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EX-31.2 - EX-31.2 - CHAUS BERNARD INCy04538exv31w2.htm
EX-32.1 - EX-32.1 - CHAUS BERNARD INCy04538exv32w1.htm
EX-31.1 - EX-31.1 - CHAUS BERNARD INCy04538exv31w1.htm
EX-32.2 - EX-32.2 - CHAUS BERNARD INCy04538exv32w2.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 1, 2011.
OR
     
o   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 incorporation or organization)   (I.R.S. employer identification number)
     
530 Seventh Avenue, New York, New York   10018
(Address of Principal Executive Offices)   (Zip Code)
(212) 354-1280
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes þ No o.
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any , every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o.
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer o   Accelerated filer o  Non-accelerated filer o  Smaller reporting company þ
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
Date   Class   Shares Outstanding
February 10, 2011   Common Stock, $0.01 par value   34,481,373
 
 

 


 

INDEX
         
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    21  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares and per share amounts)
                         
    January 1,     July 3,     December 31,  
    2011     2010     2009  
    (Unaudited)     ( * )     (Unaudited)  
Assets
                       
Current Assets
                       
Cash
  $ 3     $ 4     $ 149  
Accounts receivable — factored
    10,063       19,404       13,443  
Accounts receivable — net
    2,073       1,789       907  
Inventories — net
    6,819       8,846       4,187  
Prepaid expenses and other current assets
    974       536       532  
 
                 
Total current assets
    19,932       30,579       19,218  
Fixed assets — net
    889       885       746  
Other assets
    3       25       91  
Trademarks
    1,000       1,000       1,000  
 
                 
Total assets
  $ 21,824     $ 32,489     $ 21,055  
 
                 
Liabilities and Stockholders’ Deficiency
                       
Current Liabilities
                       
Revolving credit borrowings
  $ 7,172     $ 11,175     $ 7,762  
Accounts payable
    17,160       19,399       8,559  
Accrued expenses
    1,162       2,305       2,392  
 
                 
Total current liabilities
    25,494       32,879       18,713  
Deferred income
    3,034       3,234       3,433  
Long term liabilities
    1,812       1,735       1,556  
Deferred income taxes
    186       173       161  
 
                 
Total liabilities
    30,526       38,021       23,863  
Stockholders’ Deficiency
                       
Preferred stock, $.01 par value, authorized shares — 1,000,000; issued and outstanding shares — none
                 
Common stock, $.01 par value, authorized shares — 50,000,000; issued shares — 37,543,643 at January 1, 2011, July 3, 2010 and December 31, 2009
    375       375       375  
Additional paid-in capital
    133,441       133,440       133,434  
Deficit
    (139,998 )     (136,827 )     (134,208 )
Accumulated other comprehensive loss
    (1,040 )     (1,040 )     (929 )
Less: Treasury stock at cost — 62,270 shares at January 1, 2011, July 3, 2010 and December 31, 2009
    (1,480 )     (1,480 )     (1,480 )
 
                 
Total stockholders’ deficiency
    (8,702 )   $ (5,532 )     (2,808 )
 
                 
Total liabilities and stockholders’ deficiency
  $ 21,824     $ 32,489     $ 21,055  
 
                 
 
*   Derived from audited financial statements at July 3, 2010.
See accompanying notes to consolidated financial statements.

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BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except number of shares and per share amounts)
                                 
    For the Three Months Ended     For the Six Months Ended  
    January 1,     December 31,     January 1,     December 31,  
    2011     2009     2011     2009  
    (Unaudited)     (Unaudited)  
Net revenue
  $ 16,909     $ 21,097     $ 44,625     $ 44,807  
Cost of goods sold
    14,855       16,396       35,978       33,635  
 
                       
 
                               
Gross profit
    2,054       4,701       8,647       11,172  
Selling, general and administrative expenses
    7,011       6,955       14,306       14,206  
Accrued gain on early termination of license agreement
    (1,033 )           (2,890 )      
     
Loss from operations
    (3,924 )     (2,254 )     (2,769 )     (3,034 )
 
                               
Interest expense
    177       207       378       360  
 
                       
 
                               
Loss before income tax provision
    (4,101 )     (2,461 )     (3,147 )     (3,394 )
Income tax provision
    12       10       24       20  
 
                       
 
                               
Net loss
  $ (4,113 )   $ (2,471 )   $ (3,171 )   $ (3,414 )
 
                       
 
                               
Basic loss per share
  $ (0.11 )   $ (0.07 )   $ (0.08 )   $ (0.09 )
 
                       
 
                               
Diluted loss per share
  $ (0.11 )   $ (0.07 )   $ (0.08 )   $ (0.09 )
 
                       
 
                               
Weighted average number of shares outstanding — basic
    37,481,000       37,481,000       37,481,000       37,481,000  
 
                       
Weighted average number of common and common equivalent shares outstanding- diluted
    37,481,000       37,481,000       37,481,000       37,481,000  
 
                       
See accompanying notes to consolidated financial statements.

