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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9169
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2807386
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1410 Broadway, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 354-1280
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on September 2,1998 was $25,914,028.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
September 2, 1998 Common Stock, $0.01 par value 27,115,907
LOCATION IN FORM 10-K IN
DOCUMENTS INCORPORATED BY REFERENCE WHICH INCORPORATED
----------------------------------- ------------------
Portions of registrant's Proxy Statement Part III
for the Annual Meeting of Stockholders to
be held November 17, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear which are marketed principally under the CHAUS (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 "-- Products." By
August 1997, the Company had successfully repositioned its Chaus product line
into the opening price points of the "better" category. In September 1995 the
Company entered into a license agreement (the "Nautica License Agreement") with
Nautica Apparel Inc. ("Nautica"), a leading name in men's apparel, pursuant to
which the Company has obtained an exclusive license to design, contract for the
manufacture of and market a new women's apparel line under the Nautica brand
name. The Company commenced sales of products in its licensed Nautica product
line in August 1996, with such Nautica product line being positioned in the
"better" to "bridge" categories. See "--License Agreement with Nautica."
In fiscal 1998 the Company completed a restructuring program. Pursuant
to the restructuring program, the Company raised $20.0 million of equity
through a rights offering, converted $40.6 million of the Company's
indebtedness to Josephine Chaus into 10,510,910 shares of Common Stock of the
Company, entered into a new revolving credit facility with BNY Financial
Corporation and closed all of its retail outlet stores (other than the retail
outlet located at the Company's Secaucus facility).
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>
WEEKEND CASUAL
CAREER SPORTSWEAR SPORTSWEAR
----------------- --------------
<S> <C> <C>
BRAND NAMES Chaus Chaus Sport
Chaus Woman Nautica
Chaus Petite
Nautica
PRODUCT OFFERINGS Jackets, Skirts, Pants, Casual Jackets
Shorts, Blouses, Shirts, Sweaters, Skirts, Pants,
Knit Tops, Sweaters Shirts, Knit Tops, Outerwear
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INDUSTRY CATEGORIES Chaus -- Better Chaus -- Better
Nautica -- Better and Bridge 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 1998, the suggested retail prices of the Company's Chaus
products ranged between $24.00 and $280.00. The Company's jackets ranged in
price between $120.00 and $280.00, its blouses and sweaters ranged in price
between $40.00 and $140.00, its skirts and pants ranged in price between $28.00
and $120.00, and its knit tops and bottoms ranged in price between $24.00 and
$120.00.
The following table sets forth a breakdown by percentage of the
Company's net sales by product category for fiscal 1996 through fiscal 1998:
Fiscal Year Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
Career Sportswear
Chaus 39% 37% 41%
Chaus Woman 12 11 11
Chaus Petite 10 6 5
---- ---- ----
Total 61 54 57
Weekend Casual - Sportswear 29 30 33
Nautica 8 15 --
Dresses -- -- 8
Other (1) 2 1 2
---- ---- ----
Total 100% 100% 100%
--------------
(1) Includes sales by outlet stores, offset by intercompany
eliminations.
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
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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.
Pursuant to the terms of the Nautica License Agreement, the Company has
granted Nautica a ten-year option to purchase up to 15,000 shares of the
Company's Common Stock at a purchase price of $50.00 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, giving effect to the
Company's 1-for-10 reverse stock split during fiscal 1998).
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, in October 1997 the Company
hired Lynn Buechner as President of the Nautica Women's Wear Division to manage
and reposition the product line. In contrast to the previous Nautica product
line, the repositioned line has a narrow focus on casual sportswear items -- a
focus that is consistent with the Nautica men's line.
The Company continues to be disappointed with the performance of its
Nautica division and is currently in negotiations with regard to an exit from
its relationship with Nautica.
CUSTOMERS
The Company's products are sold nationwide in an estimated 1,800
individual stores operated by approximately 160 department store chains,
specialty retailers and other retail outlets. The Company does not have any
long-term commitments or contracts with any of its customers.
The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. At June 30, 1998 and 1997, approximately 87% and 62%, respectively, of
the Company's accounts receivable were due from department store customers
owned by four single corporate entities. During fiscal 1998, approximately 82%
of the Company's net sales were made to department store customers owned by
four single corporate entities, as compared to 63% in fiscal 1997 and 60% in
fiscal 1996. Sales to Dillard's Department Stores accounted for 43% of net
sales in fiscal 1998, 33% of net sales in fiscal 1997 and 29% of net sales in
fiscal 1996. Sales to nine department store companies owned by The May
Department Stores Company accounted for approximately 29% of the Company's net
sales in fiscal 1998, 16% of net sales in fiscal 1997 and 10% of net sales in
fiscal 1996. Sales to eight department store companies owned by Federated
Department Stores accounted for approximately 7% of net sales in fiscal 1998,
8% of net sales in fiscal 1997 and 5% of net sales in fiscal 1996. Sales to two
department store customers owned by TJX Companies, Inc. accounted for
approximately 3% of net sales in fiscal 1998, 6% of net sales in fiscal 1997
and 16% of net sales in fiscal 1996. The percentages of net sales are based
upon stores owned by the four corporate entities at the end of fiscal 1998. As
a result
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of the Company's dependence on its major customers, they may have the ability
to influence the Company's business decisions. The loss of or significant
decrease in business from any of its major customers would have a material
adverse effect on the Company's financial position and results of operations.
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 28, 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 of the
Company, actively participate in the planning of the Company's marketing and
selling efforts. The Company does not employ independent sales representatives
or operate regional sales offices, but it does participate in various regional
merchandise marts. This sales structure enables management to control the
Company's selling operation more effectively, to limit travel expenses, as well
as to deal directly with, and be readily accessible to, major customers.
Products are marketed to department and specialty store customers during
"market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating
their purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each collection.
During the course of the retail selling seasons, the Company monitors its
product sell-through at retail in order to directly assess consumer response to
its products.
The Company emphasizes the development of long-term customer
relationships by consulting with its customers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales
personnel and their counterparts at various levels in the buying organizations
of the Company's customers is an essential element of the Company's marketing
and sales efforts. These contacts allow the Company to closely monitor retail
sales volume to maximize sales at acceptable profit margins for both the
Company and its customers. The Company's marketing efforts attempt to build
upon the success of prior selling seasons to encourage existing customers to
devote greater selling space to the Company's product lines and to penetrate
additional individual stores within the Company's existing customers. The
Company's largest customers discuss with the Company retail trends and their
plans regarding their anticipated levels of total purchases of Company products
for future seasons. These discussions are intended to assist the Company in
planning the production and timely delivery of its products.
The Company maintains a cooperative advertising program under which it
reimburses, in certain circumstances, a portion of a customer's advertising
expenditures promoting the Company's products up to a maximum percentage of the
customer's purchases. Except for this cooperative advertising program, the
Company has not engaged in any direct advertising to the public with respect to
its Chaus product line. There was no direct advertising for the Company's
Nautica product line in fiscal 1998 and limited direct advertising in 1997.
Cooperative advertising expenditures for the Company were approximately $1.8
million for fiscal 1998, $1.1 million for fiscal 1997 and $0.8 million for
fiscal 1996.
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 23 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Ms. Chaus and Mr. Grossman, 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 well regarded for its distinctive styling and its
ability to contemporize fashion classics. Emphasis is placed on the
coordination of outfits and quality of fabrics to encourage the purchase of
more than one garment.
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MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and
the costs of a large workforce. A substantial amount (approximately 80%) of its
product is manufactured by approximately 35 key independent suppliers located
primarily in South Korea, Hong Kong, Taiwan, China, Indonesia and elsewhere in
the Far East. Approximately 20% of the Company's products are manufactured in
the United States and the Caribbean Basin. No contractual obligations exist
between the Company and its manufacturers except on an order-by-order basis.
During fiscal 1998, the Company purchased approximately 75% of its finished
goods from its ten largest manufacturers, including approximately 17% 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 1998, 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
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it in accordance with its own specifications. To date, the Company has not
experienced any significant difficulty in obtaining fabrics or other raw
materials and considers its sources of supply to be adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to five months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection. In order to make timely delivery of
merchandise which reflects current style trends and tastes, the Company
attempts to schedule a substantial portion of its fabric and manufacturing
commitments relatively late in a production cycle. However, in order to secure
adequate amounts of quality raw materials, especially greige (i.e., "undyed")
goods, the Company must make substantial advance commitments to suppliers of
such goods, often as much as seven months prior to the receipt of firm orders
from customers for the related merchandise. Many of these early commitments are
made subject to changes in colors, assortments and/or delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition of
export duties, political and social instability, currency revaluations, and
restrictions on the transfer of funds. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade in Textiles, known
as the Multifiber Arrangement ("MFA") which has been in effect since 1974. The
United States has concluded international negotiations known as the "Uruguay
Round" in which a variety of trade matters were reviewed and modified. Quotas
established under the MFA will be gradually phased out over a ten year
transition period, after which the textile and clothing trade will be fully
integrated into the General Agreement on Trade and Tariffs ("GATT") and will be
subject to the same disciplines as other sections. The GATT agreement provides
for expanded trade, improved market access, lower tariffs and improved
safeguard mechanisms.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adversely adjust presently prevailing quotas, duty or
tariff levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot now predict the likelihood or frequency of any
such events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise
categories where more quota is available and shifts of production among
countries and manufacturers. The expansion in the past few years of the
Company's varied manufacturing sources and the variety of countries in which it
has potential manufacturing arrangements, although not the result of specific
import restrictions, have had the result of reducing the potential adverse
effect of any increase in such restrictions. In addition, substantially all of
the Company's products are subject to United States customs duties.
RETAIL OUTLET STORES
The Company closed all of its retail outlet stores (other than the
retail outlet located at the Company's Secaucus facility, the space for which
is leased by the Company as part of its warehouse lease) during fiscal 1998 and
does not intend to open any new stores in the foreseeable future.
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BACKLOG
As of August 31, 1998 and 1997, the Company's order book reflected
unfilled customer orders for approximately $73.4 and $74.0 million of
merchandise, respectively. Order book data at any date are materially affected
by the timing of the initial showing of collections to the trade, as well as by
the timing of recording of orders and of shipments. The order book represents
customer orders prior to discounts. The Company does not believe that
cancellations, rejections or returns will materially reduce the amount of sales
realized from such backlog.
TRADEMARKS
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.
COMPETITION
The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies,
some of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers. The Company's Nautica
product line has experienced intense competition from other designer labels.
The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and product identity, are also important
aspects of competition in this industry. The Company believes that its success
will depend upon its ability to remain competitive in these areas.
Furthermore, the Company's traditional department store customers, which
account for a substantial portion of the Company's business, encounter intense
competition from so-called "off-price" and discount retailers, mass
merchandisers and specialty stores. The Company believes that its ability to
increase its present levels of sales will depend on such customers' ability to
maintain their competitive position and the Company's ability to increase its
market share of sales to department stores.
EMPLOYEES
At June 30, 1998, the Company employed 334 employees as compared with
482 employees (of which 178 were retail store employees) at June 30, 1997. This
total includes 69 in managerial and administrative positions, approximately 107
in production, production administration and design, 35 in marketing,
merchandising and sales and 66 in distribution. Of the Company's total
employees, 57 were located in the Far East. The Company is a party to a
collective bargaining agreement with the Amalgamated Workers Union, Local 88,
covering 86 full-time employees. This agreement expires in August 1999.
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The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Josephine Chaus 47 Chairwoman of the Board and member, Office of the Chairman
Andrew Grossman 39 Chief Executive Officer and member, Office of the Chairman
Stuart S. Levy 56 Chief Financial Officer and Secretary
Barton Heminover 44 Vice President-- Corporate Controller and Assistant Secretary
</TABLE>
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus has been an employee of the Company in various
capacities since its inception. She has been a director of the Company since
1977, President from 1980 through February 1993, Chief Executive Officer from
July 1991 through September 1994, Chairwoman of the Board since 1991 and member
of the Office of the Chairman since September 1994.
Andrew Grossman was appointed a director of the Company on September 13,
1994. He has been employed by the Company as its Chief Executive Officer and
member of the Office of the Chairman since September 28, 1994. Prior to
September 1994, Mr. Grossman was President from 1991 to 1994 and Executive Vice
President from 1990 to 1991 of Jones Apparel Group, a manufacturer of women's
apparel, and Vice President of Merchandising for Jones New York from 1987 to
1990. Prior to joining Jones, Mr. Grossman was employed by Willie Wear Ltd.,
Herbert Grossman Enterprises, the Ralph Lauren Womenswear division of Bidermann
Industries, Corp., and the Evan Picone division of Palm Beach, Inc.
Stuart S. Levy joined the Company as Chief Financial Officer on
September 8, 1998. He was Vice President -- Finance and the Chief Financial
Officer of Donnkenny, Inc. from 1996 to 1998. From January 1993 to July 1996,
Mr. Levy was Vice President of Finance and Chief Financial Officer of Xpedite
Systems, Inc., a publicly-held provider of enhanced fax services. From August
1996 through October 1996, Mr. Levy provided services to Xpedite Systems, Inc.,
in connection with the completion and integration of international
acquisitions.
Barton Heminover joined the Company as Vice President -- Corporate
Controller and Assistant Secretary in July 1996. From January 1983 to July 1996
he was employed by Petrie Retail, Inc. (formerly Petrie Stores Corporation), a
woman's retail apparel chain, in various capacities, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial
Controller from 1994 to 1996.
On September 15, 1997, the Company announced the resignation of Wayne
Miller, the Company's Chief Financial Officer. From September 15, 1997 through
September 8, 1998, Mr. Heminover, together with the Company's financial
advisors, were responsible for all of Mr. Miller's duties.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 1410 Broadway
in New York City, where the Company currently leases approximately 29,000
square feet, which represents a reduction of approximately 12,000 square feet
from the aggregate space occupied under several leases that terminated in July
1996. These facilities also house the Company's showrooms and its sales,
design, production and merchandising staffs. This space is occupied under a
lease expiring in July
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1999. Net base rental expense aggregated approximately $0.7 million in fiscal
1998 and 1997, and $2.3 million in fiscal 1996. Chaus also leases approximately
19,000 square feet of space at 520 Eighth Avenue in New York City, which houses
its technical production support facilities (including its sample and pattern
makers). Net base rental expense for this space aggregated approximately $0.2
million in each of fiscal 1998, 1997 and 1996. The lease for this facility
expires in January 1999.
The Company's distribution centers are located in Secaucus, New Jersey
where the Company leases approximately 275,000 square feet. This facility
also houses the Company's administrative and finance personnel, its computer
operations, and one retail outlet store. This space is occupied under a lease
expiring June 30, 2000. Base rental expense for the Secaucus facilities
aggregated approximately $1.1 million in fiscal 1998 and 1.3 million in each of
fiscal 1997 and 1996.
Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.2 million for fiscal 1998 and $0.3
million for fiscal 1997 and 1996.
In prior years the company leased space for its outlet stores operation,
with the average store utilizing approximately 3,000 square feet in fiscal
1997. The Company closed all of its retail outlet stores (other than the retail
outlet store located at the Company's Secaucus facility, the space for which is
leased by the Company as part of its warehouse lease) during fiscal 1998. The
annual aggregate base rental expense for the outlet stores was approximately
$0.7 million for fiscal 1998 and $1.7 million for each of fiscal 1997 and 1996.
ITEM 3. LEGAL PROCEEDINGS.
Without admitting any liability, the Company settled, in July 1998, an
action brought by the Equal Employment Opportunity Commission on behalf of
three former patternmakers, each of whom was terminated by the Company in late
1995. The amount of the settlement was not material and was provided for in
selling, general and administrative expenses in the fiscal 1997 financial
statements.
There are no other material pending legal proceedings to which the
Company is a party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "CHS." The following table sets forth for each of the Company's
fiscal periods indicated the high and low sales prices for the Common Stock as
reported on the NYSE.
HIGH LOW
Fiscal 1997 ---- ---
First Quarter............................$36.250 $20.000
Second Quarter........................... 28.750 16.250
Third Quarter............................ 17.500 5.000
Fourth Quarter........................... 15.000 6.870
FISCAL 1998
First Quarter............................$21.250 $ 8.125
Second Quarter........................... 11.250 6.250
Third Quarter............................ 5.250 1.625
Fourth Quarter........................... 5.750 3.438
As of September 2, 1998, the Company had approximately 441 stockholders of
record.
The Company has not declared or paid cash dividends or made other
distributions on its Common Stock since prior to its 1986 initial public
offering. The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on the Company's earnings,
its capital requirements and financial condition. It is the present intention
of the Board of Directors to retain all earnings, if any, for use in the
Company's business operations and, accordingly, the Board of Directors does not
expect to declare or pay any dividends in the foreseeable future. In addition,
the New Financing Agreement prohibits the Company from declaring dividends or
making other distributions on its capital stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources."
