<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
NEW YORK 2331, 2339 13-2807386
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
----------------------------
</TABLE>
1410 BROADWAY
NEW YORK, NEW YORK 10018
(212) 354-1280
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-----------------------------------
<TABLE>
<CAPTION>
<S> <C>
JOSEPHINE CHAUS ANDREW GROSSMAN
CHAIRWOMAN OF THE BOARD CHIEF EXECUTIVE OFFICER
BERNARD CHAUS, INC. BERNARD CHAUS, INC.
1410 BROADWAY 1410 BROADWAY
NEW YORK, NEW YORK 10018 NEW YORK, NEW YORK 10018
(212) 354-1280 (212) 354-1280
</TABLE>
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
---------------------------
Copy to:
RICHARD A. GOLDBERG, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 758-9500
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvzestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF CLASS OF SECURITIES AMOUNT PRICE OFFERING REGISTRATION
TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE FEE
- --------------------------------- ---------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share, reserved for issuance
upon exercise of Rights ......... 13,977,270 $1.4309 $20,000,000 $6,061
- --------------------------------- ---------------- ----------- ------------- --------------
--
Rights ........................... 2,627,727 -- -- (2)
- --------------------------------- ---------------- ----------- ------------- --------------
</TABLE>
(1) Ms. Chaus will receive one Right for each share of Common Stock held by
her on the Record Date, with each Right entitling her to subscribe for
and purchase 5.181105 shares of Common Stock at the Subscription Price.
Stockholders of the Company, other than Ms. Chaus, shall receive one
Right for each share of Common Stock held by such stockholder on the
Record Date, with each Right entitling such stockholder to subscribe
for and purchase 5.464751 shares of Common Stock at the Subscription
Price.
(2) Pursuant to Rule 457(g) under the Securities Act, no separate
registration fee is required with respect to the Rights.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1997
PRELIMINARY PROSPECTUS
RIGHTS TO SUBSCRIBE FOR 13,977,270 SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS
EXPIRING ON , 1997
[CHAUS LOGO]
Bernard Chaus, Inc., a New York Corporation ("Chaus" or the "Company") is
distributing at no cost to holders of its common stock, par value $.01 per
share (the "Common Stock"), of record as of the close of business on
1997 (the "Record Date"), transferable rights (other than those distributed
to Josephine Chaus) to purchase shares of Common Stock (the "Rights"). Each
such holder (a "Holder"), other than Josephine Chaus, Chairwoman of the Board
and principal stockholder of the Company ("J. Chaus" or "Ms. Chaus"), will
receive one Right for each share of Common Stock held on the Record Date (the
"Rights Offering"), with each Right entitling the Holder thereof to subscribe
for and purchase 5.464751 shares of Common Stock (the "Basic Subscription
Privilege"), for a price of $1.4309 per share (on a post Stock Split basis,
the "Subscription Price"). Except where otherwise noted, all share data in
this Prospectus gives effect to a one-for-ten reverse stock split to be
effected prior to the consummation of the Rights Offering (the "Stock
Split"). Ms. Chaus will receive one Right for each share of Common Stock held
by her on the Record Date, with each Right entitling her to subscribe for and
purchase 5.181105 shares of Common Stock at the Subscription Price. No
fractional shares or cash in lieu thereof will be issued or paid. The number
of shares distributed to each Holder upon exercise of the Rights will be
rounded up to the nearest whole number of shares. The Common Stock is traded
on the New York Stock Exchange (the "NYSE") under the symbol "CHS." On
1997, the last reported sales price for the Common Stock on the NYSE was
$ per share. See "Price Range of Common Stock." The Rights will expire at
5:00 p.m. New York City time, on 1997, unless extended as provided
herein (the "Expiration Date"). The issuance of shares pursuant to the Rights
Offering is subject to the following conditions: (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, and (d) the sale by the
Company of up to 1,747,160 shares to J. Chaus in connection with the Standby
Commitment, 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.
(continued on inside front cover)
CURRENT STOCKHOLDERS OF THE COMPANY WHO DO NOT PARTICIPATE IN THE RIGHTS
OFFERING WILL SUFFER SUBSTANTIAL DILUTION IN THEIR RELATIVE PERCENTAGE
OWNERSHIP IN THE COMPANY UPON ISSUANCE OF COMMON STOCK TO HOLDERS EXERCISING
RIGHTS.
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE
RIGHTS AND OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
THE RIGHTS MAY NOT BE EXERCISED BY ANY PERSON, AND NEITHER THIS PROSPECTUS
NOR ANY SUBSCRIPTION DOCUMENT SHALL CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO PURCHASE ANY SHARES OF COMMON STOCK, IN ANY
JURISDICTION IN WHICH SUCH TRANSACTIONS WOULD BE UNLAWFUL. SEE "THE RIGHTS
OFFERING--STATE AND FOREIGN SECURITIES LAWS."
===============================================================================
<TABLE>
<CAPTION>
UNDERWRITING
SUBSCRIPTION DISCOUNTS AND PROCEEDS
PRICE COMMISSIONS(1) TO COMPANY(2)
- --------------- -------------- --------------- --------------
<S> <C> <C> <C>
Per Share....... $1.4309 -- $1.4309
- --------------- -------------- --------------- --------------
Total Minimum .. $1.4309 -- $12,500,000(3)
- --------------- -------------- --------------- --------------
Total Maximum .. $1.4309 -- $20,000,000(4)
- --------------- -------------- --------------- --------------
</TABLE>
===============================================================================
- ------------
(1) The shares of Common Stock are being offered and sold directly by the
Company, and no commissions or other renumeration is intended to be
paid to any person for soliciting purchases of the shares in the Rights
Offering. See "The Rights Offering--Method of Offering."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) Assuming no purchase of Common Stock by the Holders, other than Ms.
Chaus, pursuant to the Basic Subscription Privilege or the
Oversubscription Privilege, and the purchase by Ms. Chaus of shares
required to be purchased by her pursuant to the Purchase Commitment and
the Standby Commitment.
(4) Assumes the exercise of all Rights.
The date of this Prospectus is , 1997.
<PAGE>
(continued from prospectus cover)
If shares of Common Stock offered hereby are not purchased by Holders
pursuant to the Basic Subscription Privilege (collectively, such shares are
sometimes hereinafter referred to as the "Excess Shares"), any Holder
purchasing all of the shares of Common Stock available to it pursuant to the
Basic Subscription Privilege may purchase the number of Excess Shares
specified by the Holder in the Subscription Documents (as defined below),
subject to proration (the "Oversubscription Privilege"). See "The Rights
Offering--Basic Subscription Privilege; Oversubscription Privilege".
The Company has entered into a purchase agreement (the "Purchase
Agreement") with Ms. Chaus, pursuant to which Ms. Chaus has agreed to
subscribe for and purchase all of the 6,988,635 shares of Common Stock
issuable to her upon exercise of the Rights distributed to her, for an
aggregate purchase price of $10.0 million (the "Purchase Commitment").
Pursuant to the Purchase Agreement, Ms. Chaus has also agreed that, in the
event that at least 1,747,160 shares of Common Stock offered hereby (the
"Standby Shares") are not purchased by the Holders, other than Ms. Chaus,
pursuant to the Basic Subscription Privilege or the Oversubscription
Privilege, she will purchase the unsubscribed portion of the Standby Shares
at the Subscription Price, for an aggregate purchase price of up to $2.5
million (the "Standby Commitment"). As part of the Company's restructuring
plan, J. Chaus has also agreed to convert approximately $40.5 million of
indebtedness owed to Ms. Chaus, consisting of $28.0 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 prior
to the consummation of the Rights Offering (the "Conversion Commitment"),
into 10,510,910 shares of Common Stock of the Company. See "The Company," and
"The Restructuring."
In addition to the Purchase Commitment and the Standby Commitment of Ms.
Chaus, the other members of the Board of Directors of the Company have
advised the Company that they intend to subscribe for an aggregate of
Rights, and certain directors may also exercise their Oversubscription
Privilege.
The Rights Offering, together with the Conversion Commitment, and a
refinancing with BNY Financial Corporation ("BNYF"), the Company's current
working capital lender, is part of a comprehensive restructuring plan to
infuse capital into the Company, restructure the Company's indebtedness owing
to BNYF and J. Chaus, and provide the Company with working capital to finance
operations. The Purchase Commitment and Standby Commitment insure that an
aggregate of at least $12.5 million is received by the Company in the Rights
Offering. Depending on the number of Rights exercised by the Holders other
than Ms. Chaus, following completion of the Rights Offering, J. Chaus will
own between approximately 69.5% and 94.2% of the issued and outstanding
Common Stock of the Company. See "The Company," "Risk Factors--Control by
Principal Stockholder," and "Use of Proceeds."
This Prospectus relates to the Rights and the shares of Common Stock
issuable upon the exercise of the Rights. Accompanying this Prospectus are
certain documents (collectively, the "Subscription Documents") that must be
completed and returned by a Holder in accordance with the appropriate
instructions in order to exercise the Basic Subscription Privilege or the
Oversubscription Privilege. Once a Holder has exercised any Right, such
exercise may not be revoked, unless there is a material amendment to the
terms of the Rights Offering. See "The Rights Offering--Amendment, Extension
and Termination." Holders exercising Rights should complete and return their
Subscription Documents with payment of the Subscription Price promptly to
insure timely receipt and the collection of any funds prior to the Expiration
Date. See "The Rights Offering--Exercise of Rights." Holders who do not
exercise or sell their Rights will relinquish any value inherent in the
Rights. See "Risk Factors--Dilution."
The Company expects to file a listing application with the NYSE seeking to
list the shares of Common Stock issuable upon the exercise of the Rights.
There can be no assurance that such listing application will be approved or
accepted by the NYSE or that the Rights will be traded on the NYSE. There has
been no prior market for the Rights and there can be no assurance that a
market for the Rights will develop. Rights may be sold in over-the-counter
and private sales transactions. Orders to sell Rights must be received by
(the "Subscription Agent") not later than on the third NYSE
trading day prior to the Expiration Date if a Holder wishes to sell Rights
through the Subscription Agent.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, DC 20549, or at the
Commission's regional offices: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th
Floor, New York, New York 10048. The Common Stock is traded on the New York
Stock Exchange.
The Company has filed with the Commission a Registration Statement on Form
S-3 (of which this Prospectus is a part) under the Securities Act of 1933
(the "Securities Act") with respect to the Common Stock issuable upon the
exercise of the Rights and offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company
and such Common Stock, reference is made to such Registration Statement and
exhibits. A copy of the Registration Statement on file with the Commission
may be obtained from the Commission's principal office in Washington, D.C.,
upon payment of the fees prescribed by the Commission.
Copies of the Registration Statement may be obtained from the Commission
at its principal office upon payment of prescribed fees. Statements contained
in this Prospectus as to the contents of any contract or other document are
not necessarily complete and, where the contract or other document has been
filed as an exhibit to the Registration Statement, each such statement is
qualified in all respects by reference to the applicable document filed with
the Commission. The Registration Statement of which this Prospectus forms a
part has been filed electronically through the Commission's Electronic Data
Gathering Analysis and Retrieval System and may be obtained through the
Commission's website on the Internet (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1997.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the
Rights Offering shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of filing
thereof. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits). Requests
for such copies should be directed to: Bernard Chaus, Inc., 1410 Broadway,
New York, New York 10018, Attention: Chief Executive Officer, telephone (212)
354-1280.
---------------------
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Prospectus
or incorporated by reference herein and does not purport to be complete.
Reference is made to, and this Prospectus Summary is qualified in its
entirety by and should be read in conjunction with, the more detailed
information contained elsewhere in this Prospectus or incorporated by
reference herein. Prospective investors should carefully consider the
information set forth under "Risk Factors."
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and
Section 21E of the Exchange Act, which generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology. Such
statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, regarding, among
other items, (i) anticipated trends in the Company's business, (ii) future
expenditures for capital projects, (iii) the Company's ability to continue to
control costs and maintain quality, (iv) the Company's business strategies,
and (v) the Company's projected financial information. These forward-looking
statements are based largely on the Company's expectations and are subject to
a number of risks and uncertainties, certain of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described in "Risk
Factors" including, among others, (a) changes in the Company's markets as a
result of economic influences, (b) the Company's history of losses, or (c)
changes in the competitive marketplace, including new products and pricing
changes by the Company's competitors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Prospectus will in fact transpire. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.
BACKGROUND; REASONS FOR RIGHTS OFFERING; PROSPECTS
The Rights Offering is the final stage of a major product line
repositioning and financial restructuring program that the Company has been
implementing over the past few years. Beginning in late fiscal 1994, the
Company commenced a program to reposition its Chaus product line at the high
end of "upper moderate" through the opening price points of the "better"
categories. Integral to its repositioning program was the hiring of Andrew
Grossman in September of 1994 as the Company's Chief Executive Officer. Mr.
Grossman was President of Jones Apparel Group, a manufacturer of women's
apparel, from 1991 to 1994. 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.
By August 1997, Mr. Grossman and the Company had completed the
repositioning of the Chaus product line into the opening price points of the
"better" category. Given the strong retail performance of the Company's Chaus
product line over the past 12 months, the Company's management believes that
the repositioning and remarketing of the Chaus product line has been
successfully implemented, and the Company's operating performance should
continue to improve over the next several years. In addition to successfully
improving the performance of its Chaus product line, the Company has begun to
implement a strategy designed to remedy the disappointing performance of the
Company's Nautica product line. To that end, the Company has, among other
things, hired a new executive officer, Lynn Buechner, formerly of Liz
Clairborne Collection to manage this line, and relaunch the Nautica product
line.
In addition to repositioning its product lines, the Company has developed
and implemented a comprehensive restructuring of its indebtedness to BNYF and
J. Chaus, as well as a recapitalization of the Company. In April of 1997 the
Company, together with its financial and legal advisors, entered into
4
<PAGE>
negotiations with various financial institutions in order to seek an
alternative working capital lender, so as to provide the Company with the
additional liquidity it needs in order to fully implement the Company's
product line repositioning. For various reasons, including BNYF's agreement
to refinance the Company's existing debt on acceptable terms, the Company
determined to refinance its existing bank debt by negotiating a new financing
agreement with BNYF. Management believes that the Company's repositioning in
the market and its improved performance over the past several months,
together with its projected performance over the next fiscal year, made it
possible for the Company to negotiate a favorable financing agreement with
BNYF. Management also believes that the refinancing of the Company's prior
bank debt and the execution of the New Financing Agreement with BNYF has
provided the Company with an incremental $8.0 million of working capital to
finance its operations and the continued development of the Chaus product
line and ongoing development of its Nautica business. See--"New Financing
Agreement."
Over the past several years, Ms. Chaus has provided the Company with
substantial credit support, as well as other support. Commencing in fiscal
1994, the Company required availability under its working capital credit line
with BNYF in excess of the amount available under its borrowing base formula.
To assist the Company, J. Chaus agreed to provide the Company with credit
support in the form of a letter of credit (the "Letter of Credit"). The
Letter of Credit, which was originally in the amount of $3.0 million, was
subsequently extended and increased to $5.0 million, $7.2 million and $10.0
million. Each time J. Chaus agreed to increase the amount of the Letter of
Credit, BNYF increased the Company's availability under the working capital
line. As additional credit support, Ms. Chaus also personally guaranteed, and
fully collateralized, $12.5 million of the Company's indebtedness to BNYF.
In September 1994, Ms. Chaus loaned the Company $7.2 million in exchange
for demand notes bearing interest at 12%. Proceeds of such cash infusion were
used for costs and associated expenses related to the retention of Andrew
Grossman as the Company's Chief Executive Officer. In order to provide
additional equity to the Company, enhance the Company's balance sheet, and to
accommodate BNYF, Ms. Chaus agreed to exchange such demand notes into Common
Stock of the Company. Upon shareholder approval, Ms. Chaus exchanged such
demand notes for 1,914,500 shares of Common Stock. Ms. Chaus also agreed, in
connection with the Company's November 1995 public offering, to extend the
maturity date of approximately $23.6 million of subordinated promissory notes
from July 1, 1996 to July 1, 1998. Over the past five fiscal years, Ms. Chaus
has committed approximately $56.0 million, in the aggregate, in the form of
equity infusions, loans and credit support, for the benefit of the Company.
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.