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BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
                 
    For the Six Months Ended  
    January 1,     December 31,  
    2011     2009  
    (Unaudited)     (Unaudited)  
Operating Activities
               
Net loss
  $ (3,171 )   $ (3,414 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    175       413  
Amortization of deferred income
    (200 )     (167 )
Stock compensation expense
    1       18  
Deferred rent expense
    52       211  
Deferred income taxes
    13       14  
Changes in operating assets and liabilities:
               
Accounts receivable — factored
    9,341       (2,854 )
Accounts receivable
    (284 )     (700 )
Inventories
    2,027       (348 )
Prepaid expenses and other assets
    (438 )     (226 )
Accounts payable
    (2,239 )     2,308  
Accrued expenses and long term liabilities
    (1,118 )     (122 )
 
           
Net cash provided by (used in) operating activities
    4,159       (4,867 )
 
           
Investing Activities
               
Purchases of fixed assets
    (157 )     (266 )
 
           
Cash used in investing activities
    (157 )     (266 )
 
           
Financing Activities
               
Net proceeds from (repayments of) revolving credit borrowings
    (4,003 )     1,156  
Proceeds from supply agreement
          4,000  
 
           
Cash provided by (used in) financing activities
    (4,003 )     5,156  
 
           
 
               
Increase (decrease) in cash
    (1 )     23  
Cash, beginning of year
    4       126  
 
           
Cash, end of year
  $ 3     $ 149  
 
           
 
               
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for:
               
Taxes
  $ 13     $ 13  
 
           
Interest
  $ 349     $ 329  
 
           

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BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended January 1, 2011 and December 31, 2009
     1. Business and Summary of Significant Accounting Policies
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® JOSEPHINE®, JOSEPHINE STUDIO®, CHAUS®, CHAUS SPORT®, CYNTHIA STEFFE®, SEAMLINE CYNTHIA STEFFE® and CYNTHIA CYNTHIA STEFFE® trademarks and under private label brand names. The Company’s products are sold nationwide through department store chains, specialty retailers, discount stores, wholesale clubs and other retail outlets. The Company’s CHAUS product lines sold through the department store channels are in the opening price points of the “better” category. The Company’s CYNTHIA STEFFE product lines are an upscale contemporary women’s apparel line sold through department stores and specialty stores. The Company’s private label product lines are designed and sold to various customers. The Company also has a license agreement (the “KCP License Agreement”) with Kenneth Cole Productions, Inc. (“KCP”) to manufacture and sell women’s sportswear under various labels. These products offer high-quality fabrications and styling at “better” price points. On October 19, 2010, the Company entered into an agreement with KCP (the “KCP Termination Agreement”) pursuant to which the license agreement will terminate on June 1, 2011 rather than the original termination date of June 30, 2012. Under the KCP Termination Agreement, the Company is relieved of certain restrictions on engaging in transactions and activities in the apparel industry as well as the obligation to pay certain promotional, marketing and advertising fees required under the license agreement. KCP has agreed to assume certain of the Company’s liabilities associated with the Company’s performance under the license agreement as well to pay the Company a termination fee upon termination of the agreement in June 2011. The termination fee is based on sales to certain customers through June 1, 2011, as defined in the agreement, and $2.9 million has been recorded during the six months ended January 1, 2011 as an accrued gain on early termination of the license agreement on the accompanying Consolidated Statement of Operations.
          On November 18, 2010, the Company entered into a trademark license agreement (“Camuto License Agreement”) with Camuto Consulting, Inc. d/b/a Camuto Group (“Camuto”). This agreement grants the Company an exclusive license to design, manufacture, sell and distribute women’s sportswear and ready-to-wear apparel under the trademark “Vince Camuto” in approved department stores, specialty retailers and off-price channels in the United States, Canada and Mexico. The initial term of the Camuto License Agreement expires on December 31, 2015. The Company has the option to renew the agreement for an additional term of three years if it meets specified sales targets and is in compliance with the terms of the agreement. In addition, Camuto has the ability to terminate the agreement under certain circumstances, as described in the agreement. The Company is required to pay Camuto certain royalties on net sales and has agreed to guaranteed minimum yearly royalty and advertising amounts. In addition, it is obligated to expend a minimum amount each quarter on marketing. See Note 6 for further information.
          The Company’s business plan requires the availability of sufficient cash flow and borrowing capacity to finance its product lines and to meet its cash needs. The Company expects to satisfy such requirements through cash on hand, cash flow from operations and borrowings from its lender. The Company’s fiscal 2011 business plan anticipates improvement from fiscal 2010, by achieving improved gross margin percentages and additional cost reduction initiatives primarily in the last six months of fiscal 2011. The Company’s ability to achieve its fiscal 2011 business plan is critical to maintaining adequate liquidity. The Company relies on CIT, the sole source of its financing, to borrow money in order to fund its operations. Should CIT cease funding its operations, the Company may not have sufficient cash flow from operations to meet its liquidity needs. In addition, China Ting Group Holdings Limited (“CTG”) manufactures the majority of the Company’s product on favorable payment terms. For additional information see Note 4 below. In the event CTG terminates this agreement or requires a change in the favorable payment terms, the Company may be unable to locate alternative suppliers in a timely manner or obtain similarly favorable payment terms. For the fiscal year ended July

