CHAUS BERNARD INC, ARS, 1994-10-21

CHAUS BERNARD INC
ARS, 1994-10-21
WOMEN'S, MISSES', AND JUNIORS OUTERWEAR

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<PAGE> 1

[LOGO]

1994 ANNUAL REPORT

<PAGE> 2
Bernard Chaus, Inc. and Subsidiaries

DESCRIPTION OF BUSINESS

Bernard Chaus, Inc. designs, arranges for the manufacture of, and markets
four lines of women's apparel in an extensive selection of styles and
sizes. Chaus believes it is one of the country's largest producers of
updated, moderately-priced women's sportswear.

Chaus' clothing combines contemporary fashion influences with traditional
classic design and is appropriate for a business environment as well as
for leisure and active wear. The Company's products are manufactured
by approximately 260 independent suppliers, located primarily in the Far East,
but also in Israel, India, the United States and the Caribbean Basin.

Chaus produces collections for six selling seasons each year. Its apparel is
sold to over 340 trade customers, principally major department stores and
specialty stores, both domestic and international. The Company has four
principal product lines. Career casual sportswear is marketed under the Chaus,
Chaus Woman, Chaus Petite labels and blouses under the Josephine label, while
weekend casual sportswear bears the Chaus Sport and Chaus Jeanswear labels.
Dresses are marketed under the Chaus Dresses, Chaus Woman Dresses and Chaus
Petite Dresses labels.

Bernard Chaus, Inc. and Subsidiaries

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- - - ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales .................................. $ 206,332 $ 235,819 $ 254,190 $ 232,444 $ 291,101
Net (loss) income .......................... (46,755) (10,989) 5,469 (12,004) 1,515
Net (loss) income per share ................ (2.55) (.60) .30 (.66) .08
Total assets ............................... 51,619 90,208 86,489 82,571 81,757
Long term debt ............................. 18,789 14,730 14,820 24,730 14,730
</TABLE>

<PAGE> 3
Bernard Chaus, Inc. and Subsidiaries

TO OUR SHAREHOLDERS:

Nineteen ninety four was a year of change for the company -- a year in
which we have taken essential steps designed to help move us toward
profitability, and put us in the position to be able to contend with the
continued difficult apparel business environment. These steps came primarily in
two areas: developing and putting in place our restructuring program, and
strengthening our management team. Combined with a sound, practical business
strategy, this is, we believe, the formula necessary to put the company on a
path toward growth going forward.

RESTRUCTURING PROGRAM

During 1994, we developed and started implementation of a restructuring
program in order to address some of our key challenges and put them behind us so
that we could begin moving toward growth and profitability. One of the major
challenges we addressed was that of our inventory levels.

The losses we experienced in the fourth quarter of 1994, and in the year
overall, were substantially associated with these excessive inventory levels.
Contributing in part to our inventory problems, and to our losses for fiscal
1994, was a lower level of sales. That was due in part to the continued weak
retail environment, but more importantly it was due to the need for
reinvigorated product lines.

In order to help position our company for the Fall 1995 season, we have
reduced inventory levels and implemented promotional allowances to help
accelerate sell-throughs at the retail level. This has enabled us to turn
inventory at the retail level in fiscal 1994, while creating space for the
strong regular priced bookings we are seeing so far this season.

Controls have been put in place, as part of our restructuring, to ensure
that our inventory levels remain consistently on plan. Most significantly, we
are doing a better job of "cutting to order," which also enhances our ability to
meet retailer needs, and greatly reduces the potential for a build up of unsold
finished goods. We have also started to introduce a more sharply focused product
line, which will simplify inventory management.

As a result of these steps, from the fourth quarter of 1993 to the fourth
quarter of 1994, we reduced inventory by 45%.

We took additional steps in our restructuring beyond inventory reduction
and controls. In particular, we have moved to reduce and control our costs
through a number of steps, including:

o Overhead reductions;

o Centralization of certain functions;

o Consolidation of key independent contractors;

o Planned closing of office space and one of our New York showrooms; and

o Planned closing of four retail outlets.

This sharp focus on cost containment will continue to be a central part of
our strategy for returning to profitability.

We have also "vertically integrated" the four divisions: Chaus, Chaus
Sport, Chaus Dresses and Chaus Special Sizes. This means that we have
dedicated design, merchandising and executive teams for each of the four
divisions -- each group will be responsible for its products from start to
finish, rather than having individuals working across divisions. This makes
us more efficient and helps eliminate duplication of effort.

Overall, our restructuring plan is now in place and, importantly, the costs
associated with it are behind us -- helping to substantially "clean the slate"
for the future.

1
<PAGE> 4
STRENGTHENED MANAGEMENT TEAM

On September 6, 1994, we announced that Andrew Grossman, at that time the
President of Jones Apparel Group, would become Chief Executive Officer of the
company. We also announced that he and I would form a new Office of the Chairman
which will direct the strategy and operations of the company. I will also
actively continue as Chairwoman.

Mr. Grossman, who officially started as CEO on September 28, has proven
himself to be one of the most talented and respected executives in the fashion
industry. As a senior executive at Jones Apparel Group for nine years, and
President since 1991, he established an unbroken track record of success while
there.

Prior to joining Jones in 1986, Mr. Grossman was employed by Willi Wear
Ltd., Herbert Grossman Enterprises, the Ralph Lauren Women's Wear division of
Bidermann Industries, Inc., and the Evan Picone Division of Palm Beach Inc.

In addition, Wayne S. Miller joined the company and was appointed Executive
Vice President-Finance and Administration and Chief Financial Officer in June,
1994. From April 1994 to June 1994 he was a senior consultant at USA Classic,
Inc. Previously, he served as a consultant to various apparel companies, as
President and Chief Executive Officer of Publix Group, L.P., and as Chief
Financial Officer at Basco All-American Sportswear Corp.

These additions to our existing management team give the company the right mix
of talent and strengths we need to build on the program we have developed and
implemented to date.

The management additions and our restructuring program have put us in a position
to focus on a major area of concentration for the company in Fiscal 1995;
improving our product line. Our commitment is to rebuilding and maintaining
strong products that are consistent with the high quality and forward looking
fashions customers associate with the Chaus name.

