letter")
pursuant to which she provided $12.5 million in cash collateral to secure the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF--J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of Common Stock of the Company.
Ms. Chaus previously entered into a deposit letter dated July 23, 1997
(the "July Deposit Letter") pursuant to which she provided $10 million in cash
collateral to secure the Bank Debt in substitution for the letter of credit
previously provided by her. The July Deposit Letter was amended on October 10,
1997 to provide that the $10 million in cash collateral shall be held as
collateral to secure indebtedness under the New Financing Agreement.
Immediately prior to the consummation of the Rights Offering, and subject to
the other conditions of the Restructuring being satisfied, such collateral will
be released and used by Ms. Chaus to purchase shares of Common Stock issuable
to her upon the exercise of the Rights, in satisfaction of her Purchase
Commitment in connection with the Rights Offering. The Company will use the
proceeds from the Purchase Commitment to retire $10 million of Bank Debt.
Pursuant to the New Financing Agreement, in the event that the Rights
Offering is not consummated by May 15, 1998, the cash collateral held under the
October Deposit Letter and the July Deposit Letter will be applied by BNYF to
retire $22.5 million of the Bank Debt.
Warrants and Options
In connection with the Restructuring, (i) Andrew Grossman, the
Company's Chief Executive Officer, has agreed in principle to relinquish all of
his rights to his existing options, to the extent that they have not been
exercised prior to the consummation of the Restructuring, and (ii) Ms. Chaus
has agreed in principle to relinquish all of her rights to her existing
warrants, to the extent that they have not been exercised prior to the
consummation of the Restructuring.
The Company currently intends that employees holding options will be
offered the right to exchange such options for new options.
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Other Creditors of the Company; Other Matters in Connection with Restructuring
Under the proposed Restructuring, the Company's existing trade claims,
which are primarily held by the Company's customers and vendors, would be
unaffected.
The Company and Mr. Grossman are currently negotiating amendments to
his employment agreement and it is anticipated that a restated and amended
employment agreement will be executed in the near term. It is expected that
such amendments will, among other things, include a cash bonus based upon the
Company's performance, the grant of new stock options in substitution for his
existing stock options, and the waiver by Mr. Grossman of his entitlement to
five percent (5%) of the Company's annual net profits, as currently provided
in his employment agreement.
PRODUCTS
The Company's products currently are divided into two principal
product categories: (i) career sportswear and (ii) weekend casual sportswear.
In late fiscal 1994 the Company shifted its product focus from single,
fashion-driven items to full collections with an emphasis on traditional
styling. With this repositioning, the Company also has enhanced its design and
quality and by August 1997, the Company had successfully positioned its Chaus
product line into the opening price points of the "better" category. The
Company's career and weekend casual sportswear are marketed as coordinated
groups of jackets, skirts, pants, blouses, sweaters and related accessories
which, while sold as separates, are coordinated by styles, color schemes and
fabrics and are designed to be merchandised and worn together. The Company
believes that the target consumers for its products are women aged 24 to 64.
The Company produces collections of each of these product lines for
each of its five principal selling seasons: Spring, Summer, Fall I, Fall II and
Holiday. Spring and Fall traditionally have been the Company's major selling
seasons.
The Company's major product categories and associated brand names are
summarized in the following table:
WEEKEND CASUAL
CAREER SPORTSWEAR SPORTSWEAR
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BRAND NAMES Chaus Chaus Sport
Chaus Woman Nautica
Chaus Petite
Nautica
PRODUCT OFFERINGS Jackets, Skirts, Pants, Casual Jackets
Shorts, Blouses, Shirts, Sweaters, Skirts, Pants,
Knit Tops, Sweaters Shirts, Knit Tops, Outerwear
INDUSTRY CATEGORIES Chaus -- Upper Moderate Chaus -- Upper Moderate
and Lower Better and Lower Better
Nautica -- Better and Bridge Nautica -- Better and Bridge
Women's apparel is generally divided into five price categories,
namely (listed from lowest to highest) "mass merchandise," "moderate,"
"better," "bridge" and "designer." These categories are distinguished
principally by differences in price and, as a general matter, by differences in
quality.
During fiscal 1997, the suggested retail prices of the Company's Chaus
products ranged between $20.00 and $280.00. The Company's jackets ranged in
price between $120.00 and $280.00, its blouses and sweaters ranged in
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price between $48.00 and $130.00, its skirts and pants ranged in price between
$28.00 and $130.00, and its knit tops and bottoms ranged in price between
$24.00 and $120.00.
The following table sets forth a breakdown by percentage of the
Company's net sales by product category for fiscal 1995 through fiscal 1997:
Fiscal Year Ended June 30,
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1997 1996 1995
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Career Sportswear
Chaus 37% 41% 31%
Chaus Woman 11 11 13
Chaus Petite 6 5 4
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Total 54 57 48
Weekend Casual - Sportswear 30 33 35
Nautica 15 -- --
Dresses -- 8 12
Other (1) 1 2 5
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Total 100% 100% 100%
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(1) Includes sales by outlet stores, offset by intercompany
eliminations. Also includes, for fiscal 1995, the Company's JOSEPHINE
and JEANSWEAR labels, which produced blouses and jeans, respectively,
until the beginning of fiscal 1995 when the Company ceased producing
garments using these labels.
Career Sportswear. The Company markets an extensive line of career
sportswear under the CHAUS label for misses sizes, the CHAUS WOMAN label for
larger sizes and the CHAUS PETITE label for smaller sizes. These product lines
offer a full collection of sportswear geared primarily for the working woman.
Each sportswear collection typically includes a broad selection of jackets,
skirts, pants, blouses and sweaters, as well as more casual apparel such as
shorts, shirts and knit tops.
Weekend Casual Sportswear. The CHAUS SPORT label offers casual
jackets, sweaters, skirts, pants, shirts and knit tops. This product line
offers soft career, weekend and leisure sportswear intended for an informal
working environment as well as for casual wear.
LICENSE AGREEMENT WITH NAUTICA
In September 1995, the Company entered into the Nautica License
Agreement under which the Company has an exclusive license to manufacture,
market, distribute and sell licensed product for women under the Nautica(R)
brand name in the United States and Puerto Rico. The Company currently
distributes its licensed Nautica product line in major department and specialty
stores, at "better" to "bridge" price points. Nautica has developed significant
brand-name recognition with its men's apparel lines. The Company's relationship
with Nautica provides the Company with exposure to "better" to "bridge"
departments, while creating an alliance with a leading company in the apparel
industry. The Company's first sales of its licensed Nautica products occurred
in August 1996. The Company's license from Nautica is limited to women's
sportswear collections including coordinating knits, blouses, wovens, sweaters,
pants, skirts, jackets, and outerwear and sportswear dresses bearing the
Nautica brand names and marks. The Company's license from Nautica excludes
business dresses, suits, coats and raincoats that are not part of a sportswear
collection. The license also excludes shoes, scarves, socks, stockings or
accessories for ladies bearing the Nautica brand names and marks.
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The initial term of the Nautica License Agreement runs through
December 31, 1999, and is thereafter renewable, at the option of the Company,
for up to two periods of three years each, provided that certain conditions are
met (including the successful attainment of certain sales targets and the
requirement that Andrew Grossman continue in his position as Chief Executive
Officer during the term of the Nautica License Agreement). The Company's
obligations include minimum royalty and advertising payments. A separate
showroom was constructed for the display of the Company's licensed Nautica
products and a full operational merchandising and retail development group has
been dedicated to its licensed Nautica product line.
Pursuant to the terms of the Nautica License Agreement, the Company
has granted Nautica a ten-year option to purchase up to 150,000 shares of the
Company's Common Stock at a purchase price of $5.00 per share (the closing
price of the Common Stock on the NYSE on September 6, 1995, the date the
Company entered into the Nautica License Agreement).
In August 1996, the Company commenced sales of its licensed NAUTICA
label. As initially launched, the Nautica product line encompassed both career
sportswear and weekend casual sportswear. In view of the disappointing
performance of the Company's Nautica product line to date, the Company is in
the process of hiring a new executive officer to manage the product line, and
intends to relaunch the Nautica product line. In contrast to the previous
Nautica product line, the relaunched line will have a narrow focus on casual
sportswear items -- a focus that is consistent with the Nautica men's line.
CUSTOMERS
The Company's products are sold nationwide in an estimated 1,900
individual stores operated by approximately 150 department store chains,
specialty retailers and other retail outlets. The Company does not have any
long-term commitments or contracts with any of its customers.
The Company extends credit to its customers based upon an evaluation
of the customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. At June 30, 1997 and 1996, approximately 62% and 66%, of the Company's
accounts receivables were due from department store customers owned by four
single corporate entities. During fiscal 1997, approximately 63% of the
Company's net sales were made to department store customers owned by four
single corporate entities, as compared to 60% in fiscal 1996 and 55% in fiscal
1995. Sales to Dillard's Department Stores accounted for 33% of net sales in
fiscal 1997, 29% of net sales in fiscal 1996 and 22% of net sales in fiscal
1995. Sales to nine department store companies owned by The May Department
Stores Company accounted for approximately 16% of the Company's net sales in
fiscal 1997, 10% of net sales in fiscal 1996 and 15% of net sales in fiscal
1995. Sales to eight department store companies owned by Federated Department
Stores accounted for approximately 8% of net sales in fiscal 1997, 5% of net
sales in fiscal 1996 and 11% of net sales in fiscal 1995. Sales to two
department store customers owned by TJX Companies, Inc. accounted for
approximately 6% of net sales in fiscal 1997, 16% of net sales in fiscal 1996
and 7% of net sales in fiscal 1995. The percentages of net sales are based upon
stores owned by the four corporate entities at the end of fiscal 1997. As a
result of the Company's dependence on these customers, they may have the
ability to influence the Company's business decisions. The loss of or
significant decrease in business from any of its major customers would have a
material adverse effect on the Company's financial position and results of
operations.
SALES AND MARKETING
The Company's selling operation is highly centralized. Sales to the
Company's department and specialty store customers are made primarily through
the Company's New York City showrooms. The Company has an in-house sales force
of 29, all of whom are located in the New York City showrooms. Senior
management, principally Josephine
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Chaus, Chairwoman of the Board and principal stockholder of the Company, and
Andrew Grossman, Chief Executive Officer, actively participate in the planning
of the Company's marketing and selling efforts. The Company does not employ
independent sales representatives or operate regional sales offices, but it
does participate in various regional merchandise marts. This sales structure
enables management to control the Company's selling operation more effectively,
to limit travel expenses, as well as to deal directly with, and be readily
accessible to, major customers.
Products are marketed to department and specialty store customers
during "market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating
their purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each collection.
During the course of the retail selling seasons, the Company monitors its
product sell-through at retail in order to directly assess consumer response to
its products.
The Company emphasizes the development of long-term customer
relationships by consulting with its customers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales
personnel and their counterparts at various levels in the buying organizations
of the Company's customers is an essential element of the Company's marketing
and sales efforts. These contacts allow the Company to closely monitor retail
sales volume to maximize sales at acceptable profit margins for both the
Company and its customers. The Company's marketing efforts attempt to build
upon the success of prior selling seasons to encourage existing customers to
devote greater selling space to the Company's product lines and to penetrate
additional individual stores within the Company's existing customers. The
Company's largest customers discuss with the Company retail trends and their
plans regarding their anticipated levels of total purchases of Company products
for future seasons. These discussions are intended to assist the Company in
planning the production and timely delivery of its products.
The Company maintains a cooperative advertising program under which it
reimburses, in certain circumstances, a portion of a customer's advertising
expenditures promoting the Company's products up to a maximum percentage of the
customer's purchases. Except for this cooperative advertising program, the
Company has not engaged in any direct advertising to the public with respect to
its Chaus product line. There was limited direct advertising for the Company's
Nautica product line. Cooperative advertising expenditures for the Company were
approximately $0.8 million for both fiscal 1995 and fiscal 1996, and $1.1
million in fiscal 1997.
DESIGN
The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The 14 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Josephine Chaus and Andrew Grossman, the
Company's Chief Executive Officer, who are instrumental in the design function,
meet regularly with the design staff to create, develop and coordinate the
seasonal collections. The Company believes that its design staff is known for
its distinctive styling and its ability to contemporize fashion classics.
Emphasis is placed on the coordination of outfits and quality of fabrics to
encourage the purchase of more than one garment.
MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and
the costs of a large workforce. A substantial amount (approximately 80%)
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of its product is manufactured by approximately 35 key independent suppliers
located primarily in South Korea, Hong Kong, Taiwan, China, Indonesia and
elsewhere in the Far East. Approximately 20% of the Company's products are
manufactured in the United States and the Caribbean Basin. No contractual
obligations exist between the Company and its manufacturers except on an
order-by-order basis. During fiscal 1997, the Company purchased approximately
68% of its finished goods from its ten largest manufacturers, including
approximately 19% of its purchases from its largest manufacturer. Contracting
with foreign manufacturers enables the Company to take advantage of prevailing
lower labor rates and to use a skilled labor force to produce high quality
products.
Generally, each manufacturer agrees to produce finished garments on
the basis of purchase orders from the Company, specifying the price and
quantity of items to be produced and supported by a letter of credit naming the
manufacturer as beneficiary to secure payment for the finished garments.
The Company's technical production support staff, located in New York
City, produces patterns, prepares production samples from the patterns for
modification and approval by the Company's design staff, and marks and grades
the patterns in anticipation of production. While the factories have the
capability to perform these services, the Company believes that its personnel
can best express its design concepts and efficiently supervise production to
better ensure that a quality product is produced. Once production fabric is
shipped to them, the manufacturers produce finished garments in accordance with
the production samples and obtain necessary quota allocations and other
requisite customs clearances. Branch offices of the Company's subsidiaries in
Korea and Hong Kong monitor production at each manufacturing facility to
control quality, compliance with the Company's specifications and timely
delivery of finished garments, and arrange for the shipment of finished
products to the Company's New Jersey distribution center. Almost all finished
goods are shipped to the Company's New Jersey distribution center for final
inspection, assembly into collections, allocation and shipment to customers.
The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.
The Company uses a broad range of fabrics in the production of its
clothing, consisting of synthetic fibers (including polyester and acrylic),
natural fibers (including cotton and wool), and blends of natural and synthetic
fibers. The Company does not have any formal, long-term arrangements with any
fabric or other raw material supplier. During fiscal 1997, virtually all of the
fabrics used in the Company's products manufactured in the Far East were
ordered from the Company's five largest suppliers in the Far East, which are
located in Japan, Taiwan and Korea, and virtually all of the fabric used in the
Company's products manufactured in the United States and the Caribbean Basin
were ordered by three major suppliers from these regions. The Company selects
the fabrics to be purchased, which are generally produced for it in accordance
with its own specifications. To date, the Company has not experienced any
significant difficulty in obtaining fabrics or other raw materials and
considers its sources of supply to be adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to five months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection.
10
<PAGE>
In order to make timely delivery of merchandise which reflects current style
trends and tastes, the Company attempts to schedule a substantial portion of
its fabric and manufacturing commitments relatively late in a production cycle.
However, in order to secure adequate amounts of quality raw materials,
especially greige (i.e., "undyed") goods, the Company must make substantial
advance commitments to suppliers of such goods, often as much as seven months
prior to the receipt of firm orders from customers for the related merchandise.
Many of these early commitments are made subject to changes in colors,
assortments and/or delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition of
export duties, political and social instability, currency revaluations, and
restrictions on the transfer of funds. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade in Textiles, known
as the Multifiber Arrangement ("MFA") which has been in effect since 1974. The
United States has concluded international negotiations known as the "Uruguay
Round" in which a variety of trade matters were reviewed and modified. Quotas
established under the MFA will be gradually phased out over a ten year
transition period, after which the textile and clothing trade will be fully
integrated into the General Agreement on Trade and Tariffs ("GATT") and will be
subject to the same disciplines as other sections. The GATT agreement provides
for expanded trade, improved market access, lower tariffs and improved
safeguard mechanisms.
The United States and the countries in which the Company's products
are manufactured may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adversely adjust presently prevailing quotas, duty or
tariff levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot now predict the likelihood or frequency of any
such events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise
categories where more quota is available and shifts of production among
countries and manufacturers. The expansion in the past few years of the
Company's varied manufacturing sources and the variety of countries in which it
has potential manufacturing arrangements, although not the result of specific
import restrictions, have had the result of reducing the potential adverse
effect of any increase in such restrictions.
Substantially all of the Company's products are subject to United
States customs duties. In the ordinary course of business, the Company, from
time to time, is subject to claims by the United States Customs Service
("Customs") for duties and other charges, is entitled to refunds from Customs
due to overpayment of duties by the Company and may be required to pay
penalties with respect to underpayment of duties.
11
<PAGE>
RETAIL OUTLET STORES
At June 30, 1997, the Company had 22 retail outlet stores, as compared
to 25 stores at June 30, 1996. The retail outlet stores operate throughout the
country in traditional factory outlet centers in locations intended to minimize
conflict with the Company's major retail department store customers. The
Company plans to close all of its retail outlet stores (other than the retail
outlet store located at the Company's Secaucus facility, the space for which is
leased by the Company as part of its warehouse lease) by the end of January
1998, and does not intend to open any new stores in the foreseeable future.
Failure to close such retail stores by the end of January 1998, is an event of
default under the New Financing Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- New Financing
Agreement" and "-- Fiscal 1997 Compared to Fiscal 1996."
BACKLOG
As of October 13, 1997, the Company's order book reflected unfilled
customer orders for approximately $92 million of merchandise. As of September
20, 1996 (as disclosed in the prior year) the backlog was $45.0 million.
Order book data at any date are materially affected by the timing of the
initial showing of collections to the trade, as well as by the timing of
recording of orders and of shipments. This year's backlog includes unfilled
customer orders for the upcoming spring season. The Company does not believe
that cancellations, rejections or returns will materially reduce the amount of
sales realized from such backlog.
TRADEMARKS
CHAUS(R), CHAUS ESSENTIAL(R), CHAUS SPORT(R), CHAUS WOMAN(R) and MS.
CHAUS(R) are registered trademarks of the Company in the United States for use
on ladies' garments. These trademarks are renewable in the years 2004, 2008,
2002, 2004 and 2005, respectively. JOSEPHINE(R) is also a registered trademark
of the Company in the United States, renewable in the year 2001, for use on
ladies' blouses and sweaters. The Company considers its trademarks to be strong
and highly recognized and, to have significant value in the marketing of its
products. See " -- License Agreement with Nautica" for certain information
concerning the Company's Nautica License Agreement.
The Company has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,
and JOSEPHINE marks for women's apparel in certain foreign countries and has
legal trademarks in certain foreign countries for selected women's accessories
including handbags, small leather goods and footwear.
COMPETITION
The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies,
some of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers. The Company's Nautica
product line has experienced intense competition from other designer labels.
The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and product identity, are also important
aspects of competition in this industry. The Company believes that its success
will depend upon its ability to remain competitive in these areas.
12
<PAGE>
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from so-called "off-price" and discount retailers, mass
merchandisers and specialty stores. The Company believes that its ability to
increase its present levels of sales will depend on such customers' ability to
maintain their competitive position and the Company's ability to increase its
market share of sales to department stores.
EMPLOYEES
At June 30, 1997, the Company employed 482 employees as compared with
525 employees at June 30, 1996. This total includes 67 in managerial and
administrative positions, approximately 92 in production, production
administration and design, 207 in marketing, merchandising and sales (including
178 employees in the retail outlet store operation) and 61 in distribution. Of
the Company's total employees, 55 were located in the Far East. The Company is
a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 83 full-time employees. This agreement expires in
August 1999.
The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
---- --- --------
Josephine Chaus 46 Chairwoman of the Board and member,
Office of the Chairman
Andrew Grossman 38 Chief Executive Officer and member,
Office of the Chairman
Barton Heminover 43 Vice President-- Corporate Controller and
Assistant Secretary
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus has been an employee of the Company in various
capacities since its inception. She has been a director of the Company since
1977, President from 1980 through February 1993, Chief Executive Officer from
July 1991 through September 1994, Chairwoman of the Board since 1991 and member
of the Office of the Chairman since September 1994.
Andrew Grossman was appointed a director of the Company on September
13, 1994. He has been employed by the Company as its Chief Executive Officer
and member of the Office of the Chairman since September 28, 1994. Prior to
September 1994, Mr. Grossman was President from 1991 to 1994 and Executive Vice
President from 1990 to 1991 of Jones Apparel Group, a manufacturer of women's
apparel, and Vice President of Merchandising for Jones New York from 1987 to
1990. Prior to joining Jones, Mr. Grossman was employed by Willie Wear Ltd.,
Herbert Grossman Enterprises, the Ralph Lauren Womenswear division of Bidermann
Industries, Corp., and the Evan Picone division of Palm Beach, Inc.
Barton Heminover joined the Company as Vice President -- Corporate
Controller and Assistant Secretary in July 1996. From January 1983 to July 1996
he was employed by Petrie Retail, Inc. (formerly Petrie Stores Corporation), a
woman's retail apparel chain, in various capacities, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial
Controller from 1994 to 1996.
13
<PAGE>
On September 15, 1997, the Company announced the resignation of Wayne
Miller, the Company's Chief Financial Officer. Pending the appointment of a
successor to Mr. Miller, Mr. Heminover, together with the Company's financial
advisors, will be responsible for all of Mr. Miller's duties.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 1410 Broadway
in New York City, where the Company currently leases approximately 29,000
square feet, which represents a reduction of approximately 12,000 square feet
from the aggregate space occupied under several leases that terminated in July
1996. These facilities also house the Company's showrooms and its sales,
design, production and merchandising staffs. This space is occupied under a
lease expiring in July 1998. Net base rental expense aggregated approximately
$0.7 million, $2.3 million and $2.2 million in fiscal 1997, 1996 and 1995,
respectively. Chaus also leases approximately 19,000 square feet of space at
520 Eighth Avenue in New York City, which houses its technical production
support facilities (including its sample and pattern makers). Net base rental
expense for this space aggregated approximately $0.3 million in fiscal 1995,
and $0.2 million in each of fiscal 1996 and fiscal 1997. The lease for this
facility expires in January 1998.
During fiscal 1995, the Company consolidated its warehouse and
distribution centers located in Secaucus, New Jersey into one building,
reducing the leased square footage from approximately 390,000 square feet to
approximately 275,000 square feet. This facility houses the Company
administrative and finance personnel, its computer operations, one retail
outlet store and its warehouse and distribution center. In September 1995 the
Company renegotiated its Secaucus leases in order to terminate the lease on a
vacant building, and the new lease expires in June 2000. Base rental expense
for the Secaucus facilities aggregated approximately $1.5 million in fiscal
1995, and $1.3 million in each of fiscal 1996 and fiscal 1997.
Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.3 million for each of fiscal 1996
and fiscal 1997. In July 1995, the Company closed its Taiwan office and in
prior years, terminated its leases as to foreign office locations in the
Philippines and Italy. The aggregate rental payments, including the closed
locations, approximated $0.5 million in fiscal 1995.
The Company also leases space for its outlet stores operation, with
the average store utilizing approximately 3,000 square feet in fiscal 1997. The
annual aggregate base rental expense for such facilities was approximately $1.9
million for 1995 and $1.7 million for each of fiscal 1996 and 1997. The Company
plans to close all of its retail outlet stores (other than the retail outlet
store located at the Company's Secaucus facility, the space for which is leased
by the Company as part of its warehouse lease) by the end of January 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in an action which was commenced in federal
district court in New York by the Equal Employment Opportunity Commission
("EEOC") on behalf of three patternmakers, each of whom was terminated by the
Company in late 1995. The complaint alleges discrimination on the basis of age
and national origin. The Company was served with the complaint on April 7,
1997. The complaint seeks equitable relief, including (i) reinstatement of the
three individuals at issue, (ii) an injunction against the Company engaging in
age or national-origin discrimination, and (iii) an order that the Company
carry out an affirmative action program for individuals over 40 and for
individuals of Italian and/or non-Asian origin. The complaint also seeks back
pay, front pay, liquidated damages, compensatory damages, punitive damages,
and the EEOC's costs in the action. The Company will answer the complaint and
deny the material allegations of the complaint and intends to vigorously oppose
the action.
14
<PAGE>
There are no other material pending legal proceedings to which the
Company is a party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CHS." The following table sets forth for each of the
Company's fiscal periods indicated the high and low sales prices for the Common
Stock as reported on the NYSE.
HIGH LOW
---- ---
FISCAL 1996
First Quarter .......... $6.125 $4.750
Second Quarter ......... 5.625 3.125
Third Quarter .......... 5.000 2.875
Fourth Quarter ......... 4.625 3.000
FISCAL 1997
First Quarter .......... $3.625 $2.000
Second Quarter ......... 2.875 1.625
Third Quarter .......... 1.750 0.500
Fourth Quarter ......... 1.500 0.687
As of September 26, 1997, the Company had approximately 1,045 stockholders of
record.
The Company has not declared or paid cash dividends or made other
distributions on its Common Stock since prior to its initial public offering of
Common Stock in the 1986 Offering. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors and will depend on
the Company's earnings, its capital requirements and financial condition. It is
the present intention of the Board of Directors to retain all earnings, if any,
for use in the Company's business operations and, accordingly, the Board of
Directors does not expect to declare or pay any dividends in the foreseeable
future. In addition, the New Financing Agreement prohibits the Company from
declaring dividends or making other distributions on its capital stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Financial Statements of the Company and
the notes thereto, as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein.
15
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales ....................................... $160,100 $170,575 $181,697 $206,332 $235,819
Cost of goods sold .............................. 125,422 (4) 147,994 149,097 186,594 187,423
------- -------- -------- -------- --------
Gross profit .................................... 34,678 22,581 32,600 19,738 48,396
Selling, general and administrative expenses .... 40,924 40,162 44,794 55,400 57,410
Restructuring expenses .......................... 2,250 (3) -- 1,200 (1) 5,300 (1) --
Unusual expenses ................................ -- -- 8,333 (2) 1,900 (2) --
Interest expense ................................ 8,030 6,560 5,976 3,439 2,322
Other income (expense), net ..................... 113 56 91 (190) 449
---------- --------- --------- --------- ----------
Loss before income tax
provision .................................... (16,413) (24,085) (27,612) (46,491) (10,887)
Income tax provision ............................ 50 301 301 264 102
---------- --------- --------- --------- ----------
Net loss ........................................ $ (16,463) $(24,386) $(27,913) $(46,755) $(10,989)
=========== ========= ========= ========= ==========
Net loss per share (5) .......................... $ (0.63) $ (1.02) $ (1.40) $ (2.55) $ (0.60)
========== ========= ========= ========= ==========
Weighted average number of common and
common equivalent shares outstanding .......... 26,277 23,987 19,910 18,352 18,272
========== ========= ========== ========= ==========
BALANCE SHEET DATA:
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) .................... $(32,729) $ (19,483) $(13,914) $ 3,342 $40,923
Total assets .................................... 34,138 32,742 28,660 51,619 90 208
Short-term debt, including current portion
of long-term debt ............................. 37,756 26,077 18,698 21,365 17,504
Long-term debt .................................. 26,374 23,588 21,066 18,789 14,730
Stockholders' equity (deficiency) ............... (57,060) (40,610) (32,379) (13,614) 33,147
</TABLE>
- - -------------------
(1) Includes, in fiscal 1995, $1.2 million of employee severance, and in
fiscal 1994, $2.1 million for closing selected outlet stores, $2.5
million for consolidation of office and warehouse space, and $0.7
million for employee severance.