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3, 2010 and the six months ended January 1, 2011, the KCP license agreement accounted for approximately 50% of the Company’s revenues and this agreement will terminate on June 1, 2011. While the Company entered into the Camuto License Agreement on November 18, 2010, there can be no assurance that it will be able to derive revenue from this agreement sufficient to offset the loss in revenue resulting from the termination of the KCP license agreement. Should CIT cease funding the Company’s operations, CTG terminate its agreement with the Company or require a change in the favorable payment terms, or the Company fails to offset the revenue lost as a result of the termination of the KCP license agreement, there could be a material adverse effect on the Company’s business, liquidity and financial condition.
Basis of Presentation:
          The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended January 1, 2011 are not necessarily indicative of the results that may be expected for the year ending July 2, 2011 or any other period. The balance sheet at July 3, 2010 has been derived from the audited financial statements at that date. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 3, 2010.
Fiscal Year:
          On June 18, 2010, the Board of Directors of the Company approved a change to the Company’s fiscal year end from June 30th to the Saturday closest to June 30th and effective immediately the Company now reports on a fifty-two/fifty-three week fiscal year-end. Due to the change, the three months ended January 1, 2011 and December 31, 2009 contained 91 and 92 days, respectively, and the six months ended January 1, 2011 and December 31, 2010 contained 182 and 184 days, respectively. The net sales for the additional days in the three and six months ended December 31, 2009 is not deemed material.
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.
Revenue Recognition:
          Sales are recognized upon shipment of products to customers since title and risk of loss passes upon shipment. Revenue relating to goods sold on a consignment basis is recognized when the Company has been notified that the buyer has resold the product. Provisions for estimated uncollectible accounts, discounts and returns and allowances are provided when sales are recorded based upon historical experience and current trends. While such amounts have been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same rates as in the past.
Factoring Agreement and Accounts Receivable:
          On March 29, 2010, the Company entered into an amended and restated factoring and financing agreement (“New Financing Agreement”) with The CIT Group/Commercial Services, Inc. (“CIT”). The New Financing Agreement provides for a non-recourse factoring arrangement which provides notification factoring on substantially all of the

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Company’s sales on terms substantially similar to those in effect under the previous factoring and financing agreement whereby CIT, based on credit approved orders, assumes the accounts receivable risk of the Company’s customers in the event of insolvency or non-payment. The Company assumes the accounts receivable risk on sales factored to CIT but not approved by CIT as non-recourse factored receivables, which approximated $0.5 million at January 1, 2011, $0.7 million at July 3, 2010, and $0.6 million at December 31, 2009. The Company receives payment on non-recourse factored receivables from CIT as of the earliest of: a) the date that CIT has been paid by the Company’s customers; b) the date of the customer’s longest maturity if the customer is in bankruptcy or insolvency proceedings; or c) the last day of the third month following the customer’s longest maturity date if the receivable remains unpaid. All receivable risks for customer deductions that reduce the customer receivable balances are retained by the Company, including, but not limited to, allowable customer markdowns, operational chargebacks, disputes, discounts, and returns. These deductions totaling $2.5 million as of January 1, 2011, $2.2 million as of July 3, 2010 and $2.6 million as of December 31, 2009, have been recorded as a reduction of either accounts receivable — factored or accounts receivable — net based upon the classification of the respective customer balance to which they pertain. The Company also assumes the risk on accounts receivable not factored to CIT which is shown as accounts receivable-net on the accompanying balance sheets. See Note 3 for additional information about the Company’s financing agreement with CIT.
Inventories:
          Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. The majority of the Company’s inventory purchases are shipped FOB shipping point from the Company’s suppliers. The Company takes title and assumes the risk of loss when the merchandise is received at the boat or airplane overseas. The Company records inventory at the point of such receipt at the boat or airplane overseas. Reserves for slow moving and aged merchandise are provided to adjust inventory costs based on historical experience and current product demand. Inventory reserves were approximately $0.4 million at January 1, 2011, $0.5 million at July 3, 2010 and $0.4 million at December 31, 2009. Inventory reserves are based upon the level of excess and aged inventory and the Company’s estimated recoveries on the sale of the inventory. While markdowns have been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same level of markdowns as in the past.
Long-Lived Assets and Trademarks:
          Trademarks relate to the Cynthia Steffe trademarks and were determined to have an indefinite life. The Company does not amortize assets with indefinite lives and conducts impairment testing annually in the fourth quarter of each fiscal year, or sooner if events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows including market participant assumptions, when available. The review of trademarks and long lived assets is based upon projections of anticipated future undiscounted cash flows. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect evaluations. To the extent these future projections or the Company’s strategies change, the conclusion regarding impairment may differ from the current estimates. There were no impairment charges for the three and six months ended January 1, 2011 and December 31, 2009.
Income Taxes:
          The Company accounts for income taxes under the asset and liability method in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740. Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end. The Company periodically reviews its historical and projected taxable income and considers available information and evidence to determine if it is more likely than not that a portion of the deferred tax assets will be realized. A valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized. As of January 1, 2011, July 3, 2010 and December 31, 2009, based upon its evaluation of the Company’s historical and projected results of operations, the current business environment and the magnitude of the net operating loss, the Company recorded a full valuation allowance on its deferred tax assets. If the Company determines that it is more likely than not that a portion of the deferred tax assets will be realized in the future, that portion of the valuation allowance will be reduced and the Company will provide for an income tax benefit in its Statement of Operations at its estimated effective tax rate.