Finally, in a further sign of confidence in the company's future, I made an
additional commitment of financial support of $14.4 million in order to
strengthen operations. The funds are in the form of an increased letter of
credit and an equity infusion, and will be used to provide additional working
capital as well as for costs and associated expenses related to our bringing
Andrew Grossman on board.

Taken together, the combination of these and other actions have started to
have a positive effect on the company. We are seeing renewed enthusiasm for
our products, our merchandising and the building of our new management team.

But we recognize that hard work remains if we are to continue,
successfully, on the road toward profitability. All of us at Chaus are firmly
committed to engaging in that work, and in justifying your faith in us.

Sincerely,

/s/ Josephine Chaus

Josephine Chaus
Chairwoman of the Board

2
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Bernard Chaus, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth, for the years indicated, certain items
expressed as a percentage of net sales.

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------
1994 1993 1992
- - - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .......................... 100.0% 100.0% 100.0%
Cost of goods sold ................. 90.4 79.5 77.3
Selling, general and
administrative expenses ............ 26.9 24.3 19.7
Restructuring expenses ............. 2.5
Unusual expenses ................... 0.9
Interest and other income .......... (0.1) 0.2 0.2
Interest expense ................... 1.7 1.0 1.0
(Loss) income before
extraordinary item ................. (22.7) (4.6) 1.4
Net (loss) income .................. (22.7) (4.6) 2.2
</TABLE>

FISCAL 1994 COMPARED TO FISCAL 1993

For the fiscal year ended June 30, 1994, net sales decreased by $29.5 million
(12.5%) compared to the prior year. Of this decrease, $7.5 million (58.3%) was
attributable to blouses, $7.4 million (11.0%) was attributable to weekend casual
sportswear, $1.3 million (5.0%) was attributable to dresses, $15.3 million
(14.6%) was attributable to sportswear and $.6 million (13.9%) was attributable
to the Company's Canadian operation, offset somewhat by an increase of $2.6
million (12.1%) attributable to the retail outlet operation. All percentages in
parenthesis compare net sales in fiscal 1994 to net sales in fiscal 1993. Sales
amounts by product line are exclusive of merchandise sold by the retail outlet
operation.

The sales decrease is primarily due to lower average unit selling prices and
higher promotional allowances to accelerate and increase sell-through at the
retail level. The Company reduced domestic standard selling prices and
anticipated a more favorable business trend which would have enabled it to
increase sales; however, the unanticipated continuation of reduced consumer
spending for women's apparel resulted in less purchasing of the Company's
product. As a result, the Company sold less units at regular price, liquidated
excess inventory at reduced prices and had higher promotional allowances to
accelerate and increase sell-through at the retail level.

During fiscal year 1994, the Company's retail outlet operation increased from 32
stores on June 30, 1993 to 35 stores on June 30, 1994. The new stores that were
opened contributed approximately $1.7 million of the $2.6 million increase in
retail operation sales. Comparative same store operations from last year to this
year (twenty-one stores) showed a combined total sales decrease of approximately
3.5%. Pursuant to the Company's restructuring as indicated below, the Company
closed one store during fiscal 1994 and plans to close four stores in fiscal
1995.

Cost of goods sold as a percentage of net sales increased to 90.4% from 79.5% as
compared to the prior year. The increase in such costs, as a percentage of net
sales, was primarily attributable to the disposal of excess inventories
throughout the year at reduced prices, combined with an increase in promotional
allowances.

Selling, general and administrative expenses, as a percent of net sales,
increased to 26.9% from 24.3% as compared to the prior year. The actual dollar
expense decrease of $2.0 million represents expenses recorded as restructuring
and unusual expenses.

In June 1994, the Company recorded restructuring expenses of $5,300,000. The
restructuring expenses primarily relate to the Company's plan to reduce overhead
costs, consolidate its office locations and close selected retail outlet stores.
The restructuring expenses include $2,100,000 for the closing of selected retail
stores, $2,500,000 for the consolidation of office space in New York, office and
warehouse space in New Jersey and the closing of the Company's Philippines
office and $700,000 for employee severance. The Company believes that its
remaining retail stores will not only provide direct contributions to income but
will also enhance the Company's ability to manage its inventory without
affecting its principal channels of distribution.

In addition, in June 1994, the Company recorded unusual expenses of $1,900,000.
These primarily relate to expenses arising from the abandonment of fixed assets,
legal fees and winding down of the Company's Canadian joint venture operation.
Interest expense increased compared with last year primarily due to higher bank
borrowings as well as the higher interest rate on subordinated debt.

FISCAL 1993 COMPARED TO FISCAL 1992

For the fiscal year ended June 30, 1993, net sales decreased by $18.4 million
(7.2%) compared to the prior year. Of this decrease, $22.1 million (63.1%) was
attributable to blouses, $12.7 million (16.1%) was attributable to weekend
casual sportswear, $7.9 million (24.0%) was attributable to dresses and $3.1
million (100.0%) was attributable to better sportswear, an operation that was
discontinued in fiscal 1992, offset somewhat by increases of $15.4 million
(17.2%) attributable to sportswear and $8.0 million (59.8%) attributable to the
retail outlet operation. All percentages

3
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Bernard Chaus, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

in parenthesis compare net sales in fiscal 1993 to net sales in fiscal 1992.
Sales amounts by product line are exclusive of merchandise sold by the retail
outlet operation.

The sales decrease was primarily due to a combination of reduced unit sales and
lower average unit selling prices. The Company continued its strategy of reduced
domestic standard selling prices and anticipated a more favorable business trend
which would have enabled it to increase sales; however, weak retail spending
patterns for women's apparel resulted in the Company's customers ordering less
than was anticipated. As a result, the Company sold less units and had higher
than anticipated inventory levels at June 30, 1993.

During fiscal year 1993, the Company continued the expansion of its retail
outlet operation from 23 stores on June 30, 1992 to 32 stores on June 30, 1993.
The new stores that were opened contributed approximately $5.0 million of the
$8.0 million increase in retail operation sales. Comparative same store
operations from last year to this year (nine stores) showed a combined total
sales decrease of approximately 8.5%.