In connection with the Company's negotiations with BNYF over the past
several months, BNYF once again requested that Ms. Chaus commit additional
personal assets for the benefit of the Company. Under the Restructuring, as
requested by BNYF in connection with the New Financing Agreement, Ms. Chaus
will provide the Company with credit support by (i) converting the debt owed
or to be owed to her (approximately $40.5 million) into equity, (ii)
committing to subscribe, pursuant to the Rights Offering, for $10.0 million
of newly issued Common Stock, and (iii) committing to subscribe for up to an
additional $2.5 million of newly issued Common Stock, if and to the extent
that the Company's other stockholders do not purchase at least that amount of
stock in the Rights Offering.
Although BNYF required that Ms. Chaus purchase additional shares of Common
Stock in connection with the Restructuring, Ms. Chaus and the Company's Board
of Directors sought to minimize the dilution to existing stockholders in
connection with the Restructuring. Therefore, Ms. Chaus agreed to convert
indebtedness owed to her into additional shares of Common Stock and to commit
to purchase up to $2.5 million in additional equity on the condition that the
Company's other stockholders be afforded
5
<PAGE>
a meaningful opportunity to participate in the future of the Company and its
projected upside in the next several years. Accordingly, the Company's
stockholders are being given the opportunity to purchase additional shares of
Common Stock through the Rights Offering.
Due to the fact that the total Company value (as estimated by the Company's
management and approved by the disinterested members of the Company's Board of
Directors) was less than the amount of the Company's indebtedness owed or to
be owed to BNYF and Ms. Chaus, the dilution to holders of the Company's Common
Stock, other than Ms. Chaus, from the conversion of indebtedness into equity,
would have reduced their ownership to less than 1% of the Company's net equity
value after giving effect to the Restructuring. Nevertheless, in accordance
with Ms. Chaus' desire to afford the Company's other stockholders a meaningful
opportunity to participate in the Company's future, Ms. Chaus, as well as the
Company's Board of Directors, have agreed to allow such holders the right to
retain a greater interest in the Company then they would otherwise have been
entitled to, and also afford them the opportunity to participate in the Rights
Offering.
6
<PAGE>
THE COMPANY
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(Registered Trademark), CHAUS SPORT(Registered
Trademark) and NAUTICA(Registered Trademark) 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 "Business--Products." In September 1995, the Company entered
into the Nautica License Agreement with Nautica, a leading name in men's
apparel, pursuant to which the Company obtained an exclusive license to
design, contract for the manufacture of and market a new women's apparel line
under the Nautica brand name. The Company commenced sales of products in its
licensed Nautica line in August 1996. The Nautica product line is being
positioned in the "better" to "bridge" categories.
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 repositioned 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. Beginning in fiscal 1996, the Company combined the Spring I and
Spring II seasons into one Spring season, thus reducing the selling seasons
from six to five.
Management of the Company believes that the initiatives it has implemented
over the last two fiscal years have begun to positively impact consumer
acceptance of its Chaus products. During the last 4 fiscal quarters, the
Company has benefited from a significant improvement in the sell-through rate
of its core Chaus products to its retail customers. The improved sales of the
Chaus products have been primarily due to the Company's repositioning of its
product line, which entailed, among other things, (i) an emphasis on product
assortments that are well-focused at point-of-sale, (ii) improvements in
design integrity and quality, (iii) a move to better price points, and (iv)
more selective distribution. This improvement has resulted in increases in
orders for Holiday and Spring merchandise on its Chaus products, of 44% and
45%, respectively, over the same period in the preceding year. In addition to
the increase in orders, the Company's margins have improved due to efficient
up-front planning, a reduction in off-price sales, and the repositioning of
the Chaus product into categories with higher price points. Furthermore, the
Company believes that the credit available to it under its new financing
arrangement with BNYF will increase its leverage in negotiating for the
purchase of products and thereby improve margin levels in the future. In
order to take advantage of this favorable trend, improve its balance sheet,
infuse capital into the Company, reduce interest and operating expenses, and
increase working capital, management of the Company has formulated a
restructuring program. 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 $20.0 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
J. Chaus, consisting of $28.0 million of existing subordinated indebtedness
(including accrued interest through January 15, 1998) and $12.5 million of
indebtedness which will be owed to J. Chaus, will be converted into Common
Stock of the Company;
7
<PAGE>
(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 the Stock Split.
The Restructuring will have an immediate positive impact on the Company's
operating results and balance sheet. The Company's interest expense will be
reduced as a result of the elimination of interest charges on the subordinated
debt (approximately $2.8 million), credit support payments ($1.0 million) for
the 1997 fiscal year and lower interest charges due to lower projected
borrowings. In addition, the Company's stockholders' equity (deficiency) will
be improved by a minimum of $52.0 million as a result of the Restructuring.
See "Pro Forma Financial Statements."
8
<PAGE>
THE RIGHTS OFFERING
Unless otherwise indicated, the share data contained in this Prospectus
(i) gives effect to the Stock Split to be effected prior to the consummation
of the Rights Offering, and (ii) is based on the number of shares of Common
Stock and other securities outstanding as of October 6, 1997.
The Rights .................... Each Holder of Common Stock, other than J.
Chaus, will receive 1 transferable Right for
every share of Common Stock held of record
as of the Record Date, and each Right will
be exercisable for 5.464751 shares of Common
Stock. Ms. Chaus will receive one
non-transferable Right for each share of
Common Stock held by her as of the Record
Date, and each Right will be exercisable for
5.181105 shares of Common Stock. An
aggregate of 2,627,727 Rights will be
distributed. If all the Rights are
exercised, an aggregate of 13,977,270 shares
of Common Stock (the "Underlying Shares")
will be sold upon exercise of the Rights.
See "The Rights Offering--The Rights."
Transferability of Rights ..... The Rights (other than those distributed to
J. Chaus) are transferable and the Company
expects to file a listing application with
the NYSE seeking to list the Underlying
Shares. There can be no assurance that such
listing application will be approved or
accepted by NYSE. Nor can there be any
assurance that the Rights will be traded on
the NYSE or that the Rights will have any
value or that any market for the Rights will
develop or, if a market develops, that the
market will remain available throughout the
period that Rights are exercisable. The
Rights (other than those distributed to J.
Chaus) will be evidenced by transferable
subscription certificates (a "Subscription
Certificate"). Each Right is transferable
(other than those distributed to J. Chaus)
in whole by a Holder, but no fractional
Rights shall be transferable. There has been
no prior market for the Rights, and no
assurance can be given that a market for the
Rights will develop or, if such a market
develops, how long it will continue.
The Subscription Agent will attempt to sell
Rights for Holders who deliver a
Subscription Certificate with the
instruction for sale contained on the
reverse side thereof, properly executed, to
the Subscription Agent no later than 11:00
a.m. New York City time, on the third NYSE
trading day preceding the Expiration Date.
There can be no assurance that the
Subscription Agent will be able to sell any
Rights or as to the price that the
Subscription Agent will be able to obtain if
it is able to effect any such sale. See "The
Rights Offering--Method of Transferring
Rights."
Subscription Price ............ $1.4309 in cash per share of Common Stock
(the "Subscription Price") subscribed for
pursuant to the Basic Subscription
Privilege, the Oversubscription Privilege,
the Purchase Commitment or the Standby
Commitment.
Record Date ................... , 1997
9
<PAGE>
Expiration Date ............... , 1997, at 5:00 p.m., New York City
time, unless extended. The Company may
extend the Expiration Date, will announce
any extension by not later than 9:00 a.m.,
New York City time, on the business day
following the previously scheduled
Expiration Date.
The Expiration Date will be extended a
reasonable period of time if the Company
files an amendment to its Registration
Statement relating to the Rights Offering
that includes a material change in the
Rights Offering. See "The Right
Offering--Amendment, Extension and
Termination." Any extension of the
Expiration Date will be for a period of at
least three NYSE trading days, provided that
the Expiration Date shall in no event be
later than , 1997. The Company will
notify stockholders of any extension of the
Expiration Date of the Rights Offering
through the issuance of a press release
indicating such extension. See "The Rights
Offering--Expiration Date."
Basic Subscription Privilege .. Each Right entitles a Holder, other than J.
Chaus, to purchase 5.464751 shares of Common
Stock of the Company upon payment of the
Subscription Price for each share purchased
(the "Basic Subscription Privilege"). Each
Right entitles J. Chaus, to purchase
5.181105 shares of Common Stock of the
Company upon payment of the Subscription
Price for each share purchased. See "The
Rights Offering--Basic Subscription
Privilege;
Oversubscription Privilege .... Each Holder who elects to exercise in full
his , her or its Basic Subscription
Privilege may also subscribe at the
Subscription Price for additional Underlying
Shares available as a result of unexercised
Rights, if any (the "Oversubscription
Privilege"). If an insufficient number of
Underlying Shares are available to satisfy
fully all exercises of the Oversubscription
Privilege after reserving a sufficient
number of shares to fulfill subscriptions
for exercises by Holder pursuant to the
Basic Subscription Privilege, the available
Underlying Shares will be prorated among
Holders who exercise their Oversubscription
Privilege in proportion to the respective
number of Rights exercised by such Holders
pursuant to the Basic Subscription
Privilege. See "The Rights--Offering; Basic
Subscription Privilege; Oversubscription
Privilege."
Purchase Commitment ........... Subject to the terms and conditions of the
Purchase Agreement, J. Chaus has agreed to
subscribe for and purchase 6,988,635 shares
of Common Stock issuable upon exercise of
the Rights, for an aggregate purchase price
of $10.0 million (the "Purchase
Commitment"). See "The Company,"
"Business--Proposed Restructuring of
Indebtedness," and "Risk Factors--Control by
Principal Stockholder."
10
<PAGE>
Standby Commitment ............ Subject to the terms and conditions of the
Purchase Agreement, J. Chaus has agreed,
that in the event that at least 1,747,160
shares of Common Stock offered hereby (the
"Standby Shares") are not purchased by
Holders, other than Ms. Chaus, pursuant to
the Basic Subscription Privilege or the
Oversubscription Privilege, she will
purchase the unsubscribed portion of the
Standby Shares for an aggregate purchase
price of up to $2.5 million (the "Standby
Commitment"). See "The Company,"
"Business--Proposed Restructuring of
Indebtedness," and "Risk Factors--Control by
Principal Stockholder."
Procedure for Exercising
Rights ........................ Rights may be exercised by a Holder by
properly completing and signing the
Subscription Documents and forwarding such
Subscription Documents (or following the
Guaranteed Delivery Procedures described
herein and therein), with payment of the
Subscription Price for each share of Common
Stock subscribed for pursuant to the Basic
Subscription Privilege and Oversubscription
Privilege, if any, prior to the Expiration
Date. If the mails are used to forward
Subscription Documents it is recommended
that insured, registered mail be used. No
interest will be paid on funds delivered in
payment of the Subscription Price. ONCE A
HOLDER HAS EXERCISED ANY RIGHTS, SUCH
EXERCISE MAY NOT BE REVOKED UNLESS THE
COMPANY FILES A POST-EFFECTIVE AMENDMENT TO
ITS REGISTRATION STATEMENT RELATED TO THE
RIGHTS OFFERING THAT INCLUDES A MATERIAL
CHANGE IN THE TERMS OF THE RIGHTS OFFERING
(A "MATERIAL AMENDMENT"), IN WHICH CASE A
HOLDER WILL HAVE THREE (3) DAYS TO EVALUATE
THE MATERIAL AMENDMENT AND TO REVOKE THE
EXERCISE OF THEIR RIGHTS, IF DESIRED. See
"The Rights Offering--Exercise of Rights,"
"The Rights Offering--Amendment, Extension
and Termination," and "The Rights
Offering--No Revocation."
Procedure for Exercising Rights
by Foreign and Certain Other
Stockholders .................. Subscription Documents will not be mailed to
Holders of Common Stock whose addresses are
outside the United States or who have an
Army Post Office ("APO") or Fleet Post
Office ("FPO") address, but will be held by
the Subscription Agent for their accounts.
To exercise the Rights represented thereby,
such Holders must contact the Subscription
Agent on or prior to the Expiration Date. If
no contrary instructions have been received
by that time, the Rights of such Holders
will be sold, subject to the Subscription
Agent's ability to find a purchaser. Any
such sales will be at prevailing market
prices. If such Rights can be sold, a check
for the proceeds from the sale of such
Rights, less any applicable brokerage
commissions, taxes and other expenses, will
be remitted to such Holders by mail or, if
such Holder's address is unknown, held in a
non-interest bearing account by the
Subscription Agent. Such Rights expire at
the
11
<PAGE>
Expiration Date. See "The Rights
Offering--Foreign and Certain Other
Stockholders."
Persons Holding Common Stock
and Wishing to Exercise Rights
Through Others ................ Holders who hold shares of the Common Stock
for the account of others, such as brokers,
trustees or depositories for securities,
should notify the respective beneficial
owners of such shares as soon as possible to
ascertain such beneficial owners' intentions
and to obtain instructions with respect to
the Rights. If the beneficial owner so
instructs, the Holder shall complete
Subscription Documents and submit them to
the Subscription Agent with the proper
payment. See "The Rights Offering --
Exercise of Rights."
Issuance of Common Stock ...... Certificates representing shares of the
Common Stock purchased pursuant to the valid
exercise of the Rights will be delivered to
subscribers as soon as practicable after the
Expiration Date and the conditions to the
Rights Offering have been satisfied. See
"The Rights Offering--Basic Subscription
Privilege; Oversubscription Privilege," and
"The Rights Offering--Conditions to the
Rights Offering."
Conditions to the Rights
Offering ...................... The issuance of shares pursuant to the
Rights Offering is subject to the following
conditions: (i) the approval by the
Company's stockholders of the (a) Stock
Split, (b) issuance of 10,510,910 shares of
Common Stock of the Company to J. Chaus in
connection with the Conversion Commitment,
(c) sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase
Commitment, and (d) sale by the Company of
up to 1,747,160 shares to J. Chaus in
connection with the Standby Commitment; 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.
Subscription Agent ............
Common Stock to be Outstanding
After the Rights Offering;
Percentage to be owned by
J. Chaus ...................... Based on 2,627,727 the number of shares
outstanding on the date of this Prospectus,
and giving effect to the issuance of the
Conversion Shares to J. Chaus, if the Rights
Offering is fully subscribed for, the
Company will have approximately 27,115,910
shares outstanding. If no shares are
subscribed for pursuant to the Basic
Subscription Privilege or the
Oversubscription Privilege, other than
shares purchased by J. Chaus, then based on
2,627,727 the number of shares outstanding
on the date of this Prospectus, giving
effect to the issuance of the Conversion
Shares to J. Chaus, the Company will have
approximately 21,874,432 shares outstanding.
Depending on the number of Rights exercised
by the public Holders following completion
of
12
<PAGE>
the Rights Offering, J. Chaus will own
between approximately 69.5% and 94.2% of the
issued and outstanding Common Stock of the
Company.
Symbol for the Common Stock ... CHS
Use of Proceeds ............... Depending on the number of shares of Common
Stock subscribed for in the Rights Offering,
the net proceeds received by the Company
from the Rights Offering after payment of
fees and expenses (exclusive of fees and
expenses of the Restructuring which do not
relate to the Rights Offering), will range
between $12.0 million and $19.5 million. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations." All of the net proceeds will be
used to retire a portion of Bank Debt. See
"Use of Proceeds," and "The Rights
Offering--The Rights."
Amendment, Extension and
Termination ................... The Company may amend, or extend the Rights
Offering at any time prior to the Expiration
Date, at the Board of Directors' discretion.
In addition, the Rights Offering will
terminate if the conditions to the Rights
Offering have not been satisfied on or prior
to the Expiration Date. If the Company
amends the terms of the Rights Offering, a
new definitive Prospectus will be
distributed to all Rights Holders who had
previously exercised Rights and to all
holders of record on the date of such
amendment, together with a form on which
each exercising Rights Holder can consent to
the amended terms. Any Rights Holder who had
previously exercised any Rights, or who
exercises Rights within four (4) business
days after the mailing of the new definitive
Prospectus, and who does not so consent
within ten (10) business days after the
mailing of the definitive Prospectus and
form of consent, will be deemed to have
canceled such exercise and the Company will
refund as soon as practicable the full
amount of the Subscription Price paid by
such Rights Holder, without interest. Any
completed Subscription Certificate received
by the Subscription Agent five (5) or more
business days after the date of the
amendment will be deemed to constitute the
consent of the Rights Holder who completed
such Subscription Certificate to the amended
terms. See "The Rights Offering--Amendment,
Extension and Termination." The Company will
issue a press release with respect to any
amendment, extension or termination of the
Rights Offering.
