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, 2001
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 No.)
incorporation or organization)
530 Seventh Avenue, 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 None; securities quoted on the Over the Counter Bulletin Board
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 17, 2001 was $2,929,000.
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 22, 2001 Common Stock, $0.01 par value 27,215,907
DOCUMENTS INCORPORATED BY REFERENCE LOCATION IN FORM 10-K IN
----------------------------------- WHICH INCORPORATED
Portions of registrant's Proxy Statement for the Annual ------------------
Meeting of Stockholders to be held November 14, 2001. Part III
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 principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) STUDIO, JOSEPHINE CHAUS(R) ESSENTIALS and JOSEPHINE CHAUS(R) SPORT
trademarks. The Company's products are sold nationwide through department store
chains, specialty retailers and other retail outlets. The Company has positioned
its Chaus product line into the opening price points of the "better" category.
PRODUCTS
The Company markets its products as coordinated groups of jackets,
skirts, pants, blouses, sweaters and related accessories principally under the
following brand names that also include products for women and petites:
JOSEPHINE CHAUS COLLECTION - a collection of better tailored career clothing
that includes tailored suits, dresses, jackets, skirts and pants.
JOSEPHINE CHAUS STUDIO- a line of better sportswear featuring contemporary
styling and offering a more casual approach to traditional career dressing.
JOSEPHINE CHAUS ESSENTIALS - a line of better sportswear separates, also
designed with a contemporary approach. This new line includes jackets, skirts,
pants, blouses and sweaters to be mixed and matched.
JOSEPHINE CHAUS SPORT - designed for more relaxed dressing. This line includes
casual tops, sweaters, pants, skirts, shorts and other items for "true weekend"
wear.
The above products, 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
25 to 65.
During fiscal 2001 (fiscal year ended June 30, 2001), the suggested
retail prices of the Company's Chaus products ranged between $24.00 and $180.00.
The Company's jackets ranged in price between $98.00 and $180.00, its blouses
and sweaters ranged in price between $38.00 and $120.00, its skirts and pants
ranged in price between $48.00 and $110.00, and its knit tops and bottoms ranged
in price between $24.00 and $68.00.
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The following table sets forth a breakdown by percentage of the
Company's net sales by brand for fiscal 1999 through fiscal 2001:
Fiscal Year Ended June 30,
2001 2000 1999
-------- -------- --------
Josephine Chaus Collection (1) 38% 30% 41%
Josephine Chaus Woman Collection (1) 10 11 14
Josephine Chaus Petite Collection (1) 8 8 13
Josephine Chaus Sport (1) 25 24 27
Josephine Chaus Essentials (1) 10 7 0
Josephine Chaus Studio (1) 8 20 2
Nautica 0 0 2
Other (2) 1 0 1
-------- -------- --------
Total 100% 100% 100%
(1) Josephine Chaus Collection and Josephine Chaus Sport were formerly Chaus
Collection and Chaus Sport, respectively. The Josephine Chaus trade names
began shipping in June 1999 to department stores for the Fall 1999 season.
(2) Other brands and Outlet stores offset by intercompany elimination.
-----------------
LICENSE AGREEMENT WITH NAUTICA
From September 1995 through October 1998, the Company had a license
agreement (the "Nautica License Agreement") with Nautica Apparel Inc.
("Nautica"), a leading name in men's apparel, pursuant to which the Company had
an exclusive license to design, contract for the manufacture of and market a new
women's apparel line under the Nautica brand name. Effective October 1998, the
Company and Nautica agreed to terminate the Nautica License Agreement and the
Company discontinued selling products under the Nautica name.
CUSTOMERS
The Company's products are sold nationwide in an estimated 2,700 doors
operated by approximately 88 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. At June 30, 2001 and 2000, approximately 71% and 77%,
respectively, of the Company's accounts receivable were due from department
store customers owned by three single corporate entities. During fiscal 2001,
approximately 81% of the Company's net sales were made to department store
customers owned by four single corporate entities, as compared to 86% in fiscal
2000 and 82% in fiscal 1999. Sales to Dillard's Department Stores accounted for
39% of net sales in fiscal 2001, 42% in fiscal 2000 and 40% in fiscal 1999.
Sales to the May Department Stores Company accounted for approximately 25% of
the Company's net sales in fiscal 2001, 26% in fiscal 2000 and 28% in fiscal
1999. Sales to TJX Companies, Inc. accounted for approximately 13% of net sales
in fiscal 2001, 13% in fiscal 2000 and 7% in fiscal 1999. Sales to Federated
Department Stores accounted for approximately 4% of net sales in fiscal 2001 and
5% of net sales in fiscal 2000 and 7% of net sales in fiscal 1999. As a result
of the Company's dependence on its major customers, such customers 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. In addition, the Company's ability to achieve growth in revenues is
dependent, in part, on its ability to identify new distribution channels, such
as the sales it has recently commenced with J.C. Penney department stores.
3
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. As of June 30, 2001, the Company had an
in-house sales force of 15, all of whom are located in the New York City
showrooms. Senior management, principally Josephine Chaus, Chairwoman of the
Board, Chief Executive Officer and principal stockholder of the Company,
Nicholas DiPaolo, Vice Chairman and Chief Operating Officer of the Company, and
Gregory Mongno, President 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.
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 19 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Ms. Chaus, who is instrumental in the design
function, meets 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.
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 90%) of its
product is manufactured by approximately 25 key independent suppliers located
primarily in South Korea, Hong Kong, Taiwan, China, Indonesia and elsewhere in
the Far East. Approximately 10% 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 2001, the Company purchased approximately 79% of its finished
goods from its ten largest manufacturers, including approximately 20% 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.
4
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, Taiwan 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 2001, 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, Hong Kong and Korea, and virtually all of the fabric used in the
Company's products manufactured in the United States and the Caribbean Basin
were ordered by three major suppliers from these regions. The Company selects
the fabrics to be purchased, which are generally produced for it in accordance
with its own specifications. To date, the Company has not experienced any
significant difficulty in obtaining fabrics or other raw materials and considers
its sources of supply to be adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to five months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection. 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
5
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. In September
2001 the Company completed a United States Customs Duty Audit covering a prior
five year period and recorded a $0.4 million charge in the fiscal year ended
June 30, 2001 for costs associated with the audit.