11
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ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Financial Statements of the Company and
the notes thereto, as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $191,546 $160,100 $170,575 $181,697 $206,332
Cost of goods sold ................................ 142,175 125,422(4) 147,994 149,097 186,594
-------- -------- -------- -------- --------
Gross profit ...................................... 49,371 34,678 22,581 32,600 19,738
Selling, general and administrative expenses ...... 38,462 40,924 40,162 44,794 55,400
Restructuring expenses............................. -- 2,250(3) -- 1,200(1) 5,300(1)
Unusual expenses .................................. -- -- -- 8,333(2) 1,900(2)
Interest expense .................................. 6,411 8,030 6,560 5,976 3,439
Other income (expense), net........................ 58 113 56 91 (190)
-------- -------- -------- -------- --------
Income (loss) before income tax
provision ...................................... 4,556 (16,413) (24,085) (27,612) (46,491)
Income tax provision .............................. 245 50 301 301 264
-------- -------- -------- -------- --------
Net income (loss) ................................. $ 4,311 $(16,463) $(24,386) $(27,913) $(46,755)
======== ========= ======== ======== ========
Basic and diluted earnings (loss) per share (5) ... $ 0.28 $ (2.46) $ (3.91) $ (5.17) $ (9.24)
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding (6) ........ 15,296 6,687 6,239 5,399 5,061
======== ======== ======== ========= ========
<CAPTION>
BALANCE SHEET DATA:
AS OF JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) ........................ $18,679 $(32,729) $ (19,483) $(13,914) $ 3,342
Total assets ........................................ 39,012 34,138 32,742 28,660 51,619
Short-term debt, including current portion
of long-term debt ................................. 1,000 37,756 26,077 18,698 21,365
Long-term debt ...................................... 13,500 26,374 23,588 21,066 18,789
Stockholders' equity (deficiency) ................... 7,015 (57,060) (40,610) (32,379) (13,614)
</TABLE>
- -------------------
(1) Includes, in fiscal 1995, $1.2 million of employee severance and, in fiscal
1994, $2.1 million for closing selected outlet stores, $2.5 million for
consolidation of office and warehouse space, and $0.7 million for employee
severance.
(2) Includes, in fiscal 1995, $7.8 million primarily relating to the costs
associated with the signing of the Company's new Chief Executive Officer
and $0.5 million related to certain legal matters and, in fiscal 1994,
expenses relating primarily to abandonment of fixed assets, certain legal
matters and the winding down of the Company's Canadian joint venture.
(3) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate
to the closing of the Company's outlet stores (such as professional fees,
lease termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of
the Company's restructuring program which was completed on January 29,
1998. Refer to Note 7 to the Consolidated Financial Statements.
(4) Includes $1.1 million for liquidation of inventory as a result of closing
the Company's outlet stores.
(5) Computed by dividing net income (loss) by the weighted average number of
shares of Common Stock outstanding during the years.
(6) All share data reflects the 1 for 10 reverse stock split which was effected
December 9, 1997.
12
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ITEM 7. 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
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales .........................................................100.0% 100.0% 100.0%
Gross profit ...................................................... 25.8 21.7 13.2
Selling, general and administrative expenses ...................... 20.0 25.6 23.5
Restructuring expenses ............................................ -- 1.4 --
Interest expense .................................................. 3.3 5.0 3.8
Net income (loss) ................................................. 2.3 (10.3) (14.3)
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
In fiscal 1998, net sales increased by $31.4 million, or 19.6%, compared
to the prior year. The increase in net sales is primarily due to increased
sales at regular and incentive prices of the Company's Chaus product lines
partially offset by a decrease in sales associated with the Company's Nautica
licensed product line and lower retail store sales. Retail store sales
decreased as a result of the liquidation of the Company's retail outlet stores
during the second quarter of fiscal 1998. In fiscal 1998, exclusive of sales
associated with the retail outlet stores, units shipped increased by 11.6% with
a 14.3% increase in average selling prices from the prior year. The increase in
average selling prices resulted from the Company's ability to increase its
selling price per unit and decrease its sales to off-price customers.
Gross profit as a percentage of net sales was 25.8% as compared to 21.7%
in the previous year. The increase in gross profit as a percentage of net sales
was primarily due to improved gross margins on the Chaus product lines,
partially offset by a decrease in gross margins associated with the Nautica
licensed product line.
Selling, general and administrative expenses decreased by $2.5 million
compared to the prior year. Approximately $2.2 million of this decrease was
attributable to the closing of the Company's retail outlet stores during the
second quarter of fiscal 1998. Selling, general and administrative expenses as
a percent of net sales decreased from 25.6% in fiscal 1997 to 20.0% in fiscal
1998. The decrease in selling, general and administrative expenses as a percent
of net sales was primarily the result of the Company's ability to keep its
expenses, exclusive of the retail operations, relatively constant as its net
sales, exclusive of the retail operations, increased.
The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Company's restructuring program, which was announced in June 1997. The costs
incurred relate to the closing of the Company's outlet stores (such as
professional fees, lease termination expenses and write-off of fixed assets),
in addition to professional fees and other expenses associated with the
implementation of the Company's restructuring program. In addition, the Company
recorded a $1.1 million charge to cost of goods sold related to the liquidation
of the retail outlet store inventory. The restructuring was completed in the
third quarter of fiscal 1998.
At the end of fiscal 1997, the remaining balance of the restructuring
reserve was $1.9 million. During fiscal 1998, $1.9 million was charged against
such remaining reserve, consisting of outlet store closing costs and
professional fees
13
<PAGE>
related to the Company's restructuring. Costs relating to the liquidation of
the retail outlet store inventory totaled $1.2 million, of which $1.1 million
was provided for in fiscal 1997.
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 predominantly 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
was primarily the result of a decrease in off-price sales volume and the impact
of the elimination of 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 was 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
Company's restructuring program, which was announced in June 1997. The costs
incurred related to the closing of the Company's outlet stores (such as
professional fees, lease termination expenses and write-off of fixed assets),
in addition to professional fees and other expenses associated with the
implementation of the Company's restructuring program. In addition, the Company
recorded a $1.1 million charge to cost of goods sold related to the liquidation
of the retail outlet store inventory.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $5.8 million for fiscal 1998,
$11.0 million for fiscal 1997, and $22.7 million for fiscal 1996. The net cash
used in operating activities for fiscal 1998 resulted primarily from net income
of $4.3 million, inclusive of $2.3 million of non-cash charges, increases in
accounts receivable of $9.8 million and decreases in accounts payable of $6.8
million, partially offset by decreases in inventory of $6.3 million.
Historically, the Company has not required major capital expenditures.
In fiscal 1998 and 1997, purchases of fixed assets were $0.3 and $0.2 million,
respectively, consisting primarily of purchases of computer software systems
and improvements in the Company's New Jersey warehouse facilities and New York
design and showroom facilities. In fiscal 1998 and 1997, the Company incurred
expenditures of $0.4 million for "in store" fixtures and signs purchased in
connection with the Nautica product line. In fiscal 1999, 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.
14
<PAGE>
Financing Agreements
The Company and BNY Financial Corporation, a wholly owned subsidiary of
The Bank of New York ("BNYF"), entered into a financing agreement in July 1991,
which was amended and restated on several occasions (as amended, the "Old Bank
Debt Agreement"). See Note 6 to Consolidated Financial Statements.
On October 10, 1997, the Company and BNYF entered into a new revolving
credit facility (the "New Revolving Facility") and a new term loan facility
(the "New Term Loan" and, together with the New Revolving Facility, the "New
Financing Agreement"). The New Financing Agreement consisted of two facilities:
(i) the New Revolving Facility which was a $66.0 million five-year revolving
credit line with a $20.0 million sublimit for letters of credit, and (ii) the
New Term Loan which was a $15.0 million term loan facility. On June 3, 1998,
the Company and BNYF amended the New Revolving Facility to provide for a $45.5
million five-year revolving credit line with $34.0 million sublimit for letters
of credit and amended the New Term Loan to provide for a $14.5 million term
loan facility. Each facility matures on December 31, 2002. See Note 6 to
Consolidated Financial Statements. At June 30, 1998, the Company had
availability of approximately $7.6 million (inclusive of overadvance
availability) under the New Financing Agreement.
The New Financing Agreement contains financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and maximum permitted loss (minimum permitted profit).
Credit Support and Subordinated Indebtedness
Josephine Chaus had arranged for letters of credit in various amounts
since April 1994 in return for which BNYF had increased the availability under
the Old Bank Debt Agreement. Ms. Chaus received certain cash payments and
warrants for her credit support to the Company. In connection with the
Restructuring (as defined below), the Company caused its subordinated
indebtedness to Ms. Chaus, together with $12.5 million in cash collateral of
Ms. Chaus, which had been pledged to BNYF, to be converted into 10,510,910
shares of Common Stock of the Company. In connection with the Restructuring,
Ms. Chaus also relinquished all warrants she had received as credit support.
See Notes 6 and 7 to Consolidated Financial Statements.
Restructuring Program
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
plan (the "Restructuring") which provided for the following: (i) the Company
raised, through an offer of rights to subscribe ("Rights"), up to $20.0
million, but not less than $12.5 million, of equity through a rights offering
to all shares of Common Stock of the Company (the "Rights Offering") of up to
13,977,270 shares of Common Stock of the Company (on a post stock split basis);
(ii) the conversion of approximately $40.6 million of the Company's
indebtedness to Ms. Chaus, consisting of $28.1 million of then existing
subordinated indebtedness (including accrued interest through January 28, 1998)
and $12.5 million of additional indebtedness owed to Ms. Chaus, into 10,510,910
shares of Common Stock of the Company; (iii) the New Financing Agreement; (iv)
the implementation of a reverse stock split of the Company's Common Stock such
that every ten (10) shares of Common Stock would be converted into one (1)
share of Common Stock; and (v) the liquidation of the Company's retail outlet
stores during the second quarter of fiscal 1998. On October 10, 1997, the
Company entered into the New Financing Agreement referred to in (iii) above. On
December 9, 1997, the reverse stock split described in (iv) above became
effective. Prior to January 14, 1998, the Company closed all of its retail
outlet stores as referenced in (v) above. On January 26, 1998, the Rights
Offering described in (i) above was consummated. On January 29, 1998, the
conversion of indebtedness into equity described in (ii) above was completed.
15
<PAGE>
Future Financing Requirements
At June 30, 1998, the Company had working capital of $18.7 million. The
Company's business plan requires the availability of sufficient cash flow and
borrowing capacity to finance its product lines. The Company expects to satisfy
such requirements through cash flow from operations and borrowings under the
New Financing Agreement.
Although there can be no assurance, the Company believes that it has
adequate resources to meet its needs for the foreseeable future, assuming it
meets its business plan.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties,
including the Company's ability to maintain its borrowing capabilities under
the New Financing Agreement, retail market conditions, and consumer acceptance
of the Company's products.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net sales or profitability.
SEASONALITY
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales,
are shipped to customers, with revenues generally being recognized at the time
of shipment. As a result, the Company experiences significant variability in
its quarterly results and working capital requirements. Moreover, delays in
shipping can cause revenues to be recognized in a later quarter, resulting in
further variability in such quarterly results.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share which was required to be adopted for interim and
annual periods ending after December 15, 1997. The statement establishes
standards for computing and presenting earnings per share ("EPS") and
simplifies the standards for computing EPS currently found in Accounting
Principles Board ("APB") 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.
The Company is required to adopt SFAS No. 130, Reporting Comprehensive
Income during the year ending June 30, 1999. SFAS 130 establishes standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Adoption of
this statement will require the Company to report changes in the excess of
additional pension liability over unrecognized prior service cost and foreign
currency translation adjustment accounts, currently shown in the stockholders'
equity section of the balance sheet, as an increase or decrease to reported net
income in arriving at comprehensive income. Currently, the Company has no items
of other comprehensive income.
The Company is required to adopt SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information during the year ending June
30, 1999. The Statement establishes standards for the way that public business
16
<PAGE>
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement supersedes FASB
Statement No. 14 Financial Reporting for Segments of a Business Enterprise, but
retains the requirement to report information about major customers. It amends
FASB Statement No. 94, Consolidation of all Majority-Owned Subsidiaries to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. The Company is currently considering what effect adoption of this
statement will have on the Company.
The Company is required to adopt SFAS No. 132, Employers' Disclosure
About Pensions and Other Postretirement Benefits during the year ending June
30, 1999. This Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful. Restatement of disclosures for earlier
periods provided for comparative purposes is required. The Company has not yet
determined the impact the adoption of this statement will have on the Company's
financial statements.
YEAR 2000 COMPLIANCE
The Company has prepared a plan to become Year 2000 compliant. Pursuant
to the Company's Year 2000 Plan, major segments of the Company's information
technology ("IT") and non-IT systems have been upgraded and tested to become
Year 2000 compliant. The Company anticipates that the remaining IT and non-IT
systems should be upgraded and tested to be Year 2000 compliant by the first
quarter of calendar 1999. The total costs of these system upgrades is projected
to approximate $0.4 million. Given that the Company expects to be Year 2000
compliant by the first quarter of calendar 1999, the Company has not prepared a
contingency plan and does not currently believe that a contingency plan is
necessary.
In some cases, the Company's computer systems are linked to its major
customers and the Company is in the process of assessing its customers'
compliance with Year 2000. The Company has had correspondence from its major
customers regarding Year 2000. The Company's major customers generally comply
with VICS (Voluntary Interindustry Commerce Standards) standards. VICS
establishes standards that simplify the flow of product and information in the
general merchandise retail industry for retailers and suppliers alike. The
Company expects to be compliant with VICS Year 2000 Electronic Data Interchange
standards by the end of calendar 1998. The Company has virtually no computer
interfaces with its vendors: however, it does not know the extent to which its
vendors, or its customers, would be impaired by their own Year 2000 issues and
its impact on the Company. The costs of assessing compliance are expected to be
minimal. In addition, although the Company believes it is adequately addressing
its Year 2000 issues, there can be no assurance that any such failure regarding
Year 2000 compliance would not have a material impact on the Company.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is set
forth in Part I of this Annual Report on Form 10-K.
Information with respect to the directors of the Company is incorporated
by reference to the information to be set forth under the heading "Election of
Directors" in the Company's definitive proxy statement relating to its 1998
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is incorporated by reference to the
information to be set forth under the heading "Executive Compensation" in the
Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 is incorporated by reference to the
information to be set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is incorporated by reference to the
information to be set forth under the headings "Executive Compensation" and
"Certain Transactions" in the Company's 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule: See List of
Financial Statements and Financial Statement Schedule on page F-1.
(b) The Company did not file a Form 8-K during the last quarter of its
fiscal year ended June 30, 1998.
(c) Exhibits filed herewith are denoted by an (*):
18
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<TABLE>
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3.1 Restated Certificate of Incorporation (the "Restated Certificate")
of the Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, Registration No.
33-5954 (the "1986 Registration Statement").
3.11 Amendment dated November 18, 1987 to the Restated Certificate
(incorporated by reference to Exhibit 3.11 of the Company's
Registration Statement on Form S-2, Registration No. 33-63317 (the
"1995 Registration Statement").
3.12 Amendment dated November 15, 1995 to the Restated Certificate
(incorporated by reference to Exhibit 3.12 of Amendment No. 1 to
the 1995 Registration Statement).
*3.13 Amendment dated December 9, 1998 to the Restated Certificate.
3.2 By-Laws of the Company, as amended (incorporated by reference to
Exhibit 3.1 of the Company's Form 10-Q for the quarter ended
December 31, 1987).
3.3 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's Form 10-Q for the
quarter ended September 30, 1994).
+10.1 Restricted Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Company's Form 10-K for the year ended June
30, 1987).
+10.2 1986 Stock Option Plan, as amended and restated as of January 1,
1987 (the "1986 Stock Option Plan") (incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K for the year ended July 1,
1989 (the "1989 Form 10-K")).
+10.3 Amendment No. 1 to the 1986 Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the 1989 Form 10-K).
+10.4 Amendment No. 2 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1990 Annual
Meeting of Stockholders).
+10.5 Amendment No. 3 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1991 Annual
Meeting of Stockholders).
+10.6 Amendment No. 4 to the 1986 Stock Option Plan (incorporated by
reference to the Company's Proxy Statement for its 1993 Annual
Meeting of Stockholders).
</TABLE>
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+10.7 Amendment No. 5 to the 1986 Stock Option Plan as amended
(incorporated by reference to the Company's Proxy Statement for
its 1995 Annual Meeting of Stockholders).
+10.8 Incentive Award Plan (incorporated by reference to Exhibit 10.6 of
the 1986 Registration Statement).