Cost of goods sold as a percentage of net sales increased to 79.5% from 77.3%
as compared to the prior year. The increase in such costs, as a percentage of
net sales, was primarily attributable to an increase in the markdown required on
our excessive inventory at June 30, 1993 which increased cost of goods sold
combined with an increase in returns and allowances which reduced net sales.

Selling, general and administrative expenses, as a percent of net sales,
increased to 24.3% from 19.7% as compared to the prior year. The actual dollar
increase of $7.4 million was comprised primarily of increases in the retail
outlet operation due to expansion ($2.8 million), an increase in the
international operation ($1.0 million) and increased design, merchandising and
production costs.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash (used in) provided by operating activities was ($5,020,000) in fiscal
1994, ($29,053,000) in fiscal 1993 and $16,074,000 in fiscal 1992. The net cash
used in operating activities in the current fiscal year resulted primarily from
the net loss ($46.8 million) and a reduction in accounts payable ($5.2 million),
offset somewhat by decreases in accounts receivable ($12.7 million) and
inventories ($20.5 million).

Historically, the Company has not required major capital expenditures. In
fiscal 1994 and 1993, purchases of fixed assets were $1.4 million and $2.3
million, respectively, consisting primarily of improvements in the Company's
New Jersey warehouse facilities, New York design and showroom facilities,
additional computer and telecommunications equipment, and for the expansion of
the retail outlet operation. In fiscal 1995, the Company anticipates capital
expenditures of approximately $1.5 million, consisting primarily of expenditures
for its warehouses, design facilities and the purchase of additional computer
software systems.

The Company has in place a Restated and Amended Financing Agreement (the
"Financing Agreement") with BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of The Bank of New York. Effective as of October 1, 1993, the
Financing Agreement provides to the Company a total line of credit up to an
aggregate of $60 million, including letter of credit and direct borrowings, with
a sublimit for loans and advances of $20 million. The Financing Agreement
contains a borrowing base formula which is the sum of (i) 85% of eligible
receivables, less reserves, (ii) 40% of eligible inventory, up to $27 million
and (iii) 100% of excess cash balances, all as defined in the agreement.
However, BNYF may decrease or increase the above percentages in the borrowing
base. The Company's indebtedness under the Financing Agreement is collateralized
by the Company's accounts receivable and inventory. Such agreement requires the
Company to comply quarterly with various financial tests including tangible net
worth of at least $47.5 million, working capital of at least $40 million and
restrictions on payment of principal and interest on subordinated indebtedness
unless certain conditions are met. Such agreement also requires the Company to
comply with various other restrictions including, but not limited to, a
restriction on the payment of dividends. Interest on direct borrowings is
payable monthly at an annual rate which is the higher of (a) 1/2 of 1% above the
prime rate of the Bank of New York (7.25% at June 30, 1994, and 6.0% at June 30,
1993) or (b) 1% above the federal funds rate, as defined. Additional interest at
2-1/2% per annum is due on amounts not paid when due. In addition, the agreement
provides for the payment of minimum service charges and/or interest which for
the fiscal year ended June 30, 1994, aggregated approximately $900,000. The
Financing Agreement may be cancelled by the Company any time after July 1, 1995,
upon 60 days prior written notice to BNYF or prior to July 1, 1995 upon 60 days
written notice to BNYF and the payment of an early termination fee. The
Financing Agreement is cancelable by BNYF effective July 1, 1995 or any July 1
thereafter, upon 60 days written notice to the Company.

During all four quarters of fiscal year 1994, the Company was not in
compliance with certain financial covenants. BNYF has waived such noncompliance.

The Company is currently negotiating with its bank for modification of certain
financial covenants for the future in

4
<PAGE> 7
Bernard Chaus, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

order to provide the latitude and resources necessary for future programs. The
Company believes that this negotiation will be successfully completed in the
near future. However, there can be no assurance that the Company will be able to
obtain the necessary modifications.

Josephine Chaus has provided a $7.2 million letter of credit expiring April 15,
1995 (increased from previous amounts provided by her of $3.0 million in April
1994 and $5.0 million in June 1994 and extended from the previous expiration
date of October 15, 1994) to support the Company's credit facility. In exchange
for this letter of credit, BNYF is providing at least an additional $12.2
million of credit availability under the Company's borrowing formula. To
compensate Ms. Chaus for the letter of credit, an independent committee of the
Company's Board of Directors has authorized the issuance to her of warrants to
purchase an aggregate of 544,000 shares of Common Stock at exercise prices
ranging from $2.25 to $3.00 (in each case equal to 120% of the market price on
the authorization date) and warrants to purchase additional shares of Common
Stock at an exercise price equal to 120% of the five days trading average of the
closing sale price of the Company's Common Stock commencing September 27, 1994.
The precise number of such shares shall be set after the exercise price is
determined. Issuance of the warrants is subject to (i) receipt of an opinion
from a nationally recognized investment banking firm that the terms of the
warrants are commercially reasonable and (ii) shareholder approval.

Josephine Chaus has also agreed to purchase $7.2 million of Common Stock of the
Company at a purchase price determined by the independent committee equal to the
five trading day average of the closing sale price of the Company's Common Stock
commencing September 27, 1994. Issuance of the shares is subject to (i) receipt
of an opinion from a nationally recognized investment banking firm that the
purchase price terms are commercially reasonable and (ii) shareholder approval.
Pending such approval, Ms. Chaus has loaned the $7.2 million to the Company and
the Company has issued a $7.2 million promissory note to Ms. Chaus, bearing
interest at 12%. The note will be exchanged for the shares of Common Stock when
the conditions to issuance have been satisfied. Proceeds from such cash infusion
are being used for costs and associated expenses related to the signing of the
new Chief Executive Officer which costs will be charged to operations in the
quarter ending September 30, 1994.

The Company has outstanding at June 30, 1994 $19,039,000 of subordinated
promissory notes payable to Josephine Chaus and the Estate of Bernard Chaus,
which were originally issued on June 30, 1986 (the "First Promissory Notes"). In
October 1993 an independent committee of the Board of Directors agreed in
principle with the noteholders to modify the First Promissory Notes. The
maturity date of the notes was extended until July 1, 1995 and, effective
October 18, 1993, it was agreed that the notes would bear interest at a rate of
12% per annum, payable quarterly. It was further agreed that interest which had
to be deferred as a result of bank covenant requirements would be added to the
New Promissory Note (see below). The noteholder has agreed that all accrued
interest added quarterly to the New Promissory Note will be payable on July 1,
1995.