BACKLOG
As of September 6, 2001 and 2000, the Company's order book reflected
unfilled customer orders for approximately $50.8 and $51.1 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. Accordingly a comparison of unfilled orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
TRADEMARKS
CHAUS(R), CHAUS SPORT(R), CHAUS WOMAN(R), MS. CHAUS(R), JOSEPHINE(R),
and JOSEPHINE CHAUS(R) are registered trademarks of the Company for use on
ladies' garments. The Company has pending applications to register J. CHAUS for
ladies garments. The Company considers its trademarks to be strong and highly
recognized, and to have significant value in the marketing of its products.
The Company has also registered its CHAUS(R), CHAUS SPORT(R), CHAUS
WOMAN(R), JOSEPHINE CHAUS(R) and JOSEPHINE(R) marks for women's apparel in
certain foreign countries. JOSEPHINE(R), and JOSEPHINE CHAUS(R) for clothing,
accessories and cosmetics are registered trademarks in the European Economic
Community. The application to register CHAUS is still pending.
6
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 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 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, 2001, the Company employed 298 employees as compared with
312 employees at June 30, 2000. This total includes 61 in managerial and
administrative positions, approximately 73 in design, production and production
administration, 29 in marketing, merchandising and sales and 83 in distribution.
Of the Company's total employees, 52 were located in the Far East. The Company
is a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 91 full-time employees. This agreement expires August
31, 2003.
The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
Josephine Chaus 50 Chairwoman of the Board and Chief Executive Officer
Nicholas DiPaolo 60 Vice Chairman of the Board and Chief Operating Officer
Greg Mongno 39 President of the Company
Barton Heminover 47 Vice President of Finance
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 and again since December 1998, Chairwoman of
the Board since 1991 and member of the Office of the Chairman since September
1994.
Nicholas DiPaolo was appointed Vice Chairman of the Board and Chief
Operating Officer in November 2000 and has been a director of the Company since
February 1999. Prior to joining the Company, Mr. DiPaolo served as a consultant
to the apparel industry and as a private investor. From 1991 through May 1997,
Mr. DiPaolo served as Chairman, President and Chief Executive Officer of Salant
Coporation, a diversified apparel company which he joined in 1988 as President
and Chief Operating Officer. Prior to 1988, he held executive positions with a
number of apparel and related companies, including
7
Manhattan Industries, a menswear company, and The Villager, a women's sportswear
company. Mr. DiPaolo currently serves as a director of JPS Industries Inc., a
publicly traded manufacturer of specialty extruded and woven materials.
Greg Mongno was appointed President of the Company in August 2001 and
served as Senior Vice President of Sales and Marketing from January 2000 through
August of 2001. He was Vice President/General Manager of Liz Casual at Liz
Claiborne, Inc. from 1996 to January 2000.
Barton Heminover was appointed Vice President of Finance in January 2000
and was Vice President - Corporate Controller and Assistant Secretary to the
Company from 1996 to 2000. From January 1983 to July 1996 he was employed by
Petrie Retail, Inc. (formerly Petrie Stores Corporation), a woman's retail
apparel chain, serving as Vice President/Treasurer from 1986 to 1994 and as Vice
President/Financial Controller from 1994 to 1996.
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company is obligated to pay up to
$900,000 in equal monthly installments over the 12-month period from January
2001 to January 2002.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that have been made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are indicated by words or phrases such as "anticipate," "estimate,"
"project," "expect," "believe" and similar words or phrases. Such statements are
based on current expectations and are subject to certain risks, uncertainties
and assumptions, including, but not limited to, the overall level of consumer
spending on apparel; the financial strength of the retail industry generally and
the Company's customers in particular; changes in trends in the market segments
in which the Company competes and the Company's ability to gauge and respond to
changing consumer demands and fashion trends; the level of demand for the
Company's products; the Company's dependence on its major department store
customers; the highly competitive nature of the fashion industry; the Company's
ability to satisfy its cash flow needs by meeting its business plan and either
refinancing its current revolving credit facility on acceptable terms prior to
its December 31, 2002 expiration or negotiating a new credit facility; and
changes in economic or political conditions in the markets where the Company
sells or sources its products, as well as other risks and uncertainties set
forth in the Company's publicly-filed documents, including this Annual Report on
Form 10-K. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. The Company disclaims
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 2. PROPERTIES.
The Company's principal executive office is located at 530 Seventh
Avenue in New York City where the Company leases approximately 28,000 square
feet. This lease expires in May 2009. This facility also houses the Company's
showrooms and its sales, design, production and merchandising staffs. Net base
rental expense for the executive offices aggregated approximately $0.9 million
in fiscal 2001 and 2000 and $0.8 million in fiscal 1999.
The Company's technical production support facility (including its
sample and patternmakers) is located at 519 Eighth Avenue in New York City where
the Company leases approximately 15,000 square feet. This lease expires in
August 2009. Net base rental expense for the technical production support
facilities aggregated approximately $0.3 million in fiscal 2001 and 2000 and
$0.2 million for fiscal 1999.
The Company's distribution center is located in Secaucus, New Jersey
where the Company leases approximately 276,000 square feet. This facility also
houses the Company's administrative and finance personnel, its computer
operations, and its one retail outlet store. This space is occupied under a
lease expiring June 30, 2004. Base rental expense for the Secaucus facility
aggregated approximately $1.2 million in fiscal 2001, and $1.1 million in fiscal
2000 and 1999.
8
Office locations are also leased in Hong Kong, Korea and Taiwan, with
annual aggregate rental expense of approximately $0.1 million for fiscal 2001,
2000, and 1999.
ITEM 3. LEGAL PROCEEDINGS.
The company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded in the over the counter
market and quotations are available on the Over the Counter Bulletin Board (OTC
BB: CHBD). New York Stock Exchange trading of the Company's common stock was
discontinued effective prior to the opening of trading on October 6, 2000.
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
OTC BB (October 6, 2000 to present) and the NYSE (July 1, 1999-October 5, 2000).