State and Foreign Securities
Laws .......................... The Rights may not be exercised by any
person, and neither this Prospectus nor any
Subscription Document shall constitute an
offer to sell or a solicitation of an offer
to purchase any shares of Common Stock, in
any jurisdiction in which such transactions
would be unlawful. See "The Rights
Offering--State and Foreign Securities
Laws."
13
<PAGE>
Federal Income Tax
Consequences .................. For United States federal income tax
purposes, Holders generally will not
recognize taxable income in connection with
the issuance to them or exercise by them of
Rights. Holders may recognize a gain or loss
upon the sale of the Rights or the shares of
Common Stock acquired upon exercise of the
Rights. See "The Rights Offering-Federal
Income Tax Consequences."
Risk Factors .................. There are substantial risks in connection
with the Rights Offering that should be
considered by prospective purchasers. See
"Risk Factors."
14
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical and unaudited pro forma
financial data of the Company. The historical data has been derived from the
consolidated financial statements of the Company. The pro forma data has been
derived from the Unaudited Pro Forma Financial Data included elsewhere in
this Prospectus. The Unaudited Pro Forma Financial Data does not purport to
represent what the Company's results of operations actually would have been
if the transactions referred to herein had been consummated on the date or
for the periods indicated or what such results will be for any date or any
future period. The financial information below should be read in conjunction
with the other financial data of the Company and the consolidated financial
statements of the Company and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales .................................... $235,819 $206,332 $181,697 $170,575
Cost of goods sold ........................... 187,423 186,594 149,097 147,994
Gross profit ................................. 48,396 19,738 32,600 22,581
Selling, general and administrative expenses 57,410 55,400 44,794 40,162
Restructuring expenses ....................... -- 5,300(1) 1,200(1) --
Unusual expenses ............................. -- 1,900(2) 8,333(2) --
Interest expense ............................. 2,322 3,439 5,976 6,560
Other income (expense), net .................. 449 (190) 91 56
Loss before income tax provision ............. (10,887) (46,491) (27,612) (24,085)
Income tax provision ......................... 102 264 301 301
Net loss ..................................... $ (10,989) $ (46,755) $ (27,913) $ (24,386)
Net loss per share (5)........................ $ (0.60)* $ (2.55)* $ (1.40)* $ (1.02)*
Weighted average number of common and common
equivalent shares outstanding ............... 18,272* 18,352* 19,910* 23,987*
BALANCE SHEET DATA: AS OF JUNE 30,
-----------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------ ------------
Working capital (deficiency) ................. $ 40,923 $ 3,342 ($ 13,914) ($ 19,483)
Total assets ................................. 90,208 51,619 28,660 32,742
Short-term debt, including current portion of
long-term debt .............................. 17,504 21,365 18,698 26,077
Long-term debt ............................... 14,730 18,789 21,066 23,588
Stockholders' equity (deficiency) ............ 33,147 (13,614) (32,379) (40,610)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
1997 1997(6)
------------ -----------
<S> <C> <C>
Net sales .................................... $160,100 $141,682
Cost of goods sold ........................... 125,422(4) 111,038
Gross profit ................................. 34,678 30,644
Selling, general and administrative expenses 40,924 35,790
Restructuring expenses ....................... 2,250(3) --
Unusual expenses ............................. -- --
Interest expense ............................. 8,030 1,435
Other income (expense), net .................. 113 113
Loss before income tax provision ............. (16,413) (6,468)
Income tax provision ......................... 50 50
Net loss ..................................... $ (16,463) (6,518)
Net loss per share (5)........................ $ (0.63)* $ (0.24)
Weighted average number of common and common
equivalent shares outstanding ............... 26,277* 27,116
BALANCE SHEET DATA:
Pro Forma
1997 1997(7)
------------ -----------
Working capital (deficiency) ................. ($ 32,729) $ 13,546
Total assets ................................. 34,138 43,382
Short-term debt, including current portion of
long-term debt .............................. 37,756 500
Long-term debt ............................... 26,374 14,500
Stockholders' equity (deficiency) ............ (57,060) 1,314
</TABLE>
15
<PAGE>
- ------------
* Does not give effect to the Stock Split
(1) Includes, in fiscal 1994, $2.1 million for closing selected outlet
stores, $2.5 million for consolidation of office and warehouse space,
and $0.7 million for employee severance, and in fiscal 1995, $1.2
million of employee severance.
(2) Includes, in fiscal 1994, expenses relating primarily to abandonment of
fixed assets, certain legal matters and the winding down of the
Company's Canadian joint venture, and in fiscal 1995, $7.8 million
primarily relating to the costs associated with the signing of the
Company's new Chief Executive Officer and $0.5 million related to
certain legal matters.
(3) The Company recorded a $2.3 million 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 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.
(6) Pro Forma income statement data gives effect to: (i) the elimination of
interest expense associated with the conversion of outstanding
indebtedness into Common Stock of the Company; (ii) the elimination of
credit support payments to Ms. Chaus; (iii) the elimination of retail
store outlet operations; and (iv) the elimination of Restructuring
expenses, and the adjusting entries reflecting each such item give
effect to such items occurring on July 1, 1996.
(7) Pro Forma balance sheet data gives effect to: (i) the conversion of
approximately $38.9 million of subordinated indebtedness owed to J.
Chaus into Common Stock of the Company; (ii) the assumed raising of
$19.5 million in net proceeds from the Rights Offering; (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;
(iv) obtaining the New Term Loan in the amount of $15.0 million; (v)
the Stock Split; and (vi) the payment of expenses associated with the
New Financing Agreement.
16
<PAGE>
RISK FACTORS
In addition to the other information included in, or incorporated by
reference into this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
exercising the Rights and thereby purchasing the shares of Common Stock
offered hereby. An investment in the Rights and Common Stock offered hereby
involves a high degree of risk. Purchasers should carefully consider the
following risk factors, as well as all other information set forth or
incorporated in the Prospectus before purchasing any Rights or Common Stock
offered hereby. Prospective investors are cautioned that the statements in
this Prospectus that are not descriptions of historical facts may be
forward-looking statements. Such statements are based on many assumptions and
are subject to risks and uncertainties. Actual results could differ
materially from the results discussed in the forward looking statements due
to a number of factors, including, but not limited to, those identified below.
HISTORY OF LOSSES; DECLINING REVENUE BASE
The Company sustained net losses of $27.9 million, $24.4 million and $16.5
million in fiscal 1995, 1996 and 1997, respectively. In addition, during such
period the Company's revenues declined from $181.7 million in fiscal 1995 to
$170.6 million in fiscal 1996 to $160.1 million in fiscal 1997. The Company
also experienced a reduction in the number of individual stores within its
major customer groups in which its products were sold during this period. The
Company believes that the Restructuring and other initiatives it has taken
will improve operating results. No assurance can be given that revenues will
eventually increase, that the number of stores within which the Company's
products are sold will eventually increase or that the Company will return to
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WORKING CAPITAL DEFICIENCY; FUTURE FINANCING REQUIREMENTS
At June 30, 1997, the Company had a working capital deficiency of $32.7
million, and has had negative cash flow from operations of $4.8 million,
$22.7 million and $11.0 million in fiscal 1995, 1996 and 1997 respectively.
The Company's business plan requires the availability of sufficient cash flow
and borrowing capacity to finance its existing product lines and develop and
market its licensed Nautica product lines. The Company expects to satisfy
such requirements through cash flow from operations, proceeds from the Rights
Offering and borrowings under the New Financing Agreement which was entered
into with BNYF on October 10, 1997. Although there can be no assurance, the
Company believes that if the Restructuring is consummated and it achieves its
projections, the Company will have sufficient cash flow and credit
availability to meet its needs for the foreseeable future. There can be no
assurance that the Company will achieve its projections.
The New Financing Agreement consists of (i) the New Revolving Facility
which is a $66.0 million five-year revolving credit line with a $20.0 million
sublimit for letters of credit, and (ii) the New Term Loan which is a $15.0
million term loan facility. Each facility matures on December 31, 2002.
Ms. Chaus has provided the Company with various forms of financial and
credit support for several years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Under the terms of the
Restructuring, J. Chaus has agreed to convert indebtedness owed, and to be
owed prior to the consummation of the Rights Offering, to her by the Company
into shares of Common Stock of the Company. As a result, BNYF indebtedness
will be reduced and Ms. Chaus' credit support will be discontinued. See "The
Company," and "Business--Proposed Restructuring of Indebtedness."
The Company has no understanding with Ms. Chaus pursuant to which Ms.
Chaus would extend credit support to the Company after the Restructuring is
consummated. During recent fiscal periods, the Company was not in compliance
with certain financial covenants under the Old Bank Debt Agreement (as
defined below) with BNYF. Although BNYF had historically agreed to relax such
covenants and permit specified levels of overadvances, there can be no
assurance that it will continue to do so in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
<PAGE>
HIGH BORROWING LEVELS AND STOCKHOLDERS' DEFICIENCY
At June 30, 1997, the Company had short-term debt of $37.8 million,
long-term debt of $26.4 million and stockholders' deficiency of $57.1
million. Although immediately after giving effect to the Rights Offering and
the contemplated conversion of indebtedness into shares of Common Stock of
the Company, the Company's short-term debt, as of January 15, 1998, will be
reduced to $3.6 million, its long-term debt will be reduced to $14.5 million
and its stockholders' equity will be increased by $61.0 million to $3.9
million, the Company debt levels may increase in the future to the extent it
must seek to reborrow to meet its working capital needs.
OBLIGATIONS UNDER NAUTICA LICENSE AGREEMENT; SUCCESS OF NAUTICA PRODUCT LINE
The Company's obligations under the Nautica License Agreement include
meeting minimum sales targets, making minimum royalty and advertising
payments, and the requirement that Andrew Grossman continue in his position
as Chief Executive Officer during the Nautica License Agreement's term. See
Note 11 to Notes to Consolidated Financial Statements. There can be no
assurance that the conditions to the continuance of the Nautica License
Agreement will be met or that the Company's licensed Nautica product line
will be successful.
In connection with the Nautica license, Nautica has asserted that the
Company has not complied with and is not in compliance with all of the terms of
the Nautica License Agreement. To date, Nautica has not sought to exercise any
rights or remedies under the Nautica License Agreement. The Company believes
that Nautica's claims are baseless and without merit. Notwithstanding that the
Company believes that it has claims against Nautica for its failure to perform
under the terms of the Nautica License Agreement and that the claims asserted
by Nautica are baseless, the Company (i) is performing and will continue to
perform all of its obligations under the Nautica License Agreement, and (ii)
intends to enforce all of its rights and remedies under the Nautica License
Agreement.
The Company commenced sales of its licensed Nautica products in August
1996. The Company's Nautica product line has experienced intense competition
from other designer labels. See "Business--License Agreement with Nautica."
To date, the Company's Nautica product line has not generated the levels of
revenues which had been anticipated and there can be no assurance that such
revenues will increase in the foreseeable future, if ever.
APPAREL RETAILING CYCLES
The apparel industry is a cyclical industry heavily dependent on the
overall level of consumer spending, with purchases of apparel and related
goods tending to decline during periods when disposable income is low, but
also declining at other times. A difficult retail environment could result in
higher than normal levels of promotional sales by the Company, thereby
reducing the Company's gross profit margins.
CHANGES IN FASHION TRENDS
The Company believes that its success depends in substantial part on its
ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner. There can be no assurance, however, that
the Company will be successful in this regard. The Company attempts to
minimize the risk of changing fashion trends and product acceptance by
producing a wide selection of garments during a particular selling season and
by closely monitoring retail sales of its products. However, if the Company
misjudges the market for a number of products or product groups, it may be
faced with a significant amount of unsold finished goods inventory, which
could have an adverse effect on the Company's results of operations.
DEPENDENCE ON MAJOR 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
18
<PAGE>
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.
DEPENDENCE ON FOREIGN SOURCING; LONG LEAD TIMES
During fiscal 1997, the Company's products were manufactured through third
party foreign contractors, principally in South Korea, Hong Kong, Taiwan,
China, Indonesia and elsewhere in the Far East. As a result, the Company may
be adversely affected by political instability resulting in the disruption of
trade from foreign countries in which the Company's manufacturers and
suppliers are located, the imposition of additional regulations relating to
imports or duties, taxes and other charges on imports, any significant
decreases in the value of the dollar against foreign currencies and
restrictions on the transfer of funds. In addition, the Company's import
operations are subject to constraints imposed by bilateral textile agreements
between the United States and a number of foreign countries. These agreements
impose quotas on the amount and type of goods which can be imported into the
United States from these countries. Furthermore, because the Company's
foreign manufacturers are located at significant geographic distances from
the Company, the Company is generally required to allow greater lead time for
foreign orders. In addition, because orders from the Company's customers
generally precede the related shipping period by up to five months and the
Company must make substantial advance commitments to its suppliers (often as
many as seven months prior to the receipt of firm orders for the related
merchandise), a lead time of as long as twelve months may be required between
the time the Company commits to a supplier and the time of shipping. This
reduces the Company's manufacturing flexibility which increases the risks
associated with changes in fashion trends or consumer preferences. See
"Business--Manufacturing and Distribution," and "Business--Imports and Import
Restrictions."
SEASONALITY AND QUARTERLY FLUCTUATIONS
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.
COMPETITION
There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other apparel
companies, some of which are larger and have better established brand names
and greater resources than the Company. In some cases, the Company also
competes with private-label brands of its department store customers. The
Company believes that in order to be successful in its industry, it must be
able to evaluate and respond to changing consumer demand and taste and to
remain competitive in the areas of style, quality and price while operating
within the significant production and delivery constraints of the industry.
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.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent upon the personal efforts and
abilities of Ms. Chaus, its Chairwoman of the Board, and Andrew Grossman, its
Chief Executive Officer. The Company has no
19
<PAGE>
employment agreement with Ms. Chaus, its principal stockholder. The Company
has an employment agreement with Mr. Grossman for a term ending in September
2004, pursuant to which Mr. Grossman has agreed not to compete with the
Company during the term of the agreement or, if the Company terminates the
agreement (with certain exceptions), for a period of up to two years after
such termination depending on the basis for termination. 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. The Company believes that the loss of the services of either Ms.
Chaus or Mr. Grossman would likely have an adverse effect on the Company. The
Company maintains key man life insurance on the lives of Ms. Chaus and Mr.
Grossman in the amounts of $35.0 million and $25.0 million, respectively.
Furthermore, the Nautica License Agreement is conditioned upon Mr. Grossman
continuing as Chief Executive Officer. See "Business--License Agreement with
Nautica."
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, Barton Heminover, the Company's Vice
President--Corporate Controller and Assistant Secretary, together with the
Company's financial advisors, will be responsible for all of Mr. Miller's
duties.
In addition, the Company believes that its future success depends in part
upon its ability to attract and retain qualified personnel. There can be no
assurance that the Company will be successful in attracting and retaining
such personnel in the future. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER
Following the completion of the Rights Offering, J. Chaus will
beneficially own between approximately 69.5% and 94.2% of the outstanding
Common Stock depending on the number of Rights exercised. As a result of her
stock ownership, Ms. Chaus has, and will continue to have, sufficient voting
power to determine the direction and policies of the Company, the election of
the directors of the Company, the outcome of any other matter submitted to a
vote of stockholders, and to prevent or cause a change in control of the
Company.
POTENTIAL CONFLICTS OF INTEREST; RELATED PARTY TRANSACTIONS
Certain conflicts of interest may arise as a result of Ms. Chaus' position
as a director, member of the Office of the Chairman and majority stockholder
of the Company. There have been a number of related party transactions
between Ms. Chaus and the Company, principally involving her provision of
credit support to the Company. Such transactions are negotiated with a
special committee made up of the disinterested members of the Board which,
where appropriate, seeks the advice of an independent investment banking firm
in connection with the approval of any such transaction. When stockholder
approval is sought, Ms. Chaus, as majority stockholder, has the ability to
approve any such matter without the affirmative vote of any other stockholder
of the Company.
LITIGATION
The Company is involved as a defendant in certain legal proceedings
incidental to its business. The Company believes that the outcome of these
legal proceedings will not have a material adverse impact on its financial
position or operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is highly volatile. Factors
such as quarterly variations in the Company's results of operations and
changes in general market conditions could cause the market price of the
Company's Common Stock to fluctuate significantly. See "Price Range of Common
Stock and Dividend Policy."