(2) Includes, in fiscal 1995, $7.8 million primarily relating to the costs
associated with the signing of the Company's new Chief Executive
Officer and $0.5 million related to certain legal matters, and in
fiscal 1994, expenses relating primarily to abandonment of fixed
assets, certain legal matters and the winding down of the Company's
Canadian joint venture.
(3) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred
relate to the closing of the Company's outlet stores (such as
professional fees, lease termination expenses, and write-off of fixed
assets), in addition to professional fees and other expenses
associated with the implementation of the Company's proposed
Restructuring.
(4) Includes $1.1 million for liquidation of inventory as a result of
closing the Company's outlet stores.
(5) Computed by dividing net income (loss) by the weighted average number
of Common and Common Equivalent Shares outstanding during the years.
For the fiscal years ended 1997, 1996, 1995, 1994 and 1993, Common
Equivalent Shares were not included in the calculation as their
inclusion would have been antidilutive.
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
expressed as a percentage of net sales.
Fiscal Year Ended June 30
---------------------------
1997 1996 1995
---- ---- ----
Net sales ...................................... 100.0% 100.0% 100.0%
Gross profit ................................... 21.7 13.2 17.9
Selling, general and administrative expenses ... 25.6 23.5 24.7
Restructuring expenses ......................... 1.4 -- 0.7
Unusual expenses ............................... -- -- 4.6
Interest expense ............................... 5.0 3.8 3.3
Net loss ....................................... (10.3) (14.3) (15.4)
Fiscal 1997 Compared to Fiscal 1996
In fiscal 1997, net sales decreased by $10.5 million, or 6.1%,
compared to the prior year. The decrease in net sales was due predominately to
a reduction in off-price sales, and the discontinuation of dresses as a product
category in March 1996. The decrease in net sales was partially offset by sales
of the Company's licensed Nautica product of approximately $25.0 million, which
commenced in August 1996. Sales by the Company's outlet stores decreased by
$1.2 million, or 6.5%, as compared to the prior year. This decrease was due to
the closing of nine outlet stores during the past two years.
Gross profit as a percentage of net sales was 21.7% as compared to
13.2% in the previous year. The increase in gross profit as a percentage of net
sales is primarily the result of a decrease in off-price sales volume and the
impact of eliminating dresses as a product category in February 1996.
Selling, general and administrative expenses increased by $0.8
million, to 25.6% of net sales in fiscal 1997 from 23.5% of net sales in fiscal
1996. This increase is primarily due to costs associated with the licensed
Nautica product line such as payroll, advertising, sample expense, and royalty
fees. The increase in such expenses was partially offset by a decrease in
payroll expenses throughout other areas of the Company, and a decrease in
occupancy costs. The decrease in occupancy costs was due to a decrease in
occupancy costs at the corporate headquarters which resulted from a decrease in
the space leased and the reduction in the number of outlet stores and the
attendant leases.
The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate to
the closing of the Company's outlet stores (such as professional fees, lease
termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's proposed Restructuring. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory.
17
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
In fiscal 1996, net sales decreased by $11.2 million, or 6.1%,
compared to the prior year. Approximately $8.6 million is due to the decrease
in dress sales as a result of the discontinuation of dresses as a product
category. The sales decrease is also the result of lower sales at regular and
incentive prices combined with an increase in off-price sales at deeper
discounts than the prior year.
Sales by the Company's outlet stores decreased by $5.7 million
compared to the prior year. This decrease is largely due to the closing of six
outlet stores in fiscal 1996 and a decline in same-store sales of approximately
$2.2 million.
Gross profit as a percentage of net sales was 13.2% as compared to
17.9% for the previous year. The decrease in gross profit as a percentage of
net sales reflects the impact of increased off-price sales volume at deeper
discounts. The Company's dress division realized a negative gross margin of
$2.2 million for fiscal 1996 which adversely impacted gross profit as a
percentage of net sales.
Selling, general and administrative expenses decreased by $4.6
million, from 24.7% of net sales in fiscal 1995 to 23.5% of net sales in fiscal
1996. This decrease is due to a decrease in payroll and payroll related items
of approximately $2.7 million, a decrease in occupancy costs of $1.2 million
and a decrease in other expenses of $0.7 million. The decrease in payroll and
payroll related items was predominately due to a decrease of approximately $0.7
million as a result of the closing of six stores in fiscal 1996 and a decrease
of approximately $2.0 million due to employee reductions as the Company
continues to improve the efficiency of its operations. The decrease in
occupancy costs was primarily due to a $1 million decrease associated with the
consolidation of the distribution facility and a $0.5 million decrease due to
the reduction in outlet stores.
At the end of fiscal 1995 the balance of the restructuring reserve was
$2.8 million. During fiscal 1996 $2.6 million was charged against the
restructuring reserve, consisting of charges relating to consolidation of
warehouse and office space ($1.3 million), severance related costs ($0.8
million) and outlet store closing costs ($0.5 million). At June 30, 1996 the
balance in the restructuring reserve was $0.2 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $11.0 million in fiscal
1997, $22.7 million in fiscal 1996, and $4.8 million in fiscal 1995. The net
cash used in operating activities in fiscal 1997 resulted primarily from the
net loss of $16.5 million, inclusive of $3.6 million of non-cash charges, and
increases in inventory of $2.5 million, partially offset by an increase in
accrued restructuring expenses of $1.7 million and an increase in accounts
payable of $2.4 million.
Historically, the Company has not required major capital expenditures.
In fiscal 1997 and 1996, purchases of fixed assets were $0.2 million and $0.5
million, respectively, consisting primarily of improvements in the Company's
New Jersey warehouse facilities, and New York design and showroom facilities.
In fiscal 1997, the Company incurred expenditures of $0.4 million for "in
store" fixtures and signs purchased in connection with the Nautica product
line. These "in store" fixtures and signs were placed in approximately 120
department stores. In fiscal 1998, the Company anticipates capital expenditures
of approximately $0.5 million, consisting primarily of expenditures for the
Company's New Jersey warehouse facility, and New York design and showroom
facilities. The Company also anticipates expenditures of approximately $1
million for "in store" fixtures and signs purchased in connection with the
Nautica product line.
18
<PAGE>
Old Bank Debt Agreement
The Company and BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of The Bank of New York, entered into a financing agreement in July
1991, which was amended and restated effective as of February 21, 1995 and
further amended, effective as of September 28, 1995 (the "September 1995
Amendment"), May 9, 1996 (the "May 1996 Amendment"), September 17, 1996 (the
"September 1996 Amendment"), January 31, 1997 (the "January 1997 Amendment"),
March 21, 1997 (the "March 1997 Amendment"), and April 1, 1997 (the "April 1,
1997 Amendment") and April 29, 1997 (the "April 29, 1997 Amendment")
(collectively, the "Old Bank Debt Agreement"). The Old Bank Debt Agreement
provided the Company with a $72 million credit facility for letters of credit
and direct borrowings, with a sublimit for loans and advances ranging between
$40.0 and $58.0 million. The amount of financing available was based upon a
formula incorporating eligible receivables and inventory, cash balances, other
collateral and permitted overadvances, all as defined in the Old Bank Debt
Agreement. At June 30, 1997, the Company had availability of approximately $2.1
million (inclusive of overadvance availability) under the Old Bank Debt
Agreement. The Company's obligations under the Old Bank Debt Agreement were
secured by the Company's accounts receivable, inventory and trademarks.
The Old Bank Debt Agreement contained certain financial covenants
including covenants regarding the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company was also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. In a Waiver,
dated May 5, 1997 (the "Waiver"), BNYF waived covenant compliance with net
worth, working capital and quarterly minimum profit requirement for the period
ended March 31, 1997.
Interest on direct borrowings was payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.50% at June 30,
1997) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeded the allowable overadvances) or (ii) the
Federal Funds Rate (8.50% at June 30, 1997) in effect plus 1% (Federal Funds
Rate in effect plus 2% in the event the Company's overadvance position exceeded
the allowable overadvances). There was an annual commitment fee of 0.375% of
the unused portion of the line, payable monthly, and letter of credit fees
equal to 0.125% of the outstanding letter of credit balance, payable monthly.
The Old Bank Debt Agreement required the payment of minimum service charges of
$0.6 million per annum. In connection with the May 1996 Amendment, BNYF was
paid a fee of $25,000, and additional fees of $10,000 per month through
December 1996 were provided for, with BNYF agreeing to provide specified levels
of overadvances up to $10.0 million through the same period. In connection with
the Waiver, BNYF was paid a fee of $25,000 and the Company issued the Existing
BNYF Warrants. In connection with the Restructuring, the Existing BNYF Warrants
were extinguished, and BNYF received the New BNYF Warrants. See "Business --
Restructuring -- Restructuring of Bank Debt." BNYF could have terminated the
Old Bank Debt Agreement after February 20, 1999, upon 60 days' written notice
to the Company.
On October 10, 1997, the Company and BNYF entered into the New
Financing Agreement which amended and restated in its entirety the Old Bank
Debt Agreement. The New Financing Agreement amends certain provisions of the
Old Bank Debt Agreement and provides for maximum availability of $81 million,
and overadvances of up to $12.8 million. The New Financing Agreement also
amends certain financial covenants contained in the Old Bank Debt Agreement.
The New Financing Agreement provides for certain additional events of default,
among which are the default by Ms. Chaus under the Bank Debt Put (as defined
below), and the failure by the Company to close all of its retail outlets by
the end of January 1998. See "Business -- Restructuring -- Restructuring of
Bank Debt".
19
<PAGE>
New Financing Agreement
The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66 million five-year revolving credit line with
a $20 million sublimit for letters of credit, and (ii) the New Term Loan which
is a $15 million term loan facility. Each facility matures on December 31,
2002. See "Business -- Restructuring -- Restructuring of Bank Debt".
The New Financing Agreement contains financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and maximum permitted loss (minimum permitted profit).
Credit Support
Josephine Chaus has arranged for a letter of credit (the "Letter of
Credit") in various amounts since April 1994 in return for which BNYF has
increased the availability under the Old Bank Debt Agreement. In consideration
for credit support provided by Ms. Chaus to the Company prior to February 1995,
Ms. Chaus was granted 1,216,500 warrants (the "1994 Warrants"), exercisable
through November 22, 1999, at prices ranging between $2.25 and $4.62 per share.
As part of the negotiations with BNYF in connection with the Old Bank Debt
Agreement, in February 1995 Josephine Chaus increased the Letter of Credit to
$10.0 million and extended its term to October 31, 1995 (the "February 1995
Increase/Extension"). In addition, in February 1995, Ms. Chaus provided a $5.0
million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Old Bank Debt Agreement's term. In September 1995, Ms. Chaus further
extended the term of the Letter of Credit to January 31, 1996 (the "September
1995 Extension"). In consideration of her provision of the February 1995
Increase/Extension, the $5.0 Million Guarantee and the September 1995
Extension, a special committee consisting of disinterested members of the Board
of Directors of the Company (the "Special Committee") authorized the issuance
to Ms. Chaus of warrants (the "1995 Warrants") to purchase an aggregate of
1,580,000 shares of Common Stock at prices ranging between $4.05 and $6.75 per
share. The issuance of the 1995 Warrants was approved at the 1995 Annual
Meeting of Stockholders. The issuance of the 1994 Warrants, the warrants for
the February 1995 Increase/Extension and the warrants for the $5.0 Million
Guarantee was recorded in fiscal 1995 at a value of $1.1 million, and was
included as a charge to interest expense with a corresponding increase to
additional paid-in capital. The issuance of the warrants for the September 1995
Extension was recorded in the second quarter of fiscal 1996 at a value of $0.2
million, and was included as a charge to interest expense with a corresponding
increase to additional paid-in capital. Ms. Chaus received warrant compensation
for her provision of the $5.0 Million Guarantee only through October 31, 1995.
Thereafter, for each three month period of the $5.0 Million Guarantee, she has
received cash compensation of $50,000, as authorized by the Special Committee.
In connection with the September 1995 Amendment, Ms. Chaus provided
the Company with an option to further extend the Letter of Credit to July 31,
1996 (the "July 1996 Option"), subject to the consummation of the Company's
November 1995 public offering of Common Stock. In January 1996, the Company
exercised the July 1996 Option to extend the Letter of Credit to July 31, 1996
(the "July 1996 Extension"). In consideration of her provision of the July 1996
Extension, the Special Committee authorized the issuance to Ms. Chaus, of
warrants (the "1996 Warrants") to purchase an aggregate of 682,012 shares of
Common Stock at a price of $4.20 per share. The issuance of the 1996 Warrants
was approved by the stockholders of the Company at the 1996 Annual Meeting of
Stockholders. The issuance of the 1996 Warrants ($0.3 million) was recorded in
the third quarter of fiscal 1996, at a value of $0.3 million and was included
as a charge to interest expense with a corresponding increase to additional
paid-in capital.
In connection with the May 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month
20
<PAGE>
period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus
for her guaranty, to $100,000 for each three month period of the $10.0 Million
Guarantee.
In connection with the September 1996 Amendment, Ms. Chaus agreed to
extend the Letter of Credit to July 31, 1997 (the "July 1997 Extension"),
increase the amount of the $10.0 Million Guarantee by $2.5 million to $12.5
million (the "$12.5 Million Guarantee") and fully collateralize the $12.5
Million Guarantee. In connection with the July 1997 Extension, the Special
Committee approved the payment of cash compensation to Ms. Chaus of $100,000
for each additional three month period of the Letter of Credit as extended from
January 31, 1997 to July 31, 1997. For her provision of the $12.5 Million
Guarantee, the Special Committee approved an increase in the amount of cash
compensation payable to Ms. Chaus for her guaranty, to $125,000 for each three
month period of the $12.5 Million Guarantee.
Ms. Chaus previously entered into the July Deposit Letter pursuant to
which she provided $10 million in cash collateral to secure the Bank Debt in
substitution for the letter of credit previously provided by her. The July
Deposit Letter was amended on October 10, 1997 to provide that the $10 million
in cash collateral shall be held as collateral to secure indebtedness under the
New Financing Agreement. Immediately prior to the consummation of the Rights
Offering, and subject to the other conditions of the Restructuring being
satisfied, such collateral will be released and used by Ms. Chaus to purchase
shares of Common Stock issuable to her upon the exercise of the Rights, in
satisfaction of her Purchase Commitment in connection with the Rights Offering.
See "Business -- Restructuring -- Restructuring of Credit Support Provided by
Ms. Chaus."
On October 10, 1997, in substitution for the $12.5 Million Guarantee
previously provided by Ms. Chaus, she entered into the October Deposit Letter
pursuant to which she provided $12.5 million in cash collateral and secured the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF-J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of common stock of the Company. See "Business
- - -- Restructuring -- Restructuring of Credit Support Provided by Ms. Chaus," and
"Business -- Restructuring -- Exchange of the Company's Indebtedness Owed to
Ms. Chaus for Equity Securities."
Subordinated Debt
The Company has outstanding at June 30, 1997, $26.4 million of
subordinated notes payable to Josephine Chaus (the "Subordinated Notes"). In
connection with the Company's November 1995 public offering (see "--Nautica
License Agreement and Future Financing Requirements"), Josephine Chaus extended
the maturity date of the Subordinated Notes (which were to mature on July 1,
1996) to July 1, 1998. The Company has been unable to pay principal or
interest, with certain exceptions, under the Subordinated Notes as a result of
covenants in the Old Bank Debt Agreement. See Note 7 to Notes to the Company's
Consolidated Financial Statements. The Subordinated Notes will, as part of the
Restructuring, be exchanged for equity. See "Business - Restructuring -
Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity
Securities."
21
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Proposed Restructuring of Indebtedness
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the Restructuring
pursuant to which: (i) the Company will seek to raise up to $20 million, but
not less than $12.5 million, of equity through the Rights Offering; (ii)
approximately $40.5 million of the Company's indebtedness to Ms. Chaus,
consisting of $28 million of existing subordinated indebtedness (including
accrued interest through January 15, 1998) and $12.5 million of indebtedness
which will be owed to Ms. Chaus, will be converted into Common Stock of the
Company; (iii) the New Financing Agreement (entered into on October 10, 1997);
and (iv) the Company will implement the Stock Split. In connection with the
Restructuring, BNYF has agreed that the credit support, described above,
heretofore provided by Ms. Chaus, will be terminated once the New Financing
Agreement becomes effective. Consummation of the Restructuring is subject to
the approval of certain aspects of the Restructuring by the stockholders of
the Company. Accordingly, until such approval is obtained, there can be no
assurances that the Restructuring will occur or be consummated. It is presently
contemplated that the Restructuring will be consummated by January 15, 1998.
See "Business -- Restructuring".
Future Financing Requirements
At June 30, 1997, the Company had a working capital deficiency of
$32.7 million. The Company requires the availability of sufficient cash flow
and borrowing capacity to finance its existing product lines and to develop and
market its licensed Nautica product lines. The Company expects to satisfy such
requirements through cash flow from operations, borrowings under the New
Financing Agreement and proceeds from the Rights Offering.
Although there can be no assurance, the Company believes that if the
Restructuring is consummated, the Company will have sufficient cash flow and
credit availability to meet its needs at least through the end of the fiscal
1998.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties,
including the Company's ability to obtain additional financing, retail market
conditions, consumer acceptance of the Company's products, shareholder approval
of certain matters related to the Restructuring and consummation of the
Restructuring.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net sales or profitability.
SEASONALITY
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales,
are shipped to customers, with revenues generally being recognized at the time
of shipment. As a result, the Company experiences significant variability in
its quarterly results and working capital requirements. Moreover, delays in
shipping can cause revenues to be recognized in a later quarter, resulting in
further variability in such quarterly results.
22
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS. For
the year ended February 1, 1997, the adoption of SFAS No. 128 would not have
had a material effect on the calculation of EPS.
SFAS No. 129, Disclosure of Information about Capital Structure,
effective for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. This statement
requires disclosure of the pertinent rights and privileges of various
securities outstanding (stocks, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of this statement will have no effect on the
Company as it currently discloses the information required.
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal periods beginning after December 15, 1997. The Company has not yet
determined the impact, if any, of adopting this standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
23
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is
set forth in Part I of this Annual Report on Form 10-K.
Information with respect to the directors of the Company is
incorporated by reference to the information to be set forth under the heading
"Election of Directors" in the Company's definitive proxy statement relating to
its 1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
(the "Company's 1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is incorporated by reference to the
information to be set forth under the heading "Executive Compensation" in the
Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information called for by Item 12 is incorporated by reference to the
information to be set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is incorporated by reference to the
information to be set forth under the headings "Executive Compensation" and
"Certain Transactions" in the Company's 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Financial Statements and Financial Statement Schedule: See List of
Financial Statements and Financial Statement Schedule on page F-1.
(b) The Company did not file a Form 8-K during the last quarter of its
fiscal year ended June 30, 1997.
(c) Exhibits filed herewith are denoted by an (*):
<TABLE>
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<S> <C> <C>
3.1 Restated Certificate of Incorporation (the "Restated Certificate") of
the Company (incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 33-5954 (the
"1986 Registration Statement").
3.11 Amendment dated November 18, 1987 to the Restated Certificate
(incorporated by reference to Exhibit 3.11 of the Company's
Registration Statement on Form S-2, Registration No. 33-63317 (the
"1995 Registration Statement").
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3.12 Amendment dated November 15, 1995 to the Restated Certificate
(incorporated by reference to Exhibit 3.12 of Amendment No. 1 to the
1995 Registration Statement).
3.2 By-Laws of the Company, as amended (incorporated by reference to
Exhibit 3.1 of the Company's Form 10-Q for the quarter ended December
31, 1987).
3.3 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's Form 10-Q for the quarter
ended September 30, 1994).
10.1 Restricted Stock Purchase Plan (incorporated by reference to Exhibit
10.1 of the Company's Form 10-K for the year ended June 30, 1987).
10.2 1986 Stock Option Plan, as amended and restated as of January 1, 1987
(the "1986 Stock Option Plan") (incorporated by reference to Exhibit
10.2 of the Company's Form 10-K for the year ended July 1, 1989 (the
"1989 Form 10-K")).
10.3 Amendment No. 1 to the 1986 Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the 1989 Form 10-K).
10.4 Amendment No. 2 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1990 Annual Meeting
of Stockholders).
10.5 Amendment No. 3 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1991 Annual Meeting
of Stockholders).
10.6 Amendment No. 4 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1993 Annual Meeting
of Stockholders).
10.7 Amendment No. 5 to the 1986 Stock Option Plan as amended (incorporated
by reference to the Company's Proxy Statement for its 1995 Annual
Meeting of Stockholders).
10.8 Incentive Award Plan (incorporated by reference to Exhibit 10.6 of the
1986 Registration Statement).
10.9 Agreement dated December 3, 1990 among the Company, Bernard Chaus,
Josephine Chaus and National Union Fire Insurance Company of
Pittsburgh, Pa., the Company's directors and officers liability
carrier (incorporated by reference to Exhibit 10.31 of the Company's
Form 10-Q for the quarter ended December 31, 1990).
10.10 Employment Agreement, dated July 1, 1991, between the Company and
Josephine Chaus (incorporated by reference to Exhibit 10.39 of the
Company's Form 10-K for the year ended June 30, 1991).
25
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EXHIBIT NO. PAGES
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10.11 Employment Agreement dated June 3, 1994 between the Company and Wayne
Miller (incorporated by reference to Exhibit 10.89 of the Company's
Form 10-K for the year ended June 30, 1994 (the "1994 Form 10-K")).
10.12 Employment Agreement dated September 1, 1994 between the Company and
Andrew Grossman with Stock Option Agreement dated as of September 1,
1994 by and between the Company and Andrew Grossman (incorporated by
reference to Exhibit 10.90 of the 1994 Form 10-K).
10.13 Employment Agreement dated December 14, 1996 between the Company and
Michael Winter (incorporated by reference to Exhibit 10.68 of the
Company's Form 10-Q for the quarter ended December 31, 1995 (the
"December 1995 Form 10-Q").
10.14 Waiver dated September 23, 1993 to the Restated and Amended Financing
Agreement between the Company and BNY Financial Corporation (the
"Financing Agreement") effective July 1, 1992 (incorporated by
reference to Exhibit 10.82 of the Company's Form 10-K for the year
ended June 30, 1993 (the "1993 form 10-K).
10.15 Waiver dated November 5, 1993 to the Financing Agreement (incorporated
by reference to Exhibit 10.83 of the Company's Form 10-Q for the
quarter ended September 30, 1993).
10.16 Amendment, effective October 1, 1993, to the Financing Agreement
(incorporated by reference to Exhibit 10-84 of the Company's Form 10-Q
for the quarter ended December 31, 1993 (the "December 1993 Form
10-Q")).
10.17 Waiver dated January 13, 1994 to the Financing Agreement (incorporated
by reference to Exhibit 10.85 of the December 1993 Form 10-Q).
10.18 Waiver dated February 10, 1994 to the Financing Agreement
(incorporated by reference to Exhibit 10.86 of the December 1993 Form
10-Q).
10.19 Waiver dated May 4, 1994 to the Financing Agreement (incorporated by
reference to Exhibit 10.87 of the Company's Form 10-Q for the quarter
ended March 31, 1994).
10.20 Waiver dated September 20, 1994 to the Financing Agreement
(incorporated by reference to Exhibit 10.93 of the 1994 Form 10-K).
10.21 Agreement, dated June 15, 1988, between the Company and Bernard Chaus
and Josephine Chaus, amending the terms of the Company's subordinated
promissory notes to each of them, each in the principal amount of
$7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
Registration Statement (incorporated by reference to Exhibit 10.11 of
the Company's Form 10-K for the year ended July 2, 1988).
26
<PAGE>
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EXHIBIT NO. PAGES
- - ----------- -----
10.22 Agreement, dated May 17, 1990, between the Company and Bernard Chaus
and Josephine Chaus amending the terms of the Company's subordinated
promissory notes to each of them, each in the principal amount of
$7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
Registration Statement.
10.23 Agreement, dated February 21, 1991, between the Company and Bernard
Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.74 of
the 1993 Form 10-K).
10.24 Subordinated promissory notes, dated March 12, 1991, between the
Company and Bernard Chaus and Josephine Chaus, separately, each in the
amount of $5,000,000 (incorporated by reference to Exhibit 10.75 of
the 1993 Form 10-K).
10.25 Agreement, dated July 31, 1991, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.76 of
the 1993 Form 10-K).
10.26 Agreement, dated July 31, 1991, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.77 of
the 1993 Form 10-K).
10.27 Agreement, dated July 15, 1992, between the Company and the Estate of
Bernard Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.78 of
the 1993 Form 10-K).
10.28 Agreement, dated October 30, 1992, between the Company and the Estate
of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in the
principal amount of $7,365,000 (incorporated by reference to Exhibit
10.79 of the 1993 Form 10-K).
10.29 Demand Notes, dated June 30, 1993, between the Company and the Estate
of Bernard Chaus and Josephine Chaus, each in the principal amount of
$1,520,216 (incorporated by reference to Exhibit 10.80 of the 1993
Form 10-K).
10.30 Agreement, dated September 21, 1993, between the Company and the
Estate of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in the
principal amount of $7,365,000 (incorporated by reference to Exhibit
10.81 of the 1993 Form 10-K).
27
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10.31 Subordinated promissory notes, dated August 1, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $208,716 (incorporated by reference
to Exhibit 10.94 of the 1994 Form 10-K).