10.9 Agreement dated December 3, 1990 among the Company, Bernard Chaus,
Josephine Chaus and National Union Fire Insurance Company of
Pittsburgh, Pa., the Company's directors and officers liability
carrier (incorporated by reference to Exhibit 10.31 of the
Company's Form 10-Q for the quarter ended December 31, 1990).
+10.10 Employment Agreement, dated July 1, 1991, between the Company and
Josephine Chaus (incorporated by reference to Exhibit 10.39 of the
Company's Form 10-K for the year ended June 30, 1991).
+10.11 Employment Agreement dated September 1, 1994 between the Company
and Andrew Grossman with Stock Option Agreement dated as of
September 1, 1994 by and between the Company and Andrew Grossman
(incorporated by reference to Exhibit 10.90 of the 1994 Form
10-K).
+10.12 Employment Agreement dated December 14, 1996 between the Company
and Michael Winter (incorporated by reference to Exhibit 10.68 of
the Company's Form 10-Q for the quarter ended December 31, 1995
(the "December 1995 Form 10-Q").
10.13 Agreement, dated June 15, 1988, between the Company and Bernard
Chaus and Josephine Chaus, amending the terms of the Company's
subordinated promissory notes to each of them, each in the
principal amount of $7,365,000, the form of which was filed as
Exhibit 10.13 of the 1986 Registration Statement (incorporated by
reference to Exhibit 10.11 of the Company's Form 10-K for the year
ended July 2, 1988).
10.14 Agreement, dated May 17, 1990, between the Company and Bernard
Chaus and Josephine Chaus amending the terms of the Company's
subordinated promissory notes to each of them, each in the
principal amount of $7,365,000, the form of which was filed as
Exhibit 10.13 of the 1986 Registration Statement.
10.15 Agreement, dated February 21, 1991, between the Company and
Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each
20
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<S> <C>
in the principal amount of $7,365,000 (incorporated by reference to
Exhibit 10.74 of the Company's Form 10-K for the year ended June
30,1993 (the "1993 Form 10-K")).
10.16 Subordinated promissory notes, dated March 12, 1991, between the
Company and Bernard Chaus and Josephine Chaus, separately, each in
the amount of $5,000,000 (incorporated by reference to Exhibit
10.75 of the 1993 Form 10-K).
10.17 Agreement, dated July 31, 1991, between the Company and the Estate
of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in
the principal amount of $7,365,000 (incorporated by reference to
Exhibit 10.76 of the 1993 Form 10-K).
10.18 Agreement, dated July 31, 1991, between the Company and the Estate
of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in
the principal amount of $5,000,000 (incorporated by reference to
Exhibit 10.77 of the 1993 Form 10-K).
10.19 Agreement, dated July 15, 1992, between the Company and the Estate
of Bernard Chaus and Josephine Chaus amending the terms of the
Company's subordinated promissory notes to each of them, each in
the principal amount of $5,000,000 (incorporated by reference to
Exhibit 10.78 of the 1993 Form 10-K).
10.20 Agreement, dated October 30, 1992, between the Company and the
Estate of Bernard Chaus and Josephine Chaus amending the terms of
the Company's subordinated promissory notes to each of them, each
in the principal amount of $7,365,000 (incorporated by reference
to Exhibit 10.79 of the 1993 Form 10-K).
10.21 Demand Notes, dated June 30, 1993, between the Company and the
Estate of Bernard Chaus and Josephine Chaus, each in the principal
amount of $1,520,216 (incorporated by reference to Exhibit 10.80
of the 1993 Form 10-K).
10.22 Agreement, dated September 21, 1993, between the Company and the
Estate of Bernard Chaus and Josephine Chaus amending the terms of
the Company's subordinated promissory notes to each of them, each
in the principal amount of $7,365,000 (incorporated by reference
to Exhibit 10.81 of the 1993 Form 10-K).
10.23 Subordinated promissory notes, dated August 1, 1993, between the
Company and Josephine Chaus and the Estate of Bernard Chaus,
21
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EXHIBIT NO. PAGES
----------- -----
<S> <C>
separately, each in the amount of $208,716 (incorporated by
reference to Exhibit 10.94 of the 1994 Form 10-K).
10.24 Subordinated promissory note, dated August 1, 1993, between the
Company and Josephine Chaus in the amount of $1,311,500
(incorporated by reference to Exhibit 10.95 of the 1994 Form
10-K.)
10.25 Subordinated Promissory Note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus in the amount of
$1,000,000 (incorporated by reference to Exhibit 10.96 of the 1994
Form 10-K).
10.26 Subordinated promissory note, dated August 1, 1993, between the
Company and the Estate of Bernard Chaus, in the amount of $311,500
(incorporated by reference to Exhibit 10.97 of the 1994 Form
10-K).
10.27 Subordinated promissory notes, dated December 31, 1993, between
the Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $181,056 (incorporated by
reference to Exhibit 10.98 of the 1994 Form 10-K).
10.28 Subordinated promissory notes, dated December 31, 1993, between
the Company and Josephine Chaus and the Estate of Bernard Chaus,
separately, each in the amount of $412,950 (incorporated by
reference to Exhibit 10.99 of the 1994 Form 10-K).
10.29 Agreements, dated September 9, 1993, between the Company and
Josephine Chaus and the Estate of Bernard Chaus, separately,
reflecting amendments to subordinated promissory notes, each in
the principal amount of $5,000,000 (incorporated by reference to
Exhibit 10.100 of the 1994 Form 10-K).
10.30 Agreements, dated October 18, 1993, between the Company and
Josephine Chaus and the Estate of Bernard Chaus, separately,
reflecting amendments to subordinated promissory notes, each in
the principal amount of $1,520,216 (incorporated by reference to
Exhibit 10.101 of the 1994 Form 10-K).
10.31 Agreements, dated October 18, 1993, between the Company and
Josephine Chaus and the Estate of Bernard Chaus, separately,
reflecting amendments to subordinated promissory notes, each in
22
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EXHIBIT NO. PAGES
----------- -----
<S> <C>
the principal amount of $7,365,000 (incorporated by reference to
Exhibit 10.102 of the 1994 Form 10-K).
10.32 Agreement, dated December 31, 1993, between the Company and
Josephine Chaus reflecting amendments to a subordinated promissory
note in the principal amount of $1,311,500 (incorporated by
reference to Exhibit 10.103 of the 1994 Form 10-K).
10.33 Agreement, dated December 31, 1993, between the Company and the
Estate of Bernard Chaus, reflecting amendments to subordinated
promissory notes, in the principal amounts of $1,000,000 and
$311,500 (incorporated by reference to Exhibit 10.104 of the 1994
Form 10-K).
10.34 Agreement, dated November 9, 1994, between the Company and
Josephine Chaus extending the due dates on subordinated promissory
notes (incorporated by reference to Exhibit 10.107 of the
Company's Form 10-Q for the quarter ended September 30, 1994 (the
"September 1994 Form 10-Q")).
10.35 Agreement, dated November 9, 1994, between the Company and the
Estate of Bernard Chaus extending the due dates on subordinated
promissory notes (incorporated by reference to Exhibit 10.108 of
the September 1994 Form 10-Q).
10.36 Agreement, dated December 19, 1994, assigning the subordinated
notes from the Estate of Bernard Chaus to Josephine Chaus
(incorporated by reference to Exhibit 10.110 of the Company's Form
10-Q for the quarter ended December 30, 1994 (the "December 1994
Form 10-Q").
10.37 Agreement, dated January 11, 1995, between the Company and
Josephine Chaus extending the due dates on subordinated promissory
notes (incorporated by reference to Exhibit 10.111 of the December
1994 Form 10-Q).
+10.38 Agreement, dated November 22, 1994, between the Company and
Josephine Chaus issuing 32,500 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.112 of the
Company's Form 10-Q for the quarter ended March 31, 1995 (the
"March 1995 Form 10-Q")).
+10.39 Agreement, dated November 22, 1994, between the Company and
Josephine Chaus issuing 206,000 warrants to purchase Common
23
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EXHIBIT NO. PAGES
----------- -----
<S> <C>
Stock of the Company (incorporated by reference to Exhibit 10.113
of the March 1995 Form 10-Q).
+10.40 Agreement, dated November 22, 1994, between the Company and
Josephine Chaus issuing 338,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.114 of the
March 1995 Form 10-Q).
+10.41 Agreement, dated November 22, 1994, between the Company and
Josephine Chaus issuing 640,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.115 of the
March 1995 Form 10-Q).
10.42 Agreement effective February 21, 1995 (the "Old Bank Debt
Agreement") between the Company and BNY Financial Corporation
restating and amending the Financing Agreement (incorporated by
reference to Exhibit 10.116 of the March 1995 Form 10-Q).
10.43 Waiver dated September 14, 1995 to the Old Bank Debt Agreement
(incorporated by reference to Exhibit 10.5 of the 1995
Registration Statement).
10.44 Agreement effective as of September 28, 1995 relating to the Old
Bank Debt Agreement (incorporated by reference to Exhibit 10.58 of
the 1995 Registration Statement).
10.45 Agreement dated April 28, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.117 of the March 1995
Form 10-Q).
10.46 Agreement dated September 8, 1995 between the Company and
Josephine Chaus extending the due dates on subordinated promissory
notes (incorporated by reference to Exhibit 10.60 of the 1995
Registration Statement).
10.47 License Agreement dated as of September 6, 1995 between the
Company and Nautica Apparel Inc. (incorporated by reference to
Exhibit 10.61 of the 1995 Registration Statement, confidential
portions of which have been omitted and filed separately with the
Commission subject to an order granting confidential treatment).
10.48 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, extending the due dates on subordinated promissory notes
and clarifying the subordination provision
24
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
----------- -----
<S> <C>
(incorporated by reference to Exhibit 10.65 of the 1995
Registration Statement).
10.49 Agreement dated October 9, 1995, between the Company and Josephine
Chaus, providing the Company with an option to extend the Letter
of Credit to July 31, 1996 (incorporated by reference to Exhibit
10.66 of the 1995 Registration Statement).
10.50 Agreement dated October 27, 1995 between the Company and Josephine
Chaus extending the due dates on subordinated promissory notes
(incorporated by reference to Exhibit 10.67 of the Company's Form
10-Q for the quarter ended September 30, 1995).
+10.51 Agreement dated November 15, 1995 between the Company and
Josephine Chaus issuing 815,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.69 of the
December 1995 Form 10-Q).
+10.52 Agreement dated November 15, 1995 between the Company and
Josephine Chaus issuing 535,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.70 of the
December 1995 Form 10-Q).
+10.53 Agreement dated November 15, 1995 between the Company and
Josephine Chaus issuing 230,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.71 of the
December 1995 Form 10-Q).
10.54 Amendment No. 4 dated September 17, 1996 to the Financing
Agreement (incorporated by reference to Exhibit 10.65 of the
Company's Form 10-K for the year ended June 30, 1996).
10.55 Lease dated June 12, 1996 between the Company and L. H. Charney
Associates, relating to the Company's facility at 1410 Broadway,
New York, New York (incorporated by reference to Exhibit 10.66 of
the Company's Form 10-K for the year ended June 30, 1996).
10.56 Amendment No. 5 dated January 31, 1997 to the Financing Agreement
(incorporated by reference to Exhibit 10.67 of the Company's Form
10-Q for the quarter ended December 31, 1996).
25
<PAGE>
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NUMBERED
EXHIBIT NO. PAGES
----------- -----
<S> <C>
10.57 Waiver dated February 4, 1997 to the Financing Agreement
(incorporated by reference to Exhibit 10.68 of the Company's Form
10-Q for the quarter ended December 31, 1996).
+10.58 Consulting Agreement dated as of December 31, 1996 between the
Company and Michael Winter (incorporated by reference to Exhibit
10.69 of the Company's Form 10-Q for the quarter ended December
31, 1996).
10.59 Agreement dated February 19, 1997, between the Company and BNY
Financial Corp. issuing 125,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.70 of the
Company's Form 10-Q for the quarter ended March 31, 1997).
10.60 Amendment No. 6 dated March 21, 1997, to the Financing Agreement
(incorporated by reference to Exhibit 10.71 of the Company's Form
10-Q for the quarter ended March 31, 1997).
10.61 Amendment No. 7 dated April 1, 1997, to the Financing Agreement
(incorporated by reference to Exhibit 10.72 of the Company's Form
10-Q for the quarter ended March 31, 1997).
10.62 Amendment No. 8 dated April 29, 1997, to the Financing Agreement
(incorporated by reference to Exhibit 10.73 of the Company's Form
10-Q for the quarter ended March 31, 1997).
10.63 Waiver dated May 5, 1997, to the Financing Agreement (incorporated
by reference to Exhibit 10.74 of the Company's Form 10-Q for the
quarter ended March 31, 1997).
10.64 Commitment Letter dated as of June 26, 1997, between the Company
and BNY Financial Corp. (incorporated by reference to Exhibit
10.75 of the Company's Form 10-K for the year ended June 30,
1997).
10.65 Cash Collateral Deposit Letter dated as of July 23, 1997, between
Josephine Chaus and BNY Financial Corp. (incorporated by reference
to Exhibit 10.76 of the Company's Form 10-K for the year ended
June 30, 1997).
10.66 Cash Collateral Deposit Letter dated as of October 10, 1997,
between Josephine Chaus and BNY Financial Corp. (incorporated by
reference to Exhibit 10.77 of the Company's Form 10-K for the year
ended June 30, 1997).
26
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<S> <C>
10.67 Amended and Restated Cash Collateral Deposit Letter dated as of
October 10, 1997, between Josephine Chaus and BNY Financial Corp.
(incorporated by reference to Exhibit 10.78 of the Company's Form
10-K for the year ended June 30, 1997).
10.68 Second Restated and Amended Financing Agreement dated as of
October 10, 1997, between the Company and BNY Financial Corp.
(incorporated by reference to Exhibit 10.79 of the Company's Form
10-K for the year ended June 30, 1997).
10.69 Agreement dated October 10, 1997, between the Company and BNY
Financial Corp. issuing 125,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.80 of the
Company's Form 10-Q for the quarter ended September 30, 1997).
10.70 Agreement dated October 10, 1997, between the Company and BNY
Financial Corp. issuing 375,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.81 of the
Company's Form 10-Q for the quarter ended September 30, 1997).
+10.71 Executive Employment Agreement dated October 28, 1997, between the
Company and Lynn Buechner (incorporated by reference to Exhibit
10.82 of the Company's Form 10-Q for the quarter ended September
30, 1997).
10.72 Letter Agreement dated December 9, 1997 between Josephine Chaus
and the Company (incorporated by reference to Exhibit 10.83 of the
Company's Form 10-Q for the quarter ended December 31, 1997).
10.73 Cash Collateral Deposit Release Letter Agreement dated as of
January 29, 1998 Agreement among Josephine Chaus, the Company and
BNY Financial Corporation (incorporated by reference to Exhibit
10.84 of the Company's Form 10-Q for the quarter ended
December 31, 1997).
10.74 Subrogated Subordinated Promissory Note dated as of January 29,
1998 from the Company to Josephine Chaus in the principal amount
of $12.5 million (incorporated by reference to Exhibit 10.85 of
the Company's Form 10-Q for the quarter ended December 31, 1997).
10.75 Conversion Agreement dated as of January 29, 1998 between
Josephine Chaus and the Company (incorporated by to reference
27
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EXHIBIT NO. PAGES
----------- -----
<S> <C>
Exhibit 10.86 of the Company's Form 10-Q for the quarter ended
December 31, 1997).
+*10.76 Letter Agreement between the Company and Andrew Grossman dated as
of January 1, 1998.
+*10.77 1998 Stock Option Plan, including form of related stock option
agreement.
*10.78 Amendment No. 1 dated June 3, 1998 to the Second Restated and
Amended Financing Agreement.
+*10.79 Letter Agreement between the Company and Stewart S. Levy dated as
of July 22, 1998.
*21 List of Subsidiaries of the Company.
*27 Financial Data Schedule.
</TABLE>
- ----------------
+ Management agreement or compensatory plan or arrangement required to be filed
as an exhibit.
* Filed herewith.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on
September 10, 1998.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
---------------------------
Josephine Chaus
Chairwoman of the Board and
Office of the Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on September 10,
1998.