20
<PAGE>
MARKET CONSIDERATIONS
There can be no assurance that the market price of the Common Stock will
not decline during the subscription period or that, following the issuance of
the Rights and the issuance of the Underlying Shares of Common Stock upon
exercise of the Rights, a subscribing Rights Holder will be able to sell the
Underlying Shares purchased in the Rights Offering at a price equal to or
greater than the Subscription Price.
IRREVOCABILITY OF SUBSCRIPTIONS
The election of a Holder to exercise Rights in the Rights Offering is
irrevocable, except in the case of a Material Amendment. See "The Rights
Offering--No Revocation." Moreover, until certificates are delivered,
subscribing Rights Holders may not be able to sell the Common Stock that they
have purchased in the Rights Offering. Certificates representing shares of
the Common Stock purchased pursuant to the Basic Subscription Privilege will
be mailed as soon as practicable after the subscriptions have been accepted
by the Subscription Agent to Holders not participating in the
Oversubscription Privilege. Certificates for shares of Common Stock issuable
upon the exercise of the Basic Subscription Privilege and the
Oversubscription Privilege will be mailed as soon as practicable after the
Expiration Date. No interest will be paid on any funds delivered to exercise
Rights.
DETERMINATION OF SUBSCRIPTION PRICE; MARKET CONSIDERATIONS AND UNCERTAIN
MARKET FOR RIGHTS
The Subscription Price was determined by the Company and management, and
was unanimously approved by the disinterested members of the Company's Board
of Directors. The Subscription Price does not necessarily bear any
relationship to the book value of the Company's assets, past operations, cash
flow, earnings, financial condition or any other established criteria for
value and should not be considered an indication of the underlying values of
the Company. The market price of the Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors, including the size of the public float of the Common Stock
which will depend, in part, on the percentage of the Rights that are
exercised by Holders after the Rights Offering. See "The Rights
Offering--Determination of Subscription Price."
The Rights (other than those distributed to Ms. Chaus) are expected to be
traded on the NYSE until the close of business on the last trading day prior
to the Expiration Date. There has been no prior market for the Rights and,
although the Rights (other than those distributed to Ms. Chaus) will be
transferable, there can be no assurance that the Rights will have any
economic value or that a market for the Rights will develop or be sustained.
There can also be no assurance that, following the issuance of the Rights and
of the Underlying Shares upon exercise of Rights, a subscribing Holder will
be able to sell shares of Common Stock purchased in the Rights Offering at a
price equal to or greater than the Subscription Price.
CONTINUED LISTING OF THE COMMON STOCK ON THE NYSE
In addition, the Company does not currently satisfy certain of the
conditions for continued listing on the NYSE and, depending on the level of
participation in the Rights Offering by stockholders, other than Ms. Chaus,
the Company may fail to meet certain additional NYSE requirements, after
completion of the Rights Offering. Although the NYSE has not, to date, taken
any action to delist the shares of Common Stock, there can be no assurance
that it will not undertake to do so in the future. The Company expects to
file a listing application with the NYSE seeking to list the Underlying
Shares. There can be no assurance that such listing application will be
approved and accepted by the NYSE, or that the Rights and the Underlying
Shares will be traded on the NYSE.
DILUTION
The Rights entitle the Holders of shares of Common Stock to purchase
shares of Common Stock at a price below the prevailing market price of the
Common Stock immediately prior to the commencement of the Rights Offering.
Although all shareholders will be diluted by the conversion of approximately
$40.5 million of the Company's indebtedness to Ms. Chaus, consisting of $28.0
million of existing subordinated
21
<PAGE>
indebtedness (including interest accrued through January 15, 1998) and $12.5
million of indebtedness which will be owed to J. Chaus, which will be
converted into Common Stock pursuant to the Restructuring, holders of shares
of Common Stock who exercise their Rights will otherwise preserve or increase
their proportionate interest in their equity ownership and voting power of
the Company. Stockholders who do not exercise their Rights will experience a
significant further decrease in their proportionate interest in the equity
ownership and voting power of the Company. The sale of the Rights may not
compensate a stockholder for all or any part of any reduction in the market
value of such stockholder's Common Stock resulting from the Rights Offering.
Stockholders who do not exercise or sell their Rights will relinquish any
value inherent in the Rights.
After giving effect to the Rights Offering, the Company will have between
approximately 27,115,907 and 21,874,432 shares of Common Stock issued and
outstanding, depending on the number of Rights exercised as compared with
approximately 2,627,727 shares of Common Stock, issued and outstanding as of
the date of this Prospectus.
If no Rights are exercised, other than those that are exercised by Ms.
Chaus, the percentage of shares owned by shareholders other than Ms. Chaus,
will decrease from approximately 9.7% (after giving effect to the conversion
of indebtedness owed by the Company to Ms. Chaus into additional shares of
Common Stock pursuant to the Conversion Commitment) to 5.8%.
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited Pro Forma
Financial Data") as of June 30, 1997, and for the year ended June 30, 1997 has
been derived by the application of pro forma adjustments to the financial
statements of the Company. The pro forma financial data for the year ended
June 30, 1997 gives effect to: (i) the elimination of interest expense
associated with the conversion of outstanding indebtedness into Common Stock
of the Company; (ii) the elimination of credit support payments to Ms. Chaus;
(iii) the elimination of retail store outlet operations; (iv) the elimination
of Restructuring expenses; (v) the conversion of approximately $38.9 million
of subordinated indebtedness owed to J. Chaus into Common Stock of the
Company; (vi) the assumed raising of $19.5 million in net proceeds from the
Rights Offering; (vii) $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; (viii) obtaining the New Term Loan in the amount of $15.0
million; (ix) the Stock Split; and (x) the payment of expenses associated with
the New Financing Agreement. The pro forma statement of income statement data
for the year ended June 30, 1997, gives effect to: (i), (ii), (iii) and (iv)
and the adjusting entries reflecting each such item give effect to such items
occurring on July 1, 1996. The related pro forma balance sheet data gives
effect to: (v), (vi), (vii), (viii), (ix) and (x) as if each had occurred on
June 30, 1997. The adjustments are described in the accompanying notes. The
Unaudited Pro Forma Financial Data does not purport to represent what the
Company's financial position and results of operations actually would have been
if those transactions had been consummated on the date or for the periods
indicated, or what such results will be for any future date or for any future
period. The Unaudited Pro Forma Financial Data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements of the Company and notes thereto
included elsewhere in this Prospectus.
23
<PAGE>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
CONSOLIDATED CONSOLIDATED
STATEMENT OF STATEMENT OF
OPERATIONS ADJUSTING OPERATIONS
AS OF 6/30/97 ENTRIES AS OF 6/30/97
--------------- ------------- ---------------
<S> <C> <C> <C>
Net Sales ................................. $160,100 $ (18,418)a $141,682
Cost of goods sold ........................ 125,422 (14,384)a 111,038
--------------- ------------- ---------------
Gross profit .............................. 34,678 (4,034)a 30,644
Selling general & administrative expenses 40,924 (5,134)a 35,790
Restructuring expenses .................... 2,250 (2,250)b --
--------------- ------------- ---------------
(8,496) 3,350 (5,146)
Other income (expense), net ............... 113 113
Interest expense .......................... (8,030) 2,852c (1,435)
957d
2,786e
--------------- ------------- ---------------
Income before provision for income taxes . (16,413) 6,202 (6,468)
Provision for income taxes ................ 50 50
--------------- ------------- ---------------
Net loss .................................. $(16,463) $ 6,202 $ (6,518)
=============== ============= ===============
</TABLE>
- ------------
a Eliminate retail store outlet operations.
b Eliminate Restructuring expenses.
c Eliminate interest expense associated with reduction of bank debt by
$24.5 million out of the proceeds of the BNYF-J. Chaus Loan and the
subscription by J. Chaus of shares of Common Stock of the Company in
the Rights Offering.
d Eliminate credit support payments to Ms. Chaus.
e Eliminate interest expense associated with conversion of $26.4 million
of subordinated indebtedness of the Company to J. Chaus (as of June 30,
1997) into Common Stock of the Company.
24
<PAGE>
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
CONSOLIDATED ADJUSTING CONSOLIDATED
BALANCE SHEET ENTRIES BALANCE SHEET
AS OF 6/30/97 RESTRUCTURING AS OF 6/30/97
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .............. $ 330 $ 9,244a $ 9,349
(225)b
Accounts receivable, net ............... 7,451 7,451
Inventories ............................ 23,746 23,746
Prepaid expenses ....................... 568 568
--------------- --------------- ---------------
Total current assets ................. 32,095 9,019 41,114
Fixed assets--net ....................... 1,295 1,295
Other assets ............................ 748 225b 973
--------------- --------------- ---------------
$ 34,138 $ 9,244 $ 43,382
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current Liabilities
Notes payable--bank .................... $ 37,756 $(37,756)a --
Term Loan (Short-term) ................. 500a $ 500
Accounts payable ....................... 19,825 19,825
Accrued expenses ....................... 5,393 5,393
Accrued restructuring expenses ........ 1,850 1,850
--------------- --------------- ---------------
Total current liabilities ............ 64,824 (37,256) 27,568
Subordinated promissory notes ........... 26,374 (26,374)a --
Term loan ............................... -- 14,500a 14,500
--------------- --------------- ---------------
91,198 (49,130) 42,068
--------------- --------------- ---------------
STOCKHOLDERS' DEFICIENCY
Preferred stock ........................ -- --
Common stock ........................... 269 2a 271
Additional paid-in capital ............. 65,463 38,874a 123,835
19,500a
(2)a
Deficit ................................ (121,312) (121,312)
Less: Treasury stock ................... (1,480) (1,480)
--------------- --------------- ---------------
Total stockholders' deficiency ...... (57,060) 58,374 (1,314)
--------------- --------------- ---------------
34,138 9,244 43,382
=============== =============== ===============
</TABLE>
- ------------
a To reflect the (i) the conversion of subordinated indebtedness owed and
to be owed to J. Chaus, into Common Stock of the Company, (ii) the
Company raising $19.5 million in net proceeds from the Rights Offering,
(iii) $12.5 million in respect of borrowings previously guaranteed by
Ms. Chaus being satisfied in full upon her assumption of such amount of
Bank Debt pursuant to the BNYF--J. Chaus Loan, which amount will, as
part of the subordinated indebtedness owed to J. Chaus by the Company,
be converted into equity,(iv) obtaining the New Term Loan in the amount
of $15.0 million, and (v) the Stock Split. There can be no assurance
that the Rights Offering will be fully subscribed. Note 7 of the Notes
to the Consolidated Financial Statements, discloses the effect of the
Rights being exercised solely by J. Chaus pursuant to the Purchase
Commitment and the Standby Commitment.
b Record payment of expenses associated with New Financing Agreement.
25
<PAGE>
PROJECTED FINANCIAL INFORMATION
GENERAL ASSUMPTIONS
The projected financial information set forth below ("PFI") should be read
in conjunction with the assumptions, qualifications, limitations and
explanations set forth herein, the selected historical financial information
and the other information set forth in "Selected Historical Financial Data"
as set forth in this Prospectus and the Pro Forma Financial Statements.
The PFI contained herein constitutes "forward-looking statements" within
the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act. The PFI reflects numerous assumptions, including various
assumptions with respect to the anticipated future performance of the Company
after the Restructuring (the "Restructured Company") industry performance,
general business and economic conditions and other matters, some of which are
beyond the control of the Restructured Company. In addition, unanticipated
events and circumstances may affect the actual financial results of the
Restructured Company. THEREFORE, WHILE THE PFI IS NECESSARILY PRESENTED WITH
NUMERICAL SPECIFICITY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE YEARS
1998--1999 ("PFI Period") MAY VARY FROM THE PROJECTED RESULTS. THESE
VARIATIONS MAY BE MATERIAL. ACCORDINGLY, NO REPRESENTATION CAN BE MADE OR IS
MADE WITH RESPECT TO THE ACCURACY OF THE PFI OR THE ABILITY OF THE
RESTRUCTURED COMPANY TO ACHIEVE THE PROJECTED RESULTS. See "Risk Factors" for
a discussion of certain factors that may affect the future financial
performance of the Restructured Company and of the various risks associated
with the securities of the Restructured Company to be issued pursuant to the
Plan.
The Company does not, as a matter of course, make public projected
financial information of their anticipated financial position or results of
operations. Accordingly, the Company does not anticipate that they will, and
disclaims any obligation to, furnish updated projected financial information
in the event that actual industry performance or the general economic or
business climate differs from that upon which the PFI has been based.
Further, the Company does not anticipate that they will include such
information in documents required to be filed with the Securities and
Exchange Commission, or otherwise make such information public.
The PFI has been prepared by the Company's management, and it believes
that the assumptions underlying the projected financial information for the
PFI Period, when considered on an overall basis, are reasonable in light of
current circumstances. However, the Company has historically furnished
projections (on at least an annual basis) to its bank lenders over the last
five fiscal years, and most of such projections were not achieved.
Accordingly, no assurance can be given or is given that the PFI will be
realized. The PFI was not prepared in accordance with standards for projected
financial information promulgated by the American Institute of Certified
Public Accountants or with a view to compliance with published guidelines of
the Securities and Exchange Commission regarding projected financial
information or forecasts.
Neither the Company's independent auditors, nor any other independent
accountants or financial advisors, have compiled, examined, or performed any
procedures with respect to the projected consolidated financial information
contained herein, nor have they expressed any opinion or any other form of
assurance on such information or its achieveability, and assume no
responsibility for, and disclaim any association with, the projected
consolidated financial information.
RIGHTS HOLDERS MUST MAKE THEIR OWN DETERMINATIONS AS TO THE RELIABILITY OF
THE PFI AND THE REASONABLENESS OF THE RELATED ASSUMPTIONS IN REACHING THEIR
DETERMINATION AS TO WHETHER TO PARTICIPATE IN THE RIGHTS OFFERING.
GENERAL ECONOMIC ASSUMPTIONS
The PFI assumes that the current economic environment continues throughout
the PFI Period. The PFI also assumes that no unforeseen national or
international events will occur during the PFI Period that would cause the
retail and/or women's apparel industries to be adversely impacted. The
apparel industry
26
<PAGE>
is a cyclical industry and the PFI assumes a continuation of the current
favorable climate in the industry. It is further assumed that no changes in
the U.S. tax laws will occur which will adversely impact the Company's
ability to utilize its net operating loss carry forwards.
Neither the Company nor any of its respective directors and officers
assumes any responsibility for the accuracy of such PFI. In addition, because
estimates and assumptions underlying the PFI are inherently subject to
significant economic and competitive uncertainties and contingencies which
are beyond the Company's control, there can be assurance that the PFI will be
realized. Actual results may be higher or lower that those set forth herein.
EFFECTIVE DATE OF THE RESTRUCTURING
The PFI assumes that the Restructuring will be effected in accordance with
its terms. The actual date of consummation of the Restructuring is not known,
however, the Company expects it to occur on or about January 15, 1998. Any
significant delay in the expected date of consummation of the Restructuring
could have a significant unfavorable impact of financial performance,
including net income for the year ended June 30, 1998, and could result in
additional professional and other fees.
NET SALES
During the PFI Period, net sales are assumed to increase from $198.0
million in fiscal year 1998 to $231.3 million in fiscal year 1999. The
assumed increase in net sales during the PFI Period is based on a
continuation of recent favorable trends in customer orders for merchandise,
sales of the Company's product at the retail level, and a modest increase in
the number of locations at which the product is sold or an increase of sales
at existing locations. The Company's ability to achieve the PFI is dependent
upon a reversal of the historical trend of declining revenues over the last
several fiscal years.
GROSS MARGIN
The overall level of gross margin as a percentage of merchandise sales
estimated by management is based on historical results and current trends in
the Company's performance. Management believes that, as a result of the
refocusing of the Company's merchandising strategy, the Company will be able
to achieve its projected gross margin levels as presented in the enclosed
PFI. The assumed increase in gross margin levels (from 21.7% in fiscal 1997
to 24.7% in fiscal 1998, and 25.3% in fiscal 1999) assumes that the Company
will increase the percentage of sales at regular prices and reduce the
percentage of promotional sales, as compared to fiscal 1997. A difficult
retail environment or a misjudgement by the Company in fashion trends could
increase the level of off price and promotional sales which would reduce
gross margin levels.
