<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended MARCH 31, 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 identification
incorporation or organization) 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
---------------------------------
Former name, former address and former fiscal year, if changed since last report
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Date Class Shares Outstanding
----------- ----------------------------- ------------------
May 5, 1998 Common Stock, $0.01 par value 27,178,177
----------- ----------------------------- ------------------
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1998, June 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the Quarters and Nine Months ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
<TABLE>
March 31, June 30, March 31,
1998 1997 1997
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $162 $330 $118
Accounts receivable, net 36,972 7,451 27,627
Inventories 16,757 23,746 20,299
Prepaid expenses and other current assets 483 568 448
--------- ----------- -----------
Total current assets 54,374 32,095 48,492
Fixed assets--net 900 1,295 1,420
Other assets 794 748 758
--------- ----------- -----------
$ 56,068 $ 34,138 $ 50,670
========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable--banks $12,655 $37,756 $48,511
Accounts payable 17,297 19,825 19,026
Accrued expenses 4,636 5,393 5,209
Accrued restructuring expenses 261 1,850 --
Term loan--current 1,000 -- --
--------- ---------- ---------
Total current liabilites 35,849 64,824 72,746
Subordinated promissory notes -- 26,374 25,653
Term loan 13,750 -- --
--------- ---------- ---------
49,599 91,198 98,399
Stockholder's 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
March 31, 1998, 2,689,997 at
June 30, 1997 and March 31, 1997 272 27 27
Additional paid-in capital 125,224 65,705 65,705
Deficit (117,547) (121,312) (111,981)
Less: Treasury stock at cost -- 62,270 shares (1,480) (1,480) (1,480)
---------- --------- ---------
Total stockholders' equity (deficiency) 6,469 (57,060) (47,729)
---------- --------- ---------
$ 56,068 $ 34,138 $ 50,670
========== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
<TABLE>
For the Quarter Ended For the Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $49,827 $ 42,946 $155,778 $129,040
Cost of goods sold 36,105 33,562 116,346 99,308
---------- ---------- ---------- -----------
Gross profit 13,722 9,384 39,432 29,732
Selling, general and
administrative expenses 9,480 10,618 29,711 31,046
---------- ---------- ---------- -----------
Income (loss) from operations 4,242 (1,234) 9,721 (1,314)
Interest and other income, net 4 44 49 85
Interest expense (1,096) (2,028) (5,835) (5.860)
---------- ---------- ---------- -----------
Income (loss) before income taxes 3,150 (3,218) 3,935 (7,089)
Income taxes 75 7 170 43
---------- ---------- ---------- -----------
Net income (loss) $ 3,075 ($ 3,225) $ 3,765 ($ 7,132)
========== ========== ========== ===========
Basic earnings (loss) per share $ 0.15 ($ 0.48) $ 0.33 ($ 1.07)
========== ========== ========== ===========
Diluted earnings (loss) per share $ 0.14 ($ 0.48) $ 0.33 ($ 1.07)
========== ========== ========== ===========
Weighted average number of
common shares outstanding 21,074,000 6,687,000 11,371,000 6,687,000
========== ========== ========== ===========
Weighted average number of
common and common
equivalent shares outstanding 21,389,000 6,687,000 11,371,000 6,687,000
========== ========== ========== ===========
</TABLE>
4
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
FOR THE NINE MONTHS ENDED
March 31, March 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,765 ($ 7,132)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 484 620
Provision (credit) for losses on accounts receivable 51 (40)
Deferred interest on subordinated promissory notes 1,751 2,065
Non-cash interest expense 13 --
Changes in operating assets and liabilities:
Accounts receivable (29,572) (19,592)
Inventories 6,989 957
Prepaid expenses and other assets 302 66
Accounts payable (2,528) 1,591
Accrued expenses (757) (847)
Accrued restructuring expenses (1,358) (196)
--------- ----------
Net Cash Used In Operating Activities (20,860) (22,508)
--------- ----------
INVESTING ACTIVITIES
Purchases of fixed assets (207) (68)
Purchases of in-store fixtures (251)
--------- ----------
Net Cash Used In Investing Activities (458) (68)
--------- ----------
FINANCING ACTIVITIES
Net (payments) proceeds on short-term bank borrowings (12,601) 22,434
Net proceeds from isuance of term loan 15,000 --
Principal payments on term loan (250) --
Net proceeds from issuance of stock 19,001 --
Net proceeds from exercise of options -- 13
--------- ----------
Net Cash Provided By Financing Activities 21,150 22,447
--------- ----------
Decrease in cash and cash equivalents (168) (129)
Cash and Cash Equivalents, Beginning of Period 330 247
--------- ----------
Cash and Cash Equivalents, End of Period $ 162 $ 118
========= ==========
Cash Paid for:
Taxes $ 7 --
Interest $ 1,483 $ 3,418
Supplemental schedule of non-cash financing activities:
Bank debt assumed by principal stockholder and
converted to subordinated notes $ 12,500 --
Exchange of subordinated notes for common stock $ 40,625 --
Issuance of warrants relating to new financing agreement $ 138 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended March 31, 1998 and March 31, 1997
1. Summary Of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months and quarter ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the year ending June 30, 1998 or any other
period. The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1997.
