Bernard Chaus Inc. has informed the Securities and Exchange Commission that it is in default on its credit agreement with The CIT Group, putting its ability to continue as a going concern at risk.
The New York-based sportswear firm didn’t specify which of its financial covenants weren’t met and said CIT was continuing to provide it with financing following an agreement on revisions and amendments to an earlier pact reached on Sept. 10 and now set to expire on Sept. 18, 2011. Chaus is seeking further revisions but noted that its ability to go forward could be in peril should CIT opt to demand immediate payment or terminate the agreement.
Obligations under the new agreement are secured by a “first priority lien on substantially all of the company’s assets, including accounts receivable, inventory, intangibles, equipment and trademarks and a pledge of the company’s interests in its subsidiaries.”
The September agreement provides Chaus with a $30 million revolving line of credit, which includes a $12 million sublimit for letters of credit. Its covenants cover financial measures such as tangible net worth, minimum EBITDA and leverage ratios, according to the Form 10-Q filed with the SEC this week.
Shares of the firm, which are traded over the counter, hit a 52-week low of 11 cents on Wednesday before closing at 12 cents, down 3 cents, or 20 percent. Their high water mark for the year was 32 cents, reached on Oct. 9.
In the SEC document, Chaus reported that in the second quarter ended Dec. 31, it trimmed its net loss to $2.5 million, or 7 cents a diluted share, from a loss of $3.5 million, or 10 cents, in the year-ago quarter. Net revenues declined 18.8 percent to $21.1 million from $26 million in the year-ago quarter as gross margin improved to 22.3 percent from 21.6 percent.
Of the $4.9 million in revenue declines, $4.2 million were attributable to decreased sales of the firm’s Chaus lines, which the firm chalked up to “a decrease in revenues in the discount channel primarily as a result of our decision to reduce levels of inventory with off-price retailers.”
Neither Chaus nor CIT responded to requests for comment.
The Chaus business has been contracting for a number of years, with sales declining to $112.1 million in the year ended June 30 from $143.3 million in 2005. The Cynthia Steffe business, acquired at the start of 2004, has shrunk from 16 percent of revenues in fiscal 2007 to 6 percent last year. The company last turned a profit in fiscal 2007, when it registered net income of $522,000.
Some of the slack has been picked up by licensed businesses, most notably the Kenneth Cole New York brand, for which Chaus has a license for women’s better sportswear through June 2012, along with an option to renew the arrangement for three years. Not only have the Kenneth Cole Productions brands grown to 38 percent of sales last year from 17 percent in fiscal 2007, but the licensor, with a 16 percent stake in the firm, is also one of only two Chaus shareholders with more than 5 percent of its common stock, according to Chaus’ last annual report.
Josephine Chaus, who began her second tour of duty as chief executive officer in 1998, holds 44.9 percent of the shares outstanding.