OPERATING EXPENSES
Operating expenses are forecast based upon existing expense structures and
adjusted for increases in sales and general economic inflation. It is assumed
that expenses will increase in total dollar amount during the PFI Period from
$39.0 million in fiscal year 1998 to $41.8 million in fiscal year 1999,
principally as a result of general economic inflation and the anticipated
sales growth.
Selling, general and administrative expenses are expected to grow at rates
somewhat lower than the increase in sales because certain fixed costs are in
place and will not increase as a result of additional sales. As a result,
operating expenses as a percentage of net sales are project to decrease from
19.7% in 1998 to 18.0% in 1999. Over the past several years, management has
downsized several departments to more efficient levels by consolidating
responsibilities and eliminating under-utilized administrative and clerical
positions. Departmental reengineering has reduced manual or duplicative
efforts and enhanced operational efficiencies while reducing overall
operating costs. As such, management believes that the existing corporate
infrastructure is sufficient to support the Company's current operations, as
well as the anticipated growth throughout the Projection period without a
significant increase from current expense levels.
27
<PAGE>
INTEREST EXPENSE
The PFI reflects a reduction in interest expense due to the lower levels
of indebtedness resulting from the Restructuring and the projected cash flows
of the Company.
BALANCE SHEET CONSIDERATIONS
Projections of changes in certain balance sheet accounts such as accounts
receivable, inventory and accounts payable are primarily based upon
historical ratios.
CAPITAL EXPENDITURES
The PFI assumes capital expenditures of approximately $3.1 million during
the PFI Period to be used for the upgrade of its management information
systems, installation of Nautica shops and fixtures at department stores, and
general corporate purposes.
THE RIGHTS OFFERING
The PFI assumes that the Rights are fully subscribed resulting in net
proceeds to the Company of $19.5 million. There can be no assurance that any
of the Rights, other than those exercised by J. Chaus pursuant to the
Purchase Commitment and the Standby Commitment, will be exercised.
WORKING CAPITAL FINANCING
The Restructured Company will utilize its working capital facility in the
aggregate amount of $58.5 million (after giving effect to the Restructuring)
to provide primarily for import letter of credit requirements and for
seasonal working capital needs. The PFI assumes that the Company will reach
agreement with BNYF on appropriate levels of overadvances to support its 1999
business plan.
INCOME TAXES
As of June 30, 1997, the Company had a tax net operating loss carryforward
(NOL) of approximately $101.0 million to offset future income tax
liabilities. The NOL will be partially reduced due to cancellation of
indebtedness income that will be realized by the Company in connection with
the conversion, pursuant to the Conversion Commitment, of the principal
amount of subordinated indebtedness owed to Ms. Chaus by the Company. The
Company does not believe that the transactions contemplated by the
Restructuring will cause a limitation of the use of the remaining NOL.
28
<PAGE>
PROJECTED CONSOLIDATED BALANCE SHEET INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ..................... $ 197 $ 6,441
Accounts receivable, net of related allowances 20,967 25,406
Inventory ..................................... 19,575 24,094
Prepaid expenses .............................. 604 424
----------- -----------
Total current assets ......................... $ 41,343 $ 56,365
----------- -----------
Fixed assets--net ............................. 719 1,814
Other assets ................................... 957 762
----------- -----------
Total assets ................................. $ 43,019 $ 58,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable-bank ............................ $ 1,593 --
Accounts payable .............................. 15,868 $ 19,530
Accrued expenses .............................. 4,206 4,295
Current portion of long-term debt ............. 1,000 1,000
----------- -----------
Total current liabilities .................... 22,667 24,825
----------- -----------
Long-term debt ................................ 13,500 12,500
----------- -----------
Total liabilities ............................ 36,167 37,325
----------- -----------
Stockholders' equity
Common stock .................................. 269 269
Additional paid-in capital .................... 125,445 125,445
Ending retained deficit ....................... (117,382) (102,618)
Less: treasury stock .......................... (1,480) (1,480)
----------- -----------
Total stockholders' equity ..................... 6,852 21,616
----------- -----------
Total liabilities and equity ................... $ 43,019 $ 58,941
=========== ===========
</TABLE>
29
<PAGE>
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30,
-----------------------------------------------
% TO % TO
1998 SALES 1999 SALES
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales ................................... $ 198,012 100.00% $ 231,253 100.00%
Cost of Goods Sold .......................... (149,167) (75.33)% (172,773) (74.71)%
----------- ---------- ----------- ----------
Gross Profit ................................ 48,845 24.67% 58,480 25.29%
----------- ---------- ----------- ----------
Selling, General and Administrative Expense (39,001) (19.70)% (41,826) (18.09)%
----------- ---------- ----------- ----------
Operating Income ............................ 9,844 4.97% 16,654 7.20%
----------- ---------- ----------- ----------
Interest Expense ............................ (5,639) (2.85)% (1,370) (0.59)%
----------- ---------- ----------- ----------
Income Before Provision for Income Taxes ... 4,205 2.12% 15,284 6.61%
Provision for Income Taxes .................. (275) (0.14)% (520) (0.22)%
----------- ---------- ----------- ----------
Net Income .................................. $ 3,930 1.98% $ 14,764 6.38%
=========== ========== =========== ==========
</TABLE>
30
<PAGE>
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
JUNE 30,
---------------------
1998 1999
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income ..................................................... $ 3,930 $14,764
Adjustment to reconcile net income to net cash used in
operating activities:
Deferred interest on subordinated promissory notes ........... 1,609 --
Depreciation .................................................. 972 1,600
Changes in operating assets and liabilities
Net accounts receivable ....................................... (13,516) (4,439)
Inventory ..................................................... 4,171 (4,519)
Prepaids and other assets ..................................... (36) 180
Accounts payable .............................................. (3,957) 3,662
Accrued expenses .............................................. (3,037) 89
---------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........... (9,864) 11,337
---------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets, net .................................. (606) (2,500)
---------- ---------
Net cash used in investing activities .......................... (606) (2,500)
---------- ---------
FINANCING ACTIVITIES:
Repayments of short-term bank borrowings ....................... (36,163) (1,593)
Proceeds from Term Loan ........................................ 15,000 --
Repayments of Term Loan ........................................ (500) (1,000)
Proceeds from Loan by J. Chaus ................................. 12,500 --
Proceeds from Rights Offering, net ............................. 19,500 --
---------- ---------
Net cash provided by (used in) financing activities ........... 10,337 (2,593)
---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........... $ (133) $ 6,244
Cash and cash equivalents, beginning of year ................... 330 197
---------- ---------
Cash and cash equivalents, end of year ......................... $ 197 $ 6,441
========== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Conversion of debt to common stock ............................. $ 40,482 --
==========
</TABLE>
31
<PAGE>
THE RIGHTS OFFERING
THE RIGHTS
The Company is distributing transferable Rights (other than those
distributed to Ms. Chaus), at no cost, to Holers, of record as of the Record
Date. Each Holder, other than J. Chaus, will receive one Right for each share
of Common Stock held on the Record Date with each Right entitling the Holder
thereof to subscribe for and purchase 5.464751 shares of Common Stock at the
Subscription Price the Basic Subscription Privilege"), for a price of $1.4309
per share (the "Subscription Price"). Ms. Chaus will receive one
non-transferable Right for each share of Common Stock held by her on the
Record Date, with each Right entitling her to subscribe for and purchase
5.181105 shares of Common Stock at the Subscription Price. On , 1997 the
average of the bid and asked prices for the Common Stock on the NYSE was
$ . The Subscription Price represents a discount of % from the average
closing price of $ for the shares of the Common Stock traded on the NYSE
over the sixty (60) day period ended on the Record Date, after giving effect
to the Stock Split. The Expiration Date will be extended a reasonable period
of time (at least three (3) NYSE trading days) if the Company files an
amendment to its registration statement relating to the Rights Offering which
includes a material change in the Rights Offering. See "The Rights
Offering--Amendment, Extension and Termination." There can be no assurance
that shares of the Common Stock will trade at prices above the Subscription
Price. See "Risk Factors--Determination of Subscription Price; Market
Considerations and Uncertain Market for Rights."
No fractional shares or cash in lieu thereof will be issued or paid. The
number of shares distributed to each Holder upon exercise of the Rights will
be rounded up to the nearest whole number of shares.
The issuance by the Company of shares of Common Stock pursuant to the
Rights Offering is not conditioned upon the subscription of any minimum
number of shares of Common Stock by Holders of the Rights. See "The Rights
Offering--Basic Subscription Privilege; Oversubscription Privilege."
J. Chaus' obligations under the Purchase Agreement are subject to certain
customary conditions. The Company's management believes that the conditions
to J. Chaus' obligations under the Purchase Agreement will be satisfied or
waived and that each of the Standby Commitment and the Purchase Commitment
will be fulfilled.
Before exercising or selling any Rights, potential investors are urged to
read carefully the information set forth under "Risk Factors."
Each Right (other than those distributed to Ms. Chaus) is transferable in
whole by a Holder but no fractional Rights shall be transferable.
All commissions, fees and other expenses (including brokerage commissions
and transfer taxes) incurred in connection with the exercise of Rights are
the responsibility of the Holder of the Rights and none of such commissions,
fees or expenses shall be paid by the Company.
METHOD OF OFFERING
The Rights Offering is being made directly by the Company. The Company
will pay no underwriting discounts or commissions, finders fees or other
remuneration in connection with any distribution of the Rights or sales of
the shares of Common Stock offered hereby, other than the fees paid to , as
Subscription Agent. The Company estimates that the expenses of the Rights
Offering (exclusive of fees and expenses of the Restructuring which do not
relate to the Rights Offering) will total approximately $0.5 million.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., New York City time, on , 1997,
unless extended by the Company as provided herein (the "Expiration Date").
See "The Rights Offering--Amendment, Extension and Termination." On and after
the Expiration Date, all unexercised Rights will be null and void. The
Company will notify stockholders of any extension of the Expiration Date of
the Rights Offering through the issuance of a press release indicating such
extension. The Company will not be
32
<PAGE>
obligated to honor any purported exercise of Rights received by the
Subscription Agent after 5:00 p.m. New York City time, on the Expiration
Date, regardless of when the documents relating to such exercise were
transmitted, except when timely transmitted pursuant to the Guaranteed
Delivery Procedures described below.
The Expiration Date will not be extended beyond , 1997.
BASIC SUBSCRIPTION PRIVILEGE; OVERSUBSCRIPTION PRIVILEGE
The Basic Subscription Privilege entitles the Holder of each Right, other
than J. Chaus, to receive, upon payment of the Subscription Price for each
share subscribed for, 5.464751 shares of Common Stock. The Basic Subscription
Privilege entitles J. Chaus to receive, upon payment of the Subscription
Price for each share subscribed for, 5.181105 shares of Common Stock. No
interest will be paid on funds delivered in connection with the payment of
the Subscription Price. If any shares of Common Stock offered hereby are not
purchased pursuant to the Basic Subscription Privilege (such shares, in
aggregate, are sometimes hereinafter referred to as the "Excess Shares"), any
Holder who elects to exercise in full his, her or its Basic Subscription
Privilege may also subscribe at the Subscription Price for additional
Underlying Shares available as a result of unexercised Rights, if any (the
"Oversubscription Privilege"). If an insufficient number of Underlying Shares
are available to satisfy fully all exercises of the Oversubscription
Privilege, after reserving a sufficient number of shares to fulfill
subscriptions for exercises by Holders pursuant to the Basic Subscription
Privilege, the available Underlying Shares will be prorated among Holders who
exercise their Oversubscription Privilege in proportion to the respective
numbers of Rights exercised by such Holders pursuant to the Basic
Subscription Privilege. Certificates representing shares of the Common Stock
purchased pursuant to the Basic Subscription Privilege will be mailed as soon
as practicable after the subscriptions have been accepted by the Subscription
Agent to Holders not participating in the Oversubscription Privilege.
Certificates for shares of Common Stock issuable upon exercise of the Basic
Subscription Privilege and Oversubscription Privilege will be mailed as soon
as practicable after the Expiration Date. The Company will notify a Holder
exercising the Oversubscription Privilege promptly after the Expiration Date
of the number of Excess Shares available to such Holder for oversubscription.
If a proration of the Excess Shares results in a Holder's receiving fewer
shares of Common Stock than the Holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that Holder as the
Subscription Price for shares not issued will be returned by mail to
subscribers as soon as practicable after the Expiration Date, without
interest or deduction.
In order to exercise the Oversubscription Privilege, banks, brokers and
other nominee Holders who exercise the Oversubscription Privilege on behalf
of beneficial owners of Rights will be required to certify (a "Nominee Holder
Certification") to the Subscription Agent and the Company: (i) the number of
shares held on the Record Date on behalf of each such beneficial owner of
Rights, (ii) the number of Rights as to which the Basic Subscription
Privilege has been exercised on behalf of each such beneficial owner, (iii)
that each such beneficial owner's Basic Subscription Privilege held in the
same capacity has been exercised in full, and the number of shares of Common
Stock subscribed for pursuant to the Oversubscription Privilege by each such
beneficial owner, and (iv) to record certain other information received from
each such beneficial owner.
PURCHASE COMMITMENT
Subject to the terms and conditions of the Purchase Agreement, J. Chaus
has agreed to subscribe and purchase 6,988,635 shares of Common Stock (the
"J. Chaus Shares") issuable upon exercise of the Rights, for an aggregate
purchase price of $10.0 million (the "Purchase Commitment"). See "The
Company," "The Restructuring," and "Risk Factors--Control by Principal
Stockholder." The rights and obligations of the Company and J. Chaus under
the Purchase Agreement are subject to certain customary conditions, including
approval by the Company's stockholders, and the absence of any litigation or
governmental action challenging or seeking to enjoin the Rights Offering or
the Purchase Agreement, which in the sole judgment of the Company makes it
inadvisable to proceed with the Rights Offering or the Purchase Commitment.
33
<PAGE>
STANDBY COMMITMENT
J. Chaus has agreed, subject to the terms and conditions of the Purchase
Agreement, that in the event that at least 1,747,160 shares of Common Stock
offered hereby (the"Standby Shares") are not purchased by Holders, other than
Ms. Chaus, pursuant to the Basic Subscription Privilege or the
Oversubscription Privilege, she will purchase the unsubscribed portion of the
Standby Shares for an aggregate purchase price of up to $2.5 million (the
"Standby Commitment"). The rights and obligations of the Company and J. Chaus
under the Purchase Agreement are subject to certain customary conditions,
including approval by the Company's stockholders, and the absence of any
litigation or governmental action challenging or seeking to enjoin the Rights
Offering or the Purchase Agreement which in the sole judgement of the
Company, makes it inadvisable to proceed with the Rights Offering or the
Purchase Agreement. See "The Company," "The Restructuring," and "Risk
Factors--Control by Principal Stockholder."
In addition to the Purchase Commitment and the Standby Commitment of Ms.
Chaus, the other members of the Board of Directors of the Company have
advised the Company that they intend to subscribe for an aggregate of
Rights, and certain directors may also exercise their Oversubscription
Privilege.
DETERMINATION OF SUBSCRIPTION PRICE
The Subscription Price was determined by the Company and management , and
was unanimously approved by the disinterested members of the Company's Board
of Directors. The Company's objective in establishing the Subscription Price
was to establish a fair price level for the shares, raise the targeted
proceeds, and provide all of the Company's stockholders with a reasonable
opportunity to make an additional investment in the Company and minimalize
the involuntary dilution of their ownership and voting percentage in the
Company. The Restructuring, including, without limitation, the Rights
Offering, was unanimously approved by the disinterested members of the
Company's Board of Directors.
In approving the Subscription Price, the Board of Directors considered
such factors as the projected value of the Company after giving effect to the
Restructuring, alternatives available to the Company for raising capital, the
market price of the Common Stock, the pro rata nature of the offering,
pricing of similar transactions, the business prospects for the Company and
the general condition of the securities markets. There can be no assurance,
however, that the market price of the Common Stock will not decline during
the subscription period or that, following the issuance of the Rights and of
the Underlying Shares upon exercise of Rights, a subscribing Holder will be
able to sell the Rights or sell the Underlying Shares purchased in the Rights
Offering at a price equal to or greater than the Subscription Price
SUBSCRIPTION PRICE
The Subscription Price is $1.4309 in cash per share of Common Stock
subscribed for pursuant to the Basic Subscription Privilege, the
Oversubscription Privilege, the Purchase Commitment or the Standby
Commitment.