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          The Company’s trademarks are not amortized for book purposes, however, they continue to be amortized for tax purposes and therefore the Company records a deferred tax liability on the temporary difference. The temporary difference will not reverse until such time as the assets are impaired or sold, therefore the likelihood of being offset by the Company’s net operating loss carryforward is uncertain.
Loss Per Share:
          Basic loss per share has been computed by dividing the applicable net loss by the weighted average number of common shares outstanding. Diluted loss per share has been computed by dividing the applicable net loss by the weighted average number of common shares outstanding. Options to purchase approximately 754,000 and 895,000 shares of common stock were excluded from the computation of diluted earnings per share for the three months and six months ended January 1, 2011 and December 31, 2009, respectively, because their exercise prices were greater than the average market price.
                                 
    For the Three Months Ended   For the Six Months Ended
    January 1,   December 31,   January 1,   December 31,
Denominator for loss per share (in millions):   2011   2009   2011   2009
Denominator for basic loss per share weighted-average shares outstanding
    37.5       37.5       37.5       37.5  
Assumed exercise of potential common shares
                       
 
                               
Denominator for diluted loss per share
    37.5       37.5       37.5       37.5  
 
                               
Fair Value of Financial Instruments:
          The carrying amounts of financial instruments, including accounts receivable, accounts payable and revolving credit borrowings approximated fair value due to their short-term maturity or variable interest rates.
New Accounting Pronouncements:
          In January 2010, FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-06 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-06 was effective for financial statements issued for interim and annual periods ending after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which were effective for interim and annual periods ending after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial statements.
          In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which improves the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. ASU 2010-20 was effective for financial statements issued for interim and annual periods ending on or after December 15, 2010 except for disclosures about activity that occurs during a reporting period, which are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-20 to have a material impact on its consolidated financial statements.

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2. Inventories — net
                         
    January 1,     July 3,     December 31,  
    2011     2010     2009  
    (in thousands)  
    (unaudited)     (*)     (unaudited)  
Raw materials
  $ 379     $ 457     $ 416  
Work-in-process
    57       63       115  
Finished goods
    6,383       8,326       3,656  
 
                 
Total
  $ 6,819     $ 8,846     $ 4,187  
 
                 
 
*   Derived from the audited financial statements at July 3, 2010.
     Inventories are stated at the lower of cost, using the first in first-out (FIFO) method, or market. Included in finished goods inventories is merchandise in transit of approximately $3.5 million at January 1, 2011, $4.3 million at July 3, 2010 and $1.1 million at December 31, 2009.
     3. Financing Agreements
          On March 29, 2010, the Company entered into the New Financing Agreement, with CIT, which amended and restated the previous factoring and financing agreement. In connection with entering into the New Financing Agreement, CIT waived the events of default under the Previous Factoring and Financing Agreement resulting from the Company’s failure to comply with the financial covenants as of December 31, 2009 set forth in that agreement.
     The New Financing Agreement eliminates the Company’s $30 million revolving line of credit and permits CIT to make loans and advances on a revolving basis at CIT’s “Sole Discretion,” which is defined as “the sole and absolute discretion exercised in good faith in accordance with customary business practices for similarly situated asset-based lenders in comparable asset-based lending transactions.” Borrowings are based on a borrowing base formula, as defined, and include a sublimit in the amount of $2 million for the issuance of letters of credit. The New Financing Agreement also eliminates most of the financial reporting and financial covenants that had been required under the previous financing agreement, as well as eliminating the early termination fee and the fee for any unused line of credit. The New Financing Agreement calls for an increase in the applicable margin interest rate on borrowing by one point (from 2.00% to 3.00%) above the JP Morgan Chase Bank Rate, however, the applicable margin shall revert to the original 2.00% interest rate in the event that the Company achieves two successive quarters of profitable business. The Company’s obligations under the New Financing Agreement continue to be secured by a first priority lien on substantially all of the Company’s assets, including the Company’s accounts receivable, inventory, intangibles, equipment, and trademarks, and a pledge of the Company’s interest in its subsidiaries. The New Financing Agreement expires on September 30, 2011.
     The borrowings under the New Financing Agreement accrue interest at a rate of 3% above prime. The interest rate as of January 1, 2011 was 6.25%. The Company has the option to terminate the New Financing Agreement with CIT. If the Company terminates the agreement with CIT due to non-performance by CIT of certain of its obligations for a specified period of time, the Company will not be liable for any termination fees. Otherwise in the event of an early termination by the Company it will be liable for minimum factoring fees.
     Prior to the New Financing Agreement, the Company’s previous agreements with CIT provided the Company with a $30.0 million revolving line of credit including a sub-limit in the amount of $12.0 million for issuance of letters of credit. The agreements contained various financing and operating covenants and charged various interest rates that were increased due to covenant defaults. The Company’s obligations under the previous agreements were secured by the same assets as the New Financing Agreement.