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.
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.
2. Inventories
Inventories (principally finished goods) are stated at the lower of cost,
using the first-in first-out (FIFO) method, or market. Included in inventories
is merchandise in transit of approximately $7.8 million at March 31, 1998, $8.5
million at June 30, 1997 and $8.1 million at March 31, 1997.
3. New Financing Agreement
On October 10, 1997, the Company and BNY Financial Corporation, a
wholly-owned subsidiary of The Bank of New York ("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
6
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BERNARD CHAUS, INC. AND SUBSIDIARIES
entirety the Company's February 1995 financing agreement with BNYF, as amended
(the "Old Bank Debt Agreement). The New Financing Agreement amended certain
provisions of the Old Bank Debt Agreement and provides for maximum availability
of $81.0 million, and overadvances of up to $12.8 million. The New Financing
Agreement also amended certain financial covenants contained in the Old Bank
Debt Agreement.
The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66.0 million five-year revolving credit line with
a $20.0 million sublimit for letters of credit, and (ii) the New Term Loan which
is a $15.0 million term loan facility. Each facility matures on December 31,
2002. 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 March 31, 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 Old Bank Debt
Agreement. 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 at prices ranging
between $3.12 and $10.63 per share. The issuance of the BNYF Warrants was
recorded in the third quarter of fiscal 1998 at a value of $0.1 million and was
included as an increase in additional paid-in capital and will be charged to
interest expense over the term of the New Financing Agreement.
Amortization payments in the amount of $250,000 are payable quarterly in
arrears in connection with the New Term Loan. 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,
Josephine Chaus, Chairwoman of the Board, a principal stockholder of the Company
and the owner of a majority of the Company's Common Stock ("Josephine Chaus" or
"Ms. Chaus") agreed with BNYF that she would purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement in the event
that (i) an event of default occurred under the New Financing Agreement prior to
May 15, 1998, or (ii) the Rights Offering (as defined below) was 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 was no longer applicable.
Refer to Note 4.
7
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
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).
4. Restructuring of Indebtedness
In June 1997, the Company announced a proposed restructuring program to be
implemented by the Company. In September 1997, the disinterested members of the
Board of Directors of the Company unanimously approved the restructuring plan
(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 existing subordinated indebtedness
(including accrued interest through January 28, 1998) and $12.5 million of
indebtedness which will be 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.
Although there can be no assurance, the Company believes that, with the
consummation of the Restructuring, the Company will have adequate resources to
meet its needs for the foreseeable future, assuming it meets its business plan.
8
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the quarter ended March 31, 1998, net sales increased by $6.9 million
or 16.0% as compared to the quarter ended March 31, 1997. For the nine months
ended March 31, 1998, net sales increased by $26.7 million or 20.7% as compared
to the nine months ended March 31, 1997. The sales increase for the quarter and
nine months ended March 31, 1998 as compared to the comparable periods last year
is primarily due to an increase in sales at regular and incentive prices of the
Company's Chaus product line, partially offset by a decrease in sales associated
with the Company's Nautica licensed product line and a decrease in 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. For the
quarter ended March 31, 1998, exclusive of sales associated with the retail
outlet stores, units shipped increased by 9.5% with a 14.5% increase in average
selling price from the comparable period last year. For the nine months ended
March 31, 1998, exclusive of sales associated with the retail outlet stores,
units shipped increased by 11.4% with a 12.2% increase in average selling prices
from the comparable period last year. The increase in average selling prices for
the quarter and the year ended March 31, 1998 resulted from the Company's
ability to increase its selling price per unit and decrease its sales to
off-price customers.