HIGH LOW
---- ---
FISCAL 2000
First Quarter......................... $3.188 $2.563
Second Quarter........................ 2.750 2.188
Third Quarter......................... 2.438 1.500
Fourth Quarter........................ 1.750 0.500
FISCAL 2001
First Quarter......................... $0.813 $0.500
Second Quarter........................ 0.750 0.266
Third Quarter......................... 0.516 0.344
Fourth Quarter........................ 0.510 0.300
As of September 17, 2001, the Company had approximately 390 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 Company's Financing
Agreement prohibits the Company from declaring dividends or making other
distributions on its capital stock, subject to certain exceptions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
9
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Consolidated 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:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 149,499 $ 181,538 $ 187,875 $ 191,546 $ 160,100
Cost of goods sold 122,324 142,909 137,958 142,175 125,422(2)
---------- ---------- ---------- ---------- ----------
Gross profit 27,175 38,629 49,917 49,371 34,678
Selling, general and administrative expenses 32,666 36,075 36,512 38,462 40,924
Restructuring expenses -- -- -- -- 2,250(1)
Interest expense, net 2,121 2,358 2,360 6,353 7,917
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax provision (7,612) 196 11,045 4,556 (16,413)
Provision for income taxes 11 4 200 245 50
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (7,623) $ 192 $ 10,845 $ 4,311 $ (16,463)
========== ========== ========== ========== ==========
Basic earnings (loss) per share (3) $ (0.28) $ 0.01 $ 0.40 $ 0.28 $ (2.46)
========== ========== ========== ========== ==========
Diluted earnings (loss) per share (4) $ (0.28) $ 0.01 $ 0.40 $ 0.28 $ (2.46)
========== ========== ========== ========== ==========
Weighted average number of common shares
outstanding - basic (5) 27,216 27,174 27,116 15,296 6,687
========== ========== ========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding - diluted (5) 27,216 27,183 27,191 15,296 6,687
========== ========== ========== ========== ==========
BALANCE SHEET DATA
AS OF JUNE 30,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital (deficiency) $ 15,185 $ 23,891 $ 29,330 $ 18,679 $ (32,729)
Total assets 44,795 49,045 53,484 39,012 34,138
Short-term debt, including current portion
of long-term debt 6,024 1,000 1,000 1,000 37,756
Long-term debt 10,500 11,500 12,500 13,500 26,374
Stockholders' equity (deficiency) 10,679 18,302 17,860 7,015 (57,060)
(1) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs incurred in connection with a
restructuring. The costs 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 which was completed on January 29, 1998.
(2) Includes $1.1 million for liquidation of inventory as a result of closing
the Company's outlet stores.
(3) Computed by dividing the applicable net income by the weighted average
number of shares of common stock outstanding during the year.
(4) Computed by dividing the applicable net income by the weighted average
number of common shares outstanding and common stock equivalents
outstanding during the year.
(5) All share data reflects the 1 for 10 reverse stock split which was
effected December 9, 1997 and reflects the retroactive adjustment for the
bonus element of the Rights Offering, which was consummated on January 26,
1998.
10
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.
Fiscal Year Ended June 30,
--------------------------
2001 2000 1999
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Gross profit 18.2 21.3 26.6
Selling, general and administrative expenses 21.9 19.9 19.4
Interest expense 1.4 1.3 1.3
Net income (loss) (5.1) 0.1 5.8
Fiscal 2001 Compared to Fiscal 2000
Net sales for fiscal 2001 decreased 17.7% or $32.0 million to $149.5
million as compared to $181.5 million for fiscal 2000. The decrease in net sales
was primarily due to a 15.2% decrease in units shipped as a result of the
difficult retail environment for women's apparel.
Gross profit for fiscal 2001 decreased $11.5 million to $27.2 million as
compared to $38.6 million for fiscal 2000. As a percentage of sales, gross
profit decreased to 18.2% for fiscal 2001 from 21.3% for fiscal 2000. The
decrease in gross profit dollars was primarily a result of decreased units
shipped. The decrease in gross profit percentage resulted primarily from a
decrease in the initial markup.
Selling, general and administrative ("SG&A") expenses decreased by $3.4
million for fiscal 2001 as compared to fiscal 2000. The decrease was primarily
due to the Company's decision to reduce marketing and advertising expenses ($1.4
million) as well as a reduction in payroll and payroll related costs ($1.4
million) and professional fees ($.8 million). These reductions were partially
offset by a $0.4 million charge for costs associated with a United States
Customs audit covering a prior five-year period. As a percentage of net sales,
SG&A expenses were approximately 21.9% in fiscal 2001 as compared to 19.9% in
fiscal 2000. The increase in SG&A expenses as a percentage of net sales was due
to the decrease in sales volume, which reduced the Company's leverage on SG&A
expenses.
Interest expense decreased by $.2 million for fiscal 2001 as compared to
fiscal 2000. The decrease was due to lower interest rates partially offset by
higher bank borrowings.
Fiscal 2000 Compared to Fiscal 1999
Net sales for fiscal 2000 decreased 3.4% or $6.4 million to $181.5
million as compared to $187.9 million for fiscal 1999. The decrease in net sales
was primarily due to a decrease in sales associated with the Company's Nautica
product line ($4.2 million) which was discontinued in the second quarter of
fiscal 1999 and a decrease in sales of the Company's Chaus product line ($2.2
million). The decrease in Chaus product line sales was primarily due to an
increase in customer discounts as a result of the highly promotional environment
which has continued since the holiday season, partially offset by a 10.4%
increase in units shipped.
Gross profit for fiscal 2000 decreased $11.3 million to $38.6 million as
compared to $49.9 million for fiscal 1999. As a percentage of sales, gross
profit decreased to 21.3% for fiscal 2000 from 26.6% for fiscal 1999. The
decrease in gross profit is primarily the result of increased customer
discounts.
11
Selling, general and administrative ("SG&A") expenses decreased by $0.4
million for fiscal 2000 as compared to fiscal 1999. The decrease resulted from
the elimination of $2.5 million of expenses attributable to the Nautica licensed
product line which was discontinued in the second quarter of fiscal 1999,
partially offset by an increase of $2.1 million in SG&A expenses associated with
the Company's Chaus product lines primarily as a result of increased payroll
expenses and professional fees. SG&A expenses for fiscal 2000 and fiscal 1999
included $0.5 million and $0.6 million, respectively, in connection with the
arbitration award to the Company's former Chief Executive Officer. As a
percentage of net sales, SG&A expenses were approximately 19.9% in fiscal 2000
as compared to 19.4% in fiscal 1999.
Interest expense was approximately the same for fiscal 2000 as compared
to fiscal 1999 primarily as a result of decreases in bank borrowings offset by
higher interest rates.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash used in operating activities was $6.6 million for fiscal 2001
as compared to net cash provided by operating activities of $4.6 million for
fiscal 2000 and $5.6 million for fiscal 1999. Net cash used in operating
activities for fiscal 2001 resulted primarily from a net loss of $7.6 million
and a decrease in accrued expenses ($1.7 million) partially offset by a decrease
in inventory ($1.1 million), an increase in accounts payable ($1.0 million) and
depreciation expense ($1.3 million).