SIGNATURE TITLE
- --------- -----
/s/ Josephine Chaus Chairwoman of the Board and Office of the
- ------------------------------- Chairman
Josephine Chaus
/s/ Andrew Grossman Chief Executive Officer and Office of the
- ------------------------------- Chairman
Andrew Grossman
/s/ Barton Heminover Vice President -- Corporate Controller
- ------------------------------- and Assistant Secretary
Barton Heminover
/s/ Philip G. Barach Director
- -------------------------------
Philip G. Barach
/s/ S. Lee Kling Director
- -------------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director
- -------------------------------
Harvey M. Krueger
29
<PAGE>
BE RNARD 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, 1998 and 1997......................................F-3
Consolidated Statements of Operations-- Years Ended June 30, 1998, 1997 and 1996..........F-4
Consolidated Statements of Stockholders' Equity (Deficiency)--
Years Ended June 30, 1998, 1997 and 1996...............................................F-5
Consolidated Statements of Cash Flows-- Years Ended June 30, 1998, 1997 and 1996..........F-6
Notes to Consolidated Financial Statements................................................F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 14(a)(2):
Schedule II -- Valuation and Qualifying Accounts..........................................S-1
</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, 1998 and June 30, 1997 and the related
consolidated statements of operations, stockholders' equity/deficiency, and
cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and June 30, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
August 26, 1998
F-2
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
ASSETS ------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents ...................................................... $ 2,039 $ 330
Accounts receivable, less allowances of $3,202 and $2,092 ...................... 17,289 7,451
Inventories..................................................................... 17,486 23,746
Prepaid expenses................................................................ 362 568
---------- ---------
Total current assets......................................................... 37,176 32,095
Fixed assets -- net............................................................... 960 1,295
Other assets...................................................................... 876 748
---------- ---------
$ 39,012 $ 34,138
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current Liabilities
Notes payable -- bank .......................................................... $ -- $ 37,756
Accounts payable ............................................................... 13,005 19,825
Accrued expenses ............................................................... 4,492 5,393
Accrued restructuring expenses ................................................. -- 1,850
Term loan -- current ........................................................... 1,000 --
---------- ---------
Total current liabilities.................................................... 18,497 64,824
Subordinated promissory notes..................................................... -- 26,374
Term loan ........................................................................ 13,500 --
---------- ---------
31,997 91,198
STOCKHOLDERS' EQUITY/(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
-- 27,178,177 at June 30, 1998 and 6,687,000 at June 30, 1997 ............... 272 269
Additional paid-in capital ..................................................... 125,224 65,463
Deficit ........................................................................ (117,001) (121,312)
Less: Treasury stock, at cost -- 62,270 shares ................................ ( 1,480) (1,480)
---------- ---------
Total stockholders' equity/(deficiency) ..................................... 7,015 (57,060)
---------- ---------
$ 39,012 $ 34,138
========== =========
</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,
-------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ................................................... $191,546 $160,100 $170,575
Cost of goods sold .......................................... 142,175 125,422 147,994
---------- --------- ---------
Gross profit ................................................ 49,371 34,678 22,581
Selling, general and administrative expenses ................ 38,462 40,924 40,162
Restructuring expenses ...................................... -- 2,250 --
---------- -------- ---------
10,909 ( 8,496) (17,581)
Interest expense ............................................ (6,411) (8,030) (6,560)
Other income (expense), net ................................. 58 113 56
---------- -------- ---------
Income (loss) before provision for income taxes ............. 4,556 (16,413) (24,085)
Provision for income taxes .................................. 245 50 301
---------- -------- ---------
Net income (loss) ........................................... $ 4,311 $(16,463) $(24,386)
========== ========== =========
Basic and diluted earnings (loss) per share ................ $ .28 $ (2.46) $ (3.91)
========== ========= =========
Weighted average number of common shares
outstanding................................................ 15,296,000 6,687,000 6,239,000
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------- Additional ---------------------
Number of Paid-in Number of
Shares Amount Capital (Deficit) Shares Amount Total
------- ------ --------- ----------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 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)
Net income ................................ 4,311 4,311
Exchange of notes for
common stock ............................ 10,510,910 105 40,520 -- -- -- 40,625
Net proceeds from issuance
of common stock........................... 13,977,270 140 18,861 -- -- -- 19,001
Issuance of warrants....................... -- -- 138 -- -- -- 138
Reverse stock split........................ (24,209,977) (242) 242 -- (560,430) -- --
---------- ------ -------- ---------- -------- -------- -------
Balance at June 30, 1998................... 27,178,177 $ 272 $125,224 $(117,001) 62,270 $(1,480) $ 7,015
========== ====== ======== ========== ======== ======= ========
</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,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income (loss) ....................................................... $ 4,311 $ (16,463) $(24,386)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization.......................................... 630 865 974
Recovery of losses on acconts receivable .............................. (65) (20) (69)
Deferred interest on subordinated promissory notes .................... 1,751 2,786 2,522
Non-cash interest expense ............................................. 27 -- 520
Changes in operating assets and liabilities:
Accounts receivable ................................................. (9,773) 564 (280)
Inventories ......................................................... 6,260 (2,490) (5,053)
Prepaid expenses and other assets ................................... 432 372 655
Accounts payable .................................................... (6,820) 2,390 4,513
Accrued expenses .................................................... (901) (663) 507
Accrued restructuring expenses ...................................... (1,619) 1,654 (2,608)
--------- ---------- ---------
Net Cash Used In Operating Activities ..................................... (5,767) (11,005) (22,705)
--------- ---------- ---------
Investing Activities
Purchases of fixed assets ............................................... (348) (186) (480)
Purchases of other assets ............................................... (421) (418) --
--------- ---------- ---------
Net Cash Used In Investing Activities ..................................... (769) (604) (480)
--------- ---------- ---------
Financing Activities
Net repayments of short-term bank borrowings ............................ (25,256) 11,679 7,379
Net proceeds from issuance of stock ..................................... 19,001 -- 15,423
Principal payments on term loan ......................................... (500) -- --
Proceeds from issuance of term loan ..................................... 15,000 -- --
Net proceeds from exercise of options.................................... -- 13 212
--------- ---------- ---------
Net Cash Provided by Financing Activities.................................. 8,245 11,692 23,014
--------- ---------- ---------
Increase (Decrease) In Cash And Cash Equivalents........................... 1,709 83 (171)
Cash and Cash Equivalents, Beginning of Year............................... 330 247 418
--------- ---------- ---------
Cash and Cash Equivalents, End of Year .................................... $ 2,039 $ 330 $ 247
========= ========== =========
Cash paid for:
Taxes.................................................................... $ 8 $ 13 $ 14
Interest ................................................................ $ 4,670 $ 4,822 $ 3,809
Supplemental schedule of non-cash financing activities:
Bank debt assumed by principal stockholder and
converted to subordinated promissory notes .......................... $12,500 -- --
Exchange of subordinated promissory notes for common stock ............ $40,625 -- --
Issuance of warrants relating to new financing agreement .............. $ 138 -- 520
</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.
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 September 1997, the disinterested members of the Board of Directors
of the Company unanimously approved a restructuring program (the
"Restructuring") which was completed in January 1998 (see Notes 6 and 7).
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.
Reclassification:
Certain reclassifications were made to the fiscal 1997 and 1996
Consolidated Financial Statements to conform with the fiscal 1998 presentation.
Earnings (Loss) Per Share:
All share and per share data reflects the 1 for 10 reverse stock split
which was effected December 9, 1997. Basic earnings (loss) per share has been
computed by dividing the applicable net income by the weighted average number
of common shares outstanding. Diluted earnings (loss) per share has been
computed by dividing the applicable net income by the weighted average number
of common shares outstanding and common stock equivalents. At June 30, 1998,
1997 and 1996, 3,079,000, 7,673,000 and 7,652,000 common stock equivalents,
respectively, were not included in the computation of earnings (loss) per share
as they were antidilutive.
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 Earnings Per Share. The statement
establishes standards for computing and presenting earnings per share ("EPS")
and simplifies the standards for computing EPS currently found in Accounting
Principles Board ("APB") Opinion No. 15, Earnings Per Share.
F-7
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition:
Revenues are recorded at the time merchandise is shipped, and with
regard to the outlet stores, at the time when goods are sold to the customer.
Credit Terms:
The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. At June 30, 1998 and 1997, approximately 87% and 62%, respectively, of
the Company's accounts receivables were due from department store customers
owned by four single corporate entities. During fiscal 1998, approximately 82%
of the Company's net sales were made to department store customers owned by
four single corporate entities, as compared to 63% in fiscal 1997 and 60% in
fiscal 1996. Sales to Dillard's Department Stores accounted for 43% of net
sales in fiscal 1998, 33% of net sales in fiscal 1997 and 29% of net sales in
fiscal 1996. Sales to nine department store companies owned by The May
Department Stores Company accounted for approximately 29% of net sales in
fiscal 1998, 16% of the Company's net sales in fiscal 1997 and 10% of net sales
in fiscal 1996. Sales to eight department store companies owned by Federated
Department Stores accounted for approximately 7% of net sales in fiscal 1998,
8% of net sales in fiscal 1997 and 5% of net sales in fiscal 1996. Sales to two
department store customers owned by TJX Companies, Inc. accounted for
approximately 3% of net sales in fiscal 1998, 6% of net sales in fiscal 1997
and 16% of net sales in fiscal 1996.
The percentages of net sales are based upon stores owned by the four
corporate entities at the end of fiscal 1998. 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 the lesser of three years or the remaining term of the Nautica
License Agreement.
F-8
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the
United States dollar to be the functional currency of its overseas
subsidiaries. All foreign currency gains and losses are recorded in the
Consolidated Statement of Operations.
Income Taxes:
The Company records income taxes in accordance with Financial Accounting
Standards Board Statement SFAS No. 109, "Accounting for Income Taxes". Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to enter into the determination of taxable income
(loss).
Fair Value of Financial Instruments:
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, accruals and notes payable -- bank, it was assumed that
the carrying amounts approximated fair value due to their short maturity.
New Accounting Pronouncements:
The Company is required to adopt SFAS No. 130, Reporting Comprehensive
Income during the year ending June 30, 1999. SFAS 130 establishes standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Adoption of
this statement will require the Company to report changes in the excess of
additional pension liability over unrecognized prior service cost and foreign
currency translation adjustment accounts, currently shown in the stockholders'
equity section of the balance sheet, as an increase or decrease to reported net
income in arriving at comprehensive income. Currently, the Company has no items
of other comprehensive income.
The Company is required to adopt SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information during the year ending June
30, 1999. The Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement supersedes FASB
Statement No. 14 Financial Reporting for Segments of a Business Enterprise, but
retains the requirement to report information about major. The Company is
currently considering what effect adoption of this statement will have on the
Company.
The Company is required to adopt SFAS No. 132, Employers' Disclosure
About Pensions and Other Postretirement Benefits during the year ending June
30, 1999. This Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful. Restatement of disclosures for earlier
periods provided for comparative purposes is required. The Company has not yet
determined the impact the adoption of this statement will have on the Company's
financial statements.
F-9
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories consist of:
JUNE 30, JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS)
Finished goods ................ $12,278 $19,981
Work-in-process ............... 3,051 1,027
Raw materials ................. 2,157 2,738
-------- -------
$17,486 $23,746
======== =======
Inventories include merchandise in transit (principally finished goods) of
approximately $7.2 million at June 30, 1998 and $8.3 million at June 30, 1997.
4. FIXED ASSETS
Fixed assets at cost, net of accumulated depreciation and amortization, consist
of:
JUNE 30, JUNE 30,
1998 1997
------- --------
(IN THOUSANDS)
Furniture and equipment............................. $10,233 $10,233
Leasehold improvements.............................. 6,501 7,955
------- -------
16,734 $18,188
Less accumulated depreciation and amortization...... 15,774 16,893
------- -------
$ 960 $ 1,295
======= =======
5. INCOME TAXES
Significant components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $40,100 $42,500
Costs capitalized to inventory for tax purposes............ 1,000 1,300
Accrued interest, subordinated debt/warrants............... 4,900 4,000
Book over tax depreciation................................. 2,200 2,000
Sales allowances not currently deductible.................. 3,500 2,100
Reserves and other items not currently deductible.......... 1,500 1,700
------- -------
53,200 53,600
Valuation allowance for deferred tax assets.................. (53,200) (53,600)
------- -------
Net deferred tax asset....................................... $ 0 $ 0
======= =======
</TABLE>
There was a change in the valuation allowance for the year ended June 30, 1997
of $0.4 million.
F-10
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CNOSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1998 1997 1996
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
(Expense) benefit for federal
income taxes at the statutory rate of
35.0% in each of 1998, 1997 and 1996................... $ 1,542 ($5,694) ($8,430)
State and local income taxes
net of federal tax benefit............................. 95 50 301
Executive compensation in excess of
amount deductible for tax purposes..................... -- -- --
Other.................................................... 51 51 35
Effect of unrecognized federal tax loss
carryforwards.......................................... (1,443) 5,643 8,395
--------- ------ -----
Provision for income taxes............................... $ 245 $ 50 $ 301
========= ====== =====
</TABLE>
At June 30, 1998, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $96 million, which will
expire between 2006 and 2011.
6. FINANCING AGREEMENTS
The Company and BNY Financial Corporation, a wholly owned subsidiary of
The Bank of New York ("BNYF"), entered into a financing agreement in July 1991,
which was amended and restated effective as of February 21, 1995 and further
amended, effective as of September 28, 1995 (the "September 1995 Amendment"),
May 9, 1996 (the "May 1996 Amendment"), 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. 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.
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 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.
Josephine Chaus had arranged for the Letter of Credit in various amounts
since April 1994 in return for which BNYF had 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
F-11
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 per share. The issuance of the 1995 Warrants was
approved at the 1995 Annual Meeting of Stockholders. The issuance of the 1994
Warrants, the warrants for the February 1995 Increase/Extension and the
warrants for the $5.0 Million Guarantee were recorded in fiscal 1995 at a value
of $1.1 million, 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, 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") 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. Such increased amount was paid to Ms. Chaus
through January 29, 1998 (on a pro-rated basis).
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 (as defined below) 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 would be held as collateral to secure indebtedness under the New
Financing Agreement. On January 23, 1998, in connection with the Rights
Offering (as defined below), such collateral was released and used
F-12
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by Ms. Chaus to purchase shares of Common Stock issuable to her upon the
exercise of the Rights (as defined below), in satisfaction of her agreement to
exercise her full $10.0 million subscription (the "Purchase Commitment") in
connection with the Rights Offering. The Company used the proceeds from the
Purchase Commitment to retire $10 million of Bank Debt.
On October 10, 1997, in substitution for 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 and secured the secured bank debt owed to BNYF by the Company (the
"Bank Debt"). The cash collateral was provided from the proceeds of a loan made
by BNYF to Ms. Chaus. On January 29, 1998, pursuant to the terms of a cash
collateral deposit release letter, the $12.5 million in cash collateral was
released to BNYF and was used to retire $12.5 million of the Bank Debt. As a
result of such repayment, the Company became indebted to Ms. Chaus for $12.5
million, and Ms. Chaus became subrogated to the rights of BNYF with respect to
such loan amount (the "Subrogated Loan") until the Subrogated Loan and the
Subordinated Notes (as defined below) were converted into 10,510,910 shares of
the Company's Common Stock. Pursuant to the terms of a conversion agreement
dated as of January 29, 1998, the Subrogated Loan and the Subordinated Notes
were converted by Ms. Chaus into 10,510,910 shares of Common Stock of the
Company.
In connection with the Restructuring, Ms. Chaus relinquished, for no
value, all of her rights in and to the 1994 Warrants, the 1995 Warrants and the
1996 Warrants.
On October 10, 1997, the Company and BNYF entered into a new revolving
credit facility (the "New Revolving Facility") and a new term loan facility
(the "New Term Loan" and, together with the New Revolving Facility, the "New
Financing Agreement") which amended and restated in its entirety the Old Bank
Debt Agreement.
The New Financing Agreement consisted of two facilities: (i) the New
Revolving Facility, which was a $66.0 million five-year revolving credit line
with a $20 million sublimit for letters of credit, and (ii) the New Term Loan,
which was a $15.0 million term loan facility. On June 3, 1998 the Company and
BNYF amended the New Financing Agreement to provide for a $45.5 million
five-year revolving credit line with a $34.0 million sublimit for letters of
credit and a $14.5 million term loan facility. Each facility will mature on
December 31, 2002. The New Financing Agreement also amended certain financial
covenants contained in the Old Bank Debt Agreement. In January 1998 an
aggregate of $22.5 million held by BNYF as cash collateral was applied by BNYF
to retire $22.5 million of the revolving credit line in connection with the
Company's Restructuring (as defined below).
Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate (8.5% at June 30, 1998) 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. As part
of the New Financing Agreement, BNYF's existing warrants were extinguished, and
BNYF received new warrants (the "BNYF Warrants") to purchase an aggregate of
162,500 shares of the Company's Common Stock. The issuance of the BNYF Warrants
was recorded in the third quarter of fiscal 1998 at a value of $0.1 million and
was included as an increase in additional paid-in capital and will be charged
to interest expense over the term of the New Financing Agreement.
F-13
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization payments in the amount of $250,000 are payable quarterly in
arrears in connection with the New Term Loan. Two amortization payments have
been made as of June 30, 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. 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.