As a percentage of net sales, gross profit increased to 27.5% and 25.3% for
the quarter and nine months ended March 31, 1998, respectively, as compared to
21.9% and 23.0% for the quarter and nine months ended March 31, 1997. The
increase in gross profit as a percentage of net sales for both the quarter and
nine months is primarily due to improved gross margins on the Chaus product
lines, partially offset by a decrease in gross margins associated with the
Company's Nautica licensed product line.
Selling, general and administrative expenses for the quarter and nine
months ended March 31, 1998 decreased by $1.1 million and $1.3 million,
respectively, as compared with the comparable periods last year. Approximately
$0.9 million of the decrease for both the quarter and nine months was
attributable to the closing of the Company's retail outlet stores which occurred
mostly at the end of the Company's second quarter. Selling, general and
administrative expenses as a percentage of net sales decreased to 19.0% and
19.1% for the quarter and nine months ended March 31, 1998, respectively, from
24.7% and 24.1% for the quarter and nine months ended March 31, 1997. Although
the closing of the retail stores impacted selling, general and administrative
expenses as a percent of net sales, 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.
Interest expense for the quarter ended March 31, 1998 decreased by $0.9
million (or 50.0%) from the comparable period last year as a result of decreases
in bank borrowings and the conversion of subordinated debt to equity in
connection with the Company's Restructuring (as defined below) which was
completed on January 29, 1998. Interest expense remained approximately the same
for the nine months ended March 31, 1998 and March 31, 1997 as a result
9
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BERNARD CHAUS, INC. AND SUBSIDIARIES
of higher average bank borrowings in the first two quarters of fiscal 1998, and
increased interest rates, offset by the decreases in bank borrowings and
subordinated debt related to the Company's Restructuring which was completed on
January 29, 1998.
Financial Position, Liquidity and Capital Resources
General
Net cash used in operating activities was $20.9 million for the nine months
ended March 31, 1998 as compared to $22.5 million for the nine months ended
March 31, 1997. Cash used in operating activities resulted primarily from a
$29.6 million increase in accounts receivable, a decrease in accounts payable of
$2.5 million, offset by net income of $3.8 million and a decrease in inventory
of $7.0 million.
Old Bank Debt Agreement
The Company and BNYF (as defined below) 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"), 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 regarding the Company's tangible net worth deficit and working capital
deficiency. In addition to a cap on personal property leases, the Company was
also prohibited from declaring or paying dividends or making other distributions
on its capital stock, with certain exceptions. In a Waiver, dated May 5, 1997
(the "Waiver"), BNYF waived covenant compliance with net worth, working capital
and quarterly minimum profit requirements for the period ended March 31, 1997.
Interest on direct borrowings was payable monthly at an annual rate equal
to the higher of (i) The Bank of New York's prime rate (8.50% at March 31, 1998)
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 (6.00% at March 31, 1998) in effect plus 1% (Federal Funds Rate in
effect plus 2% in the event the Company's overadvance position exceeded the
allowable overadvances). There was an annual commitment fee of 0.375% of the
unused portion of the line, payable monthly, and letter of credit fees equal to
0.125% of the outstanding letter of credit balance, payable monthly. The Old
Bank Debt Agreement required the payment of minimum service charges of $0.6
million per annum. In connection with the May
10
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BERNARD CHAUS, INC. AND SUBSIDIARIES
1996 Amendment, BNYF was paid a fee of $25,000, and additional fees of $10,000
per month through December 1996 were provided for, with BNYF agreeing to provide
specified levels of overadvances up to $10.0 million through the same period. In
connection with the Waiver, BNYF was paid a fee of $25,000 and the Company
issued certain warrants to BNYF.
New Financing Agreement
On October 10, 1997, the Company and BNY Financial Corporation, a
wholly-owned subsidiary of The Bank of New York ("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 amended certain provisions of
the Old Bank Debt Agreement and provides for maximum availability of $81.0
million, and overadvances of up to $12.8 million. At March 31, 1998, the Company
had availability of approximately $7.5 million (inclusive of overadvance
availability) under the New Financing Agreement. The New Financing Agreement
also amended certain financial covenants contained in the Old Bank Debt
Agreement. The New Financing Agreement provides for certain additional events of
default, among which are the default by Josephine Chaus, Chairwoman of the
Board, a principal stockholder of the Company and the owner of a majority of the
Company's Common Stock ("Josephine Chaus" or "Ms. Chaus"), under the Bank Debt
Put (as defined below), and the failure by the Company to close all of its
retail outlets by the end of January 1998. The Company closed all of its retail
outlets prior to January 14, 1998 and, as of January 26, 1998, the Bank Debt Put
was no longer applicable.