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     On January 1, 2011, the Company had $1.1 million of outstanding letters of credit, total availability of approximately $1.1 million, and $7.2 million of revolving credit borrowings under the New Financing Agreement. On December 31, 2009, the Company had $1.5 million of outstanding letters of credit, total availability of approximately $4.0 million, and $7.8 million of revolving credit borrowings under the previous factoring and financing agreement.
Factoring Agreement
          The New Financing Agreement provides for a non-recourse factoring arrangement which provides notification factoring on substantially all of the Company’s sales on terms substantially similar to those in effect under the previous factoring and financing agreement. The proceeds of this agreement are assigned to CIT as collateral for all indebtedness, liabilities and obligations due to CIT. A factoring commission based on various rates is charged on the gross face amount of all accounts with minimum fees as defined in the agreement. The previous factoring agreements operated under similar conditions.
4. Deferred Income
          In July 2009, the Company entered into an exclusive supply agreement with CTG. Under this agreement, CTG acts as the exclusive supplier of substantially all merchandise purchased by the Company in addition to providing sample making and production supervision services. In consideration for the Company appointing CTG as the sole supplier of its merchandise in Asia/China for a term of 10 years, CTG paid the Company an exclusive supply premium of $4.0 million. The Company recorded this premium as deferred income and as of January 1, 2011, $0.4 million of the premium is included in accrued expenses and approximately $3.0 million is considered long term. The Company will recognize the premium as income on a straight line basis over the 10 year term of the agreement. For each of the three months and six months ended January 1, 2011 and December 31, 2009, the Company recognized approximately $0.1 million and $0.2 million, respectively, of income as a reduction to cost of goods sold. For the six months ended December 31, 2009, the Company recorded a charge of $0.2 million reflecting net severance costs related to the closure of the Company’s Hong Kong office and the transfer of the majority of the staff to CTG. At January 1, 2011, amounts owed to CTG for merchandise approximated $10.3 million and are included in accounts payable.
5. Pension Plan
          Components of Net Periodic Benefit Cost
                                 
    For the Three Months Ended     For the Six Months Ended  
    January 1,     December 31,     January 1,     December 31,  
    2011     2009     2011     2009  
    (Unaudited)     (Unaudited)  
    (In Thousands)     (In Thousands)  
Service cost
  $ 2     $ 2     $ 4     $ 4  
Interest cost
    28       28       56       56  
Expected return on plan assets
    (26 )     (26 )     (52 )     (52 )
Amortization of net loss
    9       20       18       40  
 
                       
Net periodic benefit cost
  $ 13     $ 24     $ 26     $ 48  
 
                       
     Employer Contributions
          The Company will be required to contribute approximately $25,000 to the pension plan in fiscal 2011.

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6. Commitments and Contingencies
     As disclosed in Note 1, on November 18, 2010, the Company entered into the Camuto License Agreement which includes the following minimum royalties, advertising and marketing expenses through December 31, 2015:
         
Fiscal year ending:   Amount  
    (in thousands)  
2011
  $ 0  
2012
    2,140  
2013
    1,350  
2014
    1,635  
2015
    1,860  
2016
    975  
 
     
Total
  $ 7,960  
 
     
7. Subsequent Event
          In connection with the KCP Termination Agreement, in January 2011, the Company repurchased 6 million shares of common stock owned by KCP for $0.6 million utilizing a short term extension of credit by CIT. In February 2011, the Company sold 3 million of such repurchased shares to Camuto, a licensor to the Company. Camuto and another party with whom the Company has a commercial relationship have expressed an interest in buying the balance of the repurchased shares. Although there can be no assurances, the Company expects that the balance of the repurchased shares will be sold in February. The proceeds of such sales will be used to repay the short term extension of credit by CIT.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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,” “may,” “could,” “would,” “plan,” “intend” 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 our customers in particular; changes in trends in the market segments in which we compete and our ability to gauge and respond to changing consumer demands and fashion trends; the level of demand for our products; our dependence on our major department store customers; the continued support of retailers for our Kenneth Cole licensed merchandise through the termination of the license; the success of the new Camuto Licensing Agreement ; the highly competitive nature of the fashion industry; our ability to satisfy our cash flow needs, including the cash requirements under the Camuto Licensing Agreement; our ability to achieve our business plan and have adequate access to capital; our ability to operate within production and delivery constraints, including the risk of failure of manufacturers and our exclusive supplier to deliver products in a timely manner or to quality standards; the risk that our exclusive supplier will continue to supply product to us on favorable payment terms; our ability to meet the requirements of the Camuto Licensing Agreement; our ability to source product in an environment of high volatility and inflationary pressures on prices of labor and raw materials; our ability to attract and retain qualified personnel; and changes in economic or political conditions in the markets where we sell or source our products, including war and terrorist activities and their effects on shopping patterns, as well as other risks and uncertainties set forth in the Company’s publicly-filed documents, including this Quarterly Report on Form 10-Q. 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.
     There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including those addressed below in Part II, Item 1A. under “Risk Factors.” For a more detailed discussion of some of the foregoing risks and uncertainties, see “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended July 3, 2010, as well as the other reports filed by us with the Securities and Exchange Commission.
     We undertake no obligation (and expressly disclaim any such obligation) to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the United States Securities and Exchange Commission (“SEC”), all of which are available in the SEC EDGAR database at www.sec.gov and from us.
     Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Bernard Chaus, Inc.
Overview
     The Company designs, arranges for the manufacture of and markets an extensive range of women’s career and casual sportswear principally under the JOSEPHINE CHAUS® JOSEPHINE®, JOSEPHINE STUDIO®, CHAUS®, CHAUS SPORT®, CYNTHIA STEFFE®, SEAMLINE CYNTHIA STEFFE® and CYNTHIA CYNTHIA STEFFE® trademarks and under private label brand names. Our products are sold nationwide through department store chains, specialty retailers, off price retailers, wholesale clubs and other retail outlets.
     We have a license agreement (the “KCP License Agreement”)with Kenneth Cole Productions, Inc. (“KCP”) to manufacture and sell women’s sportswear under various labels. These products offer high-quality fabrications and styling at “better” price points. On October 19, 2010, we entered into an agreement with KCP (the “KCP Termination Agreement”) pursuant to which the KCP License Agreement will terminate on June 1, 2011 rather than the original termination date of June 30, 2012. Under the KCP Termination Agreement, we are relieved of certain restrictions on engaging in transactions and activities in the apparel industry as well as the obligation to pay certain promotional,