As an inducement to BNYF to enter into the New Financing Agreement, Ms.
Chaus had agreed with BNYF that she would 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"). The
Rights Offering was consummated on January 26, 1998, and therefore, the Bank
Debt Put expired in accordance with its terms. See Note 7.
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).
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 the
Restructuring which provided for the following: (i) the Company would raise,
through an offer of rights to subscribe ("Rights"), up to $20.0 million, but
not less than $12.5 million, of equity through a rights offering to all shares
of Common Stock of the Company (the "Rights Offering") of up to 13,977,270
shares of Common Stock of the Company (on a post stock split basis); (ii) the
conversion of approximately $40.6 million of the Company's indebtedness to Ms.
Chaus, consisting of $28.1 million of then existing subordinated indebtedness
(including accrued interest through January 28, 1998) and $12.5 million of
additional indebtedness owed to Ms. Chaus, into 10,510,910 shares of Common
Stock of the Company; (iii) the New Financing Agreement; (iv) the
implementation of a reverse stock split of the Company's Common Stock such that
every ten (10) shares of Common Stock would be converted into one (1) share of
Common Stock; and (v) the liquidation of the Company's retail outlet stores
during the second quarter of fiscal 1998. On October 10, 1997, the Company
entered into the New Financing Agreement referred to in (iii) above. On
December 9, 1997, the reverse stock split described in (iv) above became
effective. Prior to January 14, 1998, the Company closed all of its retail
outlet stores as referenced in (v) above. On January 26, 1998, the Rights
Offering described in (i) above was consummated. On January 29, 1998, the
conversion of indebtedness into equity described in (ii) above was completed.
8. SUBORDINATED PROMISSORY NOTES
The Company had outstanding at June 30, 1997, $26.4 million, including
accrued interest at 12% per annum, of subordinated promissory notes payable to
Josephine Chaus, certain of which were originally issued on June 30, 1986 and
the remainder of which were issued in February and March 1991 (the
"Subordinated Notes"). The Company had 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
F-14
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 converted 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 $105,000, $69,000 and $40,000 in fiscal 1996, 1997
and 1998, respectively. As of December 31, 1997, 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 1998, 1997 and 1996.
Savings Plan:
The Company has a savings plan (the "Savings Plan") under which eligible
employees may contribute a percentage of their compensation and the Company
(subject to certain limitations) will match 50% of the employee's contribution.
Company contributions will be invested half in the Common Stock of the Company
and half in investment funds selected by the participant and are subject to
vesting provisions of the Savings Plan. Expense under the Savings Plan was
approximately $0.2 in each of fiscal 1998, 1997 and 1996. An aggregate of
10,000 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,
25,000 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% of such shares on each anniversary of their date of
allocation. As of June 30, 1998, no restricted shares have been granted under
this plan.
F-15
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plan:
On February 23,1998, the Company cancelled all options granted under the
Company's 1986 stock option plan and reissued the holders of such options with
an equivalent number of options (at fair market value) under the Company's 1998
Stock Option Plan (the "Option Plan"). Pursuant to the Option Plan, the Company
may grant to eligible individuals incentive stock options, as defined in the
Internal Revenue Code, and non-incentive stock options. Under the Option Plan,
2,712,000 shares of Common Stock were reserved for issuance. No stock options
may be granted subsequent to 2007 and the exercise price may not be less than
100% of the fair market value on the date of grant for incentive stock options
and 85% of the fair market value on the date of grant for non-incentive stock
options.
Grossman Option Plan:
At the annual meeting of stockholders in November 1994, the stockholders
approved the issuance of options for the Company's new Chief Executive Officer
(the "Grossman Option Plan") to purchase 300,000 shares of Common Stock (the
"1994 Options"). Of this amount, 150,000 options were granted, at fair market
value, in September 1994, and the balance were granted in September 1995, at
fair market value, in connection with the extension of the term of his
employment agreement. In connection with the Restructuring, the 1994 Options
were exchanged in February 1998, at fair market value, for new options to
purchase 300,000 shares of Common Stock (which become exercisable in annual 20%
increments commencing one year from the original grant date). Additionally, as
part of Mr. Grossman's amended employment agreement, 1,375,157 additional
options were granted in February 1998, 50% of which became exercisable on the
grant date, and the remaining amounts are exercisable over two years in annual
25% increments. See Note 10. All options granted under the Grossman Option Plan
are included in the table below.
Total Options Reserved for Issuance
At June 30, 1998, a total of approximately 4,397,157 shares of Common
Stock were reserved for issuance under the Stock Option Plan, the Savings Plan
and the Grossman Option Plan.
NON-INCENTIVE
STOCK OPTIONS
-----------------------------------
NUMBER EXERCISE
OF SHARES PRICE RANGE
----------- --------------
Outstanding at July 1, 1995 286,686 $18.75--$48.75
Options granted 206,400 $36.25--$58.75
Options canceled (68,720) $18.75--$58.75
Options exercised (7,064) $18.75--$48.80
-----------
Outstanding at June 30, 1996 417,302 $18.75--$56.25
Options granted 9,500 $23.75--$31.25
Options canceled (6,701) $20.00--$48.80
Options exercised (625) $20.00--$20.00
-----------
Outstanding at June 30, 1997 419,476 $18.75--$56.25
Options granted 2,916,407 $3.110--$3.110
Options canceled (419,476) $18.75--$56.25
-----------
Outstanding at June 30, 1998 $2,916,407 $3.110--$3.110
============ ==============
The stock options are exercisable over four years in annual 25%
increments. As of June 30, 1998 options to purchase approximately 864,000
shares were exercisable.
F-16
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
1998, 1997 and 1996 was $2.74, $1.93 and $3.29, respectively. The fair value of
each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for the
grants in fiscal 1998: risk-free interest rate of 5.49%; expected dividend
yield of 0%; expected life of 3.34 years; and expected volatility of 237.06%.
The outstanding stock options at June 30, 1998 have a weighted average
contractual life of 9.3 years. The number of stock options exercisable at June
30, 1998 was 863,550. These options have a weighted average exercise price of
$3.11 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 1998, 1997 and 1996 would have been $997, $19,658 and $26,469,
respectively. The Company's pro forma net loss per share for 1998, 1997 and
1996 would have been $0.07, $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. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities, and
equipment under various noncancellable operating lease agreements which expire
through 2006. Rental expense for the years ended June 30, 1998, 1997 and 1996
was approximately $3.2 million, $4.7 million and $5.8 million, respectively.
The minimum aggregate rental commitments at June 30, 1998 are as follows
(in thousands):
Fiscal year ending:
1999 .............................. $2,194
2000 .............................. 1,312
2001 .............................. 74
Subsequent to 2001 .................... --
------
$3,580
======
Letters of Credit:
The Company is contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $17.8 million at June 30, 1998.
Litigation:
Without admitting any liability, the Company settled, in July 1998, an
action brought by the Equal Employment Opportunity Commission on behalf of
three former patternmakers, each of whom was terminated by the Company in late
1995. The amount of the settlement was not material and was provided for in
fiscal 1997.
F-17
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is also involved in various other legal proceedings arising
out of the conduct of its business. The Company believes that the eventual
outcome of the proceedings referred to above will not have a material adverse
effect on the Company's financial condition or results of operations.
Employment Agreement:
The Company has entered into a number of employment agreements with
various senior executives. In addition to his $1 million salary, Mr. Grossman
is entitled to a bonus equal to 5% of the Company's annual net profits, as
defined, for the 1998 fiscal year and 2.5% of the Company's annual net profits,
as defined, for the duration of his agreement, which expires in 2000, subject
to a four year extension at the Company's option. Mr. Grossman has also been
granted stock options to acquire an aggregate of 5% of the outstanding shares
of common stock of the Company (approximately 1.38 million shares), and if the
agreement is extended by the Company, Mr. Grossman will be entitled to stock
options for an additional 3% of the outstanding shares of Common Stock of the
Company.
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 15,000 shares of the
Company's Common Stock at a purchase price of $50.00 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, giving effect to the
Company's one-for-ten reverse stock split during 1998).
11. 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-18
<PAGE>
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------- ------- -------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended June 30, 1998
Allowance for doubtful accounts ............................. $ 341 $ (65) $ (92)(1) $ 368
======= ========= ======== =======
Reserve for customer allowances and deductions .............. $ 1,751 $ 8,054 $ 6,971 (2) $ 2,834
------- --------- -------- -------
Accrued restructuring expenses .............................. $ 1,850 $ 0 $ 1,850 (3) $ 0
------- --------- -------- -------
Year ended June 30, 1997
Allowance for doubtful accounts ............................. $ 378 $ (20) $ 17 (1) $ 341
------- --------- -------- -------
Reserve for customer allowances and deductions .............. $ 2,576 $ 3,723 $ 4,548 (2) $ 1,751
------- --------- -------- -------
Accrued restructuring expenses .............................. $ 196 $ 1,850 $ 196 (3) $ 1,850
------- --------- -------- -------
Year ended June 30, 1996
Allowance for doubtful accounts ............................. $ 619 $ (70) $ 171 (1) $ 378
------- --------- -------- -------
Reserve for customer allowances and deductions .............. $ 1,500 $ 6,786 $ 5,710 (2) $ 2,576
------- --------- -------- -------
Accrued restructuring expenses .............................. $ 2,804 $ 0 $ 2,608 (3) $ 196
------- --------- -------- -------
</TABLE>
- --------------
(1) Uncollectible accounts written off.
(2) Allowances charged to reserve and granted to customers.
(3) Expenses charged to reserve.
S-1
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
BERNARD CHAUS, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
The undersigned, Chairwoman of the Board and Assistant Secretary of
Bernard Chaus, Inc, a corporation organized and existing under the laws of the
State of New York (the "Corporation"), do hereby certify as follows:
FIRST: The name of the Corporation is Bernard Chaus, Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed by
the Department of State on the 16th day of April, 1975.
THIRD: The amendment of the Certificate of Incorporation of the Corporation
effected by this Certificate of Amendment is as follows: Effect a reverse stock
split of shares of common stock of the Corporation, par value $.01 per share
("Common Stock"), on the basis of issuing one (1) share of Common Stock for
each ten (10) issued shares of Common Stock. Reduce the number of outstanding
shares of Common Stock from 26,277,274, par value $.01 per share, to
approximately 2,627,727 shares of Common Stock, par value $.01 per share. In
lieu of the issuance of any fractional shares that would otherwise result from
the reverse stock split effected hereby, issue to any stockholder that would
otherwise receive fractional shares of Common Stock one (1) additional share of
Common Stock.
FOURTH: To accomplish the foregoing amendment, Article FOURTH of the
Certificate of Incorporation is hereby amended to read as follows:
<PAGE>
FOURTH. A. Authorized Shares. The total number of shares of all
classes of stock which the Corporation shall have authority to issues
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").
FIFTH: The foregoing amendment of the Certificate of Incorporation of the
Corporation was authorized by the vote at a meeting of the Board of Directors
of the Corporation, followed by the vote of the holders of at least a majority
of all of the outstanding shares of the Corporation entitled to vote on the
said amendment of the Certificate of Incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set forth
below and do hereby affirm, under penalties of perjury, that the statements
contained therein have been examined by us and are true and correct.
Date: December 8, 1997
/s/ Josephine Chaus
------------------------------
Josephine Chaus
Chairwoman of the Board
/s/ Barton Heminover
------------------------------
Barton Heminover
Assistant Secretary
2
<PAGE>
BERNARD CHAUS, INC.
1410 Broadway
New York, New York 10018
As of January 1, 1998
Andrew Grossman
125 Pecksland Road
Greenwich, CT 06830
Dear Andrew:
Reference is made to the Employment Agreement, made as of September 1,
1994, by and between Bernard Chaus, Inc. and you for a term beginning on
September 1, 1994 (the "Agreement"). This letter amendment (the "Letter
Amendment") when signed by both parties constitutes an amendment to the
Agreement. Except as the context may otherwise require, any reference herein or
in the Agreement to the "Agreement" shall mean the Agreement as amended by the
Letter Agreement. Capitalized terms used and not separately defined herein
shall have the meanings ascribed to such terms in the Agreement.
1. Employment. Section 1 of the Agreement shall be amended to add the
following phrase in the sixth line after the words "Josephine Chaus":
an active, full time executive chairwoman,
2. Term. The Company's previous election to extend the Term for an
additional five (5) years, is replaced by this Amendment. Section 2 of the
Agreement is hereby amended to provide that the Initial Term shall end on
September 1, 2000.
3. Extension. Section 2(b) of the Agreement shall be amended to read
in its entirety as follows:
Provided that the Company shall have complied with its obligations to
issue certain stock options pursuant to the third sentence of Section 8 of the
Agreement, the Company may at any time during the Initial Term elect to extend
the Term for an additional four years
<PAGE>
Andrew Grossman
As of January 1, 1998
Page 2
ending on September 1, 2004 (as so extended, the "Extended Term") by providing
the Executive with notice not later than March 1, 2000 of its intention to
extend the Term.
4. Board Member. Section 3(b) of the Agreement shall be amended by
deleting the last sentence thereof.
5. Compensation. Clause (ii) of the first sentence of Section 5(a) of
the Agreement shall be amended to read in its entirety as follows:
(ii) (A) five percent (5.0%) of the Annual Net Profits (as hereinafter
defined) of the Company for the fiscal year ended June 30, 1998 and (B) two and
one-half percent (2.5%) of the Annual Net Profits of the Company for each
fiscal year thereafter during the Term ("Net Profit Participation").
6. Stock Options. Section 8 of the Agreement shall be amended to read
in its entirety as follows:
The Company agrees to cause the issuance under the Company's 1998
Stock Option Plan, heretofore authorized by the Compensation Committee of the
Board of Directors, effective February 23, 1998, to the Executive of stock
options ("Stock Options") embodying the terms set forth below and otherwise
containing terms and conditions set forth in the form of the Stock Option
Agreement attached to the Letter Amendment as Attachment A, to purchase
1,375,137 shares of Common Stock (representing five percent (5%) of the
outstanding shares of Common Stock on a fully diluted basis calculated in
accordance with the "so called" "treasury method" under U.S. generally accepted
accounting principles ("GAAP")), with an exercise price equal to $3.11 per
share (which is the average of the closing sale prices of the Common Stock on
the New York Stock Exchange over the thirty (30) days commencing on January 24,
1998 and ending February 22, 1998). The Executive agrees that in consideration
for such replacement options, he is surrendering effective immediately, all
Stock Options received by him pursuant to the Agreement (i.e., stock options
for an aggregate of 3,000,000 shares as the same may have been adjusted under
applicable provisions of the stock option agreement(s) evidencing the same). In
addition, the Company agrees to cause the Stock Option Committee to award on
the date the Company elects to extend the term of this Agreement pursuant to
Section 2(b) above (the "Extension Date"), if any, Stock Options to purchase
additional shares of Common Stock equal to three percent (3%) of the then
outstanding shares of Common Stock on a fully diluted basis calculated in
accordance with the so called "treasury method" under GAAP (the "Extension
Stock Options"), with an exercise price equal to the closing sales price per
share of the
<PAGE>
Andrew Grossman
As of January 1, 1998
Page 3
Company's Common Stock on the Extension Date, which Stock Options shall be
granted in a manner that complies with Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Act"), to the extent the benefits of Rule 16b-3
are available with respect to such awards; provided, that if such benefits are
not available, the Company shall use its best efforts to make the grant in a
manner such that the Executive does not incur any liability under Section 16(b)
of the Act. The Extension Stock Options shall vest and be exercisable at the
rate of 331/3% a year on a cumulative basis commencing on the first anniversary
of the date of grant and will otherwise be issued on the same terms and
conditions as those Stock Options granted pursuant to the first sentence of
this Section 8. The award of the Extension Stock Options to the Executive shall
be subject to receipt of approval by the Company's shareholders. The Company
agrees to reserve sufficient authorized but unissued shares of Common Stock to
be available at all times to satisfy any obligation of the Company to issue
shares of Common Stock to the Executive upon exercise of any stock options.
7. Termination. Section 9(e) of the Agreement shall be amended by
inserting after the words "Annual Salary", in clause (i) of the first sentence
thereof, the following: "(in monthly installments)".
8. Notice. Section 13 of the Agreement shall be amended by replacing
Mr. Andrew Grossman's address for notices and copies with the following:
Mr. Andrew Grossman
125 Pecksland Road
Greenwich, Connecticut 06830
with a copy to:
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
Attention: Kenneth Lefkowitz, Esq.
9. Non-competition. Section 14(c) of the Agreement shall be amended by
adding, immediately prior to the final sentence thereof, the following:
<PAGE>
Andrew Grossman
As of January 1, 1998
Page 4
Notwithstanding anything else contained herein, if the Company does
not elect to extend the Term pursuant to Section 2(b), the Non-Competition
Period shall terminate on the last day of the Initial Term.