10.32 Subordinated promissory note, dated August 1, 1993, between the
Company and Josephine Chaus in the amount of $1,311,500 (incorporated
by reference to Exhibit 10.95 of the 1994 Form 10-K.)
10.33 Subordinated Promissory Note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus in the amount of $1,000,000
(incorporated by reference to Exhibit 10.96 of the 1994 Form 10-K).
10.34 Subordinated promissory note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus, in the amount of $311,500
(incorporated by reference to Exhibit 10.97 of the 1994 Form 10-K).
10.35 Subordinated promissory notes, dated December 31, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $181,056 (incorporated by reference
to Exhibit 10.98 of the 1994 Form 10-K).
10.36 Subordinated promissory notes, dated December 31, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $412,950 (incorporated by reference
to Exhibit 10.99 of the 1994 Form 10-K).
10.37 Agreements, dated September 9, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $5,000,000 (incorporated by reference to Exhibit 10.100 of
the 1994 Form 10-K).
10.38 Agreements, dated October 18, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $1,520,216 (incorporated by reference to Exhibit 10.101 of
the 1994 Form 10-K).
10.39 Agreements, dated October 18, 1993, between the Company and Josephine
Chaus and the Estate of Bernard Chaus, separately, reflecting
amendments to subordinated promissory notes, each in the principal
amount of $7,365,000 (incorporated by reference to Exhibit 10.102 of
the 1994 Form 10-K).
10.40 Agreement, dated December 31, 1993, between the Company and Josephine
Chaus reflecting amendments to a subordinated promissory note in the
principal amount of $1,311,500 (incorporated by reference to Exhibit
10.103 of the 1994 Form 10-K).
10.41 Agreement, dated December 31, 1993, between the Company and the Estate
of Bernard Chaus, reflecting amendments to subordinated promissory
notes, in the
28
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principal amounts of $1,000,000 and $311,500 (incorporated by
reference to Exhibit 10.104 of the 1994 Form 10-K).
10.42 Agreement, dated November 9, 1994, between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.107 of the Company's Form
10-Q for the quarter ended September 30, 1994 (the "September 1994
Form 10-Q")).
10.43 Agreement, dated November 9, 1994, between the Company and the Estate
of Bernard Chaus extending the due dates on subordinated promissory
notes (incorporated by reference to Exhibit 10.108 of the September
1994 Form 10-Q).
10.44 Agreement, dated December 19, 1994, assigning the subordinated notes
from the Estate of Bernard Chaus to Josephine Chaus (incorporated by
reference to Exhibit 10.110 of the Company's Form 10-Q for the quarter
ended December 30, 1994 (the "December 1994 Form 10-Q").
10.45 Agreement, dated January 11, 1995, between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.111 of the December 1994 Form
10-Q).
10.46 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 32,500 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.112 of the Company's Form
10-Q for the quarter ended March 31, 1995 (the "March 1995 Form
10-Q")).
10.47 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 206,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.113 of the March 1995 Form
10-Q).
10.48 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 338,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.114 of the March 1995 Form
10-Q).
10.49 Agreement, dated November 22, 1994, between the Company and Josephine
Chaus issuing 640,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.115 of the March 1995 Form
10-Q).
10.50 Waiver dated November 7, 1994, to the Financing Agreement
(incorporated by reference to Exhibit 10.106 of the September 1994
Form 10-Q).
10.51 Waiver dated February 10, 1995 to the Financing Agreement
(incorporated by reference to Exhibit 10.109 of the December 1994 Form
10-Q).
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10.52 Agreement effective February 21, 1995 (the "Old Bank Debt Agreement")
between the Company and BNY Financial Corporation restating and
amending the Financing Agreement (incorporated by reference to Exhibit
10.116 of the March 1995 Form 10-Q).
10.53 Waiver dated September 14, 1995 to the Old Bank Debt Agreement
(incorporated by reference to Exhibit 10.5 of the 1995 Registration
Statement).
10.54 Agreement effective as of September 28, 1995 relating to the Old Bank
Debt Agreement (incorporated by reference to Exhibit 10.58 of the 1995
Registration Statement).
10.55 Agreement dated April 28, 1995 between the Company and Josephine Chaus
extending the due dates on subordinated promissory notes (incorporated
by reference to Exhibit 10.117 of the March 1995 Form 10-Q).
10.56 Agreement dated September 8, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.60 of the 1995 Registration
Statement).
10.57 License Agreement dated as of September 6, 1995 between the Company
and Nautica Apparel Inc. (incorporated by reference to Exhibit 10.61
of the 1995 Registration Statement, confidential portions of which
have been omitted and filed separately with the Commission subject to
an order granting confidential treatment).
10.58 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, extending the due dates on subordinated promissory notes and
clarifying the subordination provision (incorporated by reference to
Exhibit 10.65 of the 1995 Registration Statement).
10.59 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, providing the Company with an option to extend the Letter of
Credit to July 31, 1996 (incorporated by reference to Exhibit 10.66 of
the 1995 Registration Statement).
10.60 Agreement dated October 27, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q
for the quarter ended September 30, 1995).
10.61 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 815,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.69 of the December 1995 Form
10-Q).
30
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
10.62 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 535,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.70 of the December 1995 Form
10-Q).
10.63 Agreement dated November 15, 1995 between the Company and Josephine
Chaus issuing 230,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.71 of the December 1995 Form
10-Q).
10.64 Amendment and waiver dated May 9, 1996 to the Financing Agreement
(incorporated by reference to Exhibit 10.73 of the Company's Form 10-Q
for the quarter ended March 31, 1996).
10.65 Amendment No. 4 dated September 17, 1996 to the Financing Agreement
(incorporated by reference to Exhibit 10.65 of the Company's Form 10-K
for the year ended June 30, 1996).
10.66 Lease dated June 12, 1996 between the Company and L. H. Charney
Associates, relating to the Company's facility at 1410 Broadway, New
York, New York (incorporated by reference to Exhibit 10.66 of the
Company's Form 10-K for the year ended June 30, 1996).
10.67 Amendment No. 5 dated January 31, 1997 to the Financing Agreement
(incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q
for the quarter ended December 31, 1996).
10.68 Waiver dated February 4, 1997 to the Financing Agreement (incorporated
by reference to Exhibit 10.68 of the Company's Form 10-Q for the
quarter ended December 31, 1996).
10.69 Consulting Agreement dated as of December 31, 1996 between the Company
and Michael Winter (incorporated by reference to Exhibit 10.69 of the
Company's Form 10-Q for the quarter ended December 31, 1996).
10.70 Agreement dated February 19, 1997, between the Company and BNY
Financial Corp. issuing 125,000 warrants to purchase Common Stock of
the Company (incorporated by reference to Exhibit 10.70 of the
Company's Form 10-Q for the quarter ended March 31, 1997).
10.71 Amendment No. 6 dated March 21, 1997, to the Financing Agreement
(incorporated by reference to Exhibit 10.71 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
10.72 Amendment No. 7 dated April 1, 1997, to the Financing Agreement
(incorporated by reference Exhibit 10.72 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
31
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- - ----------- -----
10.73 Amendment No. 8 dated April 29, 1997, to the Financing Agreement
(incorporated by reference Exhibit 10.73 of the Company's Form 10-Q
for the quarter ended March 31, 1997).
10.74 Waiver dated May 5, 1997, to the Financing Agreement (incorporated by
reference Exhibit 10.74 of the Company's Form 10-Q for the quarter
ended March 31, 1997).
*10.75 Commitment Letter dated as of June 26, 1997, between the Company and
BNY Financial Corp.
*10.76 Cash Collateral Deposit Letter dated as of July 23, 1997, between
Josephine Chaus and BNY Financial Corp.
*10.77 Cash Collateral Deposit Letter dated as of October 10, 1997, between
Josephine Chaus and BNY Financial Corp.
*10.78 Amended and Restated Cash Collateral Deposit Letter dated as of
October 10, 1997, between Josephine Chaus and BNY Financial Corp.
*10.79 Second Restated and Amended Financing Agreement dated as of October
10, 1997, between the Company and BNY Financial Corp.
21 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's Form 10-K for the year ended June 30,
1995).
*27 Financial Data Schedule.
</TABLE>
- - --------------
* Filed herewith.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on
October 14, 1997.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
-------------------------------
Josephine Chaus
Chairwoman of the Board and
Office of the Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on October 14, 1997.
SIGNATURE TITLE
--------- -----
/s/ Josephine Chaus Chairwoman of the Board and Office of the Chairman
- - -----------------------
Josephine Chaus
/s/ Andrew Grossman Chief Executive Officer and Office of the Chairman
- - -----------------------
Andrew Grossman
/s/ Barton Heminover Vice President -- Corporate Controller and Assistant
- - ----------------------- Secretary
Barton Heminover
/s/ Philip G. Barach Director
- - -----------------------
Philip G. Barach
/s/ S. Lee Kling Director
- - -----------------------
S. Lee Kling
/s/ Harvey M. Krueger Director
- - -----------------------
Harvey M. Krueger
33
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Bernard Chaus, Inc.
and subsidiaries are included in Item 8:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets -- June 30, 1997 and 1996 ................. F-3
Consolidated Statements of Operations -- Years Ended
June 30, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) --
Years Ended June 30, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Cash Flows -- Years
Ended June 30, 1997, 1996 and 1995................................... F-6
Notes to Consolidated Financial Statements............................. F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 14(a)(2):
Schedule II -- Valuation and Qualifying Accounts....................... S-1
The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 1997 and June 30, 1996 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bernard Chaus, Inc. and
subsidiaries at June 30, 1997 and June 30, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
September 19, 1997
(October 10, 1997 as to Note 6)
F-2
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .................................................... $ 330 $ 247
Accounts receivable, less allowances of $5,375 and $5,070 .................... 7,451 7,995
Inventories .................................................................. 23,746 21,256
Prepaid expenses ............................................................. 568 783
--------- ---------
Total current assets ...................................................... 32,095 30,281
Fixed assets-- net ............................................................. 1,295 1,898
Other assets ................................................................... 748 563
--------- ---------
$ 34,138 $ 32,742
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Notes payable-- bank ......................................................... $ 37,756 $ 26,077
Accounts payable ............................................................. 19,825 17,435
Accrued expenses ............................................................. 5,393 6,056
Accrued restructuring expenses ............................................... 1,850 196
--------- ---------
Total current liabilities ................................................. 64,824 49,764
Subordinated promissory notes .................................................. 26,374 23,588
--------- ---------
91,198 73,352
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.01 par value, authorized shares -- 1,000,000; outstanding
shares -- none
Common stock, $.01 par value; authorized shares -- 50,000,000; issued shares
-- 26,899,974 at June 30, 1997 and 26,893,724
at June 30, 1996 .......................................................... 269 269
Additional paid-in capital ................................................... 65,463 65,450
Deficit ...................................................................... (121,312) (104,849)
Less: Treasury stock, at cost-- 622,700 shares .............................. (1,480) (1,480)
--------- ---------
Total stockholders' deficiency ............................................ (57,060) (40,610)
--------- ---------
$ 34,138 $ 32,742
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales ........................................ $ 160,100 $ 170,575 $ 181,697
Cost of goods sold ............................... 125,422 147,994 149,097
----------- ----------- -----------
Gross profit ..................................... 34,678 22,581 32,600
Selling, general and administrative expenses ..... 40,924 40,162 44,794
Restructuring expenses ........................... 2,250 -- 1,200
Unusual expenses ................................. -- -- 8,333
----------- ----------- -----------
( 8,496) (17,581) (21,727)
Interest expense ................................. (8,030) (6,560) (5,976)
Other income (expense), net ...................... 113 56 91
----------- ----------- -----------
Loss before provision for income taxes ........... (16,413) (24,085) (27,612)
Provision for income taxes ....................... 50 301 301
----------- ----------- -----------
Net loss ......................................... $ (16,463) $ (24,386) $ ( 27,913)
=========== =========== ===========
Net loss per share ............................... $ (0.63) $ (1.02) $ (1.40)
=========== =========== ===========
Weighted average number of common shares
outstanding .................................... 26,277,000 23,987,000 19,910,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------------------- Additional --------------------------
Number of Paid-in Number of
Shares Amount Capital (Deficit) Shares Amount Total
------- ------ --------- ----------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994 18,975,031 $ 190 $40,226 $(52,550) 622,700 $ (1,480) $(13,614)
Net loss ..................... (27,913) (27,913)
Exchange of notes for
common stock ........... 1,914,500 19 7,352 -- -- -- 7,371
Issuance of warrants ..... -- -- 1,136 -- -- -- 1,136
Exercise of stock options 183,550 2 639 -- -- -- 641
---------- ------ -------- -------- -------- --------- --------
Balance at June 30, 1995.. 21,073,081 211 49,353 (80,463) 622,700 (1,480) (32,379)
Net loss ...................... (24,386) (24,386)
Net proceeds from issuance
of common stock.......... 5,750,000 57 15,366 -- -- -- 15,423
Issuance of warrants ....... -- -- 520 -- -- -- 520
Exercise of stock options 70,643 1 211 212
------------ ------ --------- ---------- ---------- --------- --------
Balance at June 30, 1996 26,893,724 269 65,450 (104,849) 622,700 (1,480) (40,610)
Net loss ...................... (16,463) (16,463)
Exercise of stock options 6,250 -- 13 13
------------- ------ ---------- ------------ ------------ ----------- ---------
Balance at June 30, 1997 26,899,974 $ 269 $65,463 $(121,312) 622,700 $(1,480) $(57,060)
========== ====== ======= ========= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
Year Ended June 30,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net loss ................................................ $(16,463) $(24,386) $(27,913)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ........................ 865 974 1,305
Loss on disposal of fixed assets ..................... -- -- 358
(Recovery of) provision for losses on accounts
receivable ......................................... (20) (69) 225
Deferred interest on subordinated promissory
notes .............................................. 2,786 2,522 2,277
Non-cash interest expense ............................ -- 520 1,307
Changes in operating assets and liabilities:
Accounts receivable ................................ 564 (280) 9,886
Inventories ........................................ (2,490) (5,053) 9,300
Prepaid expenses and other assets .................. 372 655 2,278
Accounts payable ................................... 2,390 4,513 (1,368)
Accrued expenses ................................... (663) 507 (1,161)
Accrued restructuring expenses ..................... 1,654 (2,608) (1,275)
-------- --------- ---------
Net Cash Used In Operating Activities .................... (11,005) (22,705) (4,781)
-------- --------- --------
Investing Activities
Purchases of fixed assets .............................. (186) (480) (443)
Purchases of other assets............................... (418) --- ---
-------- ------------ ---------
Net Cash Used In Investing Activities .................... (604) (480) (443)
Financing Activities
Net proceeds from (repayments of) short-term bank
borrowings ........................................... 11,679 7,379 (2,417)
Net proceeds from issuance of stock .................... -- 15,423 --
Principal payments on subordinated promissory
notes ................................................ -- -- (250)
Proceeds from issuance of subordinated promissory
notes ................................................ -- -- 7,200
Net proceeds from exercise of options .................. 13 212 641
-------- ----------- -----------
Net Cash Provided by Financing Activities ................ 11,692 23,014 5,174
------- --------- ----------
Increase (Decrease) In Cash And Cash Equivalents ......... 83 (171) (50)
Cash and Cash Equivalents, Beginning of Year ............. 247 418 468
-------- ---------- -----------
Cash and Cash Equivalents, End of Year ................... 330 $ 247 $ 418
======== ========== ===========
Cash paid for:
Taxes .................................................. 13 14 7
Interest ............................................... 4,822 3,809 2,283
Supplemental schedule of non-cash financing activities:
Exchange of subordinated promissory notes for
common stock ....................................... -- -- 7,200
Issuance of warrants for credit support by
principal stockholder .............................. -- 520 1,136
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Bernard Chaus, Inc. (the "Company") designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear which are marketed principally under the CHAUS(R), CHAUS SPORT(R),
and NAUTICA(R) trademarks. The Company's products are sold nationwide through
department store chains, specialty retailers and other retail outlets.
In the latter part of fiscal 1994, the Company initiated a
restructuring plan (the "1994 Restructuring Plan") which entailed several
initiatives to improve its financial position. These initiatives included,
among other things, a $7.2 million cash infusion from Josephine Chaus to fund
the costs associated with hiring Andrew Grossman as its new Chief Executive
Officer, negotiation of a new bank financing agreement with BNY Financial
Corporation ("BNYF"), a wholly owned subsidiary of The Bank of New York,
expiring in February 1999, overhead reductions, centralization of certain
functions, closing of selected outlet stores.
On November 22, 1995, the Company issued 5,750,000 shares of Common
Stock at a price of $3.00 per share in an underwritten public offering.
Proceeds from the offering, net of commissions and other expenses were $15.4
million.
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved a restructuring
program (the "Restructuring"). See Notes 6 and 7.
The Company's business plan requires the availability of sufficient
cash flow and borrowing capacity to finance its existing product lines and the
development and marketing of its new licensed Nautica lines. The Company
expects to satisfy such requirements through cash flow from operations, and its
proposed Restructuring, including the New Financing Agreement.
Although there can be no assurance that the plans set forth above will
provide the Company with adequate resources, the Company believes that these
initiatives will have a positive impact on future operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material intercompany accounts and transactions
have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share:
Net loss per share has been computed by dividing the applicable net
loss by the weighted average number of common shares outstanding during the
year. Common equivalent shares were not included as their inclusion would have
been antidilutive.
Revenue Recognition:
Revenues are recorded at the time merchandise is shipped, and with
regard to the outlet stores, at the time when goods are sold to the customer.
Credit Terms:
The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. The Company has historically incurred
minimal credit losses. At June 30, 1997 and 1996, approximately 62% and 66%, of
the Company's accounts receivables were due from department store customers
owned by four single corporate entities. During fiscal 1997, approximately 63%
of the Company's net sales were made to department store customers owned by
four single corporate entities, as compared to 60% in fiscal 1996 and 55% in
fiscal 1995. Sales to Dillard's Department Stores accounted for 33% of net
sales in fiscal 1997, 29% of net sales in fiscal 1996 and 22% of net sales in
fiscal 1995. Sales to nine department store companies owned by The May
Department Stores Company accounted for approximately 16% of the Company's net
sales in fiscal 1997, 10% of net sales in fiscal 1996 and 15% of net sales in
fiscal 1995. Sales to eight department store companies owned by Federated
Department Stores accounted for approximately 8% of net sales in fiscal 1997,
5% of net sales in fiscal 1996 and 11% of net sales in fiscal 1995. Sales to
two department store customers owned by TJX Companies, Inc. accounted for
approximately 6% of net sales in fiscal 1997, 16% of net sales in fiscal 1996
and 7% of net sales in fiscal 1995.
The percentages of net sales are based upon stores owned by the four
corporate entities at the end of fiscal 1997. As a result of the Company's
dependence on these customers, they may have the ability to influence the
Company's business decisions. The loss of or significant decrease in business
from any of its major customers would have a material adverse effect on the
Company's financial position and results of operations.
Cash Equivalents:
Cash equivalents are short-term, highly liquid investments purchased
with an original maturity of three months or less.
Inventories:
Inventories are stated at the lower of cost, using the first-in,
first-out method, or market.
Fixed Assets:
Furniture and equipment are depreciated principally using the
straight-line method over eight years. Leasehold improvements are amortized
using the straight-line method over either the term of the lease or the
estimated useful
F-8
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life of the improvement, whichever period is shorter. Computer software is
depreciated using the straight-line method over three years.
Other Assets:
"In store" fixtures and signs are depreciated using the straight line
method over five years.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the
United States dollar to be the functional currency of its overseas
subsidiaries. All foreign currency gains and losses are recorded in the
Consolidated Statement of Operations.
Income Taxes:
The Company records income taxes in accordance with Financial
Accounting Standards Board Statement SFAS No. 109, "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to enter into the determination of
taxable income (loss).
Fair Value of Financial Instruments
For financial instruments, including cash and cash equivalents,
accounts receivable and payable, accruals and notes payable -- bank, it was
assumed that the carrying amounts approximated fair value due to their short
maturity.
It is not practicable to determine the fair value of the subordinated
debt with the principal shareholder as alternative sources of financing have
not been evaluated by the Company.
Effect of Accounting Pronouncements Not Yet Adopted:
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS. For
the year ended February 1, 1997, the adoption of SFAS No. 128 would not have
had a material effect on the calculation of EPS.
SFAS No. 129, Disclosure of Information about Capital Structure,
effective for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. This statement
requires disclosure of the pertinent rights and privileges of various
securities outstanding (stocks, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of this statement will have no effect on the
Company as it currently discloses the information required.
F-9
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal periods beginning after December 15, 1997. The Company has not yet
determined the impact, if any, of adopting this standard.
3. INVENTORIES
Inventories consist of:
JUNE 30, JUNE 30,
1997 1996
----------- -----------
(IN THOUSANDS)
Finished goods .................. $19,981 18,151
Work-in-process ................. 1,027 1,471
Raw materials ................... 2,738 1,634
------- -------
$23,746 $21,256
======= =======
Inventories include merchandise in transit (principally finished goods) of
approximately $8.5 million at June 30, 1997 and $9.0 million at June 30, 1996.
F-10
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS
Fixed assets at cost, net of accumulated depreciation and amortization, consist
of:
JUNE 30, JUNE 30,
1997 1996
---------- --------
(IN THOUSANDS)
Furniture and equipment .................... $10,233 $10,234
Leasehold improvements ..................... 7,955 8,118
------ -------
$18,188 $18,352
Less accumulated depreciation and
amortization ............................ 16,893 16,454
------- -------
$ 1,295 $ 1,898
======= =======
5. INCOME TAXES
Significant components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...........................$ 42,500 $ 38,200
Costs capitalized to inventory for tax purposes............ 1,300 900
Accrued interest, subordinated debt/warrants ............. 4,000 3,000
Book over tax depreciation ................................... 2,000 1,900
Sales allowances not currently deductible .................. 2,100 1,600
Reserves and other items not currently deductible ....... 1,700 1,200
--------- --------
53,600 46,800
Valuation allowance for deferred tax assets ................. (53,600) (46,800)
--------- --------
Net deferred tax asset ...................................... $ 0 $ 0
======== =========
</TABLE>
There was a change in the valuation allowance for the year ended June 30, 1997
of $6.8 million.
<TABLE>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1997 1996 1995
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Benefit for federal
income taxes at the statutory rate of
35.0% in each of 1997, 1996 and 1995 ............ ($5,694) ($8,430) ($9,665)
State and local income taxes
net of federal tax benefit ....................... 50 301 301
Executive compensation in excess of
amount deductible for tax purposes ............... -- -- 2,100
Other .............................................. 51 35 35
Effect of unrecognized federal tax loss
carryforwards .................................... 5,643 8,395 7,530
--------- --------- -------
Provision for income taxes ......................... $ 50 $ 301 $ 301
========= ========= =======
</TABLE>
F-11
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1997, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $101 million, which will
expire between 2006 and 2011.
6. FINANCIAL AGREEMENT
The Company and BNYF, a wholly owned subsidiary of The Bank of New
York, entered into a financing agreement in July 1991, which was amended and
restated effective as of February 21, 1995 and further amended, effective as of
September 28, 1995 (the "September 1995 Amendment"), May 9, 1996 (the "May 1996
Amendment"), September 17, 1996 (the "September 1996 Amendment"), January 31,
1997 (the "January 1997 Amendment"), March 21, 1997 (the "March 1997
Amendment"), and April 1, 1997 (the "April 1, 1997 Amendment") and April 29,
1997 (the "April 29, 1997 Amendment")(collectively, the "Old Bank Debt
Agreement"). The Old Bank Debt Agreement provided the Company with a $72
million credit facility for letters of credit and direct borrowings, with a
sublimit for loans and advances ranging between $40.0 and $58.0 million. The
amount of financing available was based upon a formula incorporating eligible
receivables and inventory, cash balances, other collateral and permitted
overadvances, all as defined in the Old Bank Debt Agreement. At June 30, 1997,
the Company had availability of approximately $2.1 million (inclusive of
overadvance availability) under the Old Bank Debt Agreement. The Company's
obligations under the Old Bank Debt Agreement were secured by the Company's
accounts receivable, inventory and trademarks.
The Old Bank Debt Agreement contained certain financial covenants
including covenants limiting the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company was also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. During the
third quarter of fiscal year 1996, the Company was not in compliance with
certain financial covenants. BNYF had waived such noncompliance.
Interest on direct borrowings was payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.25% at June 30,
1997) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeded the allowable overadvances) or (ii) the
Federal Funds Rate in effect plus 1% (Federal Funds Rate in effect plus 2% in
the event the Company's overadvance position exceeded the allowable
overadvances). There was a commitment fee of 0.375% of the unused portion of
the line, payable monthly, and letter of credit fees equal to 0.125% of the
outstanding letter of credit balance, payable monthly. The Old Bank Debt
Agreement required the payment of minimum service charges of $0.6 million per
annum. In connection with the May 1996 Amendment, BNYF was paid a fee of
$25,000, and additional fees of $10,000 per month through December 1996 were
provided for, with BNYF agreeing to provide specified levels of overadvances up
to $10.0 million through the same period. In connection with the September 1996
Amendment, BNYF agreed to provide overadvances of up to $15.0 million through
June 1997. BNYF could have terminated the Old Bank Debt Agreement after
February 20, 1999, upon 60 days' written notice to the Company. The weighted
average interest rate was 6.7%, 8.9% and 9.0% for the years ended June 30,
1994, 1995, and 1996, respectively.
Josephine Chaus has arranged for the Letter of Credit in various
amounts since April 1994 in return for which BNYF has increased the
availability under the Old Bank Debt Agreement. In consideration for credit
support provided by Ms. Chaus to the Company prior to February 1995, Ms. Chaus
was granted 1,216,500 warrants (the "1994 Warrants"), exercisable through
November 22, 1999, at prices ranging between $2.25 to $4.62 per share. In
February 1995 Josephine Chaus increased the Letter of Credit to $10.0 million
and extended its term to October 31, 1995 (the "February 1995
Increase/Extension"). In addition, in February 1995, Mrs. Chaus provided a $5.0
million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Old Bank Debt Agreement's term. In September 1995, Ms. Chaus further
extended the term of the Letter of Credit to January 31, 1996 (the
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<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"September 1995 Extension"). In consideration of the February 1995
Increase/Extension, the $5.0 Million Guarantee and the September 1995
Extension, a special committee consisting of disinterested members of the Board
of Directors of the Company (the "Special Committee") authorized the issuance
of warrants (the "1995 Warrants") to purchase an aggregate of 1,580,000 shares
of Common Stock at prices ranging between $4.05 and $6.75 per share. The
issuance of the 1995 Warrants was approved at the 1995 Annual Meeting of
Stockholders. Ms. Chaus received warrant compensation for her provision of the
$5.0 Million Guarantee only through October 31, 1995. Thereafter, for each
three month period of the $5.0 Million Guarantee, she has received cash
compensation of $50,000, as authorized by the Special Committee. The issuance
of the 1994 Warrants, the warrants for the February 1995 Increase/Extension and
the warrants for the $5.0 Million Guarantee were recorded in fiscal 1995 at a
value of $1.1 million, included as a charge to interest expense with a
corresponding increase to additional paid-in capital. The issuance of the
warrants for the September 1995 Extension was recorded in the second quarter of
fiscal 1996 at a value of $0.2 million, included as a charge to interest
expense with a corresponding increase to additional paid-in capital.