In February and March 1991, Bernard Chaus and Josephine Chaus each provided
subordinated financing to the Company in the aggregate amount of $10.0 million
(the "Second Promissory Notes"). In September 1993, both Josephine Chaus and the
Estate of Bernard Chaus agreed to convert the remaining balance of the Second
Promissory Notes ($2,623,000) and the interest for the quarter ended June 30,
1993 for both the First Promissory Notes and the Second Promissory Notes
($417,432) into a demand note (the "Demand Note") in the aggregate amount of
$3,040,432.

In October 1993, an independent committee of the Board of Directors agreed in
principle with the noteholders to modify the Demand Note. The Demand Note was
converted into new promissory notes (collectively the "New Promissory Notes").
It was agreed that the New Promissory Notes would bear interest at the rate of
10% per annum effective from July 1, 1993, and that such interest would be
payable on July 1, 1994. Principal payments on the New Promissory Notes were
made in November 1993 ($500,000), February 1994 ($250,000) and August 15, 1994
($250,000). The noteholder agreed to extend the maturity date for the remaining
principal and interest payments which were to have been due on July 1, 1994 to
July 1, 1995.

Aggregate annual principal payments of subordinated debt as of June 30, 1994
are $250,000 in fiscal year 1995, and $18,789,000 in fiscal year 1996.

The Company has undertaken a number of initiatives to strengthen its financial
position, including a cash infusion of $7.2 million from its principal
shareholder, a letter of credit issued by this shareholder to facilitate an
increase in loan availability, closure of certain retail operations,
consolidation of other office facilities, an overhead reduction program and the
hiring of certain senior management personnel. The Company believes that these
initiatives will have a positive impact on future operating results.

5
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Bernard Chaus, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
June 30, June 30,
1994 1993
---------------------------
(In thousands except
number of shares)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .............................................................. $ 468 $ 1,367
Accounts receivable, less allowance for doubtful accounts,
sales discounts, returns and allowances of $6,340 and $4,341 ......................... 17,757 30,562
Inventories ............................................................................ 25,503 45,974
Prepaid expenses ....................................................................... 3,608 4,629
Refundable and prepaid income taxes .................................................... 135 722
------- -------
Total Current Assets ................................................................. 47,471 83,254
Fixed Assets ............................................................................. 3,612 5,932
Other Assets ............................................................................. 536 1,022
------- --------
$51,619 $90,208
======= ========
Liabilities and Stockholders' (Deficit) Equity
Current Liabilities
Notes payable -- banks ................................................................. $21,115 $14,881
Subordinated promissory notes -- current ............................................... 250 2,623
Accounts payable ....................................................................... 14,290 19,489
Accrued expenses ....................................................................... 6,710 5,338
Accrued restructuring expenses ......................................................... 1,764
-------- --------
Total Current Liabilities ............................................................ 44,129 42,331
Subordinated Promissory Notes ............................................................ 18,789 14,730
Accrued Restructuring Expenses ........................................................... 2,315
-------- --------
65,233 57,061
Stockholders' (Deficit) 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 --
18,975,031 at June 30, 1994 and June 30, 1993 ........................................ 190 190
Additional paid-in capital ............................................................. 40,226 40,232
Deficit ................................................................................ (52,550) (5,795)
Less: Treasury stock, at cost -- 622,700 shares ........................................ (1,480) (1,480)
-------- --------
Total Stockholders' (Deficit) Equity ................................................. (13,614) 33,147
-------- --------
$51,619 $90,208
======== ========
</TABLE>
See accompanying notes.

6
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Bernard Chaus, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------
1994 1993 1992
- - - ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
Net sales ........................................................... $ 206,332 $ 235,819 $ 254,190
Cost of goods sold .................................................. 186,594 187,423 196,415
------------ ------------ ------------
Gross profit ........................................................ 19,738 48,396 57,775
Selling, general and administrative expenses ........................ 55,400 57,410 50,016
Restructuring expenses .............................................. 5,300
Unusual expenses .................................................... 1,900
------------ ------------ ------------
(42,862) (9,014) 7,759
Interest income ..................................................... 20 293 444
Interest expense .................................................... (3,439) (2,322) (2,474)
Other income (expense) .............................................. (210) 156 28
------------ ------------ ------------
(Loss) income before provision
for income taxes & extraordinary item ............................. (46,491) (10,887) 5,757
Provision for income taxes .......................................... 264 102 2,245
------------ ------------ ------------
(Loss) income before extraordinary item ............................. (46,755) (10,989) 3,512
Extraordinary item:
Benefit from utilization of net operating
loss carryforward ............................................... 1,957
------------ ------------ ------------
Net (loss) income ................................................... ($46,755) ($10,989) $ 5,469
============ ============ ============
(Loss) income per common share before extraordinary item ............ ($ 2.55) ($ 0.60) $ 0.19
Income per common share from extraordinary item ..................... 0.11
------------ ------------ ------------
Net (loss) income per share ......................................... ($ 2.55) ($ 0.60) $ 0.30
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding .............................. 18,352,000 18,272,000 18,363,000
</TABLE>

See accompanying notes.

7
<PAGE> 10
Bernard Chaus, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

<TABLE>
<CAPTION>
Common Stock Additional (Deficit) Treasury Stock
------------ --------------
Number of Paid-in Deferred Retained Number of
Shares Amount Capital Compensation Earnings Shares Amount Total
- - - -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except number of shares)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1991 . 18,680,738 $ 187 $ 39,259 ($8) ($275) 622,700 ($1,480) $37,683
Net income ............... 5,469 5,469
Exercise of stock options 54,770 168 168
Deferred compensation
amortization ............ 8 8
---------- ----- -------- ---- ------ ------- ----- -------
Balance at June 30, 1992 18,735,508 187 39,427 0 5,194 622,700 (1,480) 43,328
Net loss ............... (10,989) (10,989)
Exercise of stock options 239,523 3 805 808
---------- ----- -------- ---- ------ ------- ----- -------
Balance at June 30, 1993 18,975,031 190 40,232 0 (5,795) 622,700 (1,480) 33,147
Net loss ................ (46,755) (46,755)
Restricted stock purchase
and retirement -- net ... (6) (6)
---------- ----- -------- ---- ------ ------- ----- -------
Balance at June 30, 1994 18,975,031 $ 190 $ 40,226 $ 0 ($52,550) 622,700 ($1,480) ($13,614)
========== ===== ======== ==== ======= ======= ====== =======
</TABLE>

See accompanying notes.