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marketing and advertising fees required under the KCP License Agreement. KCP has agreed to assume certain of our liabilities associated with our performance under the KCP License Agreement as well to pay us a termination fee upon termination of the agreement in June 2011.
     On November 18, 2010, we entered into a trademark license agreement (“Camuto License Agreement”) with Camuto Consulting, Inc. d/b/a Camuto Group (“Camuto”). This agreement grants us an exclusive license to design, manufacture, sell and distribute women’s sportswear and ready-to-wear apparel under the trademark “Vince Camuto” in approved department stores, specialty retailers and off-price channels in the United States, Canada and Mexico. The initial term of the Camuto License Agreement expires on December 31, 2015. We have the option to renew the agreement for an additional term of three years if we meet specified sales targets and are in compliance with other terms of the agreement. In addition, Camuto has the ability to terminate the agreement under certain circumstances, as described in the agreement. We are required to pay Camuto certain royalties on net sales and have agreed to guaranteed minimum yearly royalty and advertising amounts. In addition, we are obligated to expend a minimum amount each year on marketing.
Exclusive Supply Agreement
     In July 2009 we entered into an exclusive supply agreement with China Ting Holdings Limited (“CTG”) pursuant to which CTG serves as the exclusive supplier of substantially all merchandise purchased by us in Asia in addition to providing sample making and production supervision services. See Note 4 for more information about this agreement.
Results of Operations
The following table sets forth, for the periods indicated, certain items expressed as a percentage of net revenue.
                                 
    For the Three Months Ended   For the Six Months Ended
    January 1,   December 31,   January 1,   December 31,
    2011   2009   2011   2009
Net Revenue
    100.0 %     100.0 %     100.0 %     100.0 %
Gross Profit
    12.2 %     22.3 %     19.4 %     24.9 %
Selling, general and administrative expenses
    41.5 %     33.0 %     32.1 %     31.7 %
Accrued gain on early termination of license agreement
    (6.1) %     %     (6.5) %     %
Interest expense
    1.1 %     1.0 %     0.8 %     0.8 %
Net loss
    (24.3 )%     (11.7 )%     (7.1 )%     (7.6 )%
     Net revenues for the three months ended January 1, 2011 decreased by 19.9%, or $4.2 million, to $16.9 million from $21.1 million for the three months ended December 31, 2009. Units sold decreased by approximately 17.7% and the overall price per unit decreased by approximately 2.6%. Our net revenues decreased due to a decrease in revenues in our licensed product lines of $2.0 million, Chaus product lines of $1.5 million, and private label product lines of $1.1 million, partially offset by a increase in our Cynthia Steffe product lines of $0.4 million. The decrease in our licensed and Chaus product lines was primarily due to decreases in the department store channel of distribution.
     Net revenues for the six months ended January 1, 2011 decreased by 0.4%, or $0.2 million, to $44.6 million from $44.8 million for the six months ended December 31, 2009. Units sold decreased by approximately 3.9% and the overall price per unit increased by approximately 3.6%. Our net revenues decreased due to a decrease in revenues in our Chaus product lines of $2.0 million and private label product lines of $0.8 million, partially offset by an increase in our Cynthia Steffe product lines of $1.9 million and our licensed product lines of $0.7 million. The decrease in our Chaus product line was primarily due to decreases in our club channel of distribution. The increase in our Cynthia Steffe product lines was due to increases in all channels of distribution.
     Gross profit for the three months ended January 1, 2011 decreased $2.6 million to $2.1 million as compared to $4.7 million for the three months ended December 31, 2009 as a result of a decrease in revenues and a decrease in gross profit percentage. The decrease in gross profit was due to decreases in gross profit in our licensed product lines of $1.5