In connection with the September 1995 Amendment, Ms. Chaus provided
the Company with an option to further extend the Letter of Credit to July 31,
1996 (the "July 1996 Option"), subject to the consummation of the Company's
November 1995 public offering of Common Stock. In January 1996, the Company
exercised the July 1996 Option to extend the Letter of Credit to July 31, 1996
(the "July 1996 Extension"). In consideration of her provision of the July 1996
Extension, the Special Committee authorized the issuance to Ms. Chaus, of
warrants (the "1996 Warrants") to purchase an aggregate of 682,012 shares of
Common Stock at a price of $4.20 per share. The issuance of the 1996 Warrants
was approved by the stockholders of the Company at the 1996 Annual Meeting of
Stockholders. The issuance of the 1996 Warrants ($0.3 million) was recorded in
the third quarter of fiscal 1996, at a value of $0.3 million and was included
as a charge to interest expense with a corresponding increase to additional
paid-in capital.
In connection with the May 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
Million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month
period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus
for her guaranty, to $100,000 for each three month period of the $10.0 Million
Guarantee.
In connection with the September 1996 Amendment, Ms. Chaus agreed to
extend the Letter of Credit to July 31, 1997 (the "July 1997 Extension") and
increase the amount of the $10.0 Million Guarantee by $2.5 million to $12.5
million (the "$12.5 Million Guarantee") and fully collateralize the $12.5
Million Guarantee. In connection with the July Extension, the Special Committee
approved the payment of cash compensation to Ms. Chaus of $100,000 for each
additional three month period of the Letter of Credit as extended from January
31, 1997 to July 31, 1997. For her provision of the $12.5 Million Guarantee,
the Special Committee approved an increase in the amount of cash compensation
payable to Ms. Chaus for her guaranty, to $125,000 for each three month period
of the $12.5 Million Guarantee.
The senior secured bank debt owing to BNYF by the Company, as of
September 30, 1997 (the "Bank Debt") consisted of approximately (i) $57.5
million in respect of direct borrowings, and (ii) $17.5 million in respect of
letters of credit.
F-13
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the Restructuring, the $57.5 million in respect of direct
borrowings by the Company has been and will be refinanced as follows: (i) $15
million has been refinanced by BNYF pursuant to the terms of the New Term Loan;
(ii) approximately $20 million has been refinanced under the terms of the New
Revolving Facility; (iii) $12.5 in respect of borrowings previously guaranteed
by Ms. Chaus will be satisfied in full out of proceeds from a loan made by BNYF
to Ms. Chaus (the "BNYF--J. Chaus Loan"), and Ms. Chaus shall become subrogated
to the rights of BNYF with respect to such loan amount (the "Subrogated Loan")
until the Subrogated Loan is exchanged for equity, as set forth above; and (iv)
$10 million will be satisfied in full out of proceeds received from the Rights
Offering pursuant to the Purchase Commitment.
Under the terms of the Restructuring the $17.5 million of Bank Debt
owing to BNYF in respect of letters of credit will be refinanced by BNYF
pursuant to the terms of the New Financing Agreement.
The approximately $75 million of Bank Debt that has been refinanced
as part of the Restructuring, has been refinanced under two facilities that are
part of the New Financing Agreement: (i) the New Revolving Facility which is a
$66 million five-year revolving credit line with a $20 million sublimit for
letters of credit, and (ii) the New Term Loan which is a $15 million term loan
facility. Each facility will mature on December 31, 2002. The Company's
obligations under the New Financing Agreement are secured by a first priority
lien on substantially all of the Company's assets, including the Company's
accounts receivable, inventory and trademarks.
Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate and is payable on a monthly basis, in arrears. Interest on the New
Term Loan accrues at an interest rate ranging from 1/2 of 1% above the Prime
Rate to 1 1/2% above the Prime Rate, which interest rate will be determined,
from time to time, based upon the Company's availability under the New
Revolving Facility. With the exception of warrants issued to BNYF (as discussed
below), the Company's execution of the New Financing Agreement did not require
the payment of any commitment, closing, administration or facility fees. The
New Financing Agreement provides for service charges and letter of credit fees
on substantially the same terms as those existing under the Company's Old Bank
Debt Agreement with BNYF.
Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the New Term Loan. The first amortization payment
is due on March 31, 1998. A balloon payment in the amount of $10.25 million is
due on December 31, 2002. In the event of the earlier termination by the
Company of the New Financing Agreement, the Company will be liable for
termination fees initially equal to $2.8 million, and declining to $2.2 million
after October 8, 2000.
BNYF's existing warrants to purchase 125,000 shares of Common Stock
(the "Existing BNYF Warrants") were extinguished, and BNYF received new
warrants (the "New BNYF Warrants") to purchase (i) 375,000 shares of the
Company's Common Stock, with an exercise price of $1.0625 per share, the
closing price per share of the Common Stock on June 26, 1997, the date on
which BNYF and the Company executed a commitment letter (the "Commitment
Letter") describing the terms and conditions of the Restructuring and (ii)
125,000 shares of the Company's Common Stock, with an exercise price equal to
the thirty day average trading price on the New York Stock Exchange beginning
on the date of the consummation of the Rights Offering.
The New Financing Agreement amends certain provisions of the Old Bank
Debt Agreement and provides for maximum availability of $81 million, and
overadvances of up to $12.8 million. The New Financing Agreement also amends
certain financial covenants contained in the Old Bank Debt Agreement. The New
F-14
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financing Agreement provides for certain additional events of default, among
which are the default by Ms. Chaus under the Bank Debt Put (as defined below),
and the failure by the Company to close all of its retail outlets by the end of
January 1988.
As an inducement to BNYF to enter into the New Financing Agreement,
Ms. Chaus has agreed with BNYF that she will purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement between the
Company and BNYF, in the event that (i) an event of default occurs under the
New Financing Agreement prior to May 15, 1998, or (ii) the Rights Offering
is not consummated prior to May 15, 1998 (the "Bank Debt Put").
Ms. Chaus previously entered into a deposit letter dated July 23, 1997
(the "July Deposit Letter") pursuant to which she provided $10 million in cash
collateral to secure the Bank Debt in substitution for the letter of credit
previously provided by her. The July Deposit Letter was amended on October 10,
1997 to provide that the $10 million in cash collateral shall be held as
collateral to secure indebtedness under the New Financing Agreement.
Immediately prior to the consummation of the Rights Offering, and subject to
the other conditions of the Restructuring being satisfied, such collateral will
be released and used by Ms. Chaus to purchase shares of Common Stock issuable
to her upon the exercise of the Rights, in satisfaction of her Purchase
Commitment in connection with the Rights Offering. The Company will use the
proceeds from the Purchase Commitment to retire $10 million of Bank Debt.
On October 10, 1997, in substitution for the personal guaranty of
$12.5 million of Bank Debt (the "$12.5 Million Guarantee") previously provided
by Ms. Chaus, she entered into a deposit letter (the "October Deposit Letter")
pursuant to which she provided $12.5 million in cash collateral to secure the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF--J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and shall be used to retire $12.5
million of the Bank Debt. As a result of such repayment, the Company will
become indebted to Ms. Chaus for $12.5 million. Pursuant to the terms of the
Subrogated Loan, as described above, the Subrogated Loan will, immediately
thereafter, be exchanged by Ms. Chaus for shares of Common Stock of the
Company.
Pursuant to the New Financing Agreement, in the event that the Rights
Offering is not consummated by May 15, 1998, the cash collateral held under the
October Deposit Letter and the July Deposit Letter will be applied by BNYF to
retire $22.5 million of the Bank Debt.
In connection with the Restructuring, Ms. Chaus has agreed in
principle to relinquish all of her rights in and to her existing warrants, and
such warrants, to the extent they have not been exercised, shall be
extinguished.
7. RESTRUCTURING
In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the restructuring
program (the "Restructuring") pursuant to which:
(i) the Company will seek to raise up to $20 million, but not
less than $12.5 million, of equity through a rights offering
(the "Rights Offering");
(ii) approximately $40.5 million of the Company's indebtedness to
Ms. Chaus, consisting of $28 million of existing subordinated
indebtedness (including accrued interest through January 15,
1998) and $12.5 million of indebtedness
F-15
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which will be owed to Josephine Chaus ("Ms. Chaus" or "J.
Chaus"), will be converted into Common Stock of the Company
(the "Conversion Commitment");
(iii) a new revolving credit facility (the "New Revolving
Facility"), and a new term loan facility (the "New Term
Loan", and together with the New Revolving Facility, the "New
Financing Agreement") was entered into with BNY Financial
Corporation ("BNYF"), the Company's current working capital
lender, on October 10, 1997; and
(iv) the Company will implement a 1-for-10 reverse stock split
(the "Stock Split").
Under the proposed Restructuring, the Company's existing trade claims,
which are primarily held by the Company's customers and vendors, would be
unaffected.
In connection with the Restructuring, (i) Andrew Grossman, the
Company's Chief Executive Officer, has agreed in principle to relinquish all of
his rights to his existing options, to the extent that they have not been
exercised prior to the consummation of the Restructuring, and (ii) Ms. Chaus
has agreed in principle to relinquish all of her rights to her existing
warrants, to the extent that they have not been exercised prior to the
consummation of the Restructuring.
The Company currently intends that employees holding options will be
offered the right to exchange such options for new options. See Note 9.
Consummation of the Restructuring is subject to (i) the approval by
the Company's stockholders of (a) the Stock Split, (b) the issuance of
10,510,910 shares of Common Stock of the Company to J. Chaus in connection
with the Conversion Commitment, (c) the sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase Commitment (as defined below), and
(d) the sale by the Company of up to 1,747,160 shares to J. Chaus in connection
with the Standby Commitment (as defined below), and (ii) the absence of any
litigation or governmental action challenging or seeking to enjoin the Rights
Offering which in the sole judgment of the Company makes it inadvisable to
proceed with the Rights Offering. Accordingly, until such conditions are
satisfied, there can be no assurance that the Restructuring will be consummated.
It is presently contemplated that the Restructuring will be consummated by
January 15, 1998. Ms. Chaus, Chairwoman of the Board, a principal stockholder
of the Company, and the owner of a majority of the Company's Common Stock, has
advised the Company that she intends to vote her shares in favor of all matters
relating to the Restructuring, thereby assuring stockholder approval of such
matters.
The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate to
the closing of the Company's outlet stores (such as professional fees, lease
termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's proposed Restructuring. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory.
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and the unaudited pro forma consolidated
capitalization of the Company after giving effect to the Restructuring as if
the Restructuring had occurred at June 30, 1997.
F-16
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and the unaudited pro forma consolidated
capitalization of the Company after giving effect to the Restructuring if
certain items had occurred at June 30, 1997. Such items include (i) the
subordinated indebtedness owed and to be owed to Josephine Chaus, being
converted by J. Chaus into Common Stock of the Company, (ii) as part of the
Rights Offering, the Company raising at least $12.5 million of equity (less
expenses of the Rights Offering of $.5 million) from the principal stockholder
and/or other stockholders, (iii) $12.5 million in respect of borrowings
previously guaranteed by Ms. Chaus being satisfied in full out of proceeds
from the BNYF--J. Chaus Loan, and (iv) obtaining the New Term Loan in the
amount of $15 million.
As of
June 30, 1997
--------------------------------------
Actual Pro forma
------ ---------
Total Debt
Bank Debt $ 37,756 $ -
Subordinated Promissory Notes 26,374 -
Term Loan-Bank - 15,000
---------- --------
Total debt 64,130 15,000
Total stockholders' deficiency (57,060) (6,186)
----------- ---------
Total capitalization $ 7,070 $ 8,814
========== ========
Although there can be no assurance, the Company believes that it
will have adequate resources after the consummation of the Restructuring.
8. SUBORDINATED PROMISSORY NOTES
The Company had outstanding at June 30, 1997, $26.4 million, including
accrued interest at 12% per annum, of subordinated promissory notes payable to
Josephine Chaus, certain of which were originally issued on June 30, 1986 and
the remainder of which were issued in February and March 1991 (the
"Subordinated Notes"). The Company has been prohibited from making payments of
principal or interest on the Subordinated Notes since 1993 (with the exception
of principal payments of approximately $0.5 million, $0.3 million and $0.3
million in November 1993, February 1994 and August 1994, respectively) as a
result of restrictive covenants under the Old Bank Debt Agreement. In
connection with the public offering, Ms. Chaus extended the maturity date of
the Subordinated Notes (which were to mature on July 1, 1996) to July 1, 1998.
In September 1994, Josephine Chaus loaned $7.2 million to the Company
in exchange for subordinated promissory notes bearing interest at 12% per
annum. Proceeds of such cash infusion were used for costs and associated
expenses related to the signing of the Company's new chief executive officer.
In November 1994, in order to provide additional equity to the Company, to
enhance the Company's balance sheet and to accommodate the bank, Josephine
Chaus subsequently agreed, at the request of the Special Committee, to exchange
such notes for shares of Common Stock of the Company on terms determined by a
Special Committee of the Board of Directors. In November 1994, following
stockholder approval, Josephine Chaus exchanged such notes, including accrued
interest thereon ($.2 million), for 1,914,500 shares of Common Stock (based
upon a purchase price of $3.85 per share). The purchase price was determined by
the Special Committee and the purchase was approved by the Company's
stockholders at the November 22, 1994 Annual Meeting of Stockholders.
In connection with the Restructuring, Ms. Chaus has agreed to convert
all indebtedness owed to her by the Company into Common Stock. See Notes 6
and 7.
F-17
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
Pension Plan:
Pursuant to a collective bargaining agreement, all of the Company's
union employees are covered by a defined benefit pension plan. Pension expense
amounted to approximately $53,000, $105,000 and $69,000 in fiscal 1995, 1996
and 1997, respectively. As of December 31, 1996, the actuarial present value of
the accumulated vested and non-vested plan benefits amounted to $0.5 million
and net assets available for benefits amounted to $0.5 million. Actuarial
assumptions related to weighted average interest rate and weighted average rate
of return were 8.0% and 8.5%, respectively, for each of 1995, 1996 and 1997.
Savings Plan:
The Company has a savings plan (the "Savings Plan") under which
eligible employees may contribute a percentage of their compensation and the
Company (subject to certain limitations) will match 50% of the employee's
contribution. Company contributions will be invested half in the Common Stock
of the Company and half in investment funds selected by the participant and are
subject to vesting provisions of the Savings Plan. Expense under the Savings
Plan was approximately $0.2 in each of fiscal 1995, 1996 and 1997. An aggregate
of 100,000 shares of Common Stock has been reserved for issuance under the
Savings Plan.
Restricted Stock Plan:
In November 1987, the Company's stockholders approved the adoption of
a restricted stock plan (the "Restricted Plan"). Pursuant to the Restricted
Plan, 250,000 restricted shares of the Company's Common Stock were reserved for
allocation to key employees of the Company. The restrictions on the shares
terminate as to 25 percent of such shares on each anniversary of their date of
allocation. As of June 30, 1997, no restricted shares have been granted under
this plan.
Stock Option Plan:
Pursuant to the Company's 1986 Stock Option Plan, as amended (the
"Option Plan"), the Company may grant to eligible individuals incentive stock
options, as defined in the Internal Revenue Code, and non-incentive stock
options. At the annual meeting of stockholders in November 1993, the
stockholders approved the increase in the number of shares of Common Stock with
respect to which options may be granted from 1,500,000 shares to 2,500,000
shares. No stock options may be granted subsequent to 2006 and the exercise
price may not be less than 100% of the fair market value on the date of grant
for incentive stock options and 85% of the fair market value on the date of
grant for non-incentive stock options.
In connection with the Restructuring, the Company currently intends
that employees holding options will be offered the right to exchange such
options for new options.
F-18
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Grossman Option Plan:
At the annual meeting of stockholders in November 1994, the
stockholders approved the issuance of options for the Company's new Chief
Executive Officer (the "Grossman Option Plan") to purchase 3,000,000 shares of
Common Stock. Of this amount, 1,500,000 options were granted in September 1994
(and included in the followingtable), and the balance were granted in
September 1995 in connection with the extension of the term of his employment
agreement. The Company and Mr. Grossman are currently negotiating amendments
to his employment agreement. See Note 11.
Total Options Reserved for Issuance
At June 30, 1997, a total of approximately 4,936,000 shares of Common
Stock were reserved for issuance under the Stock Option, Savings and Grossman
Option Plans.
NON-INCENTIVE
STOCK OPTIONS
----------------------------------------
NUMBER EXERCISE
OF SHARES PRICE RANGE
--------- -----------
Outstanding at July 1, 1994 1,419,148 $1.875--$9.375
Options granted 2,186,688 $2.250--$4.750
Options canceled (555,428) $2.000--$9.375
Options exercised (183,550) $2.000--$4.750
---------- --------------
Outstanding at June 30, 1995 2,866,858 $1.875--$4.875
Options granted 2,064,000 $3.625--$5.875
Options canceled (687,201) $1.875--$5.875
Options exercised ( 70,643) $1.875--$4.880
----------- --------------
Outstanding at June 30, 1996 4,173,014 $1.875--$5.625
Options granted 95,000 $2.375--$3.125
Options canceled (67,006) $2.000--$4.880
Options exercised (6,250) $2.000--$2.000
------------ --------------
Outstanding at June 30, 1997 4,194,758 $1.875--$5.625
============ ==============
The stock options become exercisable in annual 25% increments
commencing one year after issuance. As of June 30, 1997 options to purchase
approximately 1,205,000 shares were exercisable.
Stock Based Compensation:
All stock options are granted at fair market value of the Common Stock
at grant date. The weighted average fair value of stock options granted during
1997 and 1996 was $1.93 and $3.29, respectively. The fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for the grants in 1996:
risk-free interest rate of 6.38%; expected dividend yield of 0%; expected life
of 3.05 years; and expected volatility of 97.25%. The outstanding stock options
at June 30, 1997 have
F-19
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a weighted average contractual life of 7.68 years. The number of stock options
exercisable at June 30, 1997 was 4,219,758. These options have a weighted
average exercise price of $3.85 per share.
The Company accounts for the stock option plans in accordance with
the Accounting Principles Board Opinion No. 25, under which no compensation
cost is recognized for stock option awards. Had compensation cost been
determined consistent with Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's pro
forma net loss for 1997 and 1996 would have been $19,658 and $26,469,
respectively. The Company's pro forma net loss per share for 1997 and 1996
would have been $0.73 and $1.10, respectively. Because the SFAS 123 method of
accounting has not been applied to options granted prior to 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
10. 1994 RESTRUCTURING PLAN AND UNUSUAL EXPENSES
Relative to the 1994 Restructuring Plan discussed in Note 1, during
the first fiscal quarter of 1995 the Company recorded restructuring expenses of
$1.2 million. These costs primarily related to employee severance as the
Company continued to reduce overhead costs.
In January 1995, the Company signed favorable early termination
agreements with the landlords of certain outlet stores, for which the Company
had previously provided a reserve as part of its restructuring expenses at June
30, 1994. As a result, the Company was able to reduce its restructuring
expenses by approximately $1.3 million. The benefit of this reduction was
offset, however, by certain additional expenses provided by the Company related
to its retail and overseas operations.
During the first fiscal quarter of 1995, the Company recorded unusual
expenses of $7.8 million primarily related to costs associated with the signing
of the Company's new Chief Executive Officer. In the fourth quarter of fiscal
1995, the Company recorded an additional $0.5 million related to certain legal
matters.
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities,
retail outlet facilities and equipment under various noncancellable operating
lease agreements which expire through 2006. In connection with the
Restructuring, the Company will close all of its retail outlet stores (other
than the retail outlet store located at the Company's Secaucus facility, the
space for which is leased by the Company as part of its warehouse lease) by the
end of January 1998. See Note 7. Rental expense for the years ended June 30,
1995, 1996 and 1997 was approximately 7.0 million, $5.8 million, and $4.7
respectively.
F-20
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The minimum aggregate rental commitments at June 30, 1997 are as
follows (in thousands):
Fiscal year ending:
1998 .............................. $3,460
1999 .............................. 2,318
2000 .............................. 2,000
2001 .............................. 610
2002 .............................. 436
Subsequent to 2002 ............... 576
------
$9,400
======
The above table reflects rental commitments under the present lease
agreements including approximately $4.9 million related to retail store leases.
Under the proposed Restructuring, the Company plans to close substantially all
of its retail outlet stores (see Note 1). The lease termination cost associated
with these closings is approximately $800,000.
Letters of Credit:
The Company is contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $13.6 million at June 30, 1997.
Litigation:
On April 19, 1993, a Class Action Complaint was filed in the Superior
Court of New Jersey, Hudson County, against the Company and others, including
the lead underwriter of the Company's 1986 initial public offering, alleging
common law fraud and negligent misrepresentation in the sale of the Company's
stock in its initial public offering. During fiscal 1996 the Company reached
settlement regarding these claims for approximately $0.3 million, which expense
had been provided for in a prior year. In connection with the Class Action
Complaint, a claim for indemnification was asserted by the Company's former
Underwriters against the Company. The indemnification claim demanded repayment
of the legal fees and expenses incurred by the Underwriters in connection with
the consolidated class actions entitled Phifer v. Chaus, et al. During fiscal
1996 the Company reached settlement regarding this matter for approximately
$0.8 million, which expense had been provided for in a prior year.
The Company is a defendant in an action which was commenced in federal
district court in New York by the Equal Employment Opportunity Commission
("EEOC") on behalf of three patternmakers, each of whom was terminated by the
Company in late 1995. The complaint alleges discrimination on the basis of age
and national origin. The Company was served with the complaint on April 7,
1997. The complaint seeks equitable relief, including (i) reinstatement of the
three individuals at issue, (ii) an injunction against the Company engaging in
age or national-origin discrimination, and (iii) an order that the Company
carry out an affirmative action program for individuals over 40 and for
individuals of Italian and/or non-Asian origin. The complaint also seeks back
pay, front pay, liquidated damages, compensatory damages, punitive damages, and
the EEOC's costs in the action. The Company will answer the complaint and deny
the material allegations of the complaint and intends to vigorously oppose the
action.
The Company is also involved in various other legal proceedings
arising out of the conduct of its business. The Company believes that the
eventual outcome of the proceedings referred to above will not have a material
adverse effect on the Company's financial condition or results of operations.
F-21
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employment Agreement:
The Company has entered into a number of employment agreements with
various senior executives. In addition to his $1 million salary, Mr. Grossman
is entitled to a bonus equal to 5% of the Company's annual net profits, as
defined, for the duration of his agreement, which expires in 2004. The Company
and Mr. Grossman are currently negotiating amendments to his employment
agreement and it is anticipated that a restated and amended employment
agreement will be executed in the near term. It is expected that such
amendments will, among other things, include a cash bonus based upon the
Company's performance, the grant of new stock options in substitution for his
existing stock options, and the waiver by Mr. Grossman of his entitlement to
five percent (5%) of the Company's annual net profits, as currently provided
in his employment agreement.
Nautica License Agreement
In September 1995, the Company entered into a license agreement (the
"Nautica License Agreement") with Nautica Apparel Inc. ("Nautica"), pursuant to
which the Company will arrange for the manufacture of, market, distribute and
sell a new women's career and casual sportswear line under the Nautica name.
The initial term of the Nautica License Agreement runs through December 31,
1999, and is thereafter renewable, at the option of the Company, for up to two
periods of three years each, provided that certain conditions are met
(including the successful attainment of certain sales targets and the
requirement that Andrew Grossman continue in his position as Chief Executive
Officer during the term of the Nautica License Agreement). The Company's
obligations include minimum royalty and advertising payments.
Pursuant to the terms of the Nautica License Agreement, the Company
has granted Nautica a ten-year option to purchase up to 150,000 shares of the
Company's Common Stock at a purchase price of $5.00 per share (the closing
price of the Common Stock on the NYSE on September 6, 1995, the date the
Company entered into the Nautica License Agreement).
12. COMMON STOCK OFFERING
On November 22, 1995, the Company issued 5,750,000 shares of Common
Stock at a price of $3.00 per share in an underwritten public offering.
Proceeds from the offering, net of commissions and other expenses totaling $1.8
million, were $15.4 million.
F-22
<PAGE>
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- - ----------- ------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended June 30, 1997
Allowance for doubtful accounts ....... $ 378 $ (20) $ 17 (1) $ 341
======= ========= ========= ========
Reserve for sales discounts and
customer allowances and deductions .. $4,692 $18,976 $ 18,634 (2) $ 5,034
----- ------- --------- --------
Accrued restructuring expenses ........ $ 196 $ 1,850 $ 196 (4) $ 1,850
------- ------- --------- -------
Year ended June 30, 1996
Allowance for doubtful accounts ....... $ 619 $ (70) $ 171 (1) $ 378
------- ------- --------- -------
Reserve for sales discounts and
customer allowances and deductions .. $3,607 $17,519 $ 16,434 (2) $ 4,692
------ ------ --------- --------
Accrued restructuring expenses ........ $2,804 $ 0 $ 2,608 (4) $ 196
------ -------- --------- -------
Year ended June 30, 1995
Allowance for doubtful accounts ....... $ 355 $ 225 $ (39)(1) $ 619
------ -------- --------- -------
Reserve for sales discounts and
customer allowances and deductions .. $5,985 $33,695 $ 36,073 (2) $ 3,607
------ ------- --------- -------
Accrued restructuring expenses ........ $4,079 $ 1,200 $ 2,475 (3) $ 2,804
------ --------- --------- -------
</TABLE>
- - --------------
1 Uncollectible accounts written off.
2 Allowances charged to reserve and granted to customers.
3 Reversal of provision no longer required and expenses charged to reserve.
4 Expenses charged to reserve.
S-1
<PAGE>
BNY FINANCIAL CORPORATION
1290 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK
June 26, 1997
Bernard Chaus, Inc.