8
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Bernard Chaus, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------
1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net (loss) income ............................................................ ($46,755) ($10,989) $5,469
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................................ 2,485 1,553 1,737
Loss on disposal of fixed assets ......................................... 1,192
Provision for (recovery of) losses on accounts receivable ................ 117 (25) (951)
Deferred compensation -- net ............................................. 8
Unpaid interest on subordinated promissory notes ......................... 2,436
Changes in operating assets and liabilities:
Accounts receivable .................................................... 12,688 2,764 6,217
Inventories ............................................................ 20,471 (26,097) 4,116
Prepaid expenses and other assets ...................................... 1,507 (2,574) (783)
Income taxes receivable ................................................ 587 (81) 1,988
Accounts payable ....................................................... (5,199) 4,588 (1,214)
Accrued expenses ....................................................... 1,372 1,808 (513)
Accrued restructuring expenses ......................................... 4,079
-------- -------- --------
Net Cash (Used In) Provided By Operating Activities .......................... (5,020) (29,053) 16,074
Investing Activities
Purchase of fixed assets ................................................... (1,357) (2,275) (2,254)
-------- -------- --------
Net Cash Used In Investing Activities ........................................ (1,357) (2,275) (2,254)
Financing Activities
Net proceeds from short term bank borrowings ............................... 6,234 14,881
Principal payments on subordinated promissory notes ........................ (750) (7,377)
Purchase and retirement of restricted stock ................................ (6)
Net proceeds from sale of stock ............................................ 808 168
-------- -------- --------
Net Cash Provided By Financing Activities .................................... 5,478 8,312 168
-------- -------- --------
(Decrease) Increase In Cash And Cash Equivalents ............................. (899) (23,016) 13,988
Cash And Cash Equivalents At Beginning Of Year ............................... 1,367 24,383 10,395
-------- -------- --------
Cash And Cash Equivalents At End Of Year ..................................... $468 $1,367 $24,383
======== ======== ========
</TABLE>

See accompanying notes.

9
<PAGE> 12
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company: Bernard Chaus, Inc. designs, arranges for the manufacture of and
markets an extensive range of women's clothing. The Company sells its
products primarily to department and specialty stores throughout the United
States.

Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. Material intercompany accounts
and transactions have been eliminated.

Net (Loss) Income Per Share: Net (loss) income per share has been computed
by dividing the applicable net (loss) income by the weighted average number of
common and common equivalent shares outstanding during the year (1994 -
18,352,000, 1993 - 18,272,000 and 1992 - 18,363,000). For the fiscal years ended
1994 and 1993, common equivalent shares were not considered as the inclusion of
such would have been antidilutive.

Revenue Recognition: Revenues are recorded at time of merchandise shipment.

Credit Terms: The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history. The Company
generally does not require collateral. There have been minimal net credit losses
in each of the last three fiscal years. The historic level of credit losses is
0.14% of net sales, and the Company provides for estimated losses. These losses
have consistently been below management's expectations. At June 30, 1994 and
1993, respectively, there was approximately 41.5% and 36% of the Company's
accounts receivable balance due from the department store customers.

Sales Returns: The Company records sales returns as a reduction to gross sales.

Cooperative Advertising: The Company records charges for cooperative
advertising as advertising expense, a component of selling, general and
administrative expenses.

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
Statement of Operations.

Employee Benefits: The Company does not provide postretirement benefits
other than pensions to union employees. Accordingly, Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits other than Pensions" will not affect the Company's financial
statements. The Company does not typically provide post employment benefits
to its employees. Accordingly, Statement of Financial Accounting Standards
No. 112 "Employers' Accounting for Postemployment Benefits" will not have a
material affect on the Company's financial statements.

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.
Automobiles are depreciated principally using the straight-line method over five
years. Computer software is depreciated using the straight-line method over five
years.

Income Taxes: Effective July 1, 1993, the Company adopted Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Under Statement 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Prior to the adoption of
Statement 109, income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expenses that were
reported in different years in the financial statements and tax returns and were
measured at the tax rate in effect in the year the difference originated.

As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. There was no cumulative effect of the
change, as well as there being no effect on pre-tax loss for the year ended June
30, 1994.

10
<PAGE> 13
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash Equivalents: Cash equivalents are short-term, highly liquid
investments purchased with an original maturity of three months or less.

2. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
June 30, June 30,
1994 1993
------------------------
(In thousands)
<S> <C> <C>
Finished goods................... $25,075 $43,666
Work-in-process.................. 124 526
Raw materials.................... 304 1,782
------- -------
$25,503 $45,974
======= =======
</TABLE>

Inventories include merchandise in transit (principally finished goods) of
approximately $11,176,000 at June 30, 1994 and $15,709,000 at June 30, 1993.

3. FIXED ASSETS

Fixed assets at cost, net of accumulated depreciation and amortization,
consist of:

<TABLE>
<CAPTION>
June 30, June 30,
1994 1993
------------------------
(In thousands)
<S> <C> <C>
Furniture and equipment.......... $11,781 $12,348
Leasehold improvements........... 9,303 9,412
Automobiles...................... 340 484
------- -------
................................. 21,424 22,244
Less accumulated depreciation
and amortization................. 17,812 16,312
------- -------
$ 3,612 $ 5,932
======= =======
</TABLE>

4. INCOME TAXES

Effective July 1, 1993, the Company adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes". Under Statement 109,
the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
operating loss carryforwards are measured using enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was based on items of income
and expenses that were reported in different years in the financial statements
and tax returns and were measured at the tax rate in effect in the year the
difference originated.