In fiscal 2001 and 2000, purchases of fixed assets were $0.9 million and
$4.9 million, respectively. Fiscal 2001 and fiscal 2000, expenditures consisted
primarily of purchases of computer hardware and software systems.
The Company also incurred capital expenditures for in-store shops of
$0.8 million and $0.4 million in fiscal 2001 and 2000, respectively. In fiscal
2002, the Company anticipates capital expenditures of approximately $0.8 million
consisting primarily of in-store shops and Management Information System
upgrades.
Financing Agreement
In October 1997, the Company and BNY Financial Corporation ("BNYF"), a
wholly owned subsidiary of General Motors Acceptance Corp. ("GMAC") entered into
a financing agreement (the "Financing Agreement"). The Financing Agreement,
which was amended on June 3, 1998, consists of two facilities: (i) the Revolving
Facility which is a $45.5 million five-year revolving credit line (subject to an
asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Term Loan which is a $14.5 million term loan facility. Each
facility matures on December 31, 2002. At June 30 2001, the Company had
borrowings of $5.0 million under the Revolving Facility and total availability
of approximately $2.5 million under the Financing Agreement.
Interest on the Revolving Facility accrues at 1/2 of 1% above the Prime
Rate (6.75% at June 30, 2001) and is payable on a monthly basis, in arrears.
Interest on the 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
Revolving Facility.
Amortization payments in the amount of $250,000 are payable quarterly in
arrears in connection with the Term Loan. Twelve amortization payments have been
made resulting in a balance of $11.5 million at June 30, 2001. 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 Financing Agreement, the Company will
be liable for termination fees of $2.2 million. The Company's obligations under
the 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.
12
The Financing Agreement contains financial covenants requiring, among
other things, the maintenance of minimum levels of tangible net worth, working
capital and minimum permitted profit (maximum permitted loss). The Financing
Agreement also contains certain restrictive covenants which, among other things,
limit the Company's ability to incur additional indebtedness or liens and to pay
dividends. In June 2001, the Financing Agreement was amended to establish
certain financial covenants for the years ending June 30, 2001 and June 30,
2002. In August 2001, the Company received a letter agreement from GMAC
approving overadvance amounts required by the Company's business plan and
amending the working capital covenants for fiscal 2002.
Future Financing Requirements
At June 30, 2001, the Company had working capital of $15.2 million as
compared with working capital of $23.9 million at June 30, 2000. 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
Financing Agreement. The Financing Agreement expires on December 31, 2002. The
Company anticipates that it will refinance the Financing Agreement with GMAC.
Although the Company has had favorable preliminary discussions with GMAC about
extending its facility, there can be no assurance that it will enter into an
acceptable agreement with GMAC or that, if an acceptable agreement cannot be
reached, that the Company can identify an alternate lender. The Company believes
that it has adequate resources to meet its needs for the foreseeable future
assuming that it meets its business plan and refinances the Financing Agreement
or negotiates an alternative arrangement.
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 Financing
Agreement, retail market conditions, and consumer acceptance of the Company's
products.
Employment and Non-Competition Agreements
On January 10, 2001, the Company entered into an employment agreement
(the "Agreement") with Nicholas DiPaolo. Mr. DiPaolo has been serving as the
Company's Vice Chairman and Chief Operating Officer since November 1, 2000, the
effective date of the Agreement. The Agreement has a term of approximately three
years from the effective date. The compensation package is weighted towards
equity, with what the Company believes is a below market salary of $300,000 per
year and options entitling Mr. DiPaolo to acquire (x)300,000 shares (the
"Sign-On Options") of the Company's common stock which were fully vested upon
issuance and (y)3,000,000 shares (the "Put Options") of the Company's common
stock, which vest in three equal annual installments upon the anniversaries of
the Agreement's effective date. The per share exercise price of the Sign-On
Options, which were issued in November 2001 in connection with the commencement
of his employment, is $0.50. The per share exercise price of the Put Options,
which were issued in January 2001, is $0.375. Each such exercise price was at or
above the fair market value of the Company's common stock on the date of
issuance. In the event that the Company achieves a cumulative EBITDA target
determined by the Company's Board of Directors for the three year period ended
June 30, 2003, Mr. DiPaolo shall be entitled to require the Company to purchase
his Put Options, for a purchase price equal to $1,125,000, i.e. the aggregate
exercise price of the Put Options. Mr. DiPaolo shall also have such right to
require the Company to purchase his then vested Put Options, at a purchase price
equal to the aggregate exercise price of such then vested Put Options, in the
event there is a "Change In Control" of the Company or his employment is
terminated without "Cause" (as such terms are defined in the Agreement).
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company is obligated to pay up to
$900,000 in equal monthly installments over the 12-month period from January
2001 to January 2002.
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.
13
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 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
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on its consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company has determined that the
adoption of this statement will not have an impact on its consolidated financial
statements.
In April 2001, the Emerging Issues Task Force ("EITF") reached consensus
on EITF Issue 00-25, "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products". The Task Force reached a consensus
that consideration from a vendor to a reseller of the vendor's products is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration should be characterized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration
that meets certain conditions. The consensuses in EITF 00-25 should be applied
no later than in annual or interim financial statements for periods beginning
after December 15, 2001. Earlier adoption is encouraged. The Company has
determined that the adoption of this statement on July 1, 2001 will not have a
significant impact on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
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 2001
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 2001 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 2001 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 2001 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 2001 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, 2001.
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").
3.2 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").
3.3 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).
3.4 Amendment dated December 9, 1998 to the Restated Certificate
(incorporated by reference to Exhibit 3.13 of the Company's Form 10-K
for the year ended June 30, 1998 (the "1998 Form 10-K").
3.5 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).
15
3.6 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).
10.9 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).
10.68 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).
+10.76 Letter Agreement between the Company and Andrew Grossman dated as of
January 1, 1998 (incorporated by reference to Exhibit 10.76 of the
Company's 1998 Form 10-K).
+10.77 1998 Stock Option Plan, as amended by Amendment No.1 thereto including
form of related stock option agreement (incorporated by reference to
Exhibit A and Exhibit B of the Company's Proxy Statement filed with the
Commission on October 17, 2000).
10.78 Amendment No. 1 dated June 3, 1998 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.78 of the
Company's 1998 Form 10-K).