10. Non-solicitation. Section 14(d) of the Agreement shall be amended
by inserting after the words "Non-Competition Period" in the second line
thereof the following: "(but in no event less than one year from March 1, 2000
in the event the Company does not provide a notice of its intention to extend
the Term pursuant to Section 2(b))".
11. Shareholder Approval. Section 16(c) of the Agreement shall be
amended to read in its entirety as follows:
The Company agrees to seek shareholder approval at its next regularly
scheduled-meeting of shareholders of the re-election of the Executive to the
Board. The Company agrees to seek shareholder approval of the Extension Stock
Options at the next regularly scheduled meeting of shareholders following the
exercise by the Company, if any, of its right to extend the Term pursuant to
Section 2(b).
12. Entire Agreement. Section 17(d) of the Agreement shall be amended
to read in its entirety as follows:
This Agreement and the Stock Option Agreement attached to the Letter
Amendment as Attachment A sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto and any prior agreement of the parties
hereto in respect of the subject matter contained herein, including, without
limitation, the Stock Option Agreement originally attached to the Agreement as
Attachment A.
13. Attorney's Fees. Section 17 of the Agreement shall be amended by
adding a new Section 17(e) which shall read in its entirety as follows:
The Company shall pay or reimburse the Executive for up to $7,500 of
the documented fees and expenses of his counsel in negotiating the Letter
Amendment.
<PAGE>
Andrew Grossman
As of January 1, 1998
Page 5
14. Agreement Otherwise Remains in Full Force and Effect. Except as
specifically amended by this Letter Agreement, all other terms of the
Agreement, including without limitation, your Annual Salary as currently in
effect, remain unmodified and in full force and effect.
Very truly yours,
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
------------------------------
Josephine Chaus
Chairwoman of the Board
The foregoing Letter Amendment
to the Employment Agreement,
made as of September 1, 1994,
between Bernard Chaus, Inc.
and Andrew Grossman is
accepted and agreed to by:
/s/ Andrew Grossman
- -------------------
Andrew Grossman
Date: March 13, 1998
<PAGE>
BERNARD CHAUS, INC.
1410 Broadway
New York, New York 10018
July 22, 1998
Stuart Levy
12 Brittany Road
Montville, New Jersey 07045
Dear Stuart:
We are pleased to offer you employment with Bernard Chaus,
Inc. (the "Company") commencing during August 1998, on the terms set forth
below:
POSITION: Chief Financial Officer.
SALARY: $300,000 per year in accordance with the Company's
regular payroll practices.
BONUS: In the sole discretion of the Board of Directors.
AUTOMOBILE
ALLOWANCE: $1,800 per month.
BENEFITS: Health insurance and other benefit plans available
to officers of the Company generally.
OPTIONS: Options for 40,000 shares of the Company's stock at
an exercise price equal to the closing sales price
on the New York Stock Exchange on the date of grant,
which grant date shall be your employment
commencement date; options to vest in equal annual
increments of 25% a year over four years. In the
event of termination for any reason, other than a
change in control, unvested options shall be
forfeited and you shall have 30 days from the
termination date to exercise vested options. All
options shall vest immediately upon a change in
control. Your options shall otherwise be subject to
the terms of the Company's Stock Option Plan.
<PAGE>
Stuart Levy
July 22, 1998
Page 2
TERMINATION
BENEFITS: In the event of termination without cause, including
a termination resulting from a change in control,
you shall be paid one year's base salary in twelve
monthly installments; provided, that such payments
shall terminate immediately upon your acceptance of
a position as an employee or consultant with another
entity and you agree to provide immediate notice to
the Company of your acceptance of any such position.
CAUSE: Conviction or guilty plea to a felony; material
neglect of duties; continued failure to carry out
responsibilities assigned by management or the Board
of Directors; commission of fraud, theft against or
embezzlement from the Company.
CHANGE IN CONTROL: The Company shall be merged or consolidated with an
unaffiliated entity resulting in a change in a
majority of the Board of Directors or the Company
shall have sold substantially all of its assets to
an unaffiliated entity; the acquisition by any
person or group of beneficial ownership (as such
terms are defined under Regulation 13D of the rules
and regulations adopted under the Securities
Exchange Act of 1934, as amended) of more than 30%
of the Company's then outstanding common stock
resulting in a change in a majority of the Board of
Directors.
Please indicate your acceptance of the terms of this offer
letter by your signature below. We look forward to your joining the Company.
Sincerely,
/s/ Josephine Chaus
--------------------------
Josephine Chaus
Accepted and agreed to:
/s/ Stuart S. Levy 7/24/98
- -----------------------
By: Stuart Levy
<PAGE>
BERNARD CHAUS, INC.
1998 STOCK OPTION PLAN
1. PURPOSE.
The purpose of this Plan is to strengthen Bernard Chaus, Inc. (the
"Company") by providing an incentive to its employees, officers, consultants
and directors and thereby encouraging them to devote their abilities and
industry to the success of the Company's business enterprise. It is intended
that this purpose be achieved by extending to employees, officers, consultants
and directors of the Company and its Subsidiaries an added long-term incentive
for high levels of performance and unusual efforts through the grant of
Incentive Stock Options and Nonqualified Stock Options (as each term is herein
defined).
2. DEFINITIONS.
For purposes of the Plan:
2.1 "Affiliate" means any entity, directly or indirectly, controlled
by, controlling or under common control with the Company or any corporation or
other entity acquiring, directly or indirectly, all or substantially all the
assets and business of the Company, whether by operation of law or otherwise.
2.2 "Agreement" means the written agreement between the Company and an
Optionee evidencing the grant of an Option and setting forth the terms and
conditions thereof.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company or another corporation, by reason of
a reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, change in corporate
structure or otherwise.
2.5 A "Change in Control" shall mean the occurrence during the term of
the Plan of:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately
after which such Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) or
more of the then outstanding Shares or the combined voting power of the
Company's then outstanding Voting Securities; provided, however, in determining
whether a Change in Control has occurred, Shares or Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a
trust forming a part thereof) maintained by (A) the Company or (B) any
corporation or other Person of which a
1
<PAGE>
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (for purposes of this
definition, a "Subsidiary"), (ii) the Company or its Subsidiaries, (iii) any
Person in connection with a "Non-Control Transaction" (as hereinafter defined),
or (iv) a trust or private foundation or other estate planning vehicle
established by a shareholder of the Company, of voting securities of the
Company from such shareholder and/or the acquisition by the heirs, executors or
administrators of a shareholder of the Company of voting securities of the
Company from such shareholder;
(b) The individuals who, as of the close of business on the Rights
Offering Effective Date are members of the Board (the "Incumbent Board"), cease
for any reason to constitute at least two-thirds of the members of the Board;
provided, however, that if the election, or nomination for election by the
Company's common stockholders, of any new director was approved by a vote of at
least two-thirds of the Incumbent Board, such new director shall, for purposes
of this Plan, be considered as a member of the Incumbent Board; provided
further, however, that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(i) A merger, consolidation or reorganization with or into the
Company or in which securities of the Company are issued, unless
such merger, consolidation or reorganization is a "Non-Control
Transaction." A "Non-Control Transaction" shall mean a merger,
consolidation or reorganization with or into the Company or in
which securities of the Company are issued where:
(A) the stockholders of the Company, immediately before
such merger, consolidation or reorganization, own directly or
indirectly immediately following such merger, consolidation or
reorganization, at least fifty percent (50%) of the combined
voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially
the same proportion as their ownership of the Voting
Securities immediately before such merger, consolidation or
reorganization,
(B) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, or a corporation
beneficially directly or indirectly owning a majority of the
Voting Securities of the Surviving Corporation, and
(C) no Person other than (i) the Company, (ii) any
Subsidiary, (iii) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to such
merger, consolidation or reorganization, was maintained by the
Company or any Subsidiary, or (iv) any Person who, immediately
prior to such merger, consolidation or reorganization had
Beneficial Ownership of more than fifty percent
2
<PAGE>
(50%) or more of the then outstanding Voting Securities or
Shares, has Beneficial Ownership of more than fifty percent
(50%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities or its common
stock.
(ii) A complete liquidation or dissolution of the Company; or
(iii) The sale or other disposition of all or substantially
all of the assets of the Company to any Person (other than a
transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then outstanding
Shares or Voting Securities as a result of the acquisition of Shares or Voting
Securities by the Company which, by reducing the number of Shares or Voting
Securities then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Persons, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Shares or Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of
any additional Shares or Voting Securities which increases the percentage of
the then outstanding Shares or Voting Securities Beneficially Owned by the
Subject Person, then a Change in Control shall occur.
2.6 "Code" means the Internal Revenue Code of 1986, as amended.
2.7 "Committee" means a committee, as described in Section 3.1,
appointed by the Board from time to time to administer the Plan and to perform
the functions set forth herein.
2.8 "Company" means Bernard Chaus, Inc.
2.9 "Disability" means:
(a) in the case of an Optionee whose employment with the Company
or a Subsidiary is subject to the terms of an employment agreement between such
Optionee and the Company or Subsidiary, which employment agreement includes a
definition of "Disability", the term "Disability" as used in this Plan or any
Agreement shall have the meaning set forth in such employment agreement during
the period that such employment agreement remains in effect; and
(b) in all other cases, the term "Disability" as used in this Plan
or any Agreement shall mean a physical or mental infirmity which impairs the
Optionee's ability to perform substantially his or her duties for a period of
one hundred eighty (180) consecutive days.
2.10 "Division" means any of the operating units or divisions of the
Company designated as a Division by the Committee.
2.11 "Eligible Individual" means any officer or employee of the
Company or a Subsidiary, or any director, consultant or advisor who is
receiving cash compensation from the Company or a Subsidiary, designated by the
Committee as eligible to receive Options subject to the conditions set forth
herein;
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provided, however, that only employees of the Company or any Subsidiary may
receive Incentive Stock Options under this Plan.
2.12 "Employee Option" means an Option granted pursuant to Section 5.
2.13 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.14 "Fair Market Value" on any date means the closing sales prices of
the Shares on such date on the principal national securities exchange on which
such Shares are listed or admitted to trading, or, if such Shares are not so
listed or admitted to trading, the average of the per Share closing bid price
and per Share closing asked price on such date as quoted on the National
Association of Securities Dealers Automated Quotation System or such other
market in which such prices are regularly quoted, or, if there have been no
published bid or asked quotations with respect to Shares on such date, the Fair
Market Value shall be the value established by the Board in good faith and, in
the case of an Incentive Stock Option, in accordance with Section 422 of the
Code.
2.15 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.16 "Nonemployee Director" means a director of the Company who is a
"nonemployee director" within the meaning of Rule 16b-3 promulgated under the
Exchange Act.
2.17 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.18 "Option" means a Nonqualified Stock Option, an Incentive Stock
Option, or any or all of them.
2.19 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.20 "Outside Director" means a director of the Company who is an
"outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.21 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the Company.
2.22 "Plan" means the Bernard Chaus, Inc. 1998 Stock Incentive Plan,
as amended and restated from time to time.
2.23 "Pooling Transaction" means an acquisition of the Company in a
transaction which is intended to be treated as a "pooling of interests" under
generally accepted accounting principles.
2.24 "Shares" means the common stock, par value $.01 per share, of the
Company.
2.25 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
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2.26 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of
the Code applies.
2.27 "Ten-Percent Stockholder" means an Eligible Individual, who, at
the time an Incentive Stock Option is to be granted to him or her, owns (within
the meaning of Section 422(b)(6) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, or of a Parent or a Subsidiary.
3. ADMINISTRATION.
3.1 The Plan shall be administered by the Committee, which shall hold
meetings at such times as may be necessary for the proper administration of the
Plan. The Committee shall keep minutes of its meetings. A quorum shall consist
of not fewer than two members of the Committee and a majority of a quorum may
authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members of the Committee shall be as fully
effective as if made by a majority vote at a meeting duly called and held. The
Committee shall consist of at least two (2) directors of the Company; provided,
however, that (A) each member shall be a Nonemployee Director and (B) to the
extent necessary for any Option intended to qualify as performance-based
compensation under Section 162(m) of the Code to so qualify, each member of the
Committee shall be an Outside Director. No member of the Committee shall be
liable for any action, failure to act, determination or interpretation made in
good faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence or
reckless disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Committee for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiating for the settlement of or
otherwise dealing with any claim, cause of action or dispute of any kind
arising in connection with any actions in administering this Plan or in
authorizing or denying authorization to any transaction hereunder.
3.2 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Employee Options
shall be granted under the Plan and the number of such Employee Options to be
granted and to prescribe the terms and conditions (which need not be identical)
of each such Employee Option, including the purchase price per Share subject to
each Employee Option, and make any amendment or modification to any Agreement
consistent with the terms of the Plan;
(b) to construe and interpret the Plan and the Options granted
hereunder and to establish, amend and revoke rules and regulations for the
administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable so that the Plan complies with applicable law including Rule 16b-3
under the Exchange Act and the Code to the extent applicable, and otherwise to
make the Plan fully effective. All decisions and determinations by the
Committee in the exercise of this power shall be final, binding and conclusive
upon the Company, the Subsidiaries, the Optionees, and all other persons having
any interest therein;
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(c) to determine the duration and purposes for leaves of absence
which may be granted to an Optionee on an individual basis without constituting
a termination of employment or service for purposes of the Plan;
(d) to exercise its discretion with respect to the powers and
rights granted to it as set forth in the Plan; and
(e) generally, to exercise such powers and to perform such acts as
are deemed necessary or advisable to promote the best interests of the Company
with respect to the Plan.
4. STOCK SUBJECT TO THE PLAN.
4.1 The maximum number of Shares that may be made the subject of
Options granted under the Plan shall be ten percent (10%) of the issued and
outstanding Shares at the close of business on the Rights Offering Effective
Date (which shall be between 2,187,443 and 2,711,591 Shares); provided,
however, that the maximum number of Shares that an Eligible Individual may be
granted in respect of Options may not exceed 2,200,000 Shares. Upon a Change in
Capitalization, the maximum number of Shares referred to in the first sentence
of this Section 4.1 shall be adjusted in number and kind pursuant to Section
12. The Company shall reserve for the purposes of the Plan, out of its
authorized but unissued Shares or out of Shares held in the Company's treasury,
or partly out of each, such number of Shares as shall be determined by the
Board.
4.2 Upon the granting of an Option, the number of Shares available
under Section 4.1 for the granting of further Options shall be reduced as
follows: In connection with the granting of an Option, the number of Shares
shall be reduced by the number of Shares in respect of which the Option is
granted or denominated.
4.3 Whenever any outstanding Option or portion thereof expires, is
canceled or is otherwise terminated for any reason without having been
exercised or payment having been made in respect of the entire Option, the
Shares allocable to the expired, canceled or otherwise terminated portion of
the Option may again be the subject of Options granted hereunder.
5. OPTION GRANTS FOR ELIGIBLE INDIVIDUALS.
5.1 AUTHORITY OF COMMITTEE. Subject to the provisions of the Plan, the
Committee shall have full and final authority to select those Eligible
Individuals who will receive Employee Options, and the terms and conditions of
the grant to such Eligible Individuals shall be set forth in an Agreement.
5.2 PURCHASE PRICE. The purchase price or the manner in which the
purchase price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement; provided,
however, that the purchase price per Share under each Incentive Stock Option
shall not be less than 100% of the Fair Market Value of a Share on the date the
Employee Option is granted (110% in the case of an Incentive Stock Option
granted to a Ten-Percent Stockholder). Subject to Section 5.5, the Committee
shall have the authority to change the purchase price for Shares under an
Employee Option subsequent to its grant.
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5.3 MAXIMUM DURATION. Employee Options granted hereunder shall be for
such term as the Committee shall determine, provided that an Incentive Stock
Option shall not be exercisable after the expiration of ten (10) years from the
date it is granted (five (5) years in the case of an Incentive Stock Option
granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option shall not
be exercisable after the expiration of ten (10) years from the date it is
granted. The Committee may, subsequent to the granting of any Employee Option,
extend the term thereof, but in no event shall the term as so extended exceed
the maximum term provided for in the preceding sentence.
5.4 VESTING. Subject to Section 6.4, each Employee Option shall become
exercisable in such installments (which need not be equal) and at such times as
may be designated by the Committee and set forth in the Agreement. To the
extent not exercised, installments shall accumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, but not later than
the date the Employee Option expires. The Committee may accelerate the
exercisability of any Employee Option or portion thereof at any time.
5.5 MODIFICATION. No modification of an Employee Option shall
adversely alter or impair any rights or obligations under the Employee Option
without the Optionee's consent.
6. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS.