EXERCISE OF RIGHTS
Rights may be exercised by a Holder, by delivering to the Subscription
Agent, at or prior to the Expiration Date, the properly completed and
executed Subscription Documents evidencing those Rights, with any required
signature guarantees, together with payment in full of the Subscription Price
for each share of the Common Stock subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege. Such payment must
be made by (a) check or bank draft drawn upon a U.S. bank or postal,
telegraphic, or express money order payable to , as Subscription
Agent, or (b) wire transfer of same day funds to the account maintained by
the Subscription Agent for such purpose at , ABA No. , Attn: .
Payment of the Subscription Price will be deemed to have been received by the
Subscription Agent only upon (i) clearance of any uncertified check,
(ii) receipt by the Subscription Agent of any certified check or bank draft
drawn upon a U.S. bank or any postal, telegraphic or express money order or
(iii) receipt of good funds in the Subscription Agent's account designated
above. HOLDERS WISHING TO PAY BY UNCERTIFIED PERSONAL CHECK
34
<PAGE>
SHOULD NOTE THAT SUCH A CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR
AND SHOULD TRANSMIT THE CHECK SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO ENSURE THAT IT IS RECEIVED AND CLEARED BY SUCH DATE OR CONSIDER PAYMENT BY
MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
The addresses to which the Subscription Documents and payment of the
Subscription Price should be delivered are:
By Mail: [INSERT NAME AND ADDRESS OF
SUBSCRIPTION AGENT]
By Hand or
Overnight: [INSERT NAME AND ADDRESS OF
SUBSCRIPTION AGENT]
If a Rights Holder wishes to exercise Rights, but time will not permit
such Holder to cause the Subscription Documents evidencing such Rights to
reach the Subscription Agent on or prior to the Expiration Date, such Rights
may nevertheless be exercised if all of the following conditions (the
"Guaranteed Delivery Procedures") are met:
1. such Holder has caused payment in full of the Subscription Price for
each share of the Common Stock being subscribed for pursuant to the Basic
Subscription Privilege and Oversubscription Privilege to be received (in the
manner set forth above) by the Subscription Agent on or prior to the
Expiration Date;
2. the Subscription Agent receives, on or prior to the Expiration Date, a
guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the
form provided with the Instructions as to Use of Bernard Chaus, Inc.
Subscription Cards (the "Instructions") distributed with the Subscription
Documents and this Prospectus, from a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealer, Inc. (the "NASD"), or from a commercial bank or trust company having
an office or correspondent in the United States (each, an "Eligible
Institution"), stating the name of the exercising Rights Holder, the number
of Rights represented by the Subscription Documents held by such exercising
Rights Holder, the number of shares of the Common Stock being subscribed for
pursuant to the Basic Subscription Privilege and the Oversubscription
Privilege, and guaranteeing the delivery to the Subscription Agent of any
Subscription Documents evidencing such Rights within three trading days
following the date of the Notice of Guaranteed Delivery; and
3. the properly completed Subscription Documents evidencing the Rights
being exercised, with any required signatures guaranteed, are received by the
Subscription Agent within three trading days following the date of the Notice
of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery
may be delivered to the Subscription Agent in the same manner as Subscription
Documents at the addresses set forth above, or may be transmitted to the
Subscription Agent by telegram or facsimile transmission (facsimile no. )
confirmed by telephone (telephone no. ). Additional copies of the
form of Notice of Guaranteed Delivery are available upon request from .
Funds received in payment of the Subscription Price for shares of Common
Stock subscribed for pursuant to the Rights will be held in a segregated
account pending issuance of such shares.
Unless a Subscription Document (i) provides that the shares of the Common
Stock to be issued pursuant to the exercise of Rights represented thereby are
to be delivered to the record holder of such Rights, or (ii) is submitted for
the account of an Eligible Institution, signatures on such Subscription
Document must be guaranteed by a commercial bank, trust company, securities
broker or dealer, credit union, savings association or other eligible
guarantor institution which is a member of or a participant in a signature
guarantee program acceptable to the Subscription Agent.
Holders who hold shares of the Common Stock for the account of others,
such as brokers, trustees or depositaries for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the record holder of such
Right should complete Subscription Cards and submit them to the Subscription
Agent with the proper payment.
35
<PAGE>
If an exercising Holder does not indicate the number of Rights being
exercised, or does not forward full payment of the aggregate Subscription
Price for the number of Rights that the Holder indicates are being exercised,
then the Holder will be deemed to have exercised the Basic Subscription
Privilege with respect to the maximum number of Rights that may be exercised
for the aggregate payment delivered by the Holder and, to the extent that the
aggregate payment delivered by the Holder exceeds the product of the
Subscription Price multiplied by the number of Rights evidenced by the
Subscription Document delivered by the Holder (such excess being the
"Subscription Excess"), the Holder will be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, that number
of whole Excess Shares equal to the quotient obtained by dividing the
Subscription Excess by the Subscription Price. Any amount remaining after
application of the foregoing procedures shall be returned to the Holder
promptly by mail without interest or deduction.
The instructions accompanying the Subscription Cards should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION DOCUMENTS TO THE
COMPANY.
THE METHOD OF DELIVERY OF SUBSCRIPTION DOCUMENTS AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH SUBSCRIPTION
DOCUMENTS AND PAYMENTS ARE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST
FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE
TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose
determinations will be final and binding. The Company in its sole discretion
may waive any defect or irregularity, or permit a defect or irregularity to
be corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such
time as the Company determines in its sole discretion. Neither the Company
nor the Subscription Agent will be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription
Cards or incur any liability for failure to give notification.
The Company will pay the fees and expenses of the Subscription Agent.
INFORMATION AGENT
The Company has appointed as Information Agent for the Rights Offering.
Any questions or requests for additional copies of this Prospectus or the
Notice of Guaranteed Delivery may be directed to the Information Agent at the
address and numbers below:
Address:
[Address of Information Agent]
Telephone Number:
[Telephone Number]
The Company will pay the fees and expenses of the Information Agent and
has agreed to indemnify the Information Agent from certain liabilities which
it may incur in connection with the Rights Offering.
METHOD OF TRANSFERRING RIGHTS
Rights may be purchased or sold through usual investment channels,
including banks and brokers. If the Rights are traded on the NYSE, it is
anticipated that the Rights will be traded on the NYSE until the close of
business on the last day prior the Expiration Date. There has, however, been
no prior trading
36
<PAGE>
on the Rights, and no assurance can be given that a trading market in the
Rights will develop, or if a market develops, that the market will remain
available throughout the subscription period. Although the Company intends to
identify broker-dealers who will make a market in the Rights, there can be no
assurance that a trading market for the Rights will develop or, if such a
market develops, as to how long it will continue.
The Rights evidenced by a single Subscription Certificate may be
transferred (other than those distributed to Ms. Chaus), in whole or in part,
by endorsing the Subscription Certificate for transfer in accordance with the
instructions included thereon. No fraction of an individual Right shall be
transferable (e.g. a Holder may not seek to transfer a portion of a Right by
selling the right to acquire 3 shares and retaining the right to acquire 2.46
shares). However, a portion of the Rights evidenced by a single Subscription
Certificate may be transferred (other than those distributed to Ms. Chaus) by
delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the
Rights evidenced thereby in the name of the transferee (and to issue a new
Subscription Certificate to the transferee evidencing such transferred
Rights). In such event, a new Subscription Certificate evidencing the balance
of the Rights will be issued to the Holder or, if the Holder so instructs, to
an additional transferee. A signature guarantee must be provided by an
Eligible Institution.
The Rights (other than those distributed to Ms. Chaus) evidenced by a
Subscription Certificate also may be sold, in whole or in part, through the
Subscription Agent by delivering to the Subscription Agent such Subscription
Certificate properly executed for sale by the Subscription Agent. If only a
portion of the Rights evidenced by a single Subscription Certificate is to be
sold by the Subscription Agent, such Subscription Certificate must be
accompanied by instructions setting forth the action to be taken with respect
to the Rights that are not to be sold. If the Rights can be sold, sales of
such Rights will be deemed to have been effected at the weighted average
price received by the Subscription Agent for all Rights sold by it on the day
such Rights are sold, less any applicable brokerage commissions, taxes and
other direct expenses of sale. Promptly following the settlement of any such
sale, the Subscription Agent will send the Holder a check for the net
proceeds (after deduction of any applicable brokerage commissions, taxes and
other direct expenses of the sale) from the sale of any Rights sold. Orders
to sell Rights must be received by the Subscription Agent prior to 11:00
a.m., New York City time, on the third NYSE trading day preceding the
Expiration Date. If less than all sales orders received by the Subscription
Agent can be filled, sales proceeds will be prorated among the Holders based
upon the number of Rights each Holder has instructed the Subscription Agent
to sell during such period, irrespective of when during such period the
instructions are received by the Subscription Agent. The Subscription Agent's
obligation to execute orders for the sale of Rights is subject to its ability
to find buyers. Any Rights that cannot be sold by the Subscription Agent by
5:00 p.m., New York City time, on the third NYSE trading day preceding the
Expiration Date, will be returned promptly by mail to the Holder.
Holders (other than Ms. Chaus) wishing to transfer all or a portion of
their Rights should allow a sufficient amount of time prior to the Expiration
Date for (i) the transfer instructions to be received and processed by the
Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred
Rights, and to the transferor with respect to retained Rights, if any, and
(iii) the Rights evidenced by such new Subscription Certificates to be
exercised or sold by the recipients thereof. Neither the Company nor the
Subscription Agent shall have any liability to a transferee or transferor of
Rights if Subscription Certificates are not received in time for exercise or
sale prior to the Expiration Date.
A new Subscription Certificate will be issued to a submitting Holder
(other than Ms. Chaus), or to any designated transferee, upon the partial
exercise or sale of Rights only if the Subscription Agent receives a properly
endorsed Subscription Certificate no later than 5:00 p.m., Eastern time, on
three (3) days prior to expiration. After such time and date, no new
Subscription Certificates will be issued. Accordingly, after such time and
date a Holder exercising less than all of its Rights will lose the power to
sell or exercise its remaining Rights. A new Subscription Certificate will be
sent by first class mail to the submitting Holder, or to any designated
transferee, only if the Subscription
37
<PAGE>
Agent receives the properly completed Subscription Certificate by 5:00 p.m.,
Eastern time, on three (3) days prior to expiration. Unless the
submitting Holder makes other arrangements with the Subscription Agent, a new
Subscription Certificate issued after 5:00 p.m., Eastern time, on
three (3) days prior to expiration will be held for pick up by the submitting
Holder, or the designated transferee, at the Subscription Agent's hand
delivery address provided above. All deliveries of newly issued Subscription
Certificates will be at the risk of the submitting Holder, or the designated
transferee.
Except for the fees charged by the Subscription Agent (which will be paid
by the Company as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection
with the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will
be paid by the Company or the Subscription Agent.
FOREIGN AND CERTAIN OTHER STOCKHOLDERS
Subscription Certificates will not be mailed to Holders or to any
subsequent transferees of any Subscription Certificates whose addresses are
outside the United States or who have APO or FPO addresses, but will be held
by the Subscription Agent for such Holders' accounts. To exercise or sell
their Rights, such Holders must notify the Subscription Agent prior to 11:00
a.m., New York City time, three (3) NYSE trading days prior to the Expiration
date, at which time (if no contrary instructions have been received) the
Rights represented thereby will be sold, subject to the Subscription Agent's
ability to find a purchaser. Any such sales will be at prevailing market
prices. See "--Method of Transferring Rights." If the Rights can be sold, a
check for the proceeds from the sale of any Rights, less any applicable
brokerage commissions, taxes and other expenses, will be remitted to such
Holders by mail. The proceeds, if any, resulting from sales of Rights of
Holders whose addresses are not known by the Subscription Agent or to whom
delivery cannot be made will be held by the Subscription Agent in a
non-interest bearing account. Any amount remaining unclaimed on the second
anniversary of the Expiration Date will be turned over by the Subscription
Agent to the Company and, after such date, any person claiming such proceeds
as an unsecured general creditor of the Company, shall be entitled to look
only to the Company for payment thereof. The Rights of such Holders expire at
the Expiration Date.
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE OR
THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED UNLESS THE
COMPANY FILES A POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT
RELATED TO THE RIGHTS OFFERING THAT INCLUDES A MATERIAL AMENDMENT. IN WHICH
CASE A HOLDER WILL HAVE A REASONABLE PERIOD OF TIME (AT LEAST THREE (3) NYSE
TRADING DAYS) TO EVALUATE THE MATERIAL AMENDMENT AND TO REVOKE THE EXERCISE
OF THEIR RIGHTS, IF DESIRED.
CONDITIONS TO THE RIGHTS OFFERING
The issuance of shares pursuant to the Rights Offering is subject to the
following conditions: (i) the approval by the Company's stockholders of the
(a) Stock Split , (b) issuance of 10,510,910 shares of Common Stock by 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, and (d) the sale by the Company of up to 1,747,160
shares to J. Chaus in connection with the Standby Commitment; 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.
38
<PAGE>
SHARES OF THE COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING;
PERCENTAGE TO BE OWNED BY J. CHAUS
Based on 2,627,727 the number of shares outstanding on the date of this
Prospectus, and giving effect to the issuance of the Conversion Shares to J.
Chaus, if the Rights Offering is fully subscribed for, the Company will have
approximately 27,115,907 shares outstanding. If no shares are subscribed for
pursuant to the Basic Subscription Privilege or the Oversubscription
Privilege, other than shares purchased by J. Chaus, then based on 2,627,727
the number of shares outstanding on the date of this Prospectus, giving
effect to the issuance of the Conversion Shares to J. Chaus, the Company will
have approximately 21,874,432 shares outstanding. Accordingly, following
completion of the Rights Offering, J. Chaus will own between approximately
69.5% and 94.2% of the Common Stock of the Company.
AMENDMENT, EXTENSION AND TERMINATION
The Company reserves the right to extend the Expiration Date and to amend
the terms and conditions of the Rights Offering at the Board of Director's
discretion. In addition, the Rights Offering will terminate if the conditions
to the Rights Offering have not been satisfied on or prior to the Expiration
Date. If the Company amends the terms of the Rights Offering, the
Registration Statement of which this Prospectus forms a part, will be
amended, and a new definitive Prospectus will be distributed to all Rights
Holders who have previously exercised Rights and to holders of record of
unexercised Rights on the date the Company amends such terms. In addition,
all holders who have previously exercised Rights, or who exercise Rights
within four (4) business days after the mailing of the new definitive
Prospectus, will be provided with a form of Consent to Amended Rights
Offering Terms, on which such Rights Holders can confirm their exercise of
Rights and their subscriptions under the terms of the Rights Offering as
amended by the Company. Any Rights Holder who has previously exercised any
Rights, or who exercises Rights within four (4) business days after the
mailing of the new definitive Prospectus, and who does not return such
Consent within ten (10) business days after the mailing of such Consent by
the Company will be deemed to have canceled such Rights Holder's exercise of
Rights, and the full amount of the Subscription Price theretofore paid by
such Rights Holder will be returned promptly after the Expiration Date by
mail, without any interest earned on such funds. Any completed Subscription
Certificate received by the Subscription Agent five (5) or more business days
after the date of the amendment will be deemed to constitute the consent of
the Rights Holder who completed such Subscription Certificate to the amended
terms.
The Company reserves the right at any time prior to delivery of the shares
of Common Stock purchased in the Rights Offering to terminate the Rights
Offering if the conditions of the Rights Offering have not been satisfied on
or prior to the Expiration Date. Such termination would be effected by the
Company by giving oral or written notice of such termination to the
Subscription Agent and making a public announcement thereof. If the Rights
Offering is so terminated, the Subscription Price will be returned promptly
after the Expiration Date by mail, without any interest earned on such funds.
Neither the Company nor any selling Rights Holder will have any obligation to
a purchaser of Rights, whether such purchase was made through the
Subscription Agent or otherwise, in the event the Rights Offering is
terminated.
SHARES NOT PURCHASED IN THE RIGHTS OFFERING
Any shares of Common Stock remaining after exercise of the Basic
Subscription Privilege and the Oversubscription Privilege will be retained by
the Company and will not be offered to the public.