+10.80 Letter Agreement between the Company and Stuart S. Levy dated February
23, 1999 (incorporated by reference to Exhibit 10.80 of the Company's
1999 Form 10-K).
10.81 Collective Bargaining Agreement between the Company and Amalgamated
Workers Union, Local 8 effective as of September 24, 1999 (incorporated
by reference to Exhibit 10.81 of the Company's 1999 Form 10-K).
10.82 Lease between the Company and Adler Realty Company, dated June 1, 1999
with respect to the Company's executive offices and showroom at 530
Seventh Avenue, New York City (incorporated by reference to Exhibit
10.82 of the Company's 1999 Form 10-K).
10.83 Employment Agreement dated November 5, 1999 between the Company and Ivy
Karkut. (incorporated by reference to Exhibit 10.82 of the Company's
Form 10-Q for the quarter ended December 31, 1999).
10.84 Lease between the Company and Kaufman Eighth Avenue Associates, dated
September 11, 1999 with respect to the Company's technical support
facilities at 519 Eighth Avenue, New York City. (incorporated by
reference to Exhibit 10.84 of the Company's 2000 Form 10-K).
10.85 Amendment dated September 22, 2000 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.85 of the
Company's 2000 Form 10-K).
16
10.86 Resignation and Non-Competition Agreement dated January 4, 2001 between
the Company and Ivy Karkut. (incorporated by reference to Exhibit 10.86
of the Company's Form 10-Q for the quarter ended December 31, 2000).
10.87 Employment Agreement dated January 10, 2001 between the Company and
Nicholas DiPaolo. (incorporated by reference to Exhibit 10.87 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.88 Amendment dated January 19, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.88 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.89 Amendment dated April 26, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.89 of the
Company's Form 10-Q for the quarter ended March 31, 2001).
*10.90 Lease modification agreement between the Company and Hartz Mountain
Industries, Inc., dated August 30, 1999 with respect to the Company's
distribution and office facilities in Secaucus, NJ.
*10.91 Employment Agreement dated June 1, 2001 between the Company and Gregory
Mongno.
*10.92 Amendment dated June 1, 2001 to the Second Restated and Amended
Financing Agreement.
*10.93 Amendment dated August 23, 2001 to the Second Restated and Amended
Financing Agreement.
*10.94 Amendment dated August 28, 2001 to the Second Restated and Amended
Financing Agreement.
21 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's 1998 Form 10-K).
*23 Consent of Deloitte & Touche LLP.
+ Management agreement or compensatory plan or arrangement required to be filed
as an exhibit.
* Filed herewith.
17
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 26, 2001.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
---------------------------
Josephine Chaus
Chairwoman of the Board and
Chief Executive Officer
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.
SIGNATURE TITLE DATE
--------- --------- ----
/s/ Josephine Chaus Chairwoman of the Board and September 26, 2001
------------------------------ Chief Executive Officer
Josephine Chaus
/s/ Nicholas DiPaolo Vice Chairman of the Board and September 26, 2001
------------------------------ Chief Operating Officer
Nicholas DiPaolo
/s/ Barton Heminover Vice President of Finance September 26, 2001
------------------------------ (Principal Financial and Accounting Officer)
Barton Heminover
/s/ Philip G. Barach Director September 26, 2001
------------------------------
Philip G. Barach
/s/ Terri Kabachnick Director September 26, 2001
------------------------------
Terri Kabachnick
/s/ S. Lee Kling Director September 26, 2001
------------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director September 26, 2001
------------------------------
Harvey M. Krueger
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Bernard Chaus, Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors.................................................................................. F-2
Consolidated Balance Sheets -- June 30, 2001 and 2000 .......................................................... F-3
Consolidated Statements of Operations -- Years Ended June 30, 2001, 2000 and 1999............................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) -- Years Ended June 30, 2001, 2000 and 1999........ F-5
Consolidated Statements of Cash Flows -- Years Ended June 30, 2001, 2000 and 1999............................... F-6
Notes to Consolidated Financial Statements...................................................................... F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 14(a)(2):
Schedule II -- Valuation and Qualifying Accounts................................................................ S-1
The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-1
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, 2001 and June 30, 2000 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and June 30, 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001 in conformity with accounting principles generally accepted in the
United States of America. 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
Parsippany, New Jersey
August 29, 2001
F-2
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
June 30, June 30,
2001 2000
---------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 183 $ 4,446
Accounts receivable - net 23,688 23,562
Inventories 13,582 14,721
Prepaid expenses and other current assets 1,051 405
---------- ----------
Total current assets 38,504 43,134
Fixed assets - net 5,079 5,169
Other assets - net 1,212 742
---------- ----------
Total assets $ 44,795 $ 49,045
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 5,024 $ -
Accounts payable 13,516 12,493
Accrued expenses 3,779 5,750
Term loan - current 1,000 1,000
---------- ----------
Total current liabilities 23,319 19,243
Deferred Rent 297 0
Term loan 10,500 11,500
---------- ----------
Total liabilities 34,116 30,743
STOCKHOLDERS' EQUITY
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 - 27,278,177 at June 30, 2001 and 2000 273 273
Additional paid-in capital 125,473 125,473
Deficit (113,587) (105,964)
Less: Treasury stock at cost - 62,270 shares at June 30, 2001 and 2000 (1,480) (1,480)
---------- ----------
Total stockholders' equity 10,679 18,302
---------- ----------
Total liabilities and stockholders' equity $ 44,795 $ 49,045
========== ==========
See accompanying notes to consolidated financial statements.
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Fiscal Year Ended June 30,
----------------------------------------------------
2001 2000 1999
-------------- --------------- --------------
Net sales $ 149,499 $ 181,538 $ 187,875
Cost of goods sold 122,324 142,909 137,958
-------------- --------------- --------------
Gross profit 27,175 38,629 49,917
Selling, general and administrative expenses 32,666 36,075 36,512
-------------- --------------- --------------
Income (loss) from operations (5,491) 2,554 13,405
Interest expense, net 2,121 2,358 2,360
-------------- --------------- --------------
Income (loss) before provision for income taxes (7,612) 196 11,045
Provision for income taxes 11 4 200
-------------- --------------- --------------
Net income (loss) $ (7,623) $ 192 $ 10,845
============== =============== ==============
Basic and diluted earnings (loss) per share $ (0.28) $ 0.01 $ 0.40
============== =============== ==============
Weighted average number of common shares
outstanding - basic 27,216,000 27,174,000 27,116,000
============== =============== ==============
Weighted average number of common and common
equivalent shares outstanding - diluted 27,216,000 27,183,000 27,191,000
============== =============== ==============
See accompanying notes to consolidated financial statements.