800 Secaucus Road
Secaucus, New Jersey 07094
RE: BERNARD CHAUS, INC. AND CHAUS RETAIL, INC.
(COLLECTIVELY, THE "CHAUS ENTITIES"):
Gentlemen:
You have asked BNY Financial Corporation ("BNYFC" or "Lender") to provide
you with commitments for senior secured debt facilities aggregating up to
$55,000,000 (the "Senior Facilities") consisting of (a) a five year senior term
loan facility in the amount of $15,000,000 (the "New Term Loan"), and (b) a
five year senior revolving credit working capital facility in the amount of
$40,000,000 (the "New Senior Secured Credit Facility").
Subject to the satisfaction of the conditions contained in this letter and
in the attached summary term sheet (the "Annex" and, together with this letter,
the "Commitment Letter"), and your acceptance hereof, BNYFC commits to lend the
entire amount of the Senior Facilities, on the terms and conditions referred to
in this Commitment Letter (the "Commitment").
Please note, however, that the terms and conditions of this Commitment and
undertaking are not limited to those set forth in this Commitment Letter. Those
matters that are not covered or made clear herein or in the attached Annex are
subject to mutual agreement of BNYFC, the Chaus Entities and Josephine Chaus.
The terms and conditions of this Commitment and undertaking may be modified
only in writing. In addition, this Commitment and undertaking is subject to:
(a) the preparation, execution and delivery of mutually acceptable loan
documentation, including a credit agreement incorporating substantially the
terms and conditions outlined herein and in the Annex, (b) the absence of any
material adverse change in the operations, performance, properties or prospects
of the Chaus Entities and their subsidiaries, taken as a whole, since March 31,
1997, (c) the material accuracy and completeness of all written representations
that you make to us and all information that you furnish to us in writing in
connection with this Commitment and
<PAGE>
Bernard Chaus, Inc.
Page 2
undertaking and your material compliance with the terms of this Commitment
Letter, (d) no development or change occurring after the date hereof has had or
could reasonably be expected to have a Material Adverse Effect (as defined
under the section "Conditions Precedent to Initial Extension of Credit" in the
Annex) and (e) a closing of the Senior Facilities (the "Closing") on or before
October 2, 1997.
Unless and until a definitive agreement among the Chaus Entities,
Josephine Chaus and BNYFC with respect to any transaction referred to in this
Commitment Letter (including the Annex) has been executed and delivered,
neither the Chaus Entities, Josephine Chaus nor BNYFC will be under any legal
obligation of any kind whatsoever with respect to such a transaction by any of
its directors, officers, employees, agents or any other representatives or its
advisors or representatives thereof and the parties will continue to be subject
to the Existing Financing Agreement; provided, however, that, from and after
the execution of this Commitment Letter by BNYFC, BNYFC shall be obligated to
provide the Bridge Facility as described in Section I of the Annex in
consideration for the Bridge Put agreement to be executed by Josephine Chaus
simultaneously with the execution of this Commitment Letter by the parties
hereto. The agreement set forth in this paragraph may be modified or waived
only by a separate writing by the Chaus Entities, Josephine Chaus and BNYFC
expressly so modifying or waiving such agreement.
The Commitment will automatically terminate if the Closing has not
occurred on or before October 2, 1997 unless extended by you and BNYFC on
mutually agreeable terms.
You agree that this Commitment Letter is for your confidential use only
and neither its existence nor the terms hereof will be disclosed by you to any
person or entity other than your affiliates, officers, directors, accountants,
attorneys and other advisors and the existing shareholders and senior
management of the Chaus Entities, and then only on a "need to know" basis and
on a confidential basis, except that, following your return of an executed
counterpart hereof to BNYFC, you may (a) make public disclosure of the
existence, amount, terms and conditions of BNYFC's Commitment and undertaking
hereunder, (b) file a copy of this Commitment Letter in any public record in
which it is required by law to be filed, (c) provide a copy of this Commitment
Letter on a confidential basis to the Chaus Entities and their officers,
directors, accountants, attorneys and other advisors and (d) make such other
public disclosures of the terms and conditions hereof as you are required by
law, in the opinion of your counsel, to make and (e) disclose information that
has been publicly disclosed other than by the Company.
<PAGE>
Bernard Chaus, Inc.
Page 3
Your obligations under this Commitment Letter with respect to
indemnification, costs and expenses and confidentiality shall survive the
expiration or termination of this Commitment Letter.
You represent and warrant that (a) all written information that has been
or will hereafter be made available by you or on your behalf or by any of your
representatives in connection with the transactions contemplated hereby to
BNYFC or any of its affiliates or representatives is and will be, taken as a
whole, complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein not misleading
in light of the circumstances under which such statements were or are made and
(b) all financial projections, if any, that have been or will be prepared by
you or on your behalf or by any of your representatives and made available to
BNYFC in connection with the transactions contemplated hereby have been or will
be prepared in good faith based upon reasonable assumptions (it being
understood that such projections are subject to significant uncertainties and
contingencies, many of which are beyond your control, and that no assurance can
be given that any particular projections will be realized). You agree to
supplement the information and projections from time to time so that the
representations and warranties contained in this paragraph remain complete and
correct.
In issuing this Commitment and undertaking, BNYFC is relying on the
accuracy of the information furnished to it by or on behalf of you or any of
your subsidiaries or by or on behalf of the Chaus Entities or any of their
subsidiaries (collectively, the "Pre-Commitment Information"). The business and
financial terms set forth in this Commitment Letter have been established as a
result of a due diligence investigation based on the Pre- Commitment
Information.
The obligations of BNYFC under this Commitment Letter for the Senior
Facilities are made solely for your benefit and may not be relied upon or
enforced by any other person or entity.
This Commitment Letter shall be governed by, and construed in accordance
with, the laws of the State of New York.
This Commitment Letter may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original and all of which,
taken together, shall constitute one and the same Commitment Letter. Delivery
of an executed counterpart of this Commitment Letter by telecopier shall be
effective as delivery of a manually executed counterpart of this Commitment
Letter.
<PAGE>
Bernard Chaus, Inc.
Page 4
Each of you and BNYFC hereby irrevocably waives all right to trial by jury
in any action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this Commitment Letter, the
transactions contemplated hereby or the actions of BNYFC in the negotiation,
performance or enforcement hereof.
Please evidence your acceptance of the provisions of this Commitment
Letter (including, without limitation, the attached Annex) and the other
transactions referred to above by signing the enclosed copy of this Commitment
Letter and returning it to the undersigned on June 26, 1997, by 11:00 a.m. (New
York City time), at which time BNYFC's Commitment and undertaking set forth
above (if not so accepted prior thereto) will expire.
Very truly yours,
BNY FINANCIAL CORPORATION
By: /s/ Andrew Rogow
-----------------------------
Name: Andrew Rogow
Title: SVP
ACCEPTED AND AGREED
this 26th day of
June, 1997
BERNARD CHAUS, INC. AND
CHAUS RETAIL, INC.
By: /s/ Wayne Miller
--------------------------------------
Name: Wayne Miller
Title: Chief Financial Officer
ACCEPTED AND AGREED
this 26th day of
June, 1997
By: /s/ Josephine Chaus
-------------------------------------
Josephine Chaus
<PAGE>
CASH COLLATERAL DEPOSIT LETTER
July 23, 1997
BNY Financial Corporation
1290 Avenue of the Americas
New York, New York
Attention: Andrew Rogow
Gentlemen:
Reference is made to (a) the Restated and Amended Financing Agreement
dated as of February 21, 1995 (as same has been and may be further amended,
modified, supplemented and restated from time to time, the "Financing
Agreement") between BNY Financial Corporation ("Lender") and Bernard Chaus,
Inc. ("Borrower") and (b) the Guaranty dated February 21, 1995 (as same has
been and may be further amended, modified, supplemented and restated from time
to time, the "Guaranty") executed by the undersigned in favor of Lender
pursuant to which the undersigned guaranteed to Lender the payment of
Borrower's Obligations to Lender. All capitalized terms used herein which are
not defined shall have the meanings given to them in the Financing Agreement.
As collateral security for the undersigned's obligations under the
Guaranty and the Obligations, the undersigned hereby deposits with Lender, the
sum of $10,000,000 which are the proceeds of certain collateral pledged by the
undersigned to secure a certain Citibank Letter of Credit No.
NY-01623-00141033, expiration date July 31, 1997, such sum to be held by Lender
for the uses and purposes herein stated (this deposit to be hereinafter
referred to as the "Collateral Deposit"). For purposes hereof, the term
"Obligations" also includes indebtedness of Borrower to Lender, whether accrued
or incurred prior or subsequent to the commencement of any voluntary or
involuntary case under Title 11, United States Code by or against Borrower, if
any, and whether or not such indebtedness is allowed or disallowed by court
order entered in such case, but does not represent indebtedness owing by Lender
to Borrower as debtor-in-possession arising pursuant to court order under
Section 364 of Title 11, United States Code.
Upon the occurrence and during the continuation of an Event of Default or
the undersigned should at any time become insolvent, or make a general
assignment, or if a proceeding in or under any federal or state bankruptcy,
reorganization, moratorium or insolvency law relating to or affecting the
enforcement of creditor's rights generally, shall be filed or commenced by, or
in respect of the undersigned, or if a notice of any lien, levy or assessment
is filed of record with respect to any assets of the undersigned by the United
States or any department, agency or instrumentality thereof, or if any taxes or
debts owing at any time or times hereafter to any one of them becomes a lien or
encumbrance upon any assets of the undersigned in Lender's possession or
otherwise, Lender and its successors and assigns may, without demand of
performance or advertisement or notice of any kind to or upon the undersigned
(each of which demands, advertisements and/or notices are hereby
<PAGE>
expressly waived), forthwith or at any time or times thereafter, appropriate and
apply all or any part of the Collateral Deposit to the payment in whole or in
part, in such order as Lender may elect, of the Obligations, whether then due
or not due, returning the surplus, if any, to the undersigned, who shall
nevertheless remain liable to Lender for the payment of any deficiency.
When all of the Obligations have been paid and/or are otherwise satisfied
in full, the Financing Agreement has been irrevocably terminated and Borrower
and the undersigned have executed full releases in favor of Lender in form and
substance reasonably satisfactory to Lender, any sums still on deposit
hereunder shall be returned to the undersigned.
While any sums are on deposit with Lender hereunder, Lender shall pay to
the undersigned interest on the Collateral Deposit at a rate per annum equal to
(a) the Alternate Base Rate minus (b) three percent (3%). Notwithstanding the
foregoing, upon the occurrence and during the continuation of an Event of
Default, interest on the Collateral Deposit shall either, at Lender's option,
accrue and be added to the Collateral Deposit or cease accruing.
This letter agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, administrators, executors,
successors and assigns and shall be governed by and construed in accordance
with the laws of the State of New York.
Very truly yours,
/s/ Josephine Chaus
-----------------------------------------
JOSEPHINE CHAUS
Social Security No.: ###-##-####
---------------------
ACCEPTED:
BNY FINANCIAL CORPORATION
By: /s/ Joseph Grimaldi
--------------------------------
Title: SVP
<PAGE>
CASH COLLATERAL DEPOSIT LETTER
October 10, 1997
BNY Financial Corporation
1290 Avenue of the Americas
New York, New York
Attention: Andrew Rogow
Gentlemen:
Reference is made to (a) the Second Restated and Amended Financing
Agreement dated as of the date hereof (as same has been and may be further
amended, modified, supplemented and restated from time to time, the "Financing
Agreement") between BNY Financial Corporation ("Lender") and Bernard Chaus,
Inc. ("Borrower") and (b) that certain $12,500,000 Promissory Note dated the
date hereof (as same has been and may be further amended, modified,
supplemented and restated from time to time, the "Note") executed by the
undersigned in favor of Lender. All capitalized terms used herein which are not
defined shall have the meanings given to them in the Financing Agreement.
As collateral security for the undersigned's obligations under the Note
and the Obligations, the undersigned hereby deposits with Lender, the sum of
$12,500,000 which are the proceeds of the loan made under the Note, such sum to
be held by Lender for the uses and purposes herein stated (this deposit to be
hereinafter referred to as the "Collateral Deposit"). For purposes hereof, the
term "Obligations" also includes indebtedness of Borrower to Lender, whether
accrued or incurred prior or subsequent to the commencement of any voluntary or
involuntary case under Title 11, United States Code by or against Borrower, if
any, and whether or not such indebtedness is allowed or disallowed by court
order entered in such case, but does not represent indebtedness owing by Lender
to Borrower as debtor-in-possession arising pursuant to court order under
Section 364 of Title 11, United States Code.
Upon the occurrence and during the continuation of an Event of Default or
the undersigned should at any time become insolvent, or make a general
assignment, or if a proceeding in or under any federal or state bankruptcy,
reorganization, moratorium or insolvency law relating to or affecting the
enforcement of creditor's rights generally, shall be filed or commenced by, or
in respect of the undersigned, or if a notice of any lien, levy or assessment
is filed of record with respect to any assets of the undersigned by the United
States or any department, agency or instrumentality thereof, or if any taxes or
debts owing at any time or times hereafter to any one of them becomes a lien or
encumbrance upon any assets of the undersigned in Lender's possession or
otherwise, Lender and its successors and assigns may, without demand of
performance or advertisement or notice of any kind to or upon the undersigned
(each of which demands, advertisements and/or notices are hereby expressly
waived), forthwith or at any time or times thereafter, appropriate and apply
all or any part of the Collateral Deposit to the payment in whole or in part,
in such order as Lender may elect, of the Obligations, whether then due or not
due, returning the surplus, if any, to the undersigned, who shall nevertheless
remain liable to
<PAGE>
Lender for the payment of any deficiency.
The Collateral Deposit shall be released simultaneously with the
Restructure Transaction and shall thereafter be applied as provided in Section
12.3 of the Financing Agreement.
When all of the Obligations have been paid and/or are otherwise satisfied
in full, the Financing Agreement has been irrevocably terminated and Borrower
and the undersigned have executed full releases in favor of Lender in form and
substance reasonably satisfactory to Lender, any sums still on deposit
hereunder shall be returned to the undersigned.
While any sums are on deposit with Lender hereunder, Lender shall pay to
the undersigned interest on the Collateral Deposit at a rate per annum equal to
(a) the Alternate Base Rate plus (b) one-half of one percent (.50%).
Notwithstanding the foregoing, upon the occurrence and during the continuation
of an Event of Default, interest on the Collateral Deposit shall either, at
Lender's option, accrue and be added to the Collateral Deposit or cease
accruing.
This letter agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, administrators, executors,
successors and assigns and shall be governed by and construed in accordance
with the laws of the State of New York.
Very truly yours,
/s/ Josephine Chaus
---------------------------------------
JOSEPHINE CHAUS
Social Security No.: ###-##-####
--------------------
ACCEPTED:
BNY FINANCIAL CORPORATION
By: /s/ Andrew Rogow
----------------------------
Title: SVP
<PAGE>
AMENDED AND RESTATED
CASH COLLATERAL DEPOSIT LETTER
October 10, 1997
BNY Financial Corporation
1290 Avenue of the Americas
New York, New York
Attention: Andrew Rogow
Gentlemen:
Reference is made to the Second Restated and Amended Financing Agreement
dated as of the date hereof (as same has been and may be further amended,
modified, supplemented and restated from time to time, the "Financing
Agreement") between BNY Financial Corporation ("Lender") and Bernard Chaus,
Inc. ("Borrower") and (b) the Guaranty dated February 21, 1995 (as same has
been and may be further amended, modified, supplemented and restated from time
to time, the "Guaranty") executed by the undersigned in favor of Lender
pursuant to which the undersigned guaranteed to Lender the payment of
Borrower's Obligations to Lender. All capitalized terms used herein which are
not defined shall have the meanings given to them in the Financing Agreement.
As collateral security for the undersigned's obligations under the
Guaranty and the Obligations, the undersigned hereby deposits with Lender, the
sum of $10,000,000 which are the proceeds of certain collateral pledged by the
undersigned to secure a certain Citibank Letter of Credit No.
NY-01623-00141033, expiration date July 31, 1997, such sum to be held by Lender
for the uses and purposes herein stated (this deposit to be hereinafter
referred to as the "Collateral Deposit"). For purposes hereof, the term
"Obligations" also includes indebtedness of Borrower to Lender, whether accrued
or incurred prior or subsequent to the commencement of any voluntary or
involuntary case under Title 11, United States Code by or against Borrower, if
any, and whether or not such indebtedness is allowed or disallowed by court
order entered in such case, but does not represent indebtedness owing by Lender
to Borrower as debtor-in-possession arising pursuant to court order under
Section 364 of Title 11, United States Code.
Upon the occurrence and during the continuation of an Event of Default or
the undersigned should at any time become insolvent, or make a general
assignment, or if a proceeding in or under any federal or state bankruptcy,
reorganization, moratorium or insolvency law relating to or affecting the
enforcement of creditor's rights generally, shall be filed or commenced by, or
in respect of the undersigned, or if a notice of any lien, levy or assessment
is filed of record with respect to any assets of the undersigned by the United
States or any department, agency or instrumentality thereof, or if any taxes or
debts owing at any time or times hereafter to any one of them becomes a lien or
encumbrance upon any assets of the undersigned in Lender's possession or
otherwise, Lender and its successors and assigns may, without demand of
performance or advertisement or notice of any kind to or upon the undersigned
(each of which demands, advertisements and/or notices are hereby expressly
waived), forthwith or at any time or times thereafter, appropriate and apply
all or any part of the Collateral Deposit to the payment in whole or in part,
in such order as Lender may elect, of the Obligations, whether then due or not
due, returning the surplus, if any, to the undersigned, who shall nevertheless
remain liable to
<PAGE>
Lender for the payment of any deficiency.
The Collateral Deposit shall be released simultaneously with the
Restructure Transaction and shall thereafter be applied as provided in Section
12.3 of the Financing Agreement.
When all of the Obligations have been paid and/or are otherwise satisfied
in full, the Financing Agreement has been irrevocably terminated and Borrower
and the undersigned have executed full releases in favor of Lender in form and
substance reasonably satisfactory to Lender, any sums still on deposit
hereunder shall be returned to the undersigned.
While any sums are on deposit with Lender hereunder, Lender shall pay to
the undersigned interest on the Collateral Deposit at a rate per annum equal to
(a) the Alternate Base Rate minus (b) three percent (3%). Notwithstanding the
foregoing, upon the occurrence and during the continuation of an Event of
Default, interest on the Collateral Deposit shall either, at Lender's option,
accrue and be added to the Collateral Deposit or cease accruing.
This Letter amends and restates in its entirety and is given in
substitution (but not in satisfaction of) that certain Cash Collateral Deposit
Letter dated July 23, 1997 between the undersigned and Lender.
This letter agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, administrators, executors,
successors and assigns and shall be governed by and construed in accordance
with the laws of the State of New York.
Very truly yours,
/s/ Josephine Chaus
-----------------------------------------
JOSEPHINE CHAUS
Social Security No.: ###-##-####
---------------------
ACCEPTED:
BNY FINANCIAL CORPORATION
By: /s/ Andrew Rogow
--------------------------------
Title: SVP
<PAGE>
BNY FINANCIAL CORPORATION
SECOND RESTATED AND AMENDED FINANCING AGREEMENT
BERNARD CHAUS, INC.
1410 Broadway
New York, NY 10018
Gentlemen/Ladies:
Second Restated and Amended Financing Agreement ("Agreement") dated as of
October 10, 1997 (the "Closing Date") between Bernard Chaus, Inc., a corporation
organized under the laws of the State of New York ("Borrower") and BNY
Financial Corporation, a corporation organized under the laws of the State of
New York ("Lender").
BACKGROUND
Borrower and Lender are parties to a Restated and Amended Financing
Agreement dated as of February 21, 1995 (as the same has been amended,
restated, supplemented or otherwise modified from time to time, the "Existing
Agreement") pursuant to which Lender provides Borrower with certain financial
accommodations.
By execution of this Agreement, Borrower and Lender intend to amend and
restate the Existing Agreement in its entirety and, as so amended and restated,
the Existing Agreement shall read in full as set forth herein from and after
the date hereof.
IN CONSIDERATION of the mutual covenants and undertakings herein
contained, Borrower and Lender hereto hereby agree as follows:
AMENDMENT AND RESTATEMENT
As of the date of this Agreement, the terms, conditions, covenants,
agreements, representations and warranties contained in the Existing Agreement
shall be deemed amended and restated in their entirety as follows; provided,
however, nothing contained in this Agreement shall impair, limit or affect the
liens heretofore granted, pledged and/or assigned to Lender with respect to the
Collateral as security for the Obligations to Lender under the Existing
Agreement. Borrower acknowledges that the outstanding balance of Obligations
under the Existing Agreement is $77,252,000 as of the date hereof ("Existing
Obligations") the payment of which is not subject to any defense, offset or
counterclaim on the part of the Borrower. Borrower reaffirms all of the Other
Documents executed in connection with the Existing Agreement, and all
references to the Existing Agreement in the Other Documents shall mean and
include this Agreement.
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1. COVERED SALES; SECURITY INTEREST
Borrower hereby acknowledges, confirms and agrees that Lender has and
shall continue to have a lien upon and security interest in all Collateral
heretofore granted to Lender pursuant to the Existing Agreement to secure the
Obligations, and to the extent not otherwise granted thereunder or under the
Other Documents or otherwise granted to or held by Lender, Borrower hereby
grants to Lender a continuing lien and security interest in all presently
existing and hereafter arising Collateral which Borrower now or hereafter owns
or has an interest in, wherever located, to secure prompt repayment of any and
all Obligations owed and to be owed by Borrower to Lender and to secure prompt
performance by Borrower of each and all of its covenants and obligations under
this Agreement and the Other Documents. Lender's lien and security interest in
the Collateral shall attach to all Collateral without further act on the part
of Lender or Borrower.
2. TERM LOAN; REVOLVING ADVANCES; L/CS; INTEREST; COMMISSIONS; LATE
PAYMENT CHARGES
2.1. If Borrower so requests, Lender shall, subject to the other
provisions of this Agreement including but not limited to Lender's rights to
withhold Reserves, make Revolving Advances and issue sight, trade Letters of
Credit ("L/Cs") (Revolving Advances and the Term Loan, collectively, the
"Loans"). All outstanding Loans and payments related to L/C's which have been
drawn upon shall be Obligations and shall be charged to Borrower's account when
made. The outstanding amount of all L/Cs shall not exceed $20,000,000 in the
aggregate at any time and shall be chargeable to Borrower's account. In no
event, however, shall the aggregate amount of all then outstanding Obligations
(including but not limited to, Loans, L/Cs and all other amounts then charged
or chargeable to Borrower's account) exceed at any time the Maximum Loan
Amount. At no time will Borrower request or incur or permit there to be
outstanding Obligations which, or request Loans or the issuance of L/Cs which
would cause the then outstanding Obligations to, exceed the Maximum Loan
Amount, or request Revolving Advances which, if made, would cause the aggregate
amount of Revolving Advances then outstanding to exceed the lesser of (i) the
Maximum Loan Amount (less outstanding L/Cs) or (ii) the Formula Amount.
Furthermore, and without limiting Borrower's Obligations or Lender's other
rights, Borrower shall forthwith pay Lender (A) the amount, if any, by which
the then outstanding Obligations at any time and from time to time exceed the
then Maximum Loan Amount, and (B) the amount by which the then aggregate amount
of outstanding Revolving Advances exceeds the lesser of (x) Maximum Revolving
Amount (less outstanding L/Cs) or (y) the Formula Amount (each, an
"Overadvance").
2.2. Fifteen Million Dollars ($15,000,000) of the Existing Obligations is
hereby recast as a Term Loan (the "Term Loan"). The Term Loan shall, with
respect to principal, amortize annually as follows, in nineteen (19) quarterly
installments, commencing as of March 31, 1998 and on the last day of each
fiscal quarter thereafter and one final installment on December 31, 2002 in
the amount of the then outstanding principal balance, subject to acceleration
upon the occurrence and continuance of an Event of Default under this Agreement
or termination of this Agreement pursuant to Section 7 hereof:
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===============================================================================
PERIOD ANNUAL AMORTIZATION QUARTERLY INSTALLMENT
- - -------------------------------------------------------------------------------
Fiscal year ending June 30, 1998 $ 500,000 $250,000
- - -------------------------------------------------------------------------------
Fiscal year ending June 30, 1999 $1,000,000 $250,000
- - -------------------------------------------------------------------------------
Fiscal year ending June 30, 2000 $1,000,000 $250,000
- - -------------------------------------------------------------------------------
Fiscal year ending June 30, 2001 $1,000,000 $250,000
- - -------------------------------------------------------------------------------
Fiscal year ending June 30, 2002 $1,000,000 $250,000
- - -------------------------------------------------------------------------------
September 30, 2002 $ 250,000 $250,000
- - -------------------------------------------------------------------------------
December 31, 2002 The outstanding balance
- - -------------------------------------------------------------------------------
The Term Loan shall be evidenced by and subject to the terms and conditions set
forth in the secured promissory note attached hereto as Exhibit 2.2.
2.3. Subject to the terms and conditions set forth in this Agreement,
Lender will make Revolving Advances to Borrower in aggregate amounts
outstanding at any time equal to the lesser of (a) the Maximum Revolving Amount
less the aggregate amount of outstanding L/Cs or (b) an amount equal to the sum
of:
(i) 85% of the net face amount of Eligible Receivables (as hereinafter
defined); provided, that with respect to Eligible Receivables
generated by sales to Dillards Department Store, such advance
percentage shall be 80%) plus ----
(ii) (A) 60% of the value of the Eligible Inventory consisting of Domestic
Finished Goods Inventory and (B) 50% of the value of the Eligible
Inventory consisting of Foreign Finished Goods Inventory; provided,
that the maximum amount of availability hereunder with respect to
Inventory located at Guarantor's retail store locations shall not
exceed (I) $2,500,000 during the period from October 1, 1997 through
and including October 31, 1997, (II) $1,500,000 during the period
from November 1, 1997 through and including November 30, 1997, (III)
$1,200,000 during
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the period from December 1, 1997 through and including January 31,
1998 and (IV) $0 at all times thereafter, plus
(iii) 100% of the Cash Collateral Deposit, plus
(iv) Permitted Overadvances, plus
(v) the Put Amount minus
(vi) Reserves.