6.1 NON-TRANSFERABILITY. Unless set forth in the Agreement evidencing
the Option (other than an Incentive Stock Option) at the time of grant or at
any time thereafter, an Option granted hereunder shall not be transferable by
the Optionee to whom granted except by will or the laws of descent and
distribution or pursuant to a domestic relations order (within the meaning of
Rule 16a-12 promulgated under the Exchange Act), and an Option may be exercised
during the lifetime of such Optionee only by the Optionee or his or her
guardian or legal representative. The terms of such Option shall be final,
binding and conclusive upon the beneficiaries, executors, administrators, heirs
and successors of the Optionee.
6.2 METHOD OF EXERCISE. The exercise of an Option shall be made only
by a written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the number of
Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid, as determined by the Committee in its discretion, in either of
the following forms (or any combination thereof): (i) cash and/or (ii) the
transfer of Shares to the Company upon such terms and conditions as determined
by the Committee. In addition, Employee Options may be exercised through a
registered broker-dealer pursuant to such cashless exercise procedures which
are, from time to time, deemed acceptable by the Committee, and the Committee
may authorize that the purchase price payable upon exercise of an Employee
Option may be paid by having Shares withheld that otherwise would be acquired
upon such exercise. Any Shares transferred to the Company (or withheld upon
exercise) as payment of the purchase price under an Option shall be valued at
their Fair Market Value on the day preceding the date of exercise of such
Option. The Optionee shall deliver the Agreement evidencing the Option to the
Secretary of the Company who shall endorse thereon a notation of such exercise
and return such Agreement to the Optionee. No fractional Shares (or cash in
lieu thereof) shall be issued upon exercise of an Option and the number of
Shares that may be purchased upon exercise shall be rounded to the nearest
number of whole Shares.
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6.3 RIGHTS OF OPTIONEES. No Optionee shall be deemed for any purpose
to be the owner of any Shares subject to any Option unless and until (i) the
Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
6.4 EFFECT OF CHANGE IN CONTROL. In the event of a Change in Control,
all Options outstanding on the date of such Change in Control shall become
immediately and fully exercisable. In the event an Optionee's employment with
the Company terminates following a Change in Control, each Option held by the
Optionee that was exercisable as of the date of termination of the Optionee's
employment shall remain exercisable for a period ending not before the earlier
of (A) the first anniversary of the termination of the Optionee's employment or
(B) the expiration of the stated term of the Option; but in no event shall the
exercise period exceed the maximum term provided in Section 5.3.
7. EFFECT OF A TERMINATION OF EMPLOYMENT.
The Agreement evidencing the grant of each Option shall set forth the
terms and conditions applicable to such Option upon a termination or change in
the status of the employment of the Optionee by the Company, a Subsidiary or a
Division (including a termination or change by reason of the sale of a
Subsidiary or a Division), which shall be as the Committee may, in its
discretion, determine at the time the Option is granted or thereafter.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) In the event of a Change in Capitalization, the Committee
shall conclusively determine the appropriate adjustments, if any, to (i) the
maximum number and class of Shares or other stock or securities with respect to
which Options may be granted under the Plan, (ii) the maximum number and class
of Shares or other stock or securities with respect to which Options may be
granted to any Eligible Individual during any fiscal year during the term of
the Plan, and (iii) subject to the provisions of Section 162(m) of the Code,
the number and class of Shares or other stock or securities which are subject
to outstanding Options granted under the Plan and the purchase price therefor,
if applicable.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to, new, additional or
different shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions, and restrictions
which were applicable to the Shares subject to the Option, as the case may be,
prior to such Change in Capitalization.
9. EFFECT OF CERTAIN TRANSACTIONS.
Subject to Section 8.4 or as otherwise provided in an Agreement or
otherwise by the Committee, in the event of (i) the liquidation or dissolution
of the Company or (ii) a merger or consolidation of the
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Company (a "Transaction"), the Plan and the Options issued hereunder shall
continue in effect in accordance with their respective terms, except that
following a Transaction each Optionee shall be entitled to receive in respect
of each Share subject to any outstanding Options, as the case may be, upon
exercise of any Option, the same number and kind of stock, securities, cash,
property or other consideration that each holder of a Share was entitled to
receive in the Transaction in respect of a Share; provided, however, that such
stock, securities, cash, property, or other consideration shall remain subject
to all of the conditions, restrictions and performance criteria which were
applicable to the Options prior to such Transaction.
10. INTERPRETATION.
The Plan is intended to comply with Rule 16b-3 promulgated under
the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not
affect the validity of the Plan.
(a) Unless otherwise expressly stated in the relevant Agreement,
each Employee Option granted under the Plan is intended to be performance-based
compensation within the meaning of Section 162(m)(4)(C) of the Code. The
Committee shall not be entitled to exercise any discretion otherwise authorized
hereunder with respect to such Options if the ability to exercise such
discretion or the exercise of such discretion itself would cause the
compensation attributable to such Options to fail to qualify as
performance-based compensation.
11. POOLING TRANSACTIONS.
Notwithstanding anything contained in the Plan or any Agreement to the
contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if
any, as are specifically recommended by an independent accounting firm retained
by the Company to the extent reasonably necessary in order to assure that the
Pooling Transaction will qualify as such, including but not limited to (i)
deferring the vesting, exercise, payment, settlement or lapsing of restrictions
with respect to any Option, (ii) providing that the payment or settlement in
respect of any Option be made in the form of cash, Shares or securities of a
successor or acquirer of the Company, or a combination of the foregoing, and
(iii) providing for the extension of the term of any Option to the extent
necessary to accommodate the foregoing, but not beyond the maximum term
permitted for any Option.
12. TERMINATION AND AMENDMENT OF THE PLAN.
The Plan shall terminate on the day preceding the tenth anniversary of
the date of its adoption by the Board and no Option may be granted thereafter.
Subject to Section 11, the Board may sooner terminate the Plan and the Board
may at any time and from time to time amend, modify or suspend the Plan;
provided, however, that:
(a) no such amendment, modification, suspension or termination
shall impair or adversely alter any Options theretofore granted under the Plan,
except with the consent of the Optionee, nor shall any amendment, modification,
suspension or termination deprive any Optionee of any Shares which he or she
may have acquired through or as a result of the Plan; and
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(b) to the extent necessary under applicable law, no amendment
shall be effective unless approved by the stockholders of the Company in
accordance with applicable law.
13. OTHER ARRANGEMENTS.
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
14. LIMITATION OF LIABILITY.
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(i) give any person any right to be granted an Option other
than at the sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(iii) limit in any way the right of the Company or any
Subsidiary to terminate the employment of any person at any time;
or
(iv) be evidence of any agreement or understanding,
expressed or implied, that the Company will employ any person at
any particular rate of compensation or for any particular period
of time.
15. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
15.1 Except as to matters of federal law, the Plan and the rights of
all persons claiming hereunder shall be construed and determined in accordance
with the laws of the State of New York without giving effect to conflicts of
laws principles thereof.
15.2 The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all applicable
laws, rules and regulations, including all applicable federal and state
securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
15.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock
Options the tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
15.4 Each Option is subject to the requirement that, if at any time
the Committee determines, in its discretion, that the listing, registration or
qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental
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regulatory body is necessary or desirable as a condition of, or in connection
with, the grant of an Option or the issuance of Shares, no Options shall be
granted or payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
15.5 Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event that the disposition of Shares acquired pursuant
to the Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise
exempt from such registration, such Shares shall be restricted against transfer
to the extent required by the Securities Act and Rule 144 or other regulations
thereunder. The Committee may require any individual receiving Shares pursuant
to an Option granted under the Plan, as a condition precedent to receipt of
such Shares, to represent and warrant to the Company in writing that the Shares
acquired by such individual are acquired without a view to any distribution
thereof and will not be sold or transferred other than pursuant to an effective
registration thereof under said Act or pursuant to an exemption applicable
under the Securities Act or the rules and regulations promulgated thereunder.
The certificates evidencing any of such Shares shall be appropriately legended
to reflect their status as restricted securities as aforesaid.
16. MISCELLANEOUS.
16.1 MULTIPLE AGREEMENTS. The terms of each Option may differ from
other Options granted under the Plan at the same time, or at some other time.
The Committee may also grant more than one Option to a given Eligible
Individual during the term of the Plan, either in addition to, or in
substitution for, one or more Options previously granted to that Eligible
Individual.
16.2 WITHHOLDING OF TAXES.
(a) At such times as an Optionee recognizes taxable income in
connection with the receipt of Shares or otherwise hereunder (a "Taxable
Event"), the Optionee shall pay to the Company an amount equal to the federal,
state and local income taxes and other amounts as may be required by law to be
withheld by the Company in connection with the Taxable Event (the "Withholding
Taxes") prior to the issuance, or release from escrow, of such Shares or
otherwise. The Company shall have the right to deduct from any payment of cash
to an Optionee an amount equal to the Withholding Taxes in satisfaction of the
obligation to pay Withholding Taxes. In satisfaction of the obligation to pay
Withholding Taxes to the Company, the Optionee may make a written election (the
"Tax Election"), which may be accepted or rejected in the discretion of the
Committee, to have withheld a portion of the Shares then issuable to him or her
having an aggregate Fair Market Value equal to the Withholding Taxes.
(b) If an Optionee makes a disposition, within the meaning of
Section 424(c) of the Code and regulations promulgated thereunder, of any Share
or Shares issued to such Optionee pursuant to the exercise of an Incentive
Stock Option within the two-year period commencing on the day after the date of
the grant or within the one-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of written notice to the Company at its principal
executive office.
16.3 EFFECTIVE DATE. The effective date of this Plan shall be the
effective date of the Company's rights offering as contemplated by the Form S-3
Registration Statement under the Securities Act of 1933, as amended, which was
filed by the Company with the Securities and Exchange Commission on October 30,
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1997 (the "Rights Offering Effective Date"), subject only to the approval by
the affirmative vote of the holders of a majority of the securities of the
Company present, or represented, and entitled to vote at a meeting of
stockholders duly held in accordance with the applicable laws of the State of
New York within twelve (12) months of the adoption of the Plan by the Board.
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[Form of Agreement for New Option Grants]
BERNARD CHAUS, INC.
1998 STOCK OPTION PLAN
NON-INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT made and entered into as of _______________, by and between
BERNARD CHAUS, INC. (the "Company"), a New York corporation with offices at
1410 Broadway, New York, New York 10018, and _________________ (the
"Optionee"), an individual residing at _____________________________________.
W I T N E S S E T H :
WHEREAS, the Board of Directors (the "Board") of the Company by
resolution dated November 7, 1997, adopted the Bernard Chaus, Inc. 1998 Stock
Option Plan (the "Plan") which authorizes the grant of options to purchase
shares of the common stock, $.01 par value per share, of the Company (the
"Common Stock") to certain employees, officers, consultants and directors of
the Company;
WHEREAS, the administration of the Plan has been delegated under its
provision to a committee (the "Committee") appointed by the Board; and
WHEREAS, the Optionee is now [employed by][serving as a non-employee
director of] the Company and the Company desires that (s)he remain in such
[employ][service] and that (s)he increase her/his stock ownership in the
Company in order to increase her/his incentive and personal interest in the
welfare of the Company; and
WHEREAS, at a meeting of the Committee held on _________________ (the
"Date of Grant"), the Committee granted to the Optionee options to purchase
shares of Common Stock of the Company, pursuant to the terms and subject to the
conditions specified herein and in the Plan.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and agreements herein contained, the parties hereby agree as
follows:
1. (a) Subject to the terms and conditions set forth herein, the
Company grants to the Optionee an option (the "Option") to purchase from the
Company all or any part of an aggregate of ________ shares of the Common Stock
(the "Shares") pursuant to the terms and subject to the conditions specified
herein and in the Plan. The Option is not intended to be an incentive stock
option within the meaning of Section 422A(b) of the Internal Revenue Code of
1986 (the "Code") and this Agreement shall be construed and interpreted in
accordance with such intention.
(b) In the case of any conflict between the provisions hereof and
those of
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the Plan, the provisions of the Plan shall be controlling. A copy of the Plan
(as such may have been amended to date) will be made available for inspection
by the Optionee during normal business hours at the principal office of the
Company. All capitalized terms used but not defined herein shall have the
respective meanings ascribed to them in the Plan. The Company makes no
representations or warranties as to the income, estate or other tax
consequences to the Optionee of the grant of exercise of the Option or the sale
or other disposition of the Shares acquired pursuant to the exercise thereof.
2. The purchase price for the Shares shall be $_____ per share,
subject to adjustment as hereinafter provided (the "Option Price").
3. (a) The Option shall vest and be exercisable at the rate of
twenty-five percent (25%) on each of the first four (4) anniversaries of the
Date of Grant, subject to the Optionee's continued employment on the applicable
vesting date. For purposes of vesting, all fractional amounts shall be rounded
to the nearest number of whole Shares. Notwithstanding the foregoing, in no
event shall the Option be exercised, and the Option shall no longer be
exercisable, at any time after ten (10) years from the Date of Grant (the
"Expiration Date"). Subject to the foregoing, any exercise of the Option may be
either in whole at any time or in part at any time or from time to time.
(b) Except as provided in subparagraph 3(c) or Paragraph 7
hereof, the Option shall cease to be exercisable thirty (30) days after the
date the Optionee terminates services as an employee, consultant or
non-employee director of the Company or any affiliate of the Company for
reasons other than a "Discharge for Cause" (as defined below), retirement with
the consent of the Company ("Retirement"), Disability or death and immediately
upon the termination of the Optionee as a result of a Discharge for Cause, and
all rights of the Optionee hereunder shall thereupon terminate. For purposes of
this Agreement, a "Discharge for Cause" shall be defined in the Optionee's
employment agreement or, if the Optionee is not party to an employment
agreement with the Company, a "Discharge for Cause" shall mean the discharge of
the Optionee from his or her employment or service as a consultant or
non-employee director by the Company and the affiliates of the Company after a
good faith determination by the Board that such termination of employment or
service as a consultant or non-employee director is necessary or desirable by
reason of (i) the commission by such Optionee of any act which, if successfully
prosecuted by the appropriate authorities, would constitute a felony under
state or federal law; (ii) the disclosure or furnishing to any one other than
the Company and its Subsidiaries, or the directors, officers, employees,
auditors and legal advisors of any of them, other in the regular course of
business of the Company and its Subsidiaries, any knowledge or information with
respect to the customers, employees, operations, financial condition, revenues
or projections of the Company and/or its Subsidiaries, other than any such
knowledge or information in the public domain which has not been improperly
disclosed by such Optionee; (iii) the commission by such Optionee of an act of
moral turpitude; (iv) the material violation by such Optionee of the terms and
provisions of an employment agreement between such Optionee and the Company
and/or any Subsidiary; or (v) a material dereliction by such Optionee of his
duties to the Company and/or any Subsidiary.
-2-
<PAGE>
(c) (i) If the Optionee ceases to be an employee of or consultant to
the Company or any affiliate of the Company and this cessation is due to
Retirement, Disability or death, the Option shall be exercisable as provided in
this subparagraph. The Optionee, or in the event of the Optionee's Disability,
the Optionee's duly appointed guardian or conservator, or in the event of the
Optionee's death, the Optionee's executor or administrator, shall have the
privilege of exercising the unexercised portion of the Option which the
Optionee could have exercised on the day on which the Optionee ceased to be an
employee of or consultant to the Company or any affiliate of the Company,
provided, however, that such exercise must be in accordance with the terms of
this Agreement and within (x) three (3) months after the Optionee's Retirement
or Disability or (y) (A) twelve (12) months after the Optionee's death or (B)
three (3) months after the Optionee's death if such death occurs during the
three (3) month period following the termination of the Optionee's employment
or service as a consultant by reason of Retirement or Disability, as the case
may be. In no event, however, shall the Optionee or the Optionee's executor or
administrator, as the case may be, exercise the Option after the Expiration
Date. For all purposes of this Agreement, an approved leave of absence shall
not constitute an interruption or cessation of the Optionee's service as an
employee or consultant of the Company or any affiliate of the Company.
(ii) If the Optionee ceases to be an non-employee director of the
Company and this cessation is due to Retirement, Disability or death, the
Option shall be exercisable as provided in this subparagraph. The Optionee, or
in the event of the Optionee's Disability, the Optionee's duly appointed
guardian or conservator, or in the event of the Optionee's death, the
Optionee's executor or administrator, shall have the privilege of exercising
the unexercised portion of the Option which the Optionee could have exercised
on the day on which the Optionee ceased to be a non-employee director of the
Company, provided, however, that such exercise must be in accordance with the
terms of this Agreement and within twelve (12) months after the Optionee's
Retirement, Disability or death. In no event, however, shall the Optionee or
the Optionee's executor or administrator, as the case may be, exercise the
Option after the Expiration Date.