Significant components of the Company's net deferred tax assets as of June 30,
1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Deferred tax assets:
Net operating loss carryforwards................. $20,300
Costs capitalized to inventory for
tax purposes..................................... 1,000
Allowance for doubtful accounts.................. 100
Book over tax depreciation....................... 1,300
Restructuring reserves not currently
deductible....................................... 1,600
Other nondeductible accruals..................... 800
------
25,100
Valuation allowance for
deferred tax assets.............................. (25,100)
------
Net deferred tax asset........................... $ 0
======
</TABLE>

There was a change in the valuation allowance for the year ended June 30,
1994 of $19,600,000.

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1994 1993 1992
- - - ------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
(Credit) provision for federal
income taxes at the statutory
rate of 35.0% in 1994,
and 34.5% in 1993
and 34% in 1992................... ($16,272) ($3,756) $1,957
State and local income taxes
net of federal tax benefit........ 264 102 288
Effect of unrecognized tax loss
carryforwards..................... 16,272 3,756
------- ------ ------
Provision for income taxes........ $ 264 $ 102 $2,245
======= ====== ======
</TABLE>

At June 30, 1994, the Company has a federal net operating loss carryforward
for income tax purposes of approximately $50 million, which will expire
between 2006 and 2009.

11
<PAGE> 14
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED STATEMENTS (continued)

5. FINANCIAL AGREEMENTS

During all four quarters of fiscal year 1994, the Company was not in
compliance with certain financial covenants. BNYF has waived such
noncompliance.

The Company is currently negotiating with its bank for modification of
certain financial covenants for the future in order to provide the latitude and
resources necessary for future programs. The Company believes that this
negotiation will be successfully completed in the near future. However, there
can be no assurance that the Company will be able to obtain the necessary
modifications.

Josephine Chaus has provided a $7.2 million letter of credit expiring April
15, 1995 (increased from previous amounts provided by her of $3.0 million in
April 1994 and $5.0 million in June 1994 and extended from the previous
expiration date of October 15, 1994) to support the Company's credit facility.
In exchange for this letter of credit, BNYF is providing at least an additional
$12.2 million of credit availability under the Company's borrowing formula. To
compensate Ms. Chaus for the letter of credit, an independent committee of the
Company's Board of Directors has authorized the issuance to her of warrants to
purchase an aggregate of 544,000 shares of Common Stock at exercise prices
ranging from $2.25 to $3.00 (in each case equal to 120% of the market price on
the authorization date) and warrants to purchase additional shares of Common
Stock at an exercise price equal to 120% of the five days trading average of the
closing sale price of the Company's Common Stock commencing September 27, 1994.
The precise number of such shares shall be set after the exercise price is
determined. Issuance of the warrants is subject to (i) receipt of an opinion
from a nationally recognized investment banking firm that the terms of the
warrants are commercially reasonable and (ii) shareholder approval.

Josephine Chaus has also agreed to purchase $7.2 million of Common Stock of
the Company at a purchase price determined by the independent committee equal to
the five trading day average of the closing sale price of the Company's Common
Stock commencing September 27, 1994. Issuance of the shares is subject to (i)
receipt of an opinion from a nationally recognized investment banking firm that
the purchase price terms are commercially reasonable and (ii) shareholder
approval. Pending such approval, Ms. Chaus has loaned the $7.2 million to the
Company and the Company has issued a $7.2 million promissory note to Ms. Chaus,
bearing interest at 12%. The note will be exchanged for the shares of Common
Stock when the conditions to issuance have been satisfied. Proceeds from such
cash infusion are being used for costs and associated expenses related to the
signing of the new

12
<PAGE> 15
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Chief Executive Officer which costs will be charged to
operations in the quarter ending September 30, 1994.

6. SUBORDINATED PROMISSORY NOTES

In October 1993, an independent committee of the Board of Directors agreed
in principle with the noteholders to modify the Demand Note. The Demand Note was
converted into new promissory notes (collectively the "New Promissory Notes").
It was agreed that the New Promissory Notes would bear interest at the rate of
10% per annum effective from July 1, 1993, and that such interest would be
payable on July 1, 1994. Principal payments on the New Promissory Notes were
made in November 1993 ($500,000), February 1994 ($250,000) and August 15, 1994
($250,000). The noteholder agreed to extend the maturity date for the remaining
principal and interest payments which were to have been due on July 1, 1994 to
July 1, 1995.

Aggregate annual principal payments of subordinated debt as of June 30,
1994 are $250,000 in fiscal year 1995, and $18,789,000 in fiscal year 1996.

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 (recovery) amounted to approximately $61,000, $28,000 and ($33,000) in
fiscal 1994, 1993 and 1992, respectively. As of December 31, 1993, the actuarial
present value of the accumulated vested and non-vested plan benefits amounted to
$415,000 and net assets available for benefits amounted to $308,000.

Savings Plan: The Company has a savings plan (the "Savings Plan") under
which eligible employees may contribute a percentage of their compensation which
the Company (subject to certain limitations) will match 50% of the employee's
contribution. Company contributions will be invested half in the Common Stock of
the Company and half in investment funds selected by the participant and are
subject to vesting provisions of the Savings Plan. Expense under the plan was
approximately $301,000, $287,000 and $204,000 in fiscal 1994, 1993 and 1992,
respectively. An aggregate of 100,000 shares of Common Stock has been reserved
for issuance under the Savings Plan.

Incentive Award Plan: Eligible participants in the Incentive Award Plan may
be allocated additional compensation from an annual bonus pool and, in the case
of participating sales executives, from their divisions' net sales performance
as determined in accordance with the Incentive Award Plan. On January 22, 1992,
however, the Incentive Award Plan was terminated by the Board of Directors and
replaced by a simplified plan (the "Simplified Plan"). Under the Simplified
Plan, bonuses may be awarded if net earnings of the Company reach a
pre-determined level. In fiscal 1994 no additional compensation was awarded
under the Simplified Plan.