The amount derived from the sum of (x) Sections 2.3(i), (ii), (iii), (iv)
and (v) minus (y) Section 2.3(vi) at any time and from time to time shall be
referred to as the "Formula Amount." However, Lender may at any time and from
time to time, in Lender's sole ----- discretion, increase or decrease any of
the percentages referred to in the preceding sentence.
2.4. For Lender's services, Lender shall charge to Borrower's account:
(a) monthly, as of the last day of each month, interest on the average
daily balance of all Obligations which are outstanding during such month (but
in the case of L/Cs, only those which have been charged to Borrower's account)
at a rate per annum which exceeds the average Alternate Base Rate in effect
during such month by the then "Applicable Margin" (as hereinafter defined);
provided, however, that said interest rate shall not be less than six percent
(6%) per annum and shall in no event be higher than the highest rate permitted
by New York law. (b) all bank charges for wire transfers.
(c) an unused line fee at the rate of three eighths of one percent (3/8%)
per annum (based on a 360-day year), calculated and payable monthly, on the
difference between (i) the Maximum Loan Amount and (ii) the average amount of
outstanding Obligations during such month.
(d) a fee at the rate of 1/8% of 1% per month (the "L/C Fee") on the
average daily balance of L/Cs outstanding during such month, but in no event
less than $25,000 per month, provided however, that if there shall exist an
Overadvance including, but not limited to a Permitted Overadvance outstanding
on each of five or more days in any month, the L/C Fee shall be increased by
1/12 of one percent for such month. Additional amounts, at Lender's standard
rates for letters of credit and those of the issuing banks, shall be charged
for letters of credit issued on Borrower's behalf which are not negotiated by
the beneficiaries at (i) an overseas branch of the Bank or (ii) another bank,
if any, chosen by Lender.
(e) monthly, as of the 15th day of each month, a commission at the rate of
twenty five one hundredths of one percent (.25%) of the gross face amount of
each invoice evidencing a Receivable assigned to Lender under this Agreement
during such month, which commission is in consideration of the accounts
receivable management and bookkeeping services to be provided by Lender
hereunder. However, for all purposes hereof, the minimum
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commission that Borrower shall pay with respect to each "Contract Quarter"
(the three month period beginning on February 1, May 1, August 1, and
November 1, of each year) shall not be less than $125,000 ("Minimum
Commission"). If the actual commission paid in any Contract Quarter or part
thereof is less than the Minimum Commission, Lender shall charge to Borrower's
account the difference ("Minimum Commission Charge") between the Minimum
Commission and the commission actually paid for the Contract Quarter or portion
thereof during which this Agreement is in effect. For each Contract Quarter
Lender shall compute the Minimum Commission Charge, if any, and charge
Borrower's account therefor for each such quarter in the month following the
end of such quarter or in the month following the Restructure Date of
termination of this Agreement in the case of the last Contract Quarter or
partial Contract Quarter.
3. MATURED FUNDS
On the last day of each month, Lender shall credit Borrower's account with
interest at a rate per annum equal to three percent (3%) less than the average
Alternate Base Rate in effect during such month on the average daily balance of
any amounts payable by Lender to Borrower hereunder with respect to Receivables
(as confirmed by Lender by appropriate credit to Borrower's account with
Lender) which are not drawn by Borrower on the Maturity Date, while held by
Lender after the Maturity Date.
4. CHARGES; BALANCES; RESERVES
Lender may charge to Borrower's account all Obligations. Recourse to
security will not be required at any time. All credit balances or other sums at
any time standing to Borrower's credit and all Reserves on Lender's books, and
all of Borrower's property in Lender's possession at any time or in the
possession of any parent, affiliate or subsidiary of Lender or on or in which
Lender or any parent, affiliate or subsidiary has a lien or security interest,
may be held and reserved by Lender as security for all Obligations. Lender will
account to Borrower monthly and each monthly accounting statement will be fully
binding on Borrower and will constitute an account stated, unless, within
thirty (30) days after such statement is mailed to Borrower or within thirty
(30) days after the mailing of any adjustment thereof Lender may make, Borrower
gives Lender specific written notice of exceptions.
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5. CERTAIN REPRESENTATIONS AND WARRANTIES; DISPUTES; RETURNS; CHARGEBACKS
5.1. Borrower warrants and represents that Borrower has good title to the
Receivables free of any encumbrance except in Lender's favor; each Receivable
purchased hereunder is a bona fide, enforceable obligation created by the
absolute sale and delivery of goods or the rendition of services in the
ordinary course of business; when Borrower assigns each Receivable to Lender,
Borrower's customer is unconditionally obligated to pay at maturity the full
amount of each Receivable purchased hereunder without defense, counterclaim or
offset, real or alleged; all documents in connection therewith are genuine; and
when Borrower assigns each Receivable to Lender the customer will accept the
goods or services without alleging any defense, counterclaim, offset, dispute
or other claim whether arising from or relating to the sale of such goods or
services or arising from or relating to any other transaction or occurrence (a
"Dispute").
5.2. Borrower further represents and warrants that (a) Borrower's address
set forth above is that of Borrower's chief place of business and chief
executive office and the location of all Collateral and of Borrower's books and
records relating to the Receivables; (b) Borrower has disclosed to Lender the
locations of all of Borrower's and Guarantor's other places of business as well
as all trade names or styles, trademarks, divisions or other names under which
Borrower and Guarantor conduct business (hereinafter collectively defined as
the "Trade Names") and that Borrower and Guarantor in the ordinary course of
its business and Lender in the exercise of its rights with respect to the
Collateral have and will have the right to use the Trade Names; and (c) except
after thirty (30) days prior written notice to Lender of Borrower's intention
to do so, neither Borrower nor Guarantor will make any change in its name or
corporate structure (whether by merger, reorganization or otherwise) or sell or
acquire any assets except in the ordinary course of its business, nor make any
change which would have the effect of rendering inaccurate or incomplete the
representations contained in this subparagraph 5.2. If Borrower or Guarantor
takes or proposes to take any action referred to in the immediately preceding
subdivision (c), Lender may, at any time before or after such action is taken,
terminate this Agreement effective immediately by giving Borrower written
notice of such termination.
Upon an "Event of Default" (as hereafter defined) Lender may at any time in
Lender's discretion (i) withdraw Borrower's authority to issue credits to its
customers without Lender's prior written consent; (ii) litigate Disputes or
settle them directly with the customers on terms acceptable to Lender; or (iii)
direct Borrower to set aside, identify as Lender's property and procure
insurance satisfactory to Lender on any returned or repossessed merchandise or
other goods which by sale resulted in Receivables theretofore assigned to
Lender ("Retained Goods"). All Retained Goods (and the proceeds thereof) shall
be (A) held by Borrower in trust for Lender as Lender's property; (B) subject
to a security interest in Lender's favor as security for the Obligations; and
(C) disposed of only in accordance with Lender's express written instructions.
5.3. BORROWER WARRANTS THAT IT WILL NOT GRANT A SECURITY INTEREST, LIEN OR
OTHER ENCUMBRANCES IN, TO OR ON ANY OF BORROWER'S RECEIVABLES OR INVENTORY TO
ANYONE EXCEPT LENDER WITHOUT LENDER'S PRIOR WRITTEN CONSENT EXCEPT FOR THE
FOLLOWING "PERMITTED LIENS":
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<PAGE>
(a) Liens for taxes or assessments or other government charges or levies
if not yet due and payable or if due and payable if they are being contested in
good faith by appropriate proceedings and for which appropriate reserves are
maintained;
(b) Liens imposed by law, such as mechanic's, materialmen's, landlord's,
warehouseman's and carrier's liens, and other similar liens, securing
obligations incurred in the ordinary course of business which are not past due
for more than thirty (30) days, or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established;
(c) Liens under workmen's compensation, unemployment insurance, social
security or similar legislation (other than ERISA);
(d) other liens incidental to the conduct of Borrower's business or the
ownership of Borrower's property and assets which were not incurred in
connection with the borrowing of money or the obtaining of advances or credit,
and which do not in the aggregate materially detract from Lender's rights in
and to Borrower's property which is subject to Lender's security interest or
which do not materially impair the use thereof in the operation of Borrower's
business;
(e) judgment and other similar liens arising in connection with court
proceedings; provided that the execution or other enforcement of such liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings and for which appropriate reserves
are maintained;
(f) purchase money liens on any equipment hereafter acquired or the
assumption of any lien on equipment existing at the time of such acquisition;
provided that:
(i) any property subject to any of the foregoing is acquired by the
Borrower in the ordinary course of its business and the lien on any
such property is created contemporaneously with such acquisition;
(ii) the obligation secured by any lien so created, assumed or existing
shall not exceed one hundred percent (100%) of the lesser of cost or
fair market value as of the time of acquisition of the property
covered thereby;
(iii) each such lien shall attach only to the property so acquired and
fixed improvements thereon;
(g) Liens securing obligations arising out of the extension or refinancing
of an obligation permitted to be secured by a lien pursuant to the provisions
of paragraph 5(f) hereof; and
(h) Liens existing on the date hereof and listed on Exhibit 5.3(h) hereto
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<PAGE>
5.4. Borrower warrants and represents that except with respect to
infractions, the consequences of which would not have a material adverse effect
on Borrower's business, Borrower is now, and Borrower hereby covenants and
agrees that Borrower will at all times hereafter be and remain in compliance
with all laws, rules, regulations and orders of all federal, state and local
governmental agencies having jurisdiction, including but not limited to those
relating to environmental protection (including CERCLA, RCRA and EPA) and
employees (including OSHA, ERISA and PBGC). Borrower will promptly advise
Lender of any action, threatened action or claim against Borrower relating to
its failure or alleged failure to comply with such laws, rules regulations, or
orders and give Lender copies of all documents received or sent by Borrower
relating thereto. Borrower will at its sole cost and expense take appropriate
steps to defend against any such actions and claims and Borrower will keep
Lender apprised of the status thereof. If, in Lender's opinion, Borrower fails
to take such steps, or fails to comply with such laws, rules, regulations or
orders, Lender may, but shall not be obligated to, take such steps, at
Borrower's cost and expense (for which Borrower will promptly reimburse
Lender), as Lender deems appropriate for such defense and/or to ensure such
compliance. Borrower will, at its sole cost and expense, furnish Lender with
such audits, assessments and evaluations (including but not limited to those
related to environmental protection) concerning its compliance or failure to
comply with such laws, rules, regulations and orders, as Lender requests.
Borrower will indemnify, defend and hold Lender harmless from and against all
losses, damages, liabilities, costs and expenses arising out of Borrower's
failure or alleged failure to comply with such laws, rules, regulations or
orders. Without limiting any of the foregoing, Borrower warrants and represents
that there are no visible signs of releases, spills, discharges, leaks or
disposal of hazardous substances at, upon, under or within any of Borrower's
realty or any premises leased by Borrower; there are no underground storage
tanks or polychlorinated biphenyls on Borrower's realty or any premises leased
by Borrower; neither Borrower's realty nor any premises leased by Borrower has
ever been used as a treatment, storage or disposal facility of hazardous waste;
and no hazardous substances are present on the realty or any premises leased by
Borrower, excepting such quantities as are handled in accordance with all
applicable manufacturer's instructions and governmental regulations and in
proper storage containers and as are necessary for the operation of its
business.
5.5. Borrower represents and warrants that (a) Borrower is not a party to
any litigation or administrative or other proceeding the adverse outcome of
which could have a material adverse effect on Borrower's business and (b) the
only material pending litigation and administrative and other proceedings to
which Borrower is a party are set forth on Exhibit 5.5 hereto.
6. INVOICING; PAYMENTS; RETURNS; L/C's
6.1. Borrower recognizes that the amount evidenced by checks, notes,
drafts or any other forms of payment relating to and/or proceeds of Receivables
may not be collectible by Lender on the date received. Accordingly, all items
of payment of Receivables shall be credited to Borrower's account two (2)
business days after confirmation to Lender that such items of payment have been
collected in good funds and finally credited to Lender's account. Lender is
not, however, required to credit Borrower's account for the amount of any item
of payment which is unsatisfactory to Lender and may charge Borrower's account
for the amount of any item of payment which is returned unpaid.
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6.2. Borrower shall pay principal, interest, fees, commissions and
expenses and all other amounts payable hereunder, or under any related
agreement, without any deduction whatsoever, including, but not limited to, any
deduction for any setoff or counterclaim.
6.3. In connection with each L/C, Borrower shall execute and deliver to
Lender such applications, agreements, certificates and other documents as
Lender may reasonably request.
6.4. Each L/C shall, among other things, call for sight drafts and have an
expiry date not later than six (6) months from date of issuance.
6.5. Borrower shall hold in trust for Lender and deliver to Lender in
original form and on the date of receipt thereof, all checks, drafts, notes,
money orders, acceptances, cash and other payments received by Borrower, if
any, in payment of the Receivables.
6.6. Lender shall have the right at any time to send notice of the
assignment of, and Lender's security interest in, the Receivables to any and
all of Borrower's customers or any third party. Thereafter, Lender shall have
the sole right to collect the Receivables. Lender's actual collection expenses,
including, but not limited to stationery and postage, telephone and telegraph,
secretarial and clerical expenses and the salaries of any collection personnel
used for collection, may be charged to Borrower's account.
6.7. Lender shall have the right to receive, endorse, assign and/or
deliver in Lender's name or Borrower's any and all checks, drafts and other
instruments for the payment of money relating to the Receivables, and Borrower
hereby waives notice of presentment, protest and non-payment of any instrument
so endorsed. Borrower hereby constitutes Lender or Lender's designee as
Borrower's attorney with power (a) to endorse Borrower's name upon any notes,
acceptances, checks, drafts, money orders or other evidences of payment; (b) to
sign Borrower's name on any invoice or bill of lading relating to any of the
Receivables, drafts against Borrower's customers, assignments and verifications
of Receivables; (c) to send verification of Receivables to any customer; (d) to
sign Borrower's name on all financing statements or any other documents or
instruments deemed necessary or appropriate by Lender to preserve, protect, or
perfect Lender's interest in the Collateral and to file same; (e) upon an Event
of Default to demand payment of the Receivables; (f) upon an Event of Default
to enforce payment of the Receivables by legal proceedings or otherwise; (g)
upon the occurrence and during the continuance of an Event of Default to
exercise all of Borrower's rights and remedies with respect to the collection
of the Receivables and any other Collateral; (h) upon the occurrence and
during the continuance of an Event of Default to settle, adjust, compromise,
extend or renew the Receivables; (i) upon the occurrence and during the
continuance of an Event of Default to settle, adjust or compromise any legal
proceedings brought to collect Receivables; (j) to prepare, file and sign
Borrower's name on a proof of claim in bankruptcy or similar document against
any customer; (k) to prepare, file and sign Borrower's name on any notice of
lien, assignment or satisfaction of lien or similar document in connection
with the Receivables; and (l) to do all other acts and things reasonably
necessary to carry out this Agreement. All acts of said attorney or designee
are hereby ratified and approved, and said attorney or designee shall
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<PAGE>
not be liable for any acts of omission or commission nor for any error of
judgment or mistake of fact or of law, unless done willfully, maliciously or
with gross negligence; this power being coupled with an interest is
irrevocable while any of the Obligations remain unpaid. Lender shall have
the right at any time to change the address for delivery of mail addressed to
Borrower to such address as Lender may designate.
6.8. Lender shall not, under any circumstances or in any event whatsoever,
have any liability for any error or omission or delay of any kind occurring in
the settlement, collection or payment of any of the Receivables or any
instrument received in payment thereof, or for any damage resulting therefrom,
except to the extent that any of the foregoing arises out of the gross
negligence, bad faith, unlawful conduct or willful misconduct of Lender.
6.9. Until Lender instructs otherwise, all proceeds of all Receivables
shall be deposited by Borrower's customers into a lockbox account. Arrangements
relating to the lockbox account shall be pursuant to agreements among Borrower,
Lender and banks acceptable to Lender, in form and substance acceptable to
Lender, and must include, inter alia, a provision prohibiting the bank from
exercising any set off or similar right and must give Lender sole and exclusive
dominion and control. All funds deposited in such lockbox account shall
immediately become Lender's property. Lender assumes no responsibility for such
lockbox account arrangement, including, without limitation, any claim of accord
and satisfaction or release with respect to deposits accepted by any bank
thereunder. Until Lender instructs otherwise, Borrower shall legend all
invoices in such manner as Lender directs in order to instruct Borrower's
customers to remit payment through the lockbox account. Borrower has previously
delivered each lockbox agreement with respect to the accounts described on
Exhibit 6.9 hereof executed by the applicable bank.
7. TERMINATION
7.1. This agreement shall remain in full force and effect until terminated
as follows:
(a) Subject to the terms of Paragraph 7(c) below, Borrower may terminate
this agreement at any time by giving Lender written notice of termination at
least ninety (90) days prior to the Restructure Date of termination. Lender may
terminate this Agreement effective as of December 31, 2002 or at any time
thereafter by giving Borrower written notice of termination at least sixty (60)
days prior to the Restructure Date of termination. Borrower and Lender each
acknowledges and agrees that Borrower or Lender may exercise the right to
terminate under this subdivision (a) even if the other party is not in breach
of or in default under this Agreement and no matter what the financial
condition or prospects of the other party may be.
(b) If Borrower shall suspend business, sell all or a significant portion
of its assets, becomes insolvent or unable to pay debts as they mature after
giving effect to the Transactions, make an assignment for the benefit of
creditors, or apply for an extension from creditors; or if a Receiver or
Trustee shall be appointed for Borrower or its property; or if Borrower's
property shall become subject to any material lien or attachment other than
Permitted
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<PAGE>
Liens; or if a petition under the Federal Bankruptcy Code shall be filed
by or against Borrower; or if Borrower shall seek relief under any insolvency
statute, federal, state or other; or if a custodian shall be appointed for
all or substantially all of Borrower's property; or if Borrower shall breach
this agreement or any other agreement with Lender except if such breach
is unintentional and immaterial; or if an Event of Default occurs and is
continuing under this Agreement; or if any warranty, or representation
hereunder or any portion of the contents of any document heretofore or
hereafter furnished in connection with this Agreement is or becomes untrue or
misleading except if such false or misleading warranty or representation is
immaterial and has been made unintentionally; or if Borrower shall fail to pay
any Obligation when due; or if any guaranty of the Obligations shall be
terminated, provided that the guaranty of J. Chaus shall be amended as of the
date hereof to limit J. Chaus's obligation thereunder to $10,000,000 and shall
thereafter be released upon application of the Cash Collateral Deposit as
provided in Section 12.3 hereof and provided, further that upon the dissolution
of Guarantor, the guaranty of Guarantor shall be released; or if there is a
default by J. Chaus under the Restructure Put which is not cured within any
applicable grace period; or if there occurs any change in Borrower's condition
or prospects which in Lender's reasonable opinion impairs the Collateral or
Lender's rights or Borrower's ability to perform the Obligations; or if
Lender's security interest in the Collateral ceases to be a perfected first
security interest; or if Borrower fails to deliver its business plan to Lender,
as required pursuant to Section 9.1(e) hereof, at least thirty (30) days prior
to June 30th of each year; or if all of the retail store operations conducted
by Borrower or Borrower's subsidiary shall not have been closed by January 31,
1998, except for the retail operation at the Secaucus, New Jersey location;
then in any of such events, an "Event of Default" shall be deemed to have
occurred under this Agreement, and Lender may terminate this Agreement at any
time without notice. In addition, this Agreement shall automatically terminate
in the event of a filing of a petition under the Federal Bankruptcy Code by or
against Borrower.
(c) Termination pursuant to paragraph 5.2 above.
7.2. On the Restructure Date of termination all Obligations shall become
immediately due and payable in full without further notice or demand and Lender
shall have no further obligation to provide any Loans or issue any L/Cs.
Lender's rights with respect to Obligations owing to it, or chargeable to
Borrower's account, arising out of transactions having their inception prior to
the Restructure Date of termination, will not be affected by termination.
Without limiting the foregoing, all of Lender's security interests and other
rights in and to all Collateral shall continue to be operative until such
Obligations have been fully and finally satisfied or Borrower has furnished
Lender an indemnity and from an indemnitor satisfactory to Lender.
7.3. If Borrower terminates this Agreement pursuant to paragraph 7.1(a),
or if Lender terminates the Agreement pursuant to paragraph 7.1(b) or 7.1(c),
in any such case, in addition to Borrower's other Obligations, Borrower will
pay Lender on or before the Restructure Date of termination an early
termination fee as follows:
(a) If termination occurs prior to October 8, 2000, Borrower shall pay
Lender $2,750,000;
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(b) If termination occurs at any time from October 9, 2000 through and
including December 30, 2002, Borrower shall pay Lender $2,200,000.
Lender's rights under this paragraph 7.3 are in addition to Lender's other
rights under this agreement.
7.4. Upon the occurrence and during the continuance of an Event of
Default, Lender may, if Lender so elects, at any time thereafter, in addition
to Lender's other rights, suspend indefinitely the making of any additional
Loans and/or the issuance of additional L/Cs and/or reduce the Formula Amount
in a manner and in amounts in Lender's sole discretion, without at the same
time terminating this Agreement. However, such suspension shall not be a waiver
of or otherwise deprive Lender of any of its other rights, including but not
limited to the right at any time to terminate this Agreement because of the
occurrence of such event or any other event, or the right to terminate this
Agreement pursuant to paragraph 7.1(a) or 7.1(c) hereof, all of which rights
are now hereby, and then shall be automatically, reserved without any other
action on Lender's part.
8. DEFINITIONS
As used herein
"Alternate Base Rate" shall mean, for any day, a rate per annum equal to
the higher of (i) the Prime Rate in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2 of 1%. Interest shall be calculated
on the basis of the actual number of days elapsed over a year of 360 days.
"Applicable Margin" shall mean (A) one percent for any month in which the
Interest bearing Obligations outstanding on each of five or more days in any
month exceed the Formula Amount or (B) one half of one percent (1/2%) at any
other time; provided, however, that the Applicable Margin shall mean two and
one half percent (2 1/2%) with respect to all Obligations not paid when due
hereunder so long as they remain unpaid.
"Availability Projections" shall have the meaning given to such term in
that certain Letter Agreement dated as of the Closing Date between Borrower and
Lender.
"Bank" shall mean The Bank of New York, New York, New York.
"Cash Collateral Deposit" shall mean an aggregate of $22,500,000 in which
Lender has been granted a security interest by J. Chaus pursuant to the Cash
Collateral Deposit Letters.
"Cash Collateral Deposit Letters" shall mean the (i) Cash Collateral
Deposit Letter dated July 23, 1997 by J. Chaus in favor of Lender and (ii) Cash
Collateral Deposit Letter dated as of the Closing Date by J. Chaus in favor of
Lender.
"Closing Date" shall have the meaning set forth in the introductory
paragraph hereof.
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"Collateral" shall mean and include:
(A) all Inventory;
(B) all Equipment;
(C) all General Intangibles;
(D) all Receivables;
(E) all books, records, ledgercards, files, correspondence, computer
programs, tapes, disks and related data processing software (owned by Borrower
or in which it has an interest) which at any time evidence or contain
information relating to (A), (B), (C) and (D) above or are otherwise necessary
or helpful in the collection thereof or realization thereupon;
(F) documents of title, policies and certificates of insurance,
securities, chattel paper, other documents or instruments evidencing or
pertaining to (A), (B), (C), (D) and (E) above;
(G) all guaranties, liens on real or personal property, leases, and other
agreements and property which in any way secure or relate to (A), (B), (C),
(D), (E) and (F) above, or are acquired for the purpose of securing and
enforcing any item thereof;
(H) (i) all cash held as cash collateral to the extent not otherwise
constituting Collateral, all other cash or property at any time on deposit with
or held by Lender for the account of Borrower (whether for safekeeping,
custody, pledge, transmission or otherwise), (ii) all present or future deposit
accounts (whether time or demand or interest or non-interest bearing) of
Borrower with Lender or any other Person including those to which any such cash
may at any time and from time to time be credited, (iii) all investments and
reinvestments (however evidenced) of amounts from time to time credited to such
accounts, and (iv) all interest, dividends, distributions and other proceeds
payable on or with respect to (x) such investments and reinvestments and (y)
such accounts; and
(I) all products and proceeds of (A), (B), (C), (D), (E), (F), (G) and (H)
above (including, but not limited to, all claims to items referred to in (A),
(B), (C), (D), (E), (F), (G) and (H) above) and all claims of Borrower against
third parties (x) for (i) loss of, damage to, or destruction of, and (ii)
payments due or to become due under leases, rentals and hires of, any or all of
(A), (B), (C), (D), (E), (F), (G) and (H) above and (y) proceeds payable under,
or unearned premiums with respect to policies of insurance in whatever form.
"Contract Quarter" shall have the meaning set forth in Section 2.4(e)
hereof.
"Contract Rate" shall mean the applicable non-default rate of interest
charged under this Agreement or the J. Chaus Subordinated Note, as applicable.
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"Dispute" shall have the meaning set forth in Section 5.1 hereof.
"Domestic Finished Goods Inventory" shall mean finished goods Inventory
(including inventory in Guarantor's retail outlets) located in the U.S.A.
"Eligible Inventory" means (A) Domestic Finished Goods Inventory, and (B)
Foreign Finished Goods Inventory, all valued at the lower of cost or market
value, determined on a first-in first-out basis, which is not, in Lender's
reasonable opinion, obsolete, slow moving in unacceptable condition or
unmerchantable or merchantable only at a price less than cost and which Lender,
in its sole discretion, shall not deem ineligible inventory, based on such
considerations as Lender may from time to time deem appropriate including,
without limitation, whether the inventory is subject to a perfected, first
priority security interest in favor of Lender (other than inventory in transit
from suppliers in the ordinary course of Borrower's business) and whether the
inventory conforms to all standards imposed by any governmental agency,
division or department thereof which has regulatory authority over such goods
or the use or sale thereof.
Without limiting the foregoing, so long as Borrower is in default under
any licensing agreement relating to any inventory, or so long as the licensor
thereunder shall not have entered into an agreement in form and substance
acceptable to Lender relating to such inventory and Lender's rights therein,
the respective inventory shall be ineligible. Lender's making loans to Borrower
related to the value of such inventory despite its ineligibility shall not be
deemed a waiver of any of Lender's rights to deem such inventory ineligible at
any time or times, or Borrower's obligation hereunder to pay Lender forthwith
the amount by which then outstanding Obligations shall exceed the then
Borrowing Base as a result of such ineligibility.