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million, private label product lines of $0.6 million, Chaus product lines of $0.4 million and in our Cynthia Steffe product lines of $0.1. As a percentage of sales, gross profit decreased to 12.2% for the three months ended January 1, 2011 from 22.3% for the three months ended December 31, 2009. The decrease in gross profit percentage was primarily a result of decreases in gross profit percentage in our Department Store and Discount Store channels.
     Gross profit for the six months ended January 1, 2011 decreased $2.6 million to $8.6 million as compared to $11.2 million for the six months ended December 31, 2009 primarily as a result of a decrease in revenues. The decrease in gross profit was primarily due to the decrease in gross profit in our licensed product lines of $1.4 million, Chaus product lines of $0.9 million, private label product lines of $0.6 million, partially offset by an increase in gross profit in our Cynthia Steffe product lines of $0.3. Gross profit for the six months ended December 31, 2009 was reduced by a one time charge of $0.2 million reflecting net severance costs related to the closure of the Company’s Hong Kong office and the transfer of the majority of the staff to CTG. See Note 4 for more information. As a percentage of sales, gross profit decreased to 19.4% for the six months ended January 1, 2011 from 24.9% for the six months ended December 31, 2009. The decrease in gross profit percentage was due to lower gross profit percentage in our department store, discounter and club channels of distribution.
     Selling, general and administrative (“SG&A”) expenses were $7.0 million in each of the three months ended January 1, 2011 and December 31, 2009. As a percentage of net revenue, SG&A expenses increased to 41.5% for the three months ended January 1, 2011 compared to 33.0% for the three months ended December 31, 2009. In the three months ended January 1, 2011, increases in professional fees and consulting expense of $0.1 million (in part due to the start-up of the Camuto License Agreement) and marketing and advertising expenses of $0.1 million, were substantially offset by reductions in other categories. The increase in SG&A as a percentage of net revenue was due to the overall decrease in sales volume which decreased our leverage on SG&A expenses.
     SG&A expenses increased by $0.1 million to $14.3 million for the six months ended January 1, 2011 from $14.2 million for the six months ended December 31, 2009. As a percentage of net revenue, SG&A expenses increased to 32.1% for the six months ended January 1, 2011 compared to 31.7% for the six months ended December 31, 2009. The increase in SG&A expenses for the six months ended January 1, 2011, were a result of increases in distribution expense of $0.2 million and professional fees and consulting expense $0.1 million, which were substantially offset by reductions in other categories. The increase in SG&A as a percentage of net revenue was due to the overall decrease in sales volume which decreased our leverage on SG&A expenses.
     Accrued gain on early termination of the KCP License Agreement was $1.0 million and $2.9 million for the three and six months ended January 1, 2011, respectively. This gain is based on sales to certain customers as defined in the KCP Termination Agreement.
     Interest expense was approximately $0.2 million in each of the three months ended January 1, 2011 and December 31, 2009 and $0.4 million in each of the six months ended January 1, 2011 and December 31 2009, primarily due to higher interest rates offset by lower bank borrowings in connection with our New Financing Agreement entered into in March 2010.
     Our income tax provision for the three and six months ended January 1, 2011 and December 31, 2009 includes provisions for state and local taxes and for the temporary differences associated with the Company’s trademarks.
     We periodically review our historical and projected taxable income and consider available information and evidence to determine if it is more likely than not that a portion of the deferred tax assets will be realized. A valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized. As of January 1, 2011 and December 31, 2009, based upon its evaluation of taxable income and the current business environment, we recorded a full valuation allowance on our deferred tax assets including net operating losses (“NOL”). If we determine that a portion of the deferred tax assets will be realized in the future, that portion of the valuation allowance will be reduced and we will provide for an income tax benefit in our Statement of Operations at our estimated effective tax rate. See “Critical Accounting Policies and Estimates” below for more information regarding income taxes and our federal NOL carryforward.