Restricted Stock Plan: In November 1987, the Company's shareholders
approved the adoption of a restricted stock plan (the "Plan"). Pursuant to the
Plan, 250,000 restricted shares of the Company's Common Stock were reserved for
allocation to key employees of the Company. The

13
<PAGE> 16
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

restrictions on the shares terminate as to 25 percent of such shares on
each anniversary of their date of allocation. As of June 30, 1994, all
restricted shares previously allocated have been vested and purchased by certain
officers and employees of the Company. The difference between the market value
of the shares on the date of allocation and the purchase price has been
reflected as deferred compensation on the Company's balance sheet and was
amortized over the vesting period of such shares.

Stock Option Plan: Pursuant to the Stock Option Plan, the Company may grant
to eligible individuals incentive stock options, as defined in the Internal
Revenue Code, and non incentive stock options. At the annual meeting of
shareholders in November 1993, the shareholders approved the increase in the
number of shares of Common Stock with respect to which options may be granted
from 1,500,000 shares to 2,500,000 shares. No stock options may be granted
subsequent to 1996 and the exercise price may not be less than 100% of the fair
market value on the date of grant for incentive stock options and 85% of the
fair market value on the date of grant for non incentive stock options.

<TABLE>
<CAPTION>
Nonincentive
Stock Options
--------------------------------------
Number Exercise
of Shares Price Range
- - - --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
June 30, 1991................. 606,116 $2.125 - $6.50
Options granted
in fiscal 1992................ 935,726 $2.375 - $4.25
Options cancelled.............. (200,964) $2.125 - $4.88
Options exercised.............. (54,770) $2.125 - $4.88
--------- --------------
Outstanding at
June 30, 1992................. 1,286,108 $2.375 - $6.50
Options granted
in fiscal 1993................ 86,906 $2.875 - $9.375
Options cancelled.............. (21,027) $4.25 - $5.375
Options exercised.............. (239,523) $2.375 - $6.50
--------- ---------------
Outstanding at
June 30, 1993................. 1,112,464 $2.375 - $9.375
Options granted
in fiscal 1994................ 630,000 $1.875 - $4.750

Options cancelled.............. (323,316) $2.875 - $6.50
--------- ---------------
Outstanding at
June 30, 1994................. 1,419,148 $1.875 - $9.375
========= ===============
</TABLE>

The stock options become exercisable one year after issuance as to 25%; an
additional 25% becomes exercisable on each of the next three anniversary dates.
As of June 30, 1994 options to purchase approximately 597,000 shares were
exercisable.

At June 30, 1994, approximately 2,546,000 shares of Common Stock were
reserved for issuance under the Stock Option, Savings and Restricted Stock plans
combined.

8. LICENSE AGREEMENTS

In fiscal year 1992 the Company terminated its two licensing agreements
("Agreements") originally entered into in fiscal year 1990, whereby the Company
had granted certain manufacturers an exclusive right to use the Company's
trademarks in connection with the manufacture, sale and promotion of ladies
footwear, handbags and small leather accessories.

During fiscal year 1992, the Company recognized royalties of approximately
$700,000 under these agreements.

9. RESTRUCTURING AND UNUSUAL EXPENSES

The Company has undertaken a number of initiatives to strengthen its
financial position, including a cash infusion of $7.2 million from its principal
shareholder, a letter of credit issued by this shareholder to facilitate an
increase in loan availability, closure of certain retail operations,
consolidation of other office facilities, an overhead reduction program and the
hiring of certain senior management personnel. The Company believes that these
initiatives will have a positive impact on future operating results.

Relative to the initiatives described, in June 1994, the Company recorded
restructuring expenses of $5,300,000. The restructuring expenses primarily
relate to the Company's plan to reduce overhead costs, consolidate its office
locations and close selected retail outlet stores. The restructuring expenses
include $2,100,000 for the closing of selected retail stores, $2,500,000 for the
consolidation of office space in New York, office and warehouse space in New
Jersey and the closing of the Company's Philippines office and $700,000 for
employee severance. The Company believes that its remaining retail stores will
not

14
<PAGE> 17
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED STATEMENTS (continued)

only provide direct contributions to income but will also enhance the
Company's ability to manage its inventory without affecting its principal
channels of distribution.

10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

The Company leases showroom, distribution and office facilities, retail
outlet facilities and equipment under various noncancellable operating lease
agreements which expire through 2005. Rental expense for the years ended June
30, 1994, 1993 and 1992 was approximately $12,909,000 (approximately $4,100,000
of which is included in restructuring expenses), $8,066,000 and $6,772,000,
respectively.

The minimum aggregate rental commitments at June 30, 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fiscal year ending:
1995.............................. $ 6,001
1996.............................. 4,649
1997.............................. 2,648
1998.............................. 1,795
1999.............................. 1,567
Subsequent to 1999....................... 4,242
-------
$20,902
=======
</TABLE>

The Company is contingently liable under letters of credit issued by banks
contractual commitments for merchandise purchases of approximately
$17,000,000 at June 30, 1994.

By order dated September 1, 1992, Federal Judge Shirley Wohl Kram dismissed
ejudice as time-barred the Amended Complaint against the Company and others,
in the previously reported consolidated class actions entitled Phifer v. Chaus
et al., Goldschlack v. Chaus et al., Susman v. Chaus et al. and I. Bibcoff Inc.
Pension Trust Fund v. Chaus et al. In such actions, claims were asserted
against the Company and others, including the Company's lead underwriters, for
alleged misstatements and omissions contained in the Company's July 1986
Prospectus delivered in connection with the Company's initial public offering
and its 1986 and 1987 Annual Reports. Plaintiffs' attorneys filed a notice of
appeal, which they subsequently withdrew subject to the right to restore the
appeal by January 8, 1993. No such appeal was made and the action was
automatically deemed dismissed with prejudice.

On April 19, 1993, a Class Action Complaint was filed in the Superior Court
ersey, Hudson County, against the Company and others, including the lead
underwriter of the Company's 1986 initial public offering, alleging common law
fraud and negligent misrepresentation in the sale of the Company's stock in its
initial public offering, allegations that are substantially similar to the
claims that were dismissed with prejudice in the federal court. One of the
plaintiffs from the federal action was originally a party in this action in
state court. On June 18, 1993, the Company received by mail, a copy of Jury
Demand Class Action in the Superior Court of New Jersey, Hudson County entitled
Theodore M. Wietecha and Lisa A. Phifer v. Bernard Chaus, Inc. et al. The
complaint was amended in September 1993 to delete Lisa Phifer as a plaintiff. On
May 27, 1994, the Company moved to dismiss the complaint and/or to deny or limit
class status. The motion is before the court for decision.