"Eligible Receivables" means each Receivable arising in the ordinary
course of Borrower's business and which Lender, in its sole reasonable credit
judgment, shall deem to be an Eligible Receivable, based on such considerations
as Lender may from time to time deem appropriate. In general, a Receivable
shall not be deemed eligible unless such Receivable is subject to Lender's
perfected security interest and no other lien and is evidenced by an invoice
or other documentary evidence satisfactory to Lender. In addition, no
Receivable shall be an Eligible Receivable if:
(A) it arises out of a sale made by Borrower to an affiliate of
Borrower's or to an entity controlled by an affiliate of Borrower's;
(B) it is unpaid more than 60 days (30 days in the case of "Dated
Invoices") after the original due date, or due more than 150 days after
the invoice date; (a Dated Invoice is any invoice issued on terms
exceeding net 45 days);
(C) twenty-five percent (25%) or more of the Receivables from the
account debtor are not deemed Eligible Receivables hereunder. Such
percentage may, in Lender's sole discretion, be increased or decreased
from time to time;
(D) any covenant, representation or warranty contained in this
Agreement with respect to such Receivable has been breached;
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(E) the account debtor is also Borrower's creditor or supplier, or
the account debtor has disputed liability, or the account debtor has made
any claim with respect to any other Receivable due from such account
debtor to Borrower, or the Receivable otherwise is or may become subject
to any right of setoff by the account debtor;
(F) the account debtor has commenced a voluntary case under the
federal bankruptcy laws, as now constituted or hereafter amended, or made
an assignment for the benefit of creditors, or if a decree or order for
relief has been entered by a court having jurisdiction in the premises in
respect of the account debtor in an involuntary case under any state or
federal bankruptcy laws, as now constituted or hereafter amended, or if
any other petition or other application for relief under any state or
federal bankruptcy law has been filed against the account debtor, or if
the account debtor has failed, suspended business, or consented to or
suffered a receiver, trustee, liquidator or custodian to be appointed for
it or for all or a significant portion of its assets or affairs; except
with respect to Receivables arising from sales to account debtors for
which Borrower have obtained Lender's prior written consent.
(G) the sale to the account debtor is on a bill-and-hold, guaranteed
sale, sale-and return, sale on approval, consignment or any other
repurchase or return basis or is evidenced by chattel paper;
(H) Lender believes, in its sole judgment, that collection of such
Receivable is insecure or that such Receivable may not be paid by reason
of the account debtor's financial inability to pay;
(I) the account debtor is the United States of America, any state or
any department, agency or instrumentality or any of them, unless Borrower
assigns its rights to payment of such Receivable to Lender pursuant to the
Assignment of Claims Act of 1940, as amended (31 U.S.C. sub-Section 203 et
seq.) or have otherwise complied with other applicable statutes or
ordinances;
(J) the goods giving rise to such Receivable have not been shipped
and delivered to and accepted by the account debtor or the services giving
rise to such receivable have not been performed by Borrower and accepted
by the account debtor or the Receivable otherwise does not represent a
final sale;
(K) the Receivables of the account debtor exceed a credit limit
determined by Lender in its sole discretion, to the extent such Receivable
exceeds such limit;
(L) the Receivable is subject to any offset, deduction, defense,
dispute, or counterclaim or if the Receivable is contingent in any respect
or for any reason;
(M) Borrower has made any agreement with any account debtor for any
deduction therefrom, except for discounts or allowances made in the
ordinary
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course of business for prompt payment, all of which discounts or
allowances are reflected in the calculation of the face value of each
respective invoice related thereto;
(N) shipment of the merchandise or the rendition of services has not
been completed;
(O) any return, rejection or repossession of the merchandise has
occurred;
(P) such Receivable is not payable to Borrower; or
(Q) such Receivable is not otherwise satisfactory to Lender as
determined in good faith by Lender in the exercise of its discretion in a
reasonable manner.
"Equipment" shall mean and include all of Borrower's now owned or
hereafter acquired equipment, machinery and goods (other than Inventory),
whether or not constituting fixtures, including, without limitation: plant and
office equipment, tools, dies, parts, data processing equipment, furniture and
trade fixtures, trucks, trailers, loaders and other vehicles and all
replacements and substitutions therefore and all accessions thereto.
"Event of Default" shall mean any of the events set forth in Section
7.1(b) hereof.
"Federal Funds Rate" shall mean, for any day, the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or
if such day is not a business day, for the next preceding business day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
day which is a business day, the average of quotations for such day on such
transactions received by the Bank from three Federal funds brokers of
recognized standing selected by the Bank.
"Foreign Finished Goods Inventory" shall mean finished goods inventory
located outside of the U.S.A. and destined for the U.S.A. to be imported by
Borrower under outstanding L/C's for which payment has not yet been made.
"Formula Amount" shall have the meaning set forth in Section 2.3 hereof.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"General Intangibles" shall mean and include all of Borrower's now owned
or hereafter acquired general intangibles as said term is defined in the
Uniform Commercial Code in effect in the State of New York including, without
limitation, trademarks, tradenames, tradestyles, trade secrets, equipment
formulation, manufacturing procedures, quality control procedures, product
specifications, patents, patent applications, copyrights, registrations,
contract rights, choses in action, causes of action, corporate or other
business records, inventions, designs,
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goodwill, claims under guarantees, licenses, franchises, tax refunds, tax
refund claims, computer programs, computer data bases, computer program flow
diagrams, source codes, object codes and all other intangible property of
every kind and nature.
"Guarantor" shall mean Chaus Retail, Inc.
"Infusion Event" shall mean a cash infusion of either equity or
subordinated debt in form reasonably satisfactory to Lender.
"Inventory" shall mean all of Borrower's [and
Guarantor 's] now owned or hereafter acquired goods, merchandise and other
personal property, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials, work in process,
finished goods and materials and supplies of any kind, nature or description
which are or might be used or consumed in Borrower's business or used in
selling or furnishing such goods, merchandise and other personal property, and
all documents of title or other documents representing them and all proceeds of
the foregoing.
"J. Chaus" shall mean Josephine Chaus.
"J. Chaus Subordinated Note" shall mean collectively those certain Notes
issued by Borrower to J. Chaus in the aggregate principal amount of
approximately $26,500,000, as amended, restated, consolidated or modified, from
time to time.
"L/C's" shall have the meaning set forth in Section 2.1 hereof.
"L/C Fee" shall have the meaning set forth in Section 2.4(d) hereof.
"Loans" shall have the meaning set forth in Section 2.1 hereof.
"Loss" shall mean for any period, "loss" as such term is defined under
GAAP.
"Maturity Date" shall mean December 31, 2002.
"Maximum Loan Amount" shall mean $81,000,000 as reduced dollar for dollar
by application of the Cash Collateral Deposit.
"Maximum Revolving Amount" shall mean $66,000,000 as reduced dollar for
dollar by application of the Cash Collateral Deposit.
"Minimum Commission" shall have the meaning set forth in Section 2.4(e)
hereof.
"Minimum Commission Charge" shall have the meaning set forth in Section
2.4(e) hereof.
"Obligations" means all amounts of any nature whatsoever, direct or
indirect, absolute or contingent, due or to become due, arising or incurred
heretofore or hereafter,
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arising under this or any other agreement or by operation of law, now or
hereafter owing by Borrower to Lender or to any parent, subsidiary or affiliate
of Lender. Said amounts include, but are not limited to, loans, debts and
liabilities heretofore or hereafter acquired by purchase or assignment from
other present or future clients of ours, or through participation. Without
limiting the foregoing, Obligations shall include Revolving Advances, Term
Loan, L/Cs, interest, commissions, bank (including those of L/C issuing
confirming and negotiating banks) related charges, costs, fees, expenses,
taxes and all Receivables and other amounts charged or chargeable to Borrower's
account hereunder.
"Other Documents" shall have the meaning set forth in Section 11.17(a)
hereof.
"Overadvance" shall have the meaning set forth in Section 2.1 hereof.
"Permitted Liens" shall have the meaning set forth in Section 5.3 hereof.
"Permitted Overadvances" shall mean the amount set forth below opposite
the applicable period:
Period Permitted Overadvances
- - ------ ----------------------
Closing Date through October 31, 1997 $ 3,445,000
November 1, 1997 through November 10, 1997 -0-
November 11, 1997 through November 30, 1997 $ 625,000
December 1, 1997 through December 10, 1997 -0-
December 11, 1997 through December 31, 1997 $ 162,000
January 1, 1998 through January 10, 1998 $ 8,475,000
January 11, 1998 through January 31, 1998 $12,475,000
February 1, 1998 through February 10, 1998 $ 8,840,000
February 11, 1998 through February 28, 1998 $12,840,000
March 1, 1998 through March 10, 1998 $ 4,333,000
March 11, 1998 through March 31, 1998 $ 8,333,000
April 1, 1998 through April 10, 1998 $ 2,197,000
April 11, 1998 through April 30, 1998 $ 6,196,000
May 1, 1998 through May 10, 1998 -0-
May 11, 1998 through May 31, 1998 $ 2,788,000
June 1, 1998 through June 10, 1998 -0-
June 11, 1998 through June 30, 1998 $ 2,742,000
July1, 1998 through July 10, 1998 $ 2,357,000
July 11, 1998 and at all times thereafter -0-
In the event that Borrower shall receive any proceeds in excess of $12,500,000
(the "Excess Proceeds" pursuant to the Restructure Transaction, the Permitted
Overadvances shall be reduced dollar for dollar in an amount equal to the
Excess Proceeds.
"Prime Rate" shall mean the prime commercial lending rate of the Bank as
publicly announced to be in effect from time to time, such rate to be adjusted
automatically, without notice, on the Restructure Date of any change in such
rate.
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"Profit" shall mean for any period "profit" as defined under GAAP.
"Put Amount" shall mean $2,500,000 for the period commencing on the
Closing Date through the Restructure Date.
"Receivables" means all amounts and all forms of obligations now or
hereafter owing to Borrower (including but not limited to accounts,
instruments, contract rights, documents and chattel paper) and general
intangibles; all security therefor and guaranties thereof; all of Borrower's
rights as an unpaid seller of goods and Borrower's rights to goods sold which
may be represented thereby (including but not limited to Borrower's rights of
replevin and stoppage in transit); all of Borrower's books of account, records,
files, and documents relating thereto and the equipment containing said books,
records, files and documents; all of Borrower's rights under insurance policies
relating to the foregoing; the right to use the Trade Names in connection with
Lender's rights with respect to the goods; and all proceeds of the foregoing.
"Reserves" means reserves for all Obligations chargeable to Borrower's
account and Obligations which, in Lender's sole judgment, may be chargeable to
Borrower's account in the future, including but not limited to (A) all
ineligible inventory and Receivables, disputed items, deductions, allowances,
credits, bill and hold and consignment sales, steamship guarantees, airway
releases, (B) an amount equal to the sum of (i) 50% of the outstanding face
amount of Documentary Letters of Credit relating to finished goods destined for
U.S. ports and Bills of Lading assigned to Lender at Lender's sole discretion,
and (ii) 100% of the outstanding face amount of all other Letters of Credit,
(C) the Term Loan Reserve and (D) such additional amounts as Lender in its sole
discretion deems appropriate.
"Restructure Date" shall mean the earlier of (a) May 15, 1998 or (b) the
date upon which the Restructure Transaction has been completed.
"Restructure Transaction" shall mean the transactions described in Exhibit
8(b) attached hereto and made a part hereof.
"Restructuring Charges" shall have the meaning given to such term in that
certain letter agreement dated as of the Closing Date between Borrower and
Lender.
"Restructure Put" shall mean the Agreement attached hereto as Exhibit
8(c).
"Retained Goods" shall have the meaning set forth in Section 5.2 hereof.
"Revolving Advances" shall mean Loans made other than L/Cs or the Term
Loan.
"Subordinated Debt" shall have the meaning set forth in Section 9.1(b)
hereof.
"Tangible Net Worth" shall have the meaning set forth in Section 9.1(d)
hereof.
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"Term Loan" shall have the meaning set forth in Section 2.2 hereof.
"Term Loan Reserve" shall mean $10,000,000
"Term Note" shall mean the promissory note described in Section 2.2
hereof.
"Trade Names" shall have the meaning set forth in Section 5.2 hereof.
"Transactions" shall have the meaning set forth in Section 11.17(o)(vi)
hereof.
9. COVENANTS
Borrower covenants and agrees that, until the later of the termination of
this Agreement or the satisfaction in full of all of the Obligations
9.1. Borrower will not:
(a) permit any of its property (including but not limited to
Receivables, inventory, machinery, equipment, furniture, fixtures, plant,
and real estate) to be encumbered by any security interest, lien,
mortgage, or other encumbrance of any nature whatsoever except in favor of
Lender or with respect to Permitted Liens.
(b) incur any indebtedness, or guaranty the obligations of any other
entity, except that Borrower may incur (i) unsecured debt to Borrower's
trade suppliers in the ordinary course of its business, (ii) debt to
Borrower's subsidiaries, as permitted hereunder, (iii) indebtedness in
connection with purchase money liens in accordance with Section 5.3(f)
hereof and (iv) debt subordinated to the Obligations in amounts and on
terms reasonably acceptable to Lender ("Subordinated Debt").
(c) Intentionally Omitted.
(d) permit Borrower's Tangible Net Worth (equity plus subordinated
debt minus goodwill and intangible assets) to be less than the following
amounts as of the following dates:
As of December 31, 1997 ($ 25,880,000)
As of March 31, 1998 $ 1,600,000
As of June 30, 1998 $ 2,010,000
For the period commencing September 30, 1997 through and including June
30, 1998, the calculation of Tangible Net Worth shall exclude Restructuring
Charges.
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Intangible assets include write ups, unamortized debt discount and
expense, unamortized deferred charges, patents, licenses, R&D expenses, and
other intangible items.
(e) permit Borrower's Working Capital (the amount by which Borrower's
current assets exceed Borrower's current liabilities) to be less than the
following amounts on the following dates:
As of December 31, 1997 ($17,050,000)
As of March 31, 1998 $10,870,000
As of June 30, 1998 $10,960,000
]
The calculation of Working Capital, shall exclude accrued but unpaid
Restructuring Charges at the end of each measurement period through June
30, 1998.
(f) To the extent the Restructure Transaction takes place on a day
other than on January 15, 1998 the Tangible Net Worth and Working Capital
covenants shall be amended to give effect to the components of the
Restructure Transaction for each of the measurement periods affected
thereby, such components including but not limited to (i) the conversion
of the J. Chaus Subordinated Note plus accrued interest thereon at the
Contract Rate through the date of occurrence of the Restructure
Transaction, and (ii) the reduction of the Revolving Advances by
$25,000,000 plus the interest which would have accrued or had accrued
thereon at the Contract Rate for the period between January 15, 1998 and
the date of the Restructure Transaction. In addition, to the extent
Borrower (a) receives any proceeds pursuant to the Restructure
Transaction, the amounts set forth in the Tangible Net Worth and Working
Capital covenants shall be increased by an amount equal to the product of
(A) the difference between the net proceeds received by Borrower and
$12,500,000 and (B) 100% or (b) receives any proceeds from equity (other
than pursuant to the Restructure Transaction) or subordinated debt (except
proceeds in connection with the Restructure Put) the amount set forth in
the Tangible Net Worth and Working Capital covenants shall be increased by
an amount equal to the product of (A) the net proceeds received by
Borrower and (B) 75%.
(g) Borrower's (i) Loss (after taxes) will not exceed and (ii) Profit
(after taxes) will not be less than the amounts specified below as
applicable to the indicated Period under the applicable column:
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Maximum Minimum
Period Permitted Loss Permitted Profit
- - ------ -------------- ----------------
Fiscal Quarter ended September 30, 1997 $1,600,000
Month of October 1997 $ 950,000
Month of November 1997 $ 510,000
Month of December 1997 $2,430,000
Fiscal quarter ended December 31, 1997 $1,750,000
Month of January 1998 $ 270,000
Month of February 1998 $ 920,000
Month of March 1998 $1,230,000
Fiscal quarter ended March 31, 1998 $2,450,000
Month of April 1998 $ 600,000
Month of May 1998 $ 720,000
Month of June 1998 $ 140,000
Fiscal year ended June 30, 1998 $2,625,000
The amounts set forth in the above subsections 9.1(d), 9.1(e) and 9.1(g) shall
be amended for each subsequent fiscal year in the term of this Agreement once
Lender has received Borrower's business plan for the next succeeding fiscal
year; such business plan to be received by Lender no later than June 1st for
the fiscal year beginning July 1st immediately thereafter. In the event that
Borrower does not deliver its business plan for fiscal years beginning July 1,
1999, July 1, 2000, July 1, 2001 or if after delivering such plans Borrower and
Lender cannot agree on revised financial covenants, Borrower agrees that the
Maximum Permitted Loss for any month and that the Maximum Permitted Loss for
each fiscal year, in the aggregate, shall not exceed $0.
In addition, for purposes of calculating Borrower's compliance with clauses
9.1(g) above through June 30, 1998, Lender shall exclude up to $4,250,000 of
Restructuring Charges.
(h) purchase or acquire obligations or stock of, or any other
interest in, any entity, except (i) obligations issued or guaranteed by
the United States of America of any agency thereof, (ii) commercial paper
with maturities of not more than 180 days and a published rating of not
less than A-1 or P-1 (or the equivalent rating), (iii) certificates of
time deposit and bankers' acceptances having maturities of not more than
180 days and repurchase agreements backed by United States government
securities of a commercial bank if (A) such bank has a combined capital
and surplus of at least $500,000,000, or (B) its debt obligations, or
those of a holding company of which it is a subsidiary, are rated not less
than A (or the equivalent rating) by a nationally recognized investment
rating agency and (iv) U.S. money market funds that invest solely in
obligations issued or guaranteed by the United States of America or an
agency thereof, and (v) Eurodollar time deposits with financial
institutions with a published rating of not less than A-1 or P-1 (or the
equivalent rating).
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(i) make advances, loans or extensions of credit to any entity,
including, without limitation, any parent, subsidiary or affiliate except
for loans to Borrower's subsidiaries not to exceed $4,000,000 in the
aggregate at any time.
(j) declare, pay or make any dividend or distribution on any shares
of common stock or preferred stock (other than dividends or distributions
payable in Borrower's stock, or split-ups or reclassifications of
Borrower's stock) or apply any of its funds, property or assets to the
purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of Borrower's
common or preferred stock, except for purchases of Borrower's common stock
made on behalf of its employees pursuant to Borrower's 401(K) plan and
except that if an Infusion Event occurs, so long as (i) no Event of
Default has occurred or is continuing and (ii) the Obligations hereunder
do not exceed the Formula Amount less the applicable Permitted
Overadvances, then Borrower may make a dividend or distribution not to
exceed 20% of the net proceeds of such infusion.
(k) substantially change the nature of the business in which Borrower
is presently engaged (except for its retail store business), nor, except
as specifically permitted hereby, purchase or invest, directly or
indirectly, in any assets or property other than in the ordinary course of
business for assets or property which are useful in, necessary for and are
to be used in Borrower's business as presently conducted.
(l) directly or indirectly, purchase, acquire or lease any property
from, or sell, transfer or lease any property to, or otherwise deal with,
any affiliate, except disclosed transactions in the ordinary course of
business, on an arm's-length basis on terms no less favorable than terms
which would have been obtainable from a person other than an affiliate.
(m) enter as lessee into any lease arrangement (i) for real or
personal property in connection with Guarantor's retail operations to the
extent such lease arrangement does not terminate by January 31, 1998 or
(ii) any other real or personal property, other than a renewal or
extension of existing real property leases listed on Exhibit 9.1(m) or
replacements thereof (unless capitalized and otherwise permitted
hereunder) except for leases entered into with respect to equipment so
long as rentals under such leases do not exceed the aggregate amount of
$2,500,000.00 per year.
(n) enter into any partnership, joint venture or similar arrangement
without Lender's prior written consent, which consent will not be
unreasonably withheld.
(o) change Borrower's fiscal year for financial reporting purposes
from June 30 or make any change (i) in accounting treatment and reporting
practices except as required by GAAP or (ii) in tax reporting treatment
except as required by law without Lender's prior written consent, which
shall not be unreasonably withheld.
9.2. Borrower will
(a) pay to Lender on demand all usual and customary fees and
reasonable out-of-pocket expenses which Lender incurs in connection with
(i) the forwarding of
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Loan proceeds and (ii) the establishment and maintenance of any lockbox
account as provided for in paragraph 6.9. Lender may, without making
demand, charge Borrower's account for all such fees and expenses.
(b) (i) conduct continuously and operate actively Borrower's business
according to good business practices and maintain all of Borrower's
properties useful or necessary in Borrower's business in good working
order and condition (reasonable wear and tear excepted) including, without
limitation, all licenses, patents, copyrights, Trade Names, trade secrets
and trademarks; (ii) keep in full force and effect its existence and
comply in all material respects with the laws and regulations governing
the conduct of its business and (iii) make all such reports and pay all
such franchise and other taxes and license fees and do all such other acts
and things as may be lawfully required to maintain Borrower's rights,
licenses, leases, powers and franchises under the laws of the United
States or any political subdivision thereof.
(c) promptly discharge all of Borrower's obligations of any nature
whatsoever, whether now existing or hereafter arising, owing to any
person, firm, corporation or governmental agency.
9.3. Borrower will give Lender
(a) once in each calendar year (but not more than twelve months shall
elapse between the first and second report in each calendar year) a
physical count of Borrower's inventory observed by an independent public
accountant acceptable to Lender in a manner consistent with procedures
followed in connection with the certification of Borrower's annual
financial statements unless waived in writing by Lender.
(b) not later than fifteen days after the end of each month,
inventory designations certified by Borrower's Treasurer to be reasonably
accurate, all in form and substance satisfactory to Lender.
(c) from time to time at Lender's request financial projections in
form and substance satisfactory to Lender;
(d) prompt written notice of any breach or default, or the occurrence
of an event which with notice or lapse of time would constitute a breach
or default, under this Agreement or Borrower's Obligations to Lender, or
any other agreement material to Borrower's business (including but not
limited to all license agreements relating to inventory), Borrower's
material violation of any law, rule, order or regulation of any
governmental agency applicable to Borrower or the Collateral, and the
commencement or assertion by or against Borrower of any claim, suit,
action or proceeding of a civil, criminal or an administrative nature or
the occurrence of any events adversely affecting the value of the
Collateral or Lender's rights or Borrower's condition. Lender may, but
shall not be obligated to, cure any such breach, default or violation and,
if Lender elects to do so, Borrower will on demand reimburse Lender for
the cost and expenses incurred by it in connection therewith.
(e) within 45 days after the close of each of the first three
quarters in each of Borrower's fiscal years (i) consolidated balance
sheets of Borrower and its
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subsidiaries as at the end of such quarter, and the related consolidated
statements of income, retained earnings and changes in financial position
of Borrower and its subsidiaries for the elapsed portion of the fiscal
year ended with the last day of such quarter setting forth in each case
in comparative form the figures for the corresponding periods of the
previous fiscal year, each of which shall be accompanied by a certificate
of Borrower's chief financial officer in form and substance satisfactory
to Lender or (ii) a copy of the Borrower's Form 10-Q filed with the
Securities and Exchange Commission for such period.
(f) within 90 days after the end of each of Borrower's fiscal years
(i) consolidated balance sheets of Borrower and its subsidiaries as at the
end of such fiscal year and the related consolidated statements of income,
retained earnings and changes in financial position of Borrower and its
subsidiaries for such fiscal year, setting forth in comparative form the
figures as at the end of and for the previous fiscal year, in each case
certified by independent certified public accountants of recognized
standing satisfactory to Lender, whose certificates shall be in scope and
substance satisfactory to Lender or (ii) a copy of the Borrower's Form
10-K filed with the Securities and Exchange Commission for such period.
Together with such financial statements Borrower shall deliver a
certificate of Borrower's chief financial officer in form and substance
satisfactory to Lender and a certificate of such accountants addressed to
Lender (i) stating that Borrower is authorized to deliver such financial
statements and their certifications thereof to Lender pursuant to this
Agreement and that they have caused this Agreement to be reviewed and
that, in making the examination necessary for the certification of such
financial statements, as a result of the output of the audit work, nothing
has come to their attention to lead them to believe that any default
hereunder or breach hereof exists, or, if such is not the case, specifying
such default or breach and its nature, when it occurred and whether it is
continuing and (ii) having attached the calculations required to establish
whether or not Borrower and Borrower's subsidiaries on a consolidated
basis were in compliance with the covenants contained in paragraph 9.1(d)
through 9.1(f).
(g) within thirty (30) days after the end of each month, an unaudited
balance sheet of Borrower and its subsidiaries and related unaudited
statements of income, retained earnings and changes in financial position
of Borrower and its subsidiaries for such period reflecting results of
operations from the beginning of the fiscal year to the end of such month
and for such month, prepared on a basis consistent with prior practices
and complete and correct in all material respects, subject to normal year
end adjustments. The reports shall be accompanied by a certificate of
Borrower's President and/or Chief Financial Officer which shall state
that, based on an examination sufficient to permit him to make an informed
statement, no Event of Default exists, or, if such is not the case,
specifying such Event of Default, its nature, when it occurred, whether it
is continuing and the steps being taken by Borrower with respect to such
default, and such certificate shall have appended thereto calculations
which set forth Borrower's compliance with the requirements or
restrictions imposed by Sections 9.1(d), 9.1(e), 9.1(k), 9.1(n) and 9.1(o)
hereof.
(h) such other reports and documents as and when Lender reasonably
request including but not limited to Borrower's reports to stockholders
and any documents filed with any governmental agency or stock exchange.
(i) With respect to Receivables, on or before the fifteenth (15th)
day of each month as and for the prior month accounts receivable ageings.
In addition,
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Borrower will deliver to Lender with respect to Receivables at such
intervals as Lender may require: (i) confirmatory assignment schedules,
(ii) copies of customer's invoices, (iii) evidence of shipment or
delivery and (iv) such further schedules, documents and/or information
regarding the Receivables as Lender may reasonably request, including,
without limitation, trial balances and test verifications. Lender shall
have the right to confirm and verify all Receivables by any manner and
through any medium it considers advisable and do whatever it may deem
reasonably necessary to protect Lender's interests hereunder. The items to
be provided under this subdivision are to be in form satisfactory to
Lender and executed by Borrower and delivered to Lender from time to time
solely for Lender's convenience in maintaining records of the Collateral,
and Borrower's failure to deliver any of such items shall not affect,
terminate, modify or otherwise limit Lender's lien on or security interest
in the Collateral.