F-4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
(In thousands, except number of shares)
Common Stock Treasury Stock
----------------------- Additional --------------------------
Number Of Paid-in Equity/ Number of
Shares Amount Capital (Deficit) Shares Amount Total
---------- -------- ---------- ----------- ----------- ---------- ---------
Balance at July 1, 1998 27,178,177 $ 272 $ 125,224 $ (117,001) 62,270 $ (1,480) $ 7,015
Net income -- -- -- 10,845 -- -- 10,845
---------- -------- ---------- ----------- ----------- ---------- ---------
Balance at June 30, 1999 27,178,177 272 125,224 (106,156) 62,270 (1,480) 17,860
Net income -- -- -- 192 -- -- 192
Issuance of restricted stock 100,000 1 249 -- -- -- 250
---------- -------- ---------- ----------- ----------- ---------- ---------
Balance at June 30, 2000 27,278,177 273 125,473 (105,964) 62,270 (1,480) 18,302
Net loss -- -- -- (7,623) -- -- (7,623)
---------- -------- ---------- ----------- ----------- ---------- ---------
Balance at June 30, 2001 27,278,177 $ 273 $ 125,473 $ (113,587) 62,270 $ (1,480) $ 10,679
========== ======== ========== =========== =========== ========== =========
See accompanying notes to consolidated financial statements.
F-5
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
----------------------------------------------------------
2001 2000 1999
--------------- -------------- ---------------
OPERATING ACTIVITIES
Net income (loss) $ (7,623) $ 192 $ 10,845
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,324 533 1,310
Provision for losses on accounts receivable 75 138 138
Stock compensation expense -- 250 --
Changes in operating assets and liabilities:
Accounts receivable (201) 3,056 (9,605)
Inventories 1,139 4,085 (1,320)
Prepaid expenses and other current assets (671) 185 (435)
Accounts payable 1,022 (5,006) 4,494
Accrued expenses (1,673) 1,125 133
--------------- -------------- ---------------
Net Cash (Used In) Provided By Operating Activities (6,608) 4,558 5,560
--------------- -------------- ---------------
INVESTING ACTIVITIES
Purchases of fixed assets (889) (4,902) (247)
Purchases of other assets (790) (418) (144)
--------------- -------------- ---------------
Net Cash Used In Investing Activities (1,679) (5,320) (391)
--------------- -------------- ---------------
FINANCING ACTIVITIES
Net proceeds from short-term bank borrowings 5,024 -- --
Principal payments on term loan (1,000) (1,000) (1,000)
--------------- -------------- ---------------
Net Cash Provided By (Used In) Financing Activities 4,024 (1,000) (1,000)
--------------- -------------- ---------------
(Decrease) Increase in Cash and Cash Equivalents (4,263) (1,762) 4,169
Cash and Cash Equivalents, Beginning of Year 4,446 6,208 2,039
--------------- -------------- ---------------
Cash and Cash Equivalents, End of Year $ 183 $ 4,446 $ 6,208
=============== ============== ===============
Cash paid for:
Taxes $ 18 $ 168 $ 336
Interest $ 1,989 $ 2,149 $ 2,167
See accompanying notes to consolidated financial statements.
F-6
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
1. BUSINESS
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 principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) STUDIO, JOSEPHINE CHAUS(R) ESSENTIALS, and JOSEPHINE CHAUS(R) SPORT
trademarks. The Company's products are sold nationwide through department store
chains, specialty retailers and other retail outlets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. 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 2000 and 1999
Consolidated Financial Statements to conform with the fiscal 2001 presentation.
Earnings Per Share:
Basic earnings per share has been computed by dividing the applicable
net income by the weighted average number of common shares outstanding. Diluted
earnings per share has been computed by dividing the applicable net income by
the weighted average number of common shares outstanding and the issuance of
potentially dilutive shares.
Revenue Recognition:
Revenues are recorded at the time merchandise is shipped, and with
regard to the outlet store at the time when goods are sold to customers.
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. At June 30, 2001 and 2000, approximately 71% and 77%,
respectively, of the Company's accounts receivable were due from department
store customers owned by three single corporate entities. During fiscal 2001,
approximately 81% of the Company's net sales were made to department store
customers owned by four single corporate entities, as compared to 86% in fiscal
2000 and 82% in fiscal 1999. Sales to Dillard's Department Stores accounted for
39% of net sales in fiscal 2001, 42% in fiscal 2000 and 40% in fiscal 1999.
Sales to the May Department Stores Company accounted for approximately 25% of
the Company's net sales in fiscal 2001, 26% in fiscal 2000 and 28% in fiscal
1999. Sales to TJX Companies, Inc. accounted for approximately 13% of net sales
in fiscal 2001, 13% in fiscal 2000 and 7% in fiscal 1999.
F-7
Sales to Federated Department Stores accounted for approximately 4% of net sales
in fiscal 2001, 5% of net sales in fiscal 2000 and 7% in fiscal 1999. As a
result of the Company's dependence on its major customers, such customers 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. As of June 30, 2001 and June 30, 2000, Accounts Receivable was net
of allowances of $1.3 million and $2.8 million, respectively.
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 hardware and
software is depreciated using the straight-line method over three to five years.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the United
States dollar to be the functional currency of its overseas subsidiaries. All
foreign currency gains and losses are recorded in the Consolidated Statement of
Operations.
Fair Value of Financial Instruments:
For financial instruments, including cash and cash equivalents,
accounts receivable and payable, accruals and term loans, the carrying amounts
approximated fair value due to their short-term maturity or variable interest
rate.
New Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company has determined that the
adoption of this statement will not have an impact on the consolidated financial
statements.
F-8
In April 2001, the Emerging Issues Task Force ("EITF") reached
consensus on EITF Issue 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products". The Task Force
reached a consensus that consideration from a vendor to a reseller of the
vendor's products is presumed to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. That presumption is
overcome and the consideration should be characterized as a cost incurred if,
and to the extent that, a benefit is or will be received from the recipient of
the consideration that meets certain conditions. The consensuses in EITF 00-25
should be applied no later than in annual or interim financial statements for
periods beginning after December 15, 2001. Earlier adoption is encouraged. The
Company has determined that the adoption of this statement on July 1, 2001 will
not have a significant impact on its consolidated financial statements.