While a negative outcome in this action could have a material adverse
effect on the Company, management believes that such action is without merit
and that the Company has both substantive and procedural bases for contesting
this latest action. The Company intends to defend itself vigorously
against this claim. Because the underlying claims asserted in the action
have not been the subject of discovery and because of the preliminary
procedural posture of the action, no estimate of any possible loss due to
this action can presently be made.

The Company has also negotiated an agreement with its directors and
liability insurance carrier whereby the Company will obtain interim
reimbursement of certain expenses incurred by the Company in connection with
these actions because a portion of such expenses may be attributable to the
defense of its directors and officers, with full reservation of rights under the
policy of the Company, the directors and officers and the insurance carrier upon
the ultimate disposition of the actions.

15
<PAGE> 18
Bernard Chaus, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A claim for indemnification has been asserted by the Company's former
ters against the Company. The indemnification claim demands repayment of the
legal fees and expenses incurred by the Underwriters in connection with the
consolidated class actions entitled Phifer v. Chaus, et al. Discussions are
ongoing with counsel for the Underwriters to resolve this claim.

The Company is also involved in various other legal proceedings arising out
onduct of its business. The Company believes that the eventual outcome of the
proceedings referred to above will not have a material adverse effect on the
Company's financial condition or results of operations.

Advertising expenses for the fiscal years ended June 30, 1994, 1993, and
1992, were approximately $1,649,000, $1,914,000 and $1,740,000.

The Company's gross sales in fiscal 1994 to department store customers
owned by three single corporate entities were approximately $38,000,000,
$38,000,000 and $21,000,000. The Company's gross sales in fiscal 1993 to these
department store customers were $52,000,000, $34,000,000 and $22,000,000. In
fiscal 1992 gross sales to these department store customers were approximately
$63,000,000, $35,000,000 and $24,000,000.

Taxes paid (refunded) amounted to ($361,000) in fiscal 1994, $180,000 in
1993 and ($2,000,000) in fiscal 1992. Interest paid amounted to
$1,400,000 in fiscal 1994, $1,900,000 in fiscal 1993 and $2,470,000 in fiscal
1992.

16
<PAGE> 19
Bernard Chaus, Inc. and Subsidiaries

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Bernard Chaus, Inc.

We have audited the accompanying consolidated balance sheet of Bernard Chaus,
subsidiaries as of June 30, 1994 and the related consolidated statement of
operations, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bernard Chaus,
Inc. and subsidiaries at June 30, 1994, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

/s/ Deloitte & Touche LLP

New York, New York
September 21, 1994

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Bernard Chaus, Inc.

We have audited the accompanying consolidated balance sheet of Bernard Chaus,
Inc. and subsidiaries as of June 30, 1993 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended June 30, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
in all material respects, the consolidated financial position of Bernard Chaus,
Inc. and subsidiaries at June 30, 1993, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1993, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

New York, New York
August 18, 1993

17
<PAGE> 20
Bernard Chaus, Inc. and Subsidiaries

MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CHS". The range of high and low sales prices for the Common
Stock on the New York Stock Exchange composite tape (as reported by The
National Quotation Bureau through June 30, 1994 and as reported by The Wall
Street Journal thereafter) through September 16, 1994 is as follows:

<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1993
-----------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter ................ $ 3.75 $ 2.625 $ 9.25 $ 6.125
2nd Quarter ................ 3.125 1.75 10.00 6.25
3rd Quarter ................ 2.625 1.625 7.25 4.50
4th Quarter ................ 3.75 1.75 5.625 3.25
</TABLE>

<TABLE>
<CAPTION>
Fiscal 1995
---------------
High Low
<S> <C> <C>
1st Quarter to Sept. 16, 1994................. $4.375 $1.75
</TABLE>

On September 16, 1994, the last sales price of the Company's Common Stock, as
reported on the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal), was $4.00.

As of June 30, 1994 the approximate number of record holders of the Company's
Common Stock was 1,300.

The Company does not plan to pay any dividends on its Common Stock within the
foreseeable future. Any such dividend would, in any event, be subject to
compliance with covenants contained in the Company's Financing Agreement (as
defined herein), which currently prohibits payment of dividends.

EXECUTIVE OFFICES
1410 Broadway
New York, New York 10018
(212) 354-1280

REGISTRAR AND TRANSFER AGENT FOR THE
COMPANY'S COMMON STOCK
Chemical Bank
P. O. Box 24935
Church Street Station
New York, New York 10249
(212) 613-7139
(212) 613-7144

INDEPENDENT AUDITORS
Deloitte & Touche

COUNSEL
Shereff, Friedman, Hoffman & Goodman

18
<PAGE> 21

BLANK PAGE

<PAGE> 22

BLANK PAGE

<PAGE> 23
Bernard Chaus, Inc. and Subsidiaries

DIRECTORS AND EXECUTIVE OFFICERS

Richard A. Baker
President

Josephine Chaus
Director, Chairwoman of the Board
and Office of the Chairman

Michael Fieman
Executive Vice President - Production

Andrew Grossman
Director, Chief Executive Officer
and Office of the Chairman

Wayne S. Miller
Executive Vice President -
Finance and Administration and
Chief Financial Officer

Marc A. Zuckerman
Treasurer

Philip G. Barach
Director, formerly Chairman of the Board
of U.S. Shoe Corporation

John W. Burden, III
Director, retired, formerly Chairman of the Board
of Federated Department Stores

S. Lee Kling
Director, Chairman, Kling Rechter & Co.

Harvey M. Krueger
Director, Senior Managing Director, Lehman Brothers

CORPORATE DATA

FORM 10-K

A copy of the Company's Annual Report on Form 10-K as filed with the Securities
and Exchange Commission will be provided to shareholders without charge (other
than a reasonable charge for any exhibits requested) upon written request to the
Company, at 800 Secaucus Road, Secaucus, New Jersey 07094, Attention: Wayne S.
Miller, Chief Financial Officer.

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BERNARD CHAUS, INC.
1410 Broadway
New York, NY 10018