(j) quarterly, Borrower's certificate signed by Borrower's Chief
Financial Officer stating, to the best of his/her knowledge, that Borrower
is in compliance in all material respects with all federal, state and
local laws including but not limited those relating to environmental
protection and control and employees.
(k) take all action that may be necessary or desirable, or that
Lender may request, so as at all time to maintain the validity,
perfection, enforceability and priority of Lender's security interest in
the Collateral or to enable Lender to protect, exercise or enforce its
rights hereunder and in the Collateral, including, but not limited to (i)
discharging all liens other than Permitted Liens, (ii) obtaining
landlords' or mortgagees' lien waivers, (iii) delivering to Lender,
endorsed or accompanied by such instruments of assignment as Lender may
specify, and stamping or marking, in such manner as Lender may specify,
any and all chattel paper, instruments, letters of credits and advices
thereof and documents evidencing or forming a part of the Collateral, (iv)
entering into warehousing, lockbox and other custodial arrangements
satisfactory to Lender, and (v) executing and delivering financing
statements, instruments of pledge, mortgages, notices and assignments, in
each case in form and substance satisfactory to Lender, relating to the
creation, validity, perfection, maintenance or continuation of Lender's
security interest under the Uniform Commercial Code or other applicable
law. All charges, expenses and fees the Lender may incur in doing any of
the foregoing, and any local taxes relating thereto, shall be charged to
the Borrower's account and added to the Obligations, or at the Lender's
option, shall be paid to the Lender immediately upon demand.
10. PLACE OF PAYMENT; NEW YORK LAW AND COURT
10.1. All Obligations shall be paid at Lender's office in New York, New
York.
10.2. This agreement shall be governed by and construed according to the
laws of the State of New York. All terms used herein, unless otherwise defined
herein, shall have the meanings given in the New York Uniform Commercial Code.
10.3. Borrower and Lender expressly submit and consent to the exclusive
jurisdiction of the Supreme Court of the State of New York, and the United
States District Court for the Southern District of New York, with respect to
any controversy arising out of or relating to this agreement or any supplement
hereto or to any transactions in connection therewith and hereby waives
personal service of the summons, complaint or other process or
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papers to be issued therein and hereby agrees that service of such summons,
complaint, process or papers may be made by registered or certified mail
addressed to the other party at the address appearing herein, but nothing
herein shall bar Lender from commencing any action against Borrower in any
court in any jurisdiction in addition to those specified above.
11. REPORTS; RECORDS; ASSURANCES; WAIVERS; REMEDIES; ADDITIONAL
WARRANTIES, REPRESENTATIONS AND COVENANTS; CONDITIONS; MISCELLANEOUS
11.1. Lender may at all times during Borrower's normal business hours have
reasonable access to, and inspect, audit, and make extracts from, all of
Borrower's records, files and books of account, and Lender may charge
Borrower's account with the costs, fees or expenses incurred in connection
therewith and Lender's then standard charges for each examiner or auditor.
11.2. Borrower shall perform all acts and execute all documents under this
agreement requested by Lender to perfect and maintain Lender's security
interest and other rights in the Collateral and under this Agreement.
11.3. Failure by Lender to exercise any right, remedy or option under this
Agreement or delay by Lender in exercising the same will not operate as a
waiver; no waiver by Lender will be effective unless Lender confirms it in
writing and then only to the extent specifically stated.
11.4. Lender may charge to Borrower's account, when incurred by Lender,
the amount of legal fees (including reasonable fees, expenses and costs payable
or allocable to attorneys retained or employed by Lender) and other costs, fees
and expenses incurred by Lender in negotiating or preparing this agreement and
any legal documentation required by Lender or requested by Borrower in
connection with this agreement or any amendments, waivers or supplements
thereof, or in enforcing, evaluating, or analyzing Lender's rights hereunder or
in connection with litigation arbitration or administrative proceedings
relating to any controversy arising out of this agreement, or in enforcing,
protecting, preserving or perfecting Lender's interest in, any Collateral,
including without limitation all taxes assessed or payable with respect to any
Collateral, and the out-of-pocket costs of all public record filings,
appraisals, reports and searches relating to Borrower or any Collateral. Lender
may file Financing Statements under the Uniform Commercial Code without
Borrower's signature or, if Lender so elects, sign and file them as Borrower's
agent.
11.5. Lender's rights and remedies under this agreement will be cumulative
and not exclusive of any other right or remedy Lender may have hereunder or
under the Uniform Commercial Code or otherwise. Without limiting the foregoing,
if Lender exercises its rights as a secured party Lender may, at any time or
times, without demand, advertisement or notice, all of which Borrower hereby
waives, sells the Collateral, or any part of it, at public or private sale, for
cash, upon credit, or otherwise, at Lender's sole option and discretion, and
Lender may bid or become purchaser at any such sale, free of any right of
redemption which Borrower hereby waive. After application of all Collateral to
Borrower's Obligations (in such
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order and manner as Lender in its sole discretion shall determine), Borrower
shall remain liable to Lender for any deficiency.
11.6. Lender shall have no liability hereunder (a) for any losses or
damages (including indirect, special or consequential damages) resulting from
Lender's refusal to assume, or delay in assuming, the Credit Risk, or any
malfunction, failure or interruption of communication facilities, or labor
difficulties, or other causes beyond Lender's control; or (b) for indirect,
special or consequential damages arising from accounting errors with respect to
Borrower's account with Lender. Lender's liability for any default by Lender
hereunder shall not exceed a refund to Borrower of any commission paid by
Borrower during the period starting on the occurrence of the default and ending
when it is cured or waived, or when this agreement is terminated, whichever is
earlier.
11.7. This agreement cannot be changed or terminated orally and is for the
benefit of and binding upon the parties and their respective successors and
assigns. Lender may assign or sell participations in this Agreement to others.
However, Borrower may not assign any of Borrower's rights or delegate any of
Borrower's duties hereunder without Lender's prior written consent. This
agreement, and any concurrent or subsequent written supplements thereto or
amendments thereof signed by both parties, represents Lender's entire
understanding and supersedes all inconsistent agreements and communications,
written or oral, between Borrower's and Lender's officers, employees, agents
and other representatives.
11.8. This agreement shall not be effective unless signed by Borrower
below, and signed by Lender at the place for its acceptance.
11.9. TO THE EXTENT LEGALLY PERMISSIBLE, BOTH BORROWER AND LENDER WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY LITIGATION RELATING TO TRANSACTIONS UNDER
THIS AGREEMENT OR THE OTHER DOCUMENTS, WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE.
11.10. Borrower shall keep proper books of record and account in which
full, true, correct and appropriate entries will be made of all dealings or
transactions of or in relation to Borrower's business and affairs, including,
but not limited to, appropriate accruals and allowances. All determinations
pursuant to this subsection shall be made in accordance with, or as required
by, GAAP (except, however, that the Restructuring Charges shall include up to
$800,000 of fees, expenses and other charges incurred by Borrower in connection
with the liquidation of Inventory at the Borrower's, shall store locations
regardless of their characterization as restructuring or unusual under GAAP)
consistently applied in the opinion of such independent public accountant
acceptable to Lender as shall then be regularly engaged by Borrower.
11.11. Confidentiality. Lender shall hold all non-public information
obtained by Lender pursuant to the requirements of this Agreement in accordance
with its customary procedures for handling confidential information of this
nature; provided, however, Lender may disclose such confidential information
(a) to its examiners, affiliates, outside auditors, counsel and other
professional advisors, (b) to any participant or assignee or prospective
participant or assignee, and (c) as required or requested by any governmental
authority or representative thereof or pursuant to legal process; provided,
further that (i) unless
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specifically prohibited by applicable law or court order, Lender shall use its
best efforts prior to disclosure thereof, to notify Borrower of the applicable
request for disclosure of such non-public information (A) by a governmental
authority or representative thereof (other than any such request in connection
with an examination of the financial condition of Lender by such governmental
authority) or (B) pursuant to legal process and (ii) in no event shall Lender
be obligated to return any materials furnished by Borrower other than those
documents and instruments in possession of Lender in order to perfect its lien
on the Collateral once the Obligations have been paid in full and this
Agreement has been terminated.
11.12. Borrower shall comply with all acts, rules, regulations, laws and
orders of any legislative, administrative or judicial body or official
applicable to Borrower, the Collateral or any part thereof, or to the operation
of Borrower's business.
11.13. At Borrower's own cost and expense in amounts and with carriers
acceptable to Lender, Borrower shall (a) keep all properties in which Borrower
has an interest insured against such hazards and for such amounts, as is
customary for companies engaged in businesses similar to Borrower's; (b)
maintain a bond in such amounts as is customary for companies engaged in
businesses similar to Borrower's, insuring against criminal misappropriation of
Borrower's employees; (c) maintain public and product liability insurance
against claims for personal injury, death or property damage suffered by
others; (d) maintain all such workmen's compensation or similar insurance as
may be required under the laws of any jurisdiction in which Borrower is engaged
in business; (e) Intentionally Omitted; (f) furnish Lender with (i) copies of
all policies and evidence of the maintenance of such policies, and (ii)
appropriate loss payable endorsements in form and substance satisfactory to
Lender, naming Lender as loss payee as its interest may appear with respect to
all insurance coverage referred to in clauses (a) with respect to inventory,
(b) with respect to Receivables and proceeds thereof, and (c) above. In the
event of any loss thereunder, the carriers named therein hereby are directed by
Borrower and Lender to make payment for such loss to Lender and not to Borrower
and Lender jointly. If any insurance losses are paid by check, draft or other
instrument payable to Borrower or to Borrower and Lender jointly, Lender may
endorse Borrower's name thereon and do such other things as Lender may deem
advisable to reduce the same to cash. Lender is hereby authorized to adjust and
compromise claims under insurance coverage referred to in clauses (a), (b) and
(c) above. All loss recoveries received by Lender upon such insurance may be
applied to the Obligations, in such order as Lender in its sole discretion
shall determine. In the event that the amount of the loss exceeds the amount of
the recovery, such deficiency shall be paid by Borrower to Lender, on demand.
11.14. If Borrower fails to obtain insurance as hereinabove provided, or
to keep it in force, Lender, if Lender so elects, may obtain such insurance and
pay the premium therefor for Borrower's account, and charge Borrower's account
therefor.
11.15. Borrower will pay, when due, all taxes, assessments and other
charges or claims lawfully levied or assessed upon Borrower or any of the
Collateral. If any tax by any governmental authority is or may be imposed on or
as a result of any transaction between Borrower and Lender which Lender may be
required to withhold or pay or if any taxes, assessments, or other charges
remain unpaid after the date fixed for their payment, or if any claim shall be
made which, in Borrower's opinion, may possibly create a valid lien, charge or
claim on the Collateral, Lender may without notice to Borrower pay the taxes,
assessments, liens,
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charges or claims and Borrower hereby indemnifies and holds Lender harmless in
respect thereof. The amount of any payment by Lender under this section shall
be charged to Borrower's account.
11.16. Borrower shall at all times pay, when and as due, rental
obligations under all leases, and shall otherwise comply, in all material
respects, with all other terms of such leases and keep them in full force and
effect and, at Lender's request, will provide evidence of having done so.
11.17. The Borrower represents and warrants as follows:
(a) Authority. The Borrower has full power, authority and legal right
to enter into this Agreement and all related documents, supplements and
agreements ("Other Documents") and perform all obligations hereunder and
thereunder. The execution, delivery and performance hereof and of the
Other Documents are within the Borrower's corporate powers, have been duly
authorized, are not in contravention of law or the terms of the Borrower's
by-laws, certificate of incorporation or other applicable documents
relating to the Borrower's formation or to the conduct of the Borrower's
business or of any agreement or undertaking to which the Borrower is a
party or by which the Borrower is bound, and will not conflict with nor
result in any breach of any of the provisions of or constitute a default
thereunder or result in the creation of any lien upon any asset of the
Borrower.
(b) Formation and Qualification. The Borrower is duly incorporated
and in good standing under the laws of the State of New York and is
qualified to do business and is in good standing in all states in which
qualification and good standing are necessary for the Borrower to conduct
its business and own its property. Borrower has delivered to Lender true
and complete copies of its certificate of incorporation and by-laws and
will promptly notify Lender of any amendment or changes thereto.
(c) Survival of Representations and Warranties. All representations
and warranties of Borrower contained in this Agreement and the Other
Documents shall be true at the time of Borrower's execution of this
Agreement and the Other Documents, and shall survive the execution,
delivery and acceptance thereof by Lender and the parties thereto and the
closing of the transactions described therein or related thereto.
(d) Tax Returns. Borrower has filed all federal, state and local tax
returns and other reports it is required by law to file and has paid all
taxes, assessments, fees and other governmental charges shown to be due
and payable on such returns. The provision for taxes on the books of
Borrower is adequate for all years not closed by applicable statutes, and
for its current fiscal year, and Borrower has no knowledge of any
deficiency or additional assessment in connection therewith not provided
for on its books.
(e) Financial Statements. All financial statements furnished by
Borrower to Lender are accurate, complete and correct in all material
respects and fairly reflect the financial condition of Borrower and have
been prepared in accordance with GAAP, consistently applied. The cash flow
projections of the Borrower and its projected balance sheets are based on
underlying assumptions which provide a reasonable basis for the
projections contained therein and reflect Borrower's judgment based on
present circumstances of the most
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likely set of conditions and course of action for the project period.
Since the end of the period covered by the most recent financial statement
furnished by Borrower, there has been no change in the condition,
financial or otherwise, of the Borrower or any of its subsidiaries and
no change in the aggregate value of the assets of Borrower and its
subsidiaries, except changes in the ordinary course of business, none of
which individually or in the aggregate has been materially adverse to the
Borrower's business.
(f) Solvency. After giving effect to the transactions contemplated by
this Agreement, the Borrower will be solvent, able to pay its debts as
they mature, and will have capital sufficient to carry on its business and
all businesses in which it is about to engage, and (A) as of the Closing
Date, the fair present saleable value of its assets, calculated on a going
concern basis, is in excess of the amount of its liabilities and (B)
subsequent to the Closing Date, the fair saleable value of its assets
(calculated on a going concern basis) will be in excess of the amount of
its liabilities.
(g) Patents, Trademarks, Tradenames, Copyrights and Licenses. All
patents, patent applications, trademarks, trademark applications,
tradenames, copyrights, copyright applications, trade secrets and licenses
owned or utilized by Borrower in the United States of America are set
forth on Exhibit 11.17(g), are valid and have been duly registered or
filed with all appropriate governmental authorities; there is no objection
or pending challenge to the validity of any such patent, trademark,
copyright, Trade Name, trade secret or license and Borrower is not aware
of any grounds for any challenge.
(h) Licenses and Permits. Borrower (i) is in compliance with and (ii)
has procured and is now in possession of, all material licenses or permits
required by any applicable federal, state or local law or regulation for
the operation of its business in each jurisdiction wherein it is now
conducting or proposes to conduct business and where the failure to
procure such licenses or permits would have a material adverse effect on
the business, properties, condition (financial or otherwise) or operations
of the Borrower.
(i) Default of Indebtedness. Borrower is not in default in the
payment of the principal of or interest on any indebtedness due to any one
party, which at any time exceeds an aggregate amount of $500,000 or under
any instrument or agreement under or subject to which any indebtedness has
been issued and no event has occurred under the provisions of any such
instrument or agreement which with or without the lapse of time or the
giving of notice, or both, constitutes or would constitute an event of
default thereunder.
(j) No Default. Borrower is not in default in the payment or
performance of any of its material contractual obligations and no event
has occurred which with the giving of notice or passage of time, would
constitute a default under this Agreement or any Other Document.
(k) No Burdensome Restrictions. Borrower is not party to any contract
or agreement the performance of which would adversely affect the business,
assets, operations or condition (taken as a whole) (financial or
otherwise) of the Borrower. Borrower has not agreed or consented (except
pursuant to this Agreement) to cause or permit in the future (upon the
happening of a contingency or otherwise) any of its property, whether now
owned or hereafter acquired, to be subject to a lien or encumbrance of any
kind.
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(l) No Labor Disputes. Borrower is not involved in any labor dispute;
there are no strikes or walkouts or union organization of any of
Borrower's employees threatened or in existence and no labor contract is
scheduled to expire July 31, 1999.
(m) Margin Regulations. No part of the proceeds of any Advance or
Loan will be used for "purchasing" or "carrying" "margin stock" as defined
in Regulation U of such Board of Governors.
(n) Disclosure. No representation or warranty made by the Borrower in
this Agreement or in any financial statement, report, certificate or any
other document furnished in connection herewith contains any untrue
statement of a material fact or omits to state any material fact necessary
in order to make the statements herein or therein not misleading.
(o) Conditions to Initial Advances. The agreement of Lender to make
the initial Loans or issue the L/C requested to be made or issued on the
Closing Date is subject to the satisfaction, or waiver by Lender,
immediately prior to or concurrently with the making of such Loans or
issuance of such L/Cs of the following conditions precedent:
(i) Filings Registrations and Recordings. Each document (including,
without limitation, any Uniform Commercial Code financing statement)
required by this Agreement, any related agreement or under law or
reasonably requested by the Lender to be filed, registered or
recorded in order to create, in favor of the Lender, a perfected
security interest in or lien upon the Collateral shall have been
properly filed, registered or recorded in each jurisdiction in which
the filing, registration or recordation thereof is so required or
requested, and the Lender shall have received an acknowledgment copy,
or other evidence satisfactory to it, or each such filing,
registration or recordation and satisfactory evidence of the payment
of any necessary fee, tax or expense relating thereto;
(ii) Corporate Proceedings of the Borrower. The Lender shall have received
a copy of the resolutions in form and substance reasonably
satisfactory to Lender, of the Board of Directors of the Borrower
authorizing (A) the execution, delivery and performance of this
Agreement, and the Other Documents, and (B) the granting by Borrower
of the security interests in and liens upon the Collateral in each
case certified by the Secretary or an Assistant Secretary of the
Borrower as of the Closing Date; and, such certificate shall state
that the resolutions thereby certified have not been amended,
modified, revoked or rescinded as of the date of such certificate;
(iii) Incumbency Certificates of the Borrower. The Lender shall have
received a certificate of the Secretary or any Assistant Secretary of
the Borrower, dated the Closing Date, as to the incumbency and
signature of the officers of the Borrower executing this Agreement,
any certificate or other documents to be delivered by it pursuant
hereto, together with evidence of the incumbency of such Secretary or
Assistant Secretary;
(iv) Guaranty. The Lender shall have received a reaffirmation by Chaus
Retail, Inc. with respect to the guaranty of Chaus Retail, Inc.;
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(v) No Litigation. No litigation, investigation or proceeding before or
by any arbitrator or governmental authority shall be continuing or
threatened against the Borrower or against the officers or directors
of the Borrower (except as set forth in Section 5.5 above and except
for such litigation, investigation or proceeding arising from or in
connection with the Restructure Transaction, including, but not
limited to, litigation by or on behalf of any holder of the
Borrower's common stock) (A) in connection with this Agreement, the
Other Documents, or any of the transactions contemplated thereby
("Transactions") or (B) which if adversely determined, would, in the
reasonable opinion of the Lender, have a material adverse effect on
the business, assets, operations or condition (financial or
otherwise) of the Borrower taken as a whole; and no injunction, writ,
restraining order or other order of any nature materially adverse to
the Borrower or the conduct of its business or inconsistent with the
due consummation of the Transactions shall have been issued by any
governmental authority;
(vi) Intentionally Omitted
(vii) Collateral Examination. The Lender shall have completed Collateral
examinations and received appraisals and reports, the results of
which shall be satisfactory in form and substance to the Lender, of
the assets of the Borrower and all books and records in connection
therewith;
(viii) Fees. The Lender shall have received all fees required by this
Agreement to be paid to the Lender on or prior to the Closing Date;
(ix) Pro Forma Financial Statements. Lender shall have received a copy of
pro forma financial statements which shall be satisfactory in all
respects to Lender;
(x) Subordination Agreement. Lender shall have entered into a
Subordination Agreement with Borrower and holders of the Subordinated
Debt which shall set forth the basis upon which said holders may
receive, and Borrower may make, payments under the Subordinated Debt,
which basis shall be satisfactory in form and substance to Lender in
its sole discretion;
(xi) Other Documents. Lender shall have received the Other Documents
executed in form and substance reasonably satisfactory to Lender;
(xii) Other. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the
Transactions shall be reasonably satisfactory in form and substance
to the Lender and its counsel.
(p) Conditions to Each Advance. Each request for a Loan, or L/C, by
Borrower hereunder shall constitute a representation and warranty by
Borrower as of the date of the making or issuance thereof that the
conditions contained in this subsection shall have been satisfied. The
agreement of Lender to make any Revolving Advance or issue any L/C
requested to be made or issued on any date (including, without limitation,
those first made or
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issued), is subject to the satisfaction of the following conditions
precedent as of the date such Loan is made:
(i) Representations and Warranties. Each of the representations and
warranties made by the Borrower in or pursuant to this Agreement, and
any related agreements to which it is a party, and each of the
representations and warranties contained in any certificate, document
or financial or other statement furnished at any time under or in
connection with this Agreement or any related agreement shall be true
and correct in all material respects on and as of such day as if made
on and as of such date;
(ii) No Default. No default or event which with the giving of notice or
passage of time would constitute a default herein shall have occurred
and be continuing on such date, or would exist after giving effect to
the Loans requested to be made, or L/Cs requested to be issued on
such date, provided, however, that Lender in its sole discretion, may
continue to make Loans notwithstanding the existence of such default
or event; and
(iii) Maximum Amount. The aggregate amount of Revolving Advances and L/Cs
at any time shall not exceed the Maximum Revolving Amount and the
aggregate Loans at any time shall not exceed the Maximum Loan Amount.
12. APPLICATION OF PAYMENTS; OPTIONAL PREPAYMENT
12.1. Lender shall have the continuing and exclusive right to apply or
reverse and reapply any and all proceeds of Collateral to any portion of the
Obligations. To the extent that Borrower makes a payment or Lender receives any
payment or proceeds of the Collateral for Borrower's benefit, which are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, debtor in possession, receiver,
custodian or any other party under any bankruptcy law, common law or equitable
cause, then, to such extent, the Obligations or part thereof intended to be
satisfied shall be revived and continue as if such payment or proceeds had not
been received by Lender.
12.2. Optional Prepayments. Borrower may prepay the Term Loan without
premium or penalty on two (2) business days' prior notice to Lender in minimum
amounts of $100,000 which shall be applied to the outstanding principal
installments on the Term Loan in the inverse maturities thereof.
12.3 Mandatory Prepayments. Upon the Restructure Date, the Maximum Loan
Amount and the Maximum Revolving Amount shall each be reduced in an amount
equal to $22,500,000 and all Revolving Loans which are then outstanding in
excess of the Maximum Revolving Amount as then reduced shall be immediately
repaid by Borrower and Lender shall have the right to apply the proceeds of the
Cash Collateral Deposit to any such payment. Any proceeds of the Cash
Collateral Deposit remaining after any such prepayment shall be applied to the
installments due under the Term Loan in the inverse order of their maturity
provided, however, that any proceeds remaining in connection with the account
established pursuant to the Amended and Restated Cash Collateral Deposit Letter
dated as of the Closing Date (a copy of which is attached hereto as Exhibit
12.3) shall be paid to J. Chaus.
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13. INDEMNITY
Borrower shall indemnify Lender from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements of any kind or nature whatsoever (including, without
limitation, reasonable out-of-pocket fees and disbursements of counsel) which
may be imposed on, incurred by, or asserted against Lender in any litigation,
proceeding or investigation instituted or conducted by any governmental agency
or instrumentality or any other entity with respect to any aspect of, or any
transaction contemplated by, or referred to in, or any matter related to, this
Agreement, whether or not the Lender is a party thereto, except to the extent
that any of the foregoing arises out of the gross negligence, bad faith,
unlawful conduct or willful misconduct of Lender.
14. NOTICE
Any notice or request hereunder may be given to Borrower or to Lender at
their respective addresses set forth below or at such other address as may
hereafter be specified in a notice designated as a notice of change of address
under this section. Any notice or request hereunder shall be given by (a) hand
delivery, (b) registered or certified mail, return receipt requested, (c) telex
or telegram, subsequently confirmed by registered or certified mail, or (d)
telefax to the number set out below (or such other number as may hereafter be
specified in a notice designated as a notice of change of address) with
telephone communication to a duly authorized officer of the recipient
confirming its receipt as subsequently confirmed by registered or certified
mail. Notices and requests shall, in the case of those by mail or telegram be
deemed to have been given when deposited in the mail, or delivered to the
telegraph office addressed as provided in this section.
(A) If to Lender, at:
BNY Financial Corporation
1290 Avenue of the Americas
New York, NY 10104
Attn: Andrew Rogow, SVP
Telephone: (212) 408-7531
FAX: (212) 408-4384
(B) If to Borrower, at:
Bernard Chaus, Inc.
1410 Broadway
New York, NY 10018
Attn: Josephine Chaus, Chairwoman of the Board
Telephone: (212) 354-1280
FAX: (212) 921-4619
and
Bernard Chaus, Inc.
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800 Secaucus Road
Secaucus, NJ 07094
Attn: Chief Financial Officer
Telephone: (201) 863-4646
FAX: (201) 863-4269
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attn: Robert C. Schwenkel
Telephone: (212) 859-8000
FAX: (212) 859-4000
15. SURVIVABILITY
If any or part of this Agreement is contrary to, prohibited by, or deemed
invalid under applicable laws or regulations, such provision shall be
inapplicable and deemed omitted to the extent so contrary, prohibited or
invalid, but the remainder hereof shall not be invalidated thereby and shall be
given effect so far as possible.
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16. INJUNCTIVE RELIEF
Borrower recognizes that, in the event Borrower fails to perform, observe
or discharge any of its obligations or liabilities under this Agreement, any
remedy at law may prove to be inadequate relief to Lender; therefore, Lender if
Lender so requests, shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.
AGREED TO ON THIS 10TH DAY OF OCTOBER, 1997
ATTEST: BERNARD CHAUS, INC.
/s/ Andrew Grossman By: /s/ Josephine Chaus
- - --------------------------------- ------------------------------
Secretary C.E.O.
ACCEPTED AT NEW YORK, NEW YORK,
AS OF THE ABOVE DATE
ATTEST: BNY FINANCIAL CORPORATION
/s/ Jean Williams By: /s/ Robert Grbic
- - --------------------------------- ------------------------------
Asst. Secretary
1290 Avenue of the Americas
New York, New York 10104
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