The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66.0 million five-year revolving credit line with
a $20.0 million sublimit for letters of credit, and (ii) the New Term Loan which
is a $15.0 million term loan facility. Each facility matures on December 31,
2002. 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 March 31, 1999) and is payable on a monthly basis, in arrears.
Interest on the New Term Loan accrues at an interest rate ranging from 1/2 of 1%
above the Prime Rate to 1 1/2% above the Prime Rate, which interest rate will be
determined, from time to time, based upon the Company's availability under the
New Revolving Facility. With the exception of warrants issued to BNYF (as
discussed below), the Company's execution of the New Financing Agreement did not
require the payment of any commitment, closing, administration or facility fees.
The New Financing Agreement provides for service charges and letter of credit
fees on substantially the same terms as those existing under the Old Bank Debt
Agreement. 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 at prices ranging
between $3.12 and $10.63 per share. 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.
11
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BERNARD CHAUS, INC. AND SUBSIDIARIES
Amortization payments in the amount of $250,000 are payable quarterly in
arrears in connection with the New Term Loan. A balloon payment in the amount of
$10.25 million is due on December 31, 2002. In the event of the earlier
termination by the Company of the New Financing Agreement, the Company will be
liable for termination fees initially equal to $2.8 million, and declining to
$2.2 million after October 8, 2000. The Company's obligations under the New
Financing Agreement are secured by a first priority lien on substantially all of
the Company's assets, including the Company's accounts receivable, inventory and
trademarks.
The New Financing Agreement contains financial covenants requiring, among
other things, the maintenance of minimum levels of tangible net worth, working
capital and maximum permitted loss (minimum permitted profit).
Credit Support
Josephine Chaus had arranged for a letter of credit (the "Letter of
Credit") in various amounts since April 1994 in return for which BNYF has
increased the availability under the Old Bank Debt Agreement. In consideration
for credit support provided by Ms. Chaus to the Company prior to February 1995,
Ms. Chaus was granted warrants (the "1994 Warrants"), exercisable through
November 22, 1999, to purchase an aggregate of 1,216,500 shares of Common Stock
at prices ranging between $2.25 and $4.62 per share. As part of the negotiations
with BNYF in connection with the Old Bank Debt Agreement, in February 1995
Josephine Chaus increased the Letter of Credit to $10.0 million and extended its
term to October 31, 1995 (the "February 1995 Increase/Extension"). In addition,
in February 1995, Ms. Chaus provided a $5.0 million personal guarantee (the
"$5.0 Million Guarantee"), to be in effect during the Old Bank Debt Agreement's
term. In September 1995, Ms. Chaus further extended the term of the Letter of
Credit to January 31, 1996 (the "September 1995 Extension"). In consideration of
her provision of the February 1995 Increase/Extension, the $5.0 Million
Guarantee and the September 1995 Extension, a special committee consisting of
disinterested members of the Board of Directors of the Company (the "Special
Committee") authorized the issuance to Ms. Chaus of warrants (the "1995
Warrants") to purchase an aggregate of 1,580,000 shares of Common Stock at
prices ranging between $4.05 and $6.75 per share. The issuance of the 1995
Warrants was approved at the 1995 Annual Meeting of Stockholders. The issuance
of the 1994 Warrants, the warrants for the February 1995 Increase/Extension and
the warrants for the $5.0 Million Guarantee was recorded in fiscal 1995 at a
value of $1.1 million, and was included as a charge to interest expense with a
corresponding increase to additional paid-in capital. The issuance of the
warrants for the September 1995 Extension was recorded in the second quarter of
fiscal 1996 at a value of $0.2 million, and was included as a charge to interest
expense with a corresponding increase to additional paid-in capital. Ms. Chaus
received warrant compensation for her provision of the $5.0 Million Guarantee
only through October 31, 1995. Thereafter, for each three month period of the
$5.0 Million Guarantee, she 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
12
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
July 31, 1996 (the "July 1996 Extension"). In consideration of her provision of
the July 1996 Extension, the Special Committee authorized the issuance to Ms.