3. INVENTORIES
June 30, June 30,
2001 2000
---------- -----------
(In thousands)
Finished goods $13,316 $12,946
Raw materials 266 1,775
----------- -----------
$13,582 $14,721
=========== ===========
Inventories include merchandise in transit (principally finished goods) of
approximately $9.0 million at June 30, 2001 and $9.3 million at June 30, 2000.
4. FIXED ASSETS
June 30, June 30,
2001 2000
--------- ---------
(In thousands)
Furniture, equipment, computer hardware
and software $ 12,709 $ 12,234
Leasehold improvements 9,968 9,579
---------- ---------
22,677 21,813
Less: accumulated depreciation and
amortization 17,598 16,644
---------- ---------
$ 5,079 $ 5,169
========== =========
5. INCOME TAXES
Significant components of the Company's net deferred tax assets are as follows:
June 30, June 30,
2001 2000
----------- -----------
(In thousands)
Deferred tax assets:
Net federal, state and local operating loss carryforwards $ 40,900 $ 36,900
Costs capitalized to inventory for tax purposes 700 900
Inventory valuation 400 1,000
Excess of book over tax depreciation 2,500 1,900
Sales allowances not currently deductible 1,300 800
Reserves and other items not currently deductible 800 800
----------- -----------
46,600 42,300
Less: valuation allowance for deferred tax assets (46,600) (42,300)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
F-9
Fiscal Year Ended June 30,
2001 2000 1999
---------- ---------- ----------
(In thousands)
Expense (benefit) for federal income taxes at the statutory
rate of 35.0% $ (2,664) $ 68 $ 3,866
Other 326 47 43
Effects of unrecognized federal tax loss carryforwards 2,349 (111) (3,709)
---------- ---------- ----------
Provision for income taxes $ 11 $ 4 $ 200
========== ========== ==========
At June 30, 2001, the Company has a federal net operating loss carryforward for
income tax purposes of approximately $99.0 million, which will expire between
fiscal 2009 and 2022.
6. FINANCING AGREEMENTS
In October 1997, the Company and BNY Financial Corporation ("BNYF"), a
wholly owned subsidiary of General Motors Acceptance Corp. ("GMAC") entered into
a financing agreement (the "Financing Agreement"). The Financing Agreement,
which was amended on June 3, 1998, consists of two facilities: (i) the Revolving
Facility which is a $45.5 million five-year revolving credit line (subject to an
asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Term Loan which is a $14.5 million term loan facility. Each
facility matures on December 31, 2002. At June 30, 2001, the Company had
borrowings of $5.0 million under the Revolving Facility and total availability
of approximately $2.5 million (inclusive of overadvance availability) under the
Financing Agreement and amending the working capital covenants for fiscal 2002.
Interest on the Revolving Facility accrues at 1/2 of 1% above the Prime
Rate (6.75% at June 30, 2001) and is payable on a monthly basis, in arrears.
Interest on the 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
Revolving Facility.
Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the Term Loan. Twelve amortization payments have
been made resulting in a balance of $11.5 million at June 30, 2001. 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 Financing Agreement, the
Company will be liable for termination fees of $2.2 million. The Company's
obligations under the 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 Financing Agreement contains financial covenants requiring, among
other things, the maintenance of minimum levels of tangible net worth, working
capital and minimum permitted profit (maximum permitted loss). The Financing
Agreement also contains certain restrictive covenants which, among other things,
limit the Company's ability to incur additional indebtedness or liens and to pay
dividends. In June 2001, the Financing Agreement was amended to establish
certain financial covenants for the years ending June 30, 2001 and June 30,
2002. In August 2001, the Company received a letter agreement from GMAC
approving overadvance amounts required by the Company's business plan and
amending the working capital covenants for fiscal 2002.
7. 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 $1,000, $61,000, and $122,000 in fiscal 2001, 2000,
and 1999, respectively.
F-10
The reconciliation of the funded status as of June 30, 2001 is as follows:
Fiscal Year Ended
June 30, 2001
-----------------
(in thousands)
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service Cost $ 50
Interest Cost 60
Expected Return on Plan Assets (89)
Recognized Net Actuarial Loss/(Gain) (20)
-----------------
Net Periodic Benefit Cost $ 1
-----------------
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 797
Service Cost 50
Interest Cost 60
Actuarial (Gain)/Loss (33)
Change in Assumption (Discount Rate) 59
Benefits Paid (28)
-----------------
Benefit Obligation at End of Year $ 905
-----------------
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year $ 971
Actual Return/(Loss) on Plan Assets (137)
Employer Contribution 108
Benefits Paid (28)
Expenses Paid (4)
-----------------
Fair Value of Plan Assets at End of Year $ 910
-----------------
RECONCILIATION OF FUNDED STATUS AT END OF YEAR
Funded Status $ 5
Unrecognized Net Actuarial Loss/(Gain) 16
-----------------
Prepaid (Accrued) Benefit Cost $ 21
-----------------
Assumptions as of June 30 2001
-----------------
Discount Rate 7.50%
Long Term Rate of Return 8.50%
As of June 30, 2000, the benefit obligation was approximately $ 797,000 and the
fair value of plan assets was approximately $971,000. Information was not
available for fiscal 2000, and fiscal 1999.
F-11
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 are invested in investment funds selected by
the participant and are subject to vesting provisions of the Savings Plan.
Expense under the Savings Plan was approximately $0.3 million in fiscal 2001 and
2000 and $0.1 million in fiscal 1999.
8. STOCK BASED COMPENSATION:
The Company has a 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, 6,750,000 shares of Common Stock are reserved
for issuance. However, the maximum number of Shares that an Eligible Individual
may be granted in respect of Options may not exceed 4,000,000 Shares. No stock
options may be granted subsequent to October 29, 2007. The exercise price may
not be less than 100% of the fair market value on the date of grant for
incentive stock options.