STATE AND FOREIGN SECURITIES LAWS
The Rights Offering is not being made in any state or other jurisdiction
in which it is unlawful to do so, nor is the Company selling or accepting any
offers to purchase any shares of the Common Stock from Rights Holders who are
residents of any such state or other jurisdiction. The Company, if it so
determines in its sole discretion, may decline to make modifications to the
terms of the Rights Offering requested by certain states or other
jurisdictions or to qualify the Common Stock in any state or other
jurisdiction, in which event Rights Holders resident in those states or
jurisdictions will not be eligible to participate in the Rights Offering.
39
<PAGE>
NO BOARD RECOMMENDATION
An investment in the Common Stock must be made pursuant to each Rights
Holder's or prospective investor's evaluation of his, her or its best
interests. Accordingly, the Board of Directors of the Company makes no
recommendation to any Rights Holder or prospective investor regarding the
exercise of Rights.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is for general
information only and is based upon the Internal Revenue Code of 1986, as
amended to date (the "Code"), the regulations promulgated or proposed
thereunder, the position of the Internal Revenue Service (the "Service") set
forth in published revenue rulings, revenue procedures and other
announcements and court decisions as in effect on the date of this
Prospectus. No assurance can be given that future legislative or
administrative actions or decisions will not result in changes in the law
which would result in significant modifications to the following discussion.
The following summary does not discuss all aspects of federal income taxation
that may be relevant to a particular investor or to certain types of
investors subject to special treatment under the federal income tax laws (for
example, and without limitation, banks, dealers in securities, life insurance
companies, tax exempt organizations and foreign taxpayers), and does not
discuss any aspect of state, local or foreign tax laws. The following
discussion is limited to Holders who will hold the Rights, and any shares of
the Common Stock received therefor upon exercise thereof, as capital assets
(i.e., generally, for investment).
Receipt of Rights. Under Section 305 of the Code, a Holder should not
recognize income for federal income tax purposes by reason of the receipt of
a Right, and the Company intends to so treat the distribution of Rights as a
nontaxable distribution.
Basis and Holding Period of the Rights. A Holder's basis in the Rights
received as a distribution on such Holder's shares of Common Stock will be
zero, unless either (i) the fair market value of the Rights on the date of
issuance is 15% or more of the fair market value (on the date of issuance) of
the shares of the Common Stock with respect to which they are received or
(ii) the holder of Common Stock irrevocably elects, in his, her or its
federal income tax return for the taxable year in which the Rights are
received, to allocate part of the basis of its shares of the Common Stock to
the Rights. If the conditions set forth in either (i) or (ii) above are
satisfied, then upon exercise of the Rights or sale of the Rights, the
Holder's basis in its shares of Common Stock will be allocated between the
shares of Common Stock and the Rights in proportion to the fair market values
of each on the date of issuance. The holding period of the Rights received by
a Holder as a distribution on such Holder's shares of the Common Stock will
include the Holder's holding period (as of the date of issuance) for the
shares of the Common Stock with respect to which Rights were issued.
Lapse of Rights. Holders who allow the Rights received by them at the
Issuance to lapse will not recognize any gain or loss, because such Holders
will not be permitted to allocate any portion of the basis in their Common
Stock to such Rights.
Exercise of the Rights; Basis and Holding Period of Shares of Common
Stock. Holders of the Rights will not recognize any gain or loss upon the
exercise of such Rights. The basis of the shares of the Common Stock acquired
through exercise of the Rights generally will be equal to the sum of the
Subscription Price paid therefor and the Holder's basis in such Rights (if
any). The holding period for the shares of the Common Stock acquired through
exercise of the Rights will begin on the date such Rights are exercised.
Disposition of Rights or Common Stock. The sale or other disposition of
the Rights or Common Stock acquired on exercise of a Right will result in the
recognition of capital gain or loss by the Holder in an amount equal to the
difference between the amount realized and the Holder's basis in such Rights
(if any) or Common Stock, as the case may be. Capital gain recognized by a
noncorporate Holder will be subject to a reduced rate of tax if the holding
period of the Rights or Common Stock sold or disposed of is greater than
twelve months and will be subject to a further reduced rate of tax if the
holding period for such Rights or Common Stock is greater than eighteen
months. Capital gains recognized by corporations currently are subject to tax
at the same rate as ordinary income.
40
<PAGE>
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH HOLDER OF RIGHTS AND
COMMON STOCK SHOULD CONSULT WITH HIS, HER OR ITS OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES OF ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
RIGHTS AND COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND INCOME TAX LAWS.
INFORMATION AVAILABLE
Any questions or requests for assistance concerning the method of
exercising Rights or additional copies of the Prospectus, the Instructions or
the Notice of Guaranteed Delivery may be directed to the Company at the
telephone number and address below.
Bernard Chaus, Inc.
Attention: Barton Heminover, Vice President--Corporate Controller
1410 Broadway
New York, New York 10018
(212) 354-1280
41
<PAGE>
THE RESTRUCTURING
Management of the Company believes that the initiatives it has implemented
over the last two fiscal years have begun to positively impact consumer
acceptance of its Chaus products. During the last three fiscal quarters, the
Company has benefitted from significant improvement in the sell-through rate
of its core Chaus products to its retail customers. In order to take
advantage of this favorable trend, improve its balance sheet, infuse capital
into the Company, reduce interest and operating expenses and increase working
capital, management of the Company has formulated a restructuring program,
which was announced in June 1997. 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 $20.0 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 $28.0 million of existing subordinated indebtedness
(including accrued interest through January 15, 1998) and $12.5 million of
indebtedness which will be owed to J. Chaus will be converted into Common
Stock of the Company;
(iii) the New Financing Agreement was entered into with BNYF, the
Company's current working capital lender, on October 10, 1997; and
(iv) the Company will implement 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, and (d) the sale by the
Company of up to 1,747,160 shares to J. Chaus in connection with the Standby
Commitment; and (ii) the absence of any litigation or other 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.
J. 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 if the
Restructuring is consummated and, it achieves its PFI, the Company will have
sufficient cash flow and credit availability to meet its needs for the
foreseeable future. See "Summary Financial Data."
UNDERTAKINGS BY J. CHAUS
Over the past several years, Ms. Chaus has provided the Company with
substantial credit support, as well as other support. Commencing in fiscal
1994, the Company required availability under its working capital credit line
with BNYF in excess of the amount available under its borrowing base formula.
To assist the Company, J. Chaus agreed to provide the Company with credit
support in the form of a letter of credit (the "Letter of Credit"). The
Letter of Credit which was in the amount of $3.0 million was subsequently
extended and increased to $5.0 million, $7.2 million, and $10.0 million. Each
time J. Chaus agreed to increase the amount of the Letter of Credit, BNYF
increased the Company's availability under its working capital line. As
additional credit support, Ms. Chaus also personally guaranteed, and fully
collateralized, $12.5 million of the Company's indebtedness to BNYF.
In September 1994, Ms. Chaus loaned the Company $7.2 million in exchange
for demand notes bearing interest at 12%. 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 order to provide additional equity
to the Company, enhance the Company's balance sheet, and to accommodate BNYF,
Ms. Chaus agreed to exchange such demand notes into Common Stock of the
Company. Upon stockholder approval Ms. Chaus exchanged such demand notes for
1,914,500 shares of Common Stock. Ms. Chaus also agreed, in
42
<PAGE>
connection with the Company's November 1995 public offering, to extend the
maturity date of approximately $23.6 million of subordinated promissory notes
from July 1, 1996 to July 1, 1998.
As part of the Restructuring, Ms. Chaus will once again provide the
Company with credit support by (i) converting (a) $28.0 million of existing
subordinated indebtedness (including accrued interest through January 15,
1998), and (b) $12.5 million of indebtedness to be owed to Ms. Chaus upon her
assumption of such amount of Bank Debt pursuant to the BNYF--J. Chaus Loan,
($40.5 million as of January 15, 1998) into equity, (ii) committing to
subscribe, pursuant to the Rights Offering for $10.0 million Common Stock,
and (iii) committing to subscribe for up to an additional $2.5 million of
Common Stock, if and to the extent that the Company's other stockholders do
not purchase at least that amount of stock in the Rights Offering.
Due to the fact that the total Company value (as estimated by the
Company's management and approved by the disinterested members of the
Company's Board of Directors) is less than the amount of the Company's
indebtedness owed or to be owed to BNYF and Ms. Chaus, the holders of the
Company's Common Stock, other than Ms. Chaus, are not legally entitled to any
portion of the Company's net equity value after giving effect to the
Restructuring. Nevertheless, Ms. Chaus has agreed to allow such holders the
right to retain their interests in the Company (subject to dilution), and
afford them the opportunity to participate in the Rights Offering. See
"Background; Reasons for the Rights Offering; Prospects."
THE RIGHTS OFFERING
The Company will seek to raise up to $20.0 million, but not less than
$12.5 million, of equity through the Rights Offering. See "The Rights
Offering."
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 $28.0 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.
RESTRUCTURING OF BANK DEBT
The senior secured bank debt owing to BNYF by the Company, as of September
30, 1997 (the "Bank Debt") consists of approximately (i) $57.5 million in
respect of direct borrowings, and (ii) $17.5 million in respect of letters of
credit.
In the Restructuring, the $57.5 million in respect of direct borrowings by
the Company has been and will be refinanced as follows:(i) $15.0 million has
been refinanced by BNYF pursuant to the terms of the New Term Loan; (ii)
approximately $20.0 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 will 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) $10.0 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 $75.0 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 $66.0 million five-year revolving credit line with a $20.0 million sublimit
for
43
<PAGE>
letters of credit, and (ii) the New Term Loan which is a $15.0 million term
loan facility. Each facility matures 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.
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 NYSE 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 $81.0 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.
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 $12.5 Million Guarantee (as
defined below) 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 $10.0 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 $10.0 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 $10.0
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 shall 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
44
<PAGE>
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.
OTHER CREDITORS OF THE COMPANY AND 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.
45
<PAGE>
USE OF PROCEEDS
The net proceeds from the Rights Offering are expected to be between $12.0
million (if the only subscriptions are pursuant to the Purchase Commitment
and the Standby Commitment) and $19.5 million (if all Rights offered hereby
are fully subscribed), after payment of fees and expenses (exclusive of fees
and expenses of the Restructuring which do not relate to the Rights
Offering). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." All of the net proceeds will be used to retire a
portion of the Bank Debt owed to BNYF. The Bank Debt borrowed pursuant to the
Old Bank Debt Agreement had a maturity date of February 20, 1999, and has
been refinanced under the New Financing Agreement. See "The Restructuring."
Interest on the Bank Debt accrued at a rate of .5% above the prime rate.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock. As
of October 6, 1997, 2,627,727 shares of Common Stock were outstanding. In
addition, 4,936,000 shares of Common Stock were reserved for issuance upon
the exercise of outstanding 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.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote on
all matters requiring a vote of stockholders. Since the Common Stock does not
have cumulative voting rights, the holders of shares having more than 50% of
the voting power, if they choose to do so, may elect all the directors of the
Company and the holders of the remaining shares would not be able to elect
any directors.
Subject to the rights of holders of any series of preferred stock that may
be issued in the future, the holders of the Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. See "Price Range of Common Stock and
Dividend Policy." In the event of a voluntary or involuntary liquidation of
the Company, all stockholders are entitled to a pro rata distribution of the
assets of the Company remaining after payment of claims of creditors and
liquidation preferences of any preferred stock. Holders of the Common Stock
have no conversion, redemption or sinking fund rights.
At the November 15, 1995 Annual Meeting of Stockholders, the stockholders
of the Company approved an amendment to the Certificate of Incorporation (the
"Amendment") to eliminate preemptive rights of holders of the Common Stock.
Until the effective date of the Amendment (November 16, 1995) holders of the
Common Stock had preemptive rights, subject to certain exceptions prescribed
by the New York Business Corporation Law. All issuances of Common Stock
subsequent to the Company's 1986 initial Public Offering and prior to the
effective date of the Amendment, as well as issuances of warrants and options
to purchase Common Stock, fell within one of such exceptions.
On September 11, 1997, the Board of Directors of the Company authorized an
amendment to the Certificate of Incorporation, subject to stockholders
approval which provides that Section A of ARTICLE FOURTH of the Certificate
of Incorporation is amended to read as follows:
"FOURTH: A. Authorized Shares. The total number of shares of all classes
of stock which the Corporation shall have the authority to issue is
51,000,000 shares, consisting of (i) 50,000,000 shares of common stock, $0.01
par value per share (hereinafter referred to as "Common Stock") and (ii)
1,000,000 shares of preferred stock, $0.01 par value per share (hereinafter
referred to as "Preferred Stock"). Upon the filing of this amendment with the
office of the Secretary of State of the State of New York, each share of
Common Stock of the Corporation issued at such time, shall be changed into
one-tenth (0.1) of one fully paid non-assessable share of Common Stock of the
Corporation. In lieu of the issuance of any fractional shares that would
otherwise result from the reverse stock split effected hereby, the
Corporation shall issue to any stockholder that would otherwise receive
fractional shares of Common Stock one (1) additional share of Common Stock."
TRANSFER AGENT
The transfer agent for the Common Stock is ChaseMellon Shareholder
Services, New York, New York 10001.
47
<PAGE>
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock
(the "Preferred Stock"). The Board of Directors is authorized to fix the
relative rights and preferences of the shares of Preferred Stock, including
voting powers, dividend rights, liquidation preferences, redemption rights
and conversion privileges. As of the date of this Prospectus, the Board of
Directors has not authorized any series of Preferred Stock, and there are no
agreements or understandings for the issuance of Preferred Stock. Without
stockholder approval, the Board of Directors could adversely affect the
voting power of the holders of Common Stock and, by issuing shares of
Preferred Stock with certain voting, conversion and/or redemption rights,
could discourage any attempt to obtain control of the Company.
48
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDEND POLICY
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.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
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
</TABLE>
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."
49
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 and as adjusted to give effect to (i) the Rights Offering
assuming the Rights Offering is fully subscribed; (ii) the conversion of
approximately $38.9 million of the Company's indebtedness to Ms. Chaus,
consisting of $26.4 million of existing subordinated indebtedness and $12.5
million of indebtedness which will be owed to Ms. Chaus, into 10,510,910
shares of Common Stock; and (iii) the refinancing of the Bank Debt through
the New Financing Agreement. This information should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition, Liquidity and Capital Resources,"
financial statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
Short-term debt ......................... $ 37,756 $ 500
Long-term debt .......................... 26,374 14,500
Total stockholders' (deficiency) equity (57,060) 1,314
---------- -------------
Total capitalization..................... $ 7,070 $16,314
========== =============
</TABLE>
50
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
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)
</TABLE>
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.
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
51
<PAGE>
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 $1.0 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 $1.0 million for "in store" fixtures and signs purchased in
connection with the Nautica product line.
Old Bank Debt 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 $72.0
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
52
<PAGE>
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 "The 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 $81.0 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,
and the failure by the Company to close all of its retail outlets by the end
of January 1998. See "The Restructuring--Restructuring of Bank Debt".
New Financing Agreement
The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66.0 million five-year revolving credit line
with a $20.0 million sublimit for letters of credit, and (ii) the New Term
Loan which is a $15.0 million term loan facility. Each facility matures on
December 31, 2002. See "The 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
53
<PAGE>
(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 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 $10.0 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 $10.0
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 "The 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
54
<PAGE>
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 "The
Restructuring--Restructuring of Credit Support Provided by Ms. Chaus," and
"The 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
"Business--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 "The
Restructuring--Exchange of the Company's Indebtedness owed to Ms. Chaus for
Equity Securities."
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 $20.0 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 $28.0 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 "The 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 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.
55
<PAGE>
SEASONALITY
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales,
are shipped to customers, with revenues generally being recognized at the
time of shipment. As a result, the Company experiences significant
variability in its quarterly results and working capital requirements.
Moreover, delays in shipping can cause revenues to be recognized in a later
quarter, resulting in further variability in such quarterly results.
NEW ACCOUNTING PRONOUNCEMENTS
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.
56
<PAGE>
BUSINESS
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:
<TABLE>
<CAPTION>
CAREER SPORTSWEAR WEEKEND CASUAL SPORTSWEAR
---------------------------- -----------------------------------------
<S> <C> <C>
Brand Names Chaus Chaus Sport
Chaus Woman Nautica
Chaus Petite
Product Offerings Jackets, Skirts, Pants, Casual Jackets
Shorts, Blouses, Shirts, Sweaters, Skirts, Pants,
Knit Tops, Sweaters Shirts, Knit Tops, Outerwear
Industry Categories Chaus--Better Chaus Sport--Upper Moderate and Better
Nautica--Better and Bridge
</TABLE>
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 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.