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Financial Position, Liquidity and Capital Resources
General
     Net cash provided by operating activities was $4.2 million for the six months ended January 1, 2011 as compared to net cash used in operating activities of $4.9 million for the six months ended December 31, 2009. Net cash provided by operating activities for the six months ended January 1, 2011 resulted primarily from a decrease in accounts receivable- factored of $9.3 million, which was partially offset by a net loss of $3.2 million and a decrease in accounts payable of $2.2 million. The decrease in accounts receivable-factored of $9.3 million was due to the reduction of sales as well as the timing of shipments for the three months ended January 1, 2011 as compared to the three months ended July 3, 2010. Net cash used in operating activities for the six months ended December 31, 2009 resulted primarily from a net loss of $3.4 million, an increase in accounts receivable — factored of $2.9 million, and an increase in accounts receivable-net of $0.7 million, which were partially offset by an increase in accounts payable of $2.3 million. The net increase in accounts receivable — factored and accounts receivable-net of $3.6 million was due to the increase in sales as well as the timing of shipments for the three months ended December 31, 2009 as compared to the three months ended June 30, 2009.
     Cash used in investing activities for the six months ended January 1, 2011 was $157,000 compared to $266,000 in the previous year. The purchases of fixed assets for the six months ended January 1, 2011 consisted primarily of management information system upgrades. In fiscal 2011, the Company anticipates capital expenditures of approximately $400,000 primarily for management information system upgrades and other capital items. The unexpended portion of capital expenditures for fiscal 2011 is approximately $240,000.
     Net cash used in financing activities of $4.0 million for the six months ended January 1, 2011 was primarily the result of net repayments of short-term bank borrowings. Net cash provided by financing activities of $5.2 million for the six months ended December 31, 2009 was primarily the result of net proceeds from short-term bank borrowings of $1.2 million and proceeds from the CTG supply premium of $4.0 million.
     In connection with the KCP Termination Agreement, in January 2011, the Company repurchased 6 million shares of common stock owned by KCP for $0.6 million utilizing a short term extension of credit by CIT. In February 2011, the Company sold 3 million of such repurchased shares to Camuto, a licensor to the Company. Camuto and another party with whom the Company has a commercial relationship have expressed an interest in buying the balance of the repurchased shares. Although there can be no assurances, the Company expects that the balance of the repurchased shares will be sold in February. The proceeds of such sales will be used to repay the short term extension of credit by CIT.
Financing Agreement
     On March 29, 2010, we entered into an amended and restated financing and factoring agreement with CIT (the “New Financing Agreement”), which amended and restated the previous factoring and financing agreement. In connection with entering into the New Financing Agreement, CIT waived the events of default under the previous factoring and financing agreement resulting from our failure to comply with the financial covenants as of December 31, 2009 set forth in that agreement.
     The New Financing Agreement eliminates our $30 million revolving line of credit and permits CIT to make loans and advances on a revolving basis at CIT’s “Sole Discretion,” which is defined as “the sole and absolute discretion exercised in good faith in accordance with customary business practices for similarly situated asset-based lenders in comparable asset-based lending transactions.” Borrowings are based on a borrowing base formula, as defined, and include a sublimit in the amount of $2 million for the issuance of letters of credit. The New Financing Agreement also eliminates most of the financial reporting and financial covenants that had been required under the previous financing agreement, as well as eliminating the early termination fee and the fee for any unused line of credit. The New Financing Agreement calls for an increase in the applicable margin interest rate on borrowing by one point (from 2.00% to 3.00%) above the JP Morgan Chase Bank Rate, however, the applicable margin shall revert to the original 2.00% interest rate in the event that we achieve two successive quarters of profitable business. Our obligations under the New Financing Agreement continue to be secured by a first priority lien on substantially all of our assets, including our accounts receivable, inventory,

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intangibles, equipment, and trademarks, and a pledge of our interest in our subsidiaries. The New Financing Agreement expires on September 30, 2011.
     The borrowings under the New Financing Agreement accrue interest at a rate of 3% above prime. The interest rate as of January 1, 2011 was 6.25%. We have the option to terminate the New Financing Agreement with CIT. If we terminate the agreement with CIT due to non-performance by CIT of certain of its obligations for a specified period of time, we will not be liable for any termination fees. Otherwise in the event of an early termination by us, we will be liable for minimum factoring fees.
     On January 1, 2011, the Company had $1.1 million of outstanding letters of credit, total availability of approximately $1.1 million, and $7.2 million of revolving credit borrowings under the New Financing Agreement. On December 31, 2009, the Company had $1.5 million of outstanding letters of credit, total availability of approximately $4.0 million, and $7.8 million of revolving credit borrowings under the previous factoring and financing agreement.
Factoring Agreement
     As discussed above, on March 29, 2010, we entered into the New Financing Agreement with CIT, which amended and restated our previous factoring and financing agreement. The New Financing Agreement provides for a non-recourse factoring arrangement which provides notification factoring on substantially all of the Company’s sales on terms substantially similar to those in effect under the previous factoring and financing agreement. The proceeds of this agreement are assigned to CIT as collateral for all indebtedness, liabilities and obligations due CIT. A factoring commission based on various rates is charged on the gross face amount of all accounts with minimum fees as defined in the agreement. The previous factoring agreements operated under similar conditions.
Future Financing Requirements
     At January 1, 2011, we had a working capital deficit of $5.6 million as compared with working capital of $0.5 million at December 31, 2009. Our business plan requires the availability of sufficient cash flow and borrowing capacity to finance our product lines and to meet our cash needs. We expect to satisfy such requirements through cash on hand, cash flow from operations and borrowings from CIT. Our fiscal 2011 business plan anticipates improvement from fiscal 2010, by achieving improved gross margin percentages and additional cost reduction initiatives primarily in the last six months of fiscal 2011. Our ability to achieve our fiscal 2011 business plan is critical to maintaining adequate liquidity. There can be no assurance that we will be successful in our efforts. We rely on CIT, the sole source of our financing, to borrow money in order to fund our operations. Should CIT cease funding our operations, we may not have sufficient cash flow from operations to meet our liquidity needs. In addition, CTG manufactures the majority of our product on favorable payment terms. In the event that CTG terminates this agreement with us or requires a change in the