On January 10, 2001, the Company entered into an employment agreement
(the "Agreement") with Nicholas DiPaolo. who has been serving as the Company's
Vice Chairman and Chief Operating Officer since November 1, 2000, the effective
date of the Agreement. The Agreement has a term of 37 months from the effective
date. Under the Agreement on November 1, 2000, Mr. DiPaolo was granted 300,000
fully vested options to purchase common stock of the Company at the fair market
value on the date of grant (the "Sign-On Options"). Under the Agreement on
January 10, 2001, Mr. DiPaolo was granted 3,000,000 options to purchase common
stock of the Company at the fair market value on the date of the grant (the "Put
Options"). The exercise price of the Put Options is $0.375. The Put Options vest
in three equal annual installments upon the anniversaries of the Agreement's
effective date. In the event that the Company achieves a cumulative EBITDA
target determined by the Company's Board of Directors for the three year period
ending June 30, 2003, Mr. DiPaolo shall be entitled to require the Company to
purchase his Put Options, for a purchase price equal to $1,125,000, i.e. the
aggregate exercise price of the Put Options. In the event there is a "Change of
Control" of the Company or his employment is terminated without "Cause" (as such
terms are defined in the Agreement), Mr. DiPaolo shall also have the right to
require the Company to purchase his vested Put Options at a purchase price equal
to the aggregate exercise price of the vested Put Options.
During February 2001, employee and director options for an aggregate of
1,400,401 shares of the Company's common stock were surrendered under a stock
option replacement program offered by the Company. Under the program, employees
had the right to surrender their outstanding, out-of-the- money options in
exchange for a commitment by the Company to grant new options to them for the
same number of shares on a date, which is in excess of six months (183 days)
after the surrender date. Eligibility to receive the new options, which have an
exercise price equal to the fair market value on the future grant date (August
8, 2001), employees (or directors as the case may be) must have been employed by
the Company (or to serve as directors) on such grant date. On August 8, 2001,
1,400,401 options were granted to employees and directors under this program.
The new options vest in increments of 50% on August 8, 2002 and 50% on August 8,
2003.
F-12
Information regarding the Company's stock options is summarized below:
Stock Options
-------------------------------------------------------------------
Weighted
Number Exercise Average
of Shares Price Range Exercise Price
--------------- -------------------------- ----------------
Outstanding at July 1, 1998 2,616,407 $ 3.11 - $ 3.11 $ 3.11
Options granted 775,000 $ 2.13 - $ 3.50 $ 2.20
Options canceled (1,557,069) $ 3.11 - $ 3.11 $ 3.11
---------------
Outstanding at June 30, 1999 1,834,338 $ 2.13 - $ 3.50 $ 2.73
Options granted 893,167 $ 1.25 - $ 3.00 $ 2.38
Options canceled (546,195) $ 2.13 - $ 3.11 $ 2.55
---------------
Outstanding at June 30, 2000 2,181,310 $ 1.25 - $ 3.50 $ 2.63
Options granted 3,325,000 $ .38 - $ .69 $ .39
Options canceled (2,166,310) $ .69 - $ 3.50 $ 2.61
---------------
Oustanding at June 30, 2001 3,340,000 $ .38 - $ 3.50 $ .41
=============== ========================== ================
The following table summarizes information about the Company's outstanding and
exercisable stock options at June 30, 2001:
Outstanding Exercisable
---------------------------------------------- ----------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life(Yrs.) Price Shares Price
-------------------------------------------------------------------------------- ----------------------------------
$0.38 3,000,000 9.34 $0.38 - -
$0.50 300,000 9.34 $0.50 300,000 $.050
$0.69 10,000 9.00 $0.69 - -
$3.00 10,000 8.00 $3.00 2,500 $3.00
$3.11 15,000 4.60 $3.11 12,500 $3.11
$3.50 5,000 7.00 $3.50 2,500 $3.50
-------------------------------------------------------------------------------- ----------------------------------
3,340,000 9.31 $.41 317,500 $0.65
-------------------------------------------------------------------------------- ----------------------------------
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
2001, 2000 and 1999 was $0.30, $1.75 and $2.04 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: risk-free interest rate of 4.38%, 6.25%, and 5.59% in 2001, 2000 and
1999, respectively; expected dividend yield of 0% in 2001, 2000, and 1999;
expected life of 2.49, 3.34, and 2.33 years in 2001, 2000 and 1999,
respectively; and expected volatility of 159.29%, 120.55%, and 232.13% in 2001,
2000, and 1999, respectively. The outstanding stock options have a weighted
average contractual life of 9.31 years, 8.53 years, and 8.98 years in 2001,
2000, and 1999, respectively. The number of stock options exercisable at June
30, 2001, 2000, and 1999 were 317,500, 849,000, and 285,000, respectively.
F-13
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)/income for 2001, 2000 and 1999 would have been ($8,008), ($1,011), and
$8,564 respectively. The Company's pro forma net (loss)/income per share for
2001, 2000 and 1999 would have been ($0.29), ($0.04), and $0.31, respectively.
9. WARRANTS
In October 1997 as part of the Company's Financing Agreement, discussed
in Note 6, GMAC was issued 162,500 warrants. As of June 30, 2001 there were
125,000 warrants exercisable at a weighted average exercise price of $3.12 and
37,500 warrants at a weighted average exercise price of $10.63. The warrants
expire December 31, 2002.
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 2009. Rental expense for the years ended June 30, 2001, 2000 and 1999
was approximately $2.5 million, $2.7 million and $2.4 million, respectively.
The minimum aggregate rental commitments at June 30, 2001 are as
follows (in thousands):
Fiscal year ending:
2002................................ $ 2,501
2003................................ 2,407
2004................................ 2,340
2005................................ 1,132
2006................................ 1,132
Subsequent to 2006.................. 3,365
------------
$ 12,877
============
Letters of Credit:
The Company was contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $13.1 million and $19.3 million at June 30, 2001 and June 30,
2000, respectively.
Non-Competition Agreements:
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company is obligated to pay up to
$900,000 in equal monthly installments over the 12-month period from January
2001 to January 2002.
Litigation:
The company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
F-14
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Deductions of Year
Year ended June 30, 2001
Allowance for doubtful accounts $ 407 $ 75 $ 209(1) $ 273
Reserve for customer allowances and deductions $ 2,365 $ 13,292 $ 14,583(2) $ 1,074
--------------- --------------- ------------ --------------
Year ended June 30, 2000
Allowance for doubtful accounts $ 366 $ 138 $ 97(1) $ 407
--------------- --------------- ------------- --------------
Reserve for customer allowances and deductions $ 1,245 $ 17,618 $ 16,498(2) $ 2,365
--------------- --------------- ------------ --------------
Year ended June 30, 1999
Allowance for doubtful accounts $ 368 $ 68 $ 70(1) $ 366
--------------- --------------- ------------ --------------
Reserve for customer allowances and deductions $ 2,834 $ 12,074 $ 13,663(2) $ 1,245
--------------- --------------- ------------ --------------
--------------
(1) Uncollectible accounts written off
(2) Allowances charged to reserve and granted to customers
S-1