57
<PAGE>
The following table sets forth a breakdown by percentage of the Company's
net sales by product category for fiscal 1995 through fiscal 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Career Sportswear
Chaus ........................ 37% 41% 31%
Chaus Woman .................. 11 11 13
Chaus Petite ................. 6 5 4
-------- -------- --------
Total ........................ 54 57 48
Weekend Casual--Sportswear ... 30 33 35
Nautica ...................... 15 -- --
Dresses ...................... -- 8 12
Other (1) .................... 1 2 5
-------- -------- --------
Total ........................ 100% 100% 100%
</TABLE>
- ------------
(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(Registered
Trademark) brand name in the United States and Puerto Rico. The Company
currently distributes its licensed Nautica product line in major department
and specialty stores, at "better" to "bridge" price points. Nautica has
developed significant brand-name recognition with its men's apparel lines.
The Company's relationship with Nautica provides the Company with exposure to
"better" to "bridge" departments, while creating an alliance with a leading
company in the apparel industry. The Company's first sales of its licensed
Nautica products occurred in August 1996. The Company's license from Nautica
is limited to women's sportswear collections including coordinating knits,
blouses, wovens, sweaters, pants, skirts, jackets, and outerwear and
sportswear dresses bearing the Nautica brand names and marks. The Company's
license from Nautica excludes business dresses, suits, coats and raincoats
that are not part of a sportswear collection. The license also excludes
shoes, scarves, socks, stockings or accessories for ladies bearing the
Nautica brand names and marks.
The initial term of the Nautica License Agreement runs through December
31, 1999, and is thereafter renewable, 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.
58
<PAGE>
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 has
hired a new executive officer , Lynn Buechner, formerly of Liz Clairborne
Collection. 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.
In connection with the Nautica license, Nautica has asserted that the
Company has not complied with and is not in compliance with all of the terms
of the Nautica License Agreement. To date, Nautica has not sought to exercise
any rights or remedies under the Nautica License Agreement. The Company
believes that Nautica's claims are baseless and without merit. Notwithstanding
that the Company believes that it has claims against Nautica for its failure
to perform under the terms of the Nautica License Agreement and that the
claims asserted by Nautica are baseless, the Company (i) is performing and
will continue to perform all of its obligations under the Nautica License
Agreement, and (ii) intends to enforce all of its rights and remedies under
the Nautica Agreement.
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.
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 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.
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 indepen-
59
<PAGE>
dent manufacturers. The Company believes that outsourcing its manufacturing
maximizes its flexibility while avoiding significant capital expenditures,
work-in-process buildup and the costs of a large workforce. A substantial
amount (approximately 80%) of its product is manufactured by approximately 35
key independent suppliers located primarily in South Korea, Hong Kong,
Taiwan, China, Indonesia and elsewhere in the Far East. Approximately 20% of
the Company's products are manufactured in the United States and the
Caribbean Basin. No contractual obligations exist between the Company and its
manufacturers except on an order-by-order basis. During fiscal 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
60
<PAGE>
commitments for each collection. In order to make timely delivery of
merchandise which reflects current style trends and tastes, the Company
attempts to schedule a substantial portion of its fabric and manufacturing
commitments relatively late in a production cycle. However, in order to
secure adequate amounts of quality raw materials, especially greige (i.e.,
"undyed") goods, the Company must make substantial advance commitments to
suppliers of such goods, often as much as seven months prior to the receipt
of firm orders from customers for the related merchandise. Many of these
early commitments are made subject to changes in colors, assortments and/or
delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition
of export duties, political and social instability, currency revaluations,
and restrictions on the transfer of funds. Bilateral agreements between
exporting countries, including those from which the Company imports
substantially all of its products, and the United States' imposition of
quotas, limits the amount of certain categories of merchandise, including
substantially all categories of merchandise manufactured for the Company,
that may be imported into the United States. Furthermore, the majority of
such agreements contain "consultation clauses" which allow the United States
to impose at any time restraints on the importation of categories of
merchandise which, under the terms of the agreements, are not subject to
specified limits. The bilateral agreements through which quotas are imposed
have been negotiated under the framework established by the Arrangement
Regarding International Trade in Textiles, known as the Multifiber
Arrangement ("MFA") which has been in effect since 1974. The United States
has concluded international negotiations known as the "Uruguay Round" in
which a variety of trade matters were reviewed and modified. Quotas
established under the MFA will be gradually phased out over a ten year
transition period, after which the textile and clothing trade will be fully
integrated into the General Agreement on Trade and Tariffs ("GATT") and will
be subject to the same disciplines as other sections. The GATT agreement
provides for expanded trade, improved market access, lower tariffs and
improved safeguard mechanisms.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adversely adjust presently prevailing quotas, duty or
tariff levels, with the result that the Company's operations and its ability
to continue to import products at current or increased levels could be
adversely affected. The Company cannot now predict the likelihood or
frequency of any such events occurring. The Company monitors duty, tariff and
quota-related developments, and seeks continually to minimize its potential
exposure to quota-related risks through, among other measures, geographical
diversification of its manufacturing sources, allocation of production of
merchandise categories where more quota is available and shifts of 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.
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
61
<PAGE>
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 $92.0 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. Company does not believe that
cancellations, rejections or returns will materially reduce the amount of
sales realized from such backlog.
TRADEMARKS
CHAUS(Registered Trademark), CHAUS ESSENTIAL(Registered Trademark), CHAUS
SPORT(Registered Trademark), CHAUS WOMAN(Registered Trademark) and MS.
CHAUS(Registered Trademark) are registered trademarks of the Company in the
United States for use on ladies' garments. These trademarks are renewable in
the years 2004, 2008, 2002, 2004 and 2005, respectively. JOSEPHINE(Registered
Trademark) is also a registered trademark of the Company in the United
States, renewable in the year 2001, for use on ladies' blouses and sweaters.
The Company considers its trademarks to 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.
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.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 2,672,727 shares of Common Stock outstanding
and, upon the completion of the Rights Offering will have, between
approximately 21,874,432 (if Rights are exercised solely by Ms. Chaus
pursuant to the Purchase Commitment and the Standby Commitment) and
27,115,907 (if all Rights offered hereby are exercised) shares of Common
Stock outstanding. Of such shares, the shares sold in the Rights Offering
(other than shares which may be purchased by "affiliates of the Company",
including up to 8,735,795 shares to be purchased by Ms. Chaus pursuant to the
Purchase Commitment and the Standby Commitment) will be freely tradeable
without restriction or further registration under the Securities Act. Of the
remaining outstanding shares, 11,859,780 shares of Common Stock beneficially
owned by Josephine Chaus will be "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act or an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed an
affiliate of the Company, who has beneficially owned restricted shares for at
least one year from the later of the date such restricted shares were
acquired from the Company and (if applicable) the date they were acquired
from an affiliate, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly trading volume in the public
market during the four calendar weeks preceding the date on which notice of
the sale is filed with the Commission. Sales under Rule 144 are also subject
to certain requirements as to the manner and notice of sale and the
availability of public information concerning the Company. Ms. Chaus has
satisfied the one-year holding period with respect to 1,348,870 of such
shares.
Further, under Rule 144(k), a person who is not an affiliate of the
Company and has not been an affiliate at any time during the 90 days
preceding a sale and who has beneficially owned the shares for a period of at
least two years would be entitled to sell the shares immediately without
regard to volume limitations and the other conditions described above.
No predictions can be made as to the effect, if any, that market sales of
shares of existing stockholders or the availability of such shares for future
sale will have on the market price of shares of Common Stock prevailing from
time to time. The prevailing market price of Common Stock after the Rights
Offering could be adversely affected by future sales of substantial amounts
of Common Stock by existing stockholders.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for the Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New
York.
EXPERTS
The consolidated financial statements and the related financial statement
schedule included and incorporated by reference in this Prospectus by
reference from the Company's Annual Report on Form 10-K for the years ended
June 30, 1996 and 1997, and for each of the three years in the period ended
June 30, 1997, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is included and incorporated by
reference herein, and has been so included and incorporated in reliance upon
such report of such firm given upon their authority as experts in accounting
and auditing.
63
<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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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............................ $ (.63) $ (1.02) $ (1.40)
=========== ============ ===========
Weighted average number of common shares
outstanding ................................. 6,277,000 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 PAID-IN NUMBER
OF SHARES AMOUNT CAPITAL (DEFICIT) OF SHARES AMOUNT TOTAL
------------ ---------- ------------ ------------ -------- ---------- -----------
<S> <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>
<CAPTION>
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(Registered Trademark), CHAUS
SPORT(Registered Trademark), and NAUTICA(Registered Trademark) trademarks.
The Company's products are sold nationwide through department store chains,
specialty retailers and other retail outlets.
In the latter part of fiscal 1994, the Company initiated a restructuring
plan (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.
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.
F-7
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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
F-8
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Finished goods ...... $19,981 $18,151
Work-in-process 1,027 1,471
Raw materials ....... 2,738 1,634
--------- ---------
$23,746 $21,256
========= =========
</TABLE>
F-9
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES (Continued)
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.
4. FIXED ASSETS
Fixed assets at cost, net of accumulated depreciation and amortization,
consist of:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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
========== ==========
</TABLE>
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>
<CAPTION>
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>
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.
F-10
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 "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
F-11
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL AGREEMENT (Continued)
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.
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.
F-12
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL AGREEMENT (Continued)
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
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 before 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
F-13
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL AGREEMENT (Continued)
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 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.
F-14
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RESTRUCTURING (Continued)
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 6,988,6365 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 absences 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
certain items had occurred at June 30, 1997. Such items include (i)
subordinated indebtedness owed and to be owed to Josephine Chaus, being
converted 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 principle 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.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-----------------------
ACTUAL PRO FORMA
---------- -----------
<S> <C> <C>
Total Debt
Bank Debt...................... $ 37,756 $ --
Subordinated Promissory Notes 26,374 --
Term Loan ..................... -- 15,000
---------- -----------
Total debt ................... 64,130 15,000
Total stockholders' deficiency (57,060) (6,186)
---------- -----------
Total capitalization.......... $ 7,070 $ 8,814
========== ===========
</TABLE>
Although there can be no assurance, the Company believes that the Company
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
F-15
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBORDINATED PROMISSORY NOTES (Continued)
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.
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.
F-16
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (Continued)
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.
Grossman Option Plan:
At the annual meeting of stockholders in November 1994, the stockholders
approved the issuance of options for the Company's new Chief Executive
Officer (the "Grossman Option Plan") to purchase 3,000,000 shares of Common
Stock. Of this amount, 1,500,000 options were granted in September 1994 (and
included in the following table), and the balance were granted in September
1995 in connection with the extension of the term of his employment
agreement. 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.
<TABLE>
<CAPTION>
NON-INCENTIVE
STOCK OPTIONS
----------------------------
NUMBER EXERCISE
OF SHARES PRICE RANGE
----------- ---------------
<S> <C> <C>
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
</TABLE>
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
F-17
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (Continued)
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 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-18
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
The minimum aggregate rental commitments at June 30, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending:
1998 .................. $3,460
1999 .................. 2,318
2000 .................. 2,000
2001 .................. 610
2002 .................. 436
Subsequent to 2002 ... 576
--------
$9,400
========
</TABLE>
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.
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
F-19
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
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-20
<PAGE>
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ ------------ ------------ -------------
DESCRIPTION (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>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
RIGHTS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Available Information..................... 3
Incorporation of Certain Documents by
Reference................................ 3
Prospectus Summary........................ 4
Summary Historical and Unaudited
Pro Forma Financial Data................. 15
Risk Factors.............................. 17
Unaudited Pro Forma Financial Data ...... 23
Projected Financial Information........... 26
The Rights Offering....................... 32
The Restructuring......................... 42
Use of Proceeds........................... 46
Description of Capital Stock.............. 47
Price Range of Common Stock;
Dividend Policy.......................... 49
Capitalization............................ 50
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................... 51
Business ................................. 57
Shares Eligible for Future Sales.......... 63
Legal Matters............................. 63
Experts................................... 63
Financial Statements...................... F-1
</TABLE>
RIGHTS TO SUBSCRIBE FOR
13,977,270 SHARES
OF COMMON STOCK
EXPIRING ON , 1997
[CHAS LOGO]
PROSPECTUS
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred by the Company in connection with the Rights
Offering are:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee ........... $6,061
Accounting fees and expenses*
Legal fees and expenses* ......
Printing costs*................
Miscellaneous..................
--------
Total........................ $
========
</TABLE>
- ------------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 722 and 726 of the New York Business Corporation Law (the "BCL")
grant the Registrant broad powers to indemnify and insure its directors and
officers against liabilities they may incur in such capacities. In accordance
therewith, the Registrant's Restated Certificate of Incorporation, as amended
(the "Charter") and By-Laws, provide for the fullest indemnification of an
officer or director of the Company under the BCL. The Charter also eliminates
liability for monetary damages for any breach of directors' duty to the
Registrant and its stockholders, provided that such breach does to result
from (a)(i) an act or omission in bad faith, (ii) intentional misconduct or
(iii) a knowing violation of law, (b) a transaction from which a director
derived a personal benefit or financial gain to which the director was not
entitled, or (c) the approval of dividends, stock repurchases, asset
distributions or loans to directors in violation of the BCL.
The Registrant has entered into agreements with its directors and certain
of its officers that require the Registrant to indemnify such persons against
expenses, including attorneys' fees, judgments, fines, settlements and other
amounts incurred directly or indirectly in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person served as a director or officer of the
Registrant or any of its affiliated enterprises, provided that such
indemnification is consistent with the BCL. The agreements also require the
Registrant to carry directors' and officers' liability insurance for as long
as such person serves in a capacity that exposes such person to liability
unless and until the Registrant's Board of Directors decides that the cost of
the insurance does not justify the benefit. The Company has purchased such
directors' and officers' liability insurance covering certain liabilities
which may be incurred by its directors and officers in the performance of
their services for the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of the exhibits included as part of this Registration Statement is
set forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated herein by reference.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because they are inapplicable or the required information has otherwise been
given.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or
II-1
<PAGE>
Section 13(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referred to in Item 15, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the bona
fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on this 29th day of
October, 1997.
BERNARD CHAUS, INC.
By: /s/ Andrew Grossman
------------------------------
Name: Andrew Grossman
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signatures appear below constitutes and appoints Andrew Grossman and
Josephine Chaus, and each of them (with full power of each of them to act
alone), his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him or her and on his or her
behalf, and in his or her name, place and stead, in any and all capacities to
execute and sign any and all amendments or post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof and the registrant hereby confers like
authority on its behalf.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
--------- ------ ----
<S> <C> <C>
/s/ Andrew Grossman Chief Executive Officer and Member, October 29, 1997
- --------------------- Office of the Chairman, and a Director
Andrew Grossman
/s/ Josephine Chaus Chairwoman of the Board and Member, October 29, 1997
- --------------------- Office of the Chairman, and a Director
Josephine Chaus
/s/ Barton Heminover Vice-Corporate Controller and Assistant October 29, 1997
- --------------------- Secretary
Barton Heminover
/s/ Philip G. Barach Director October 29, 1997
- ---------------------
Philip G. Barach
/s/ S. Lee Kling Director October 29, 1997
- ---------------------
S. Lee Kling
/s/ Harvey M. Krueger Director October 29, 1997
- ---------------------
Harvey M. Krueger
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------- ----------------
<S> <C> <C>
*4.1 Form of Common Stock Certificate
*4.2 Form of Subscription Certificate
*5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Shereff, Friedman Hoffman & Goodman, LLP (included in its
opinion filed as Exhibit 5.1 hereto)
*24.1 Power of Attorney (included on the signature page of this Registration
Statement)
*99.1 Form of Instructions to Record Holder
*99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates
*99.3 Form of Certification and Request for Additional Rights
*99.4 Nominee Holder Subscription Certification
*99.5 Special Notice to Foreign Holders
*99.6 Form of Letter to Common Stockholders who are record holders
*99.7 Form of Letter to Common Stockholders who are beneficial holders
*99.8 Form of Letter to Common Stockholders
*99.9 Form of Participant Oversubscription Exercise Form.
</TABLE>
- ------------
* To be filed by amendment.