Chaus, of warrants (the "1996 Warrants") to purchase an aggregate of 682,012
shares of Common Stock at a price of $4.20 per share. The issuance of the 1996
Warrants was approved by the stockholders of the Company at the 1996 Annual
Meeting of Stockholders. The issuance of the 1996 Warrants ($0.3 million) was
recorded in the third quarter of fiscal 1996, at a value of $0.3 million and was
included as a charge to interest expense with a corresponding increase to
additional paid-in capital.
In connection with the May 1996 Amendment, Ms. Chaus agreed to extend the
Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
Million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month
period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus for
her guaranty to $100,000 for each three month period of the $10.0 Million
Guarantee.
In connection with the September 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to July 31, 1997 (the "July 1997 Extension"), increase the
amount of the $10.0 Million Guarantee by $2.5 million to $12.5 million (the
"$12.5 Million Guarantee") and fully collateralize the $12.5 Million Guarantee.
In connection with the July 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each additional three
month period of the Letter of Credit as extended from January 31, 1997 to July
31, 1997. For her provision of the $12.5 Million Guarantee, the Special
Committee approved an increase in the amount of cash compensation payable to Ms.
Chaus for her guaranty to $125,000 for each three month period of the $12.5
Million Guarantee. 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 $10.0 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 shall
be held as collateral to secure indebtedness under the New Financing Agreement.
On January 23, 1998, in connection with the Rights Offering, such collateral was
released and used by Ms. Chaus to purchase shares of Common Stock issuable to
her upon the exercise of subscription rights, in satisfaction of her agreement
to exercise her full $10.0 million subscription (the "Purchase Commitment") in
connection with the Rights Offering.
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 owing 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 used to retire $12.5 million of the Bank Debt. As a result
of such repayment, the Company became indebted
13
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 Common Stock of the Company. 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.
The cash collateral held under the July Deposit Letter and the October
Deposit Letter was applied by BNYF to retire $22.5 million of the Bank Debt.
In connection with the restructuring, Ms. Chaus relinquished, for no value,
all of her rights under the 1994 Warrants, the 1995 Warrants and the 1996
Warrants.
Subordinated Debt
The Company had outstanding at January 29, 1998 $28.1 million of
subordinated promissory notes, excluding the Subrogated Loan, payable to
Josephine Chaus (the "Subordinated Notes"). In connection with the Company's
November 1995 public offering, Ms. Chaus extended the maturity date of the
Subordinated Notes (which were to mature on July 1, 1996) to July 1, 1998. The
Company has been unable to pay principal or interest, with certain exceptions,
under the Subordinated Notes as a result of covenants in the Old Bank Debt
Agreement. Pursuant to the terms of a conversion agreement dated as of Janaury
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.
Restructuring of Indebtedness
In June 1997, the Company announced a proposed restructuring program to be
implemented by the Company. In September 1997, the disinterested members of the
Board of Directors of the Company unanimously approved the restructuring plan
(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 existing subordinated indebtedness
(including accrued interest through January 28, 1998) and $12.5 million of
indebtedness which will be 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. 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.
14
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
Newly Adopted Accounting Standards
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.
Future Financing Requirements
At March 31, 1998, the Company had working capital of $18.5 million. The
Company requires the availability of sufficient cash flow and borrowing capacity
to finance its existing product lines and to develop and market its licensed
Nautica product lines. The Company expects to satisfy such requirements through
cash flow from operations, borrowings under the New Financing Agreement and
proceeds from the Rights Offering.
Although there can be no assurance, the Company believes that, with the
consummation of the Restructuring, the Company will have 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
continuation of the favorable trend in the Company's sales, retail market
conditions, consumer acceptance of the Company's products and continued ability
to maintain costs and quality controls.
15
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Attached hereto as Exhibits are the following:
27 Financial Data Schedules
(b) The Company filed no reports on Form 8-K during the quarter
ended March 31, 1998.
16
<PAGE>
BERNARD CHAUS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERNARD CHAUS, INC.
(Registrant)
Date: May 13, 1998 By: /s/ Josephine Chaus
--------------------
JOSEPHINE CHAUS
Chairwoman of the Board and
Office of the Chairman
Date: May 13, 1998 By: /s/ Andrew Grossman
--------------------
ANDREW GROSSMAN
Chief Executive Officer and
Office of the Chairman
Date: May 13, 1998 By: /s/ Barton Heminover
---------------------
BARTON HEMINOVER
Vice President -- Corporate Controller
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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