(iii) Except as set forth in this subparagraph 3(c), during the
Optionee's lifetime, the Option may be exercised only by the Optionee.
4. No Optionee shall be deemed for any purpose to be the owner of any
Shares unless and until (i) the Option shall be exercised pursuant to the terms
thereof, (ii) the Company shall have issued and delivered Shares to the
Optionee and (iii) the Optionee's name shall have been entered as a stockholder
of record on the books of the Company. Thereupon, the Optionee shall have full
voting, dividend and other ownership rights with respect to such Shares,
subject to the terms and conditions hereof.
5. The Option shall be exercised when written notice of such exercise,
signed by the person entitled to exercise the Option, has been delivered or
transmitted by registered or certified mail, to the Secretary of the Company at
its principal executive office. Said written notice shall specify the number of
Shares purchasable under the Option which such person then wishes to
-3-
<PAGE>
purchase and shall be accompanied by this Agreement and such other
documentation, if any, as may be required by the Company as provided in
Paragraph 6 below and be accompanied by payment of the aggregate Option Price.
Such payment shall be in the form of (i) cash or, to the extent the Committee
shall have adopted provisions therefor, Shares or other consideration, or any
combination thereof, having a Fair Market Value on the day preceding the
exercise date equal to the exercise price of the Option or portion thereof
being exercised or (ii) the sale of Shares underlying Employee Options, through
a registered broker-dealer, pursuant to the Company's broker-assisted cashless
exercise program, to the extent such program has been established by the
Committee. In connection with any payment of Shares, the Optionee shall, to the
extent requested by the Committee, certify to the Company that such delivery
will not result in "short-swing" profit to him under Section 16 of the
Securities and Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations promulgated thereunder ("Section 16"). Delivery of said notice and
such documentation shall constitute an irrevocable election to purchase the
Shares specified in said notice and the date on which the Company receives said
notice and documentation shall, subject to the provisions of Paragraph 6, be
the date as of which the Shares so purchased shall be deemed to have been
issued. The person entitled to exercise the Option shall not have the right or
status as a holder of the Shares to which such exercise relates prior to
receipt by the Company of such payment, notice and documentation. No fractional
Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and
the number of Shares that may be purchased upon exercise shall be rounded to
the nearest number of whole Shares.
6. (a) In the event that the disposition of Shares acquired pursuant
to the Option is not covered by a then current registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise
exempt from such registration, such Shares shall be restricted against transfer
to the extent required by the Securities Act and Rule 144 or other regulations
promulgated thereunder. The Committee may require as a condition to the right
to exercise the Option hereunder that the Company receive from the person
exercising the Option, representations, warranties and agreements, at the time
of any such exercise, to the effect that the Shares are being purchased for
investment only and without any present intention to sell or otherwise
distribute such Shares and that the Shares will not be disposed of in
transactions which, in the opinion of counsel to the Company, would violate the
registration provisions of the Securities Act. The certificate issued to
evidence such Shares shall bear appropriate legends summarizing such
restrictions on the disposition thereof.
(b) In the event of the death of the Optionee, an additional
condition of exercising the Option shall be the delivery to the Company of such
tax waivers and other documents as the Company shall reasonably determine. The
executors, administrators, legal representatives, distributees and legatees of
the Optionee are, after the death of the Optionee, referred to as the Optionee
with respect to the Option.
(c) The Optionee shall, as an additional condition of exercising
the Option, make appropriate arrangements with the Company for the payment of
all Withholding Taxes applicable as a result of the exercise of the Option
prior to the issuance or release from escrow of
-4-
<PAGE>
such Shares.
(d) Anything in this Agreement to the contrary notwithstanding, in
no event may the Option be exercisable if the Company shall, at any time and in
its sole discretion, determine that (i) the listing, registration or
qualification of any shares otherwise deliverable upon such exercise, upon any
securities exchange or under any state or federal law, or (ii) the consent or
approval of any regulatory body or the satisfaction of withholding tax or other
withholding liabilities, is necessary or desirable in connection with such
exercise. In such event, such exercise shall be held in abeyance and shall not
be effective unless and until such withholding, listing, registration,
qualification, or approval shall have been effected or obtained free of any
conditions not acceptable to the Committee.
7. In the event of a Change in Control of the Company, all Options
outstanding on the date of such Change in Control shall become immediately and
fully exercisable. If the Optionee's employment is terminated for any reason
following a Change in Control, each Option held by the Optionee that was
exercisable as of the date of termination of the Optionee's employment shall
remain exercisable for a period ending not before the earlier of (A) the first
anniversary of the termination of the Optionee's employment or (B) the
Expiration Date.
8. (a) In the event of a Change in Capitalization, if an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall, in such manner as it may deem
necessary to prevent dilution or enlargement of the benefits or potential
benefits intended to be made under the Plan, adjust any or all of (x) the
number and type of Shares subject to the unexercised portion of the Option, and
(y) the exercise price with respect to the unexercised portion of the Option
or, if deemed appropriate, make provision for a cash payment with respect to
the unexercised portion of the Option. In computing any adjustment under this
paragraph, the number of Shares that may be purchased upon exercise shall be
rounded to the nearest number of whole Shares.
(b) Subject to subparagraph 8(a) or as otherwise provided by the
Committee, in the event that a Transaction is consummated, the Option shall,
after the consummation of such Transaction, be exercisable into the kind and
number of shares of stock, securities, cash, property or other consideration
which the Optionee would have been entitled to receive if the Optionee had held
the Shares issuable upon the exercise of the Option immediately prior to such
Transaction; provided, however, that such stock, securities, cash, property or
other consideration shall remain subject to all of the conditions, restrictions
and performance criteria which were applicable to the Options prior to such
Transaction.
9. The existence of the Option shall not affect in any way the right
or power of the Company or its shareholders to make or authorize any or all
Changes in Capitalization, Changes in Control or Transactions.
-5-
<PAGE>
10. Nothing contained herein shall be construed (i) to confer on the
Optionee any right to continue as an employee of the Company or any affiliate,
Subsidiary or Division of the Company at any particular rate of compensation or
for any particular length of time or (ii) to derogate from any right of the
Company or any affiliate, Subsidiary or Division thereof to retire, request the
resignation thereof or discharge the Optionee, or to layoff or require a leave
of absence of the Optionee, with or without pay, at any time, with or without
cause.
11. This Agreement shall be construed and enforced in accordance with
the laws of the State of New York and applicable Federal law, without giving
effect to conflicts of laws principles thereof. Subject to subparagraph 3(c)
hereof, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, personal representatives,
successors or assigns, as the case may be.
12. This Agreement and the Plan set forth the entire understanding of
the parties with respect to the subject matter hereof, supersede all existing
agreements between them concerning such subject matter. No amendment,
modification, suspension or termination of this Agreement may be made without
the consent of each party hereto; provided, however, that the Company may amend
modify, suspend or terminate this Agreement in a manner which does not impair
or adversely alter any Options without the written consent of the Optionee.
13. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt request, or delivered against receipt to the party to whom it is
to be given at the address of such party set forth in the preamble to this
Agreement (or to such other address as the party shall have furnished in
writing in accordance with the provisions of this paragraph 13). Notice to the
estate of the Optionee shall be sufficient if addressed to the Optionee as
provided in this paragraph 13. Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof,
except for a notice changing a party's address which shall be deemed given at
the time of receipt thereof.
14. Any waiver by either party of a breach of any provision of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term
of this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
15. The Option is not assignable, alienable, saleable or transferable
otherwise than (a) by will or the laws of descent and distribution, (b)
pursuant to a domestic relations order (within the meaning of Rule 16a-12
promulgated under the Exchange Act, (c) as provided in subparagraph 3(c) above
or (d) with the consent of, or in accordance with rules and procedures
established by, the Board of Directors of the Company. The Optionee's rights
shall not be subject to commutation, encumbrance or the claims of the
Optionee's creditors, and any attempt to do any of the foregoing
-6-
<PAGE>
shall be void. The provisions of this Agreement shall be final, binding and
conclusive upon the beneficiaries, executors, administrators, heirs and
successors of the Optionee.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by a duly authorized officer and its corporate seal hereunto affixed,
and the Optionee has hereunto affixed his hand and seal, the day and year first
above written.
BERNARD CHAUS, INC.
By
------------------------------
Name:
Title:
ACCEPTED AND AGREED TO:
By
---------------------------
Optionee
-7-
<PAGE>
BNY FINANCIAL CORPORATION
A WHOLLY OWNED SUBSIDIARY OF THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED 1784 BY ALEXANDER HAMILTON
1290 AVENUE OF THE AMERICAS, NEW YORK, N.Y. 10104
212-408-7000
June 3, 1998
Bernard Chaus, Inc.
1410 Broadway
New York, New York 10018
Attention: Josephine Chaus, Chairwoman of the Board
Bernard Chaus, Inc.
800 Secaucus Road
Secaucus, New Jersey 07094
Attention: Chief Financial Officer
Ladies/Gentlemen:
Reference is made to the Second Restated and Amended Financing
Agreement between us dated as of October 10, 1997, as supplemented and amended
(the "Financing Agreement"). Initially capitalized terms not otherwise defined
herein shall have the meanings given to them in the Financing Agreement.
It is hereby agreed that, effective as of June 1, 1998, the Financing
Agreement shall be amended as follows:
1. The third sentence of Section 2.1 is amended to read in its
entirety as follows:
"The outstanding amount of all L/Cs shall not exceed $34,000,000 in
the aggregate at any time and shall be chargeable to Borrower's
account."
2. The definition of "Applicable Margin" set forth in Section 8 is
amended by inserting the words "less Permitted Overadvances" after the words
"Formula Amount".
3. The definition of "Maximum Loan Amount" set forth in Section 8 is
amended to read in its entirety as follows:
""Maximum Loan Amount" shall mean $60,000,000.00."
4. The definition of "Maximum Revolving Amount" set forth in Section 8
is amended to read in its entirety as follows:
""Maximum Revolving Amount" shall mean $45,500,000.00"
<PAGE>
5. The "Permitted Overadvances" for the periods "June 4, 1998 through
June 24, 1998" and "June 25, 1998 and at all times thereafter", as set forth in
the definition of "Permitted Overadvances" in Section 8, are deleted in their
entirety and replaced by the following:
Permitted
"Period Overadvances
------- ------------
June 10, 1998 through June 29, 1998 $7,000,000
June 30,1998 through July 9, 1998 $2,500,000
July 10, 1998 through July 29, 1998 $8,500,000
July 30, 1998 through August 9, 1998 $2,000,000
August 10, 1998 through August 29, 1998 $8,000,000
August 30, 1998 through September 9, 1998 $1,500,000
September 10, 1998 through September 29, 1998 $6,500,000
September 30, 1998 through October 9, 1998 $1,500,000
October 10, 1998 through October 29, 1998 $6,500,000
October 30, 1998 through November 9, 1998 -0-
November 10, 1998 through November 29, 1998 $2,000,000
November 30, 1998 through December 9, 1998 -0-
December 10, 1998 through December 29, 1998 $5,000,000
December 30, 1998 through January 9, 1999 -0-
January 10, 1999 through January 29, 1999 $5,000,000
January 30, 1999 through February 9, 1999 -0-
February 10, 1999 through February 27, 1999 $5,000,000
February 28, 1999 through March 9, 1999 -0-
March 10, 1999 through March 29, 1999 $4,000,000
March 30, 1999 through June 9, 1999 -0-
June 10, 1999 through June 29, 1999 $1,000,000
June 30, 1999 and at all times thereafter -0-"
6. Section 9.1(d) is amended to provide that the Borrower will not
permit its Tangible Net Worth to be less than the following amounts as of the
following dates:
"As of September 30, 1998 $9,300,000
As of December 31, 1998 $9,800,000
As of March 31, 1999 $13,300,000
As of June 30, 1999 $13,800,000"
7. Section 9.1(e) is amended to provide that the Borrower will not
permit its Working Capital to be less than the following amounts on the
following dates:
"As of September 30, 1998 $18,500,000
As of December 31, 1998 $18,500,000
As of March 31, 1999 $22,000,000
As of June 30, 1999 $22,000,000"
2
<PAGE>
8. The "Maximum Permitted Loss" and "Minimum Permitted Profit" for the
"Month of May 1998" and each subsequent "Period", as set forth in the covenant
in Section 9.1(g), are deleted in their entirety and replaced by the following:
Maximum Minimum
"Period Permitted Loss Permitted Profit
- ------- -------------- ----------------
Fiscal Quarter ended June 30, 1998 $250,000
Fiscal Year Ended June 30, 1998 $2,500,000
Month of July 1998 $1,000,000
Month of August 1998 $1,000,000
Month of September 1998 $1,000,000
Fiscal Quarter ended September 30, 1998 $2,500,000
Month of October 1998 $1,000,000
Month of November 1998 $1,000,000
Month of December 1998 $2,250,000
Fiscal Quarter ended December 31, 1998 $500,000
Month of January 1999 $1,000,000
Month of February 1999 $1,000,000
Month of March 1999 $1,000,000
Fiscal Quarter ended March 31, 1999 $3,500,000
Month of April 1999 $1,000,000
Month of May 1999 $2,250,000
Month of June 1999 $1,750,000
Fiscal Quarter ended June 30, 1999 -0-
Fiscal Year ended June 30, 1999 $7,000,000"
Except as hereinabove specifically set forth, the Financing Agreement
shall remain unmodified and in full force and effect in accordance with its
terms.
3
<PAGE>
If you are in agreement with the foregoing, please so indicate by
signing and returning to us the enclosed copy of this letter.
Very truly yours,
BNY FINANCIAL CORPORATION
By: /s/
---------------------------
Title:
AGREED AND ACCEPTED:
BERNARD CHAUS, INC.
By: /s/
---------------------------------
Title: VP - Corporate Controller
GUARANTOR:
CHAUS RETAIL, INC.
By: /s/
---------------------------------
Title: Assistant Secretary
<PAGE>
LIST OF SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
DATE
BUSINESS OR PERCENTAGE ACQUIRED/ DOMESTIC
NAME TYPE OF OPERATION OF OWNERSHIP INCORPORATED OR FOREIGN
- ---- ----------------- ------------ ------------ ----------
International Companies
- -----------------------
<S> <C> <C> <C> <C>
Bernard Chaus
International Wholesaler Delaware
(Hong Kong), Inc. Ladies Apparel 100% 1/05/88 Domestic
22-2868547
Bernard Chaus
International Wholesaler Delaware
(Korea), Inc. Ladies Apparel 100% 12/31/87 Domestic
22-2868618
(1) Bernard Chaus
International Wholesaler Delaware
(Philippines), Inc. Ladies Apparel 100% 2/10/88 Domestic
22-2869803
(1) Bernard Chaus
International Wholesaler Delaware
(Taiwan), Inc. Ladies Apparel 100% 2/10/88 Domestic
22-2869810
Others
- ------
(1) Chaus Specialists, Inc. Merchandising New Jersey
22-3093898 Specialists 100% 2/18/91 Domestic
(2) Chaus Retail, Inc. Retail Stores 100% New Jersey
22-2850337 10/19/87 Domestic
</TABLE>
- -----------------------------
(1) These corporations are no longer in operation.
(2) This company was originally formed as Chaus Retail Outlet of Burlington.
Subsequently, the outlet was closed and in January 1991 the corporation was
reactivated as Chaus Retail, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-1-1997 JUL-1-1996 JUL-1-1995
<PERIOD-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 2,039 330 247
<SECURITIES> 0 0 0
<RECEIVABLES> 20,491 9,543 10,949
<ALLOWANCES> 3,202 2,092 2,954
<INVENTORY> 17,486 23,746 21,256
<CURRENT-ASSETS> 37,176 32,095 30,281
<PP&E> 16,734 18,188 18,352
<DEPRECIATION> 15,774 16,893 16,454
<TOTAL-ASSETS> 39,012 34,138 32,742
<CURRENT-LIABILITIES> 18,497 64,824 49,764
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 272 269 269
<OTHER-SE> 6,743 (57,329) (40,879)
<TOTAL-LIABILITY-AND-EQUITY> 39,012 34,138 32,742
<SALES> 191,546 160,100 170,575
<TOTAL-REVENUES> 191,546 160,100 170,575
<CGS> 142,175 125,422 147,994
<TOTAL-COSTS> 180,637 168,596 188,156
<OTHER-EXPENSES> (58) (113) (56)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 6,411 8,030 6,560
<INCOME-PRETAX> 4,556 (16,413) (24,085)
<INCOME-TAX> 245 50 301
<INCOME-CONTINUING> 4,311 (16,463) (24,386)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,311 (16,463) (24,386)
<EPS-PRIMARY> 0.28 (2.46) (3.91)
<EPS-DILUTED> 0.28 (2.46) (3.91)
</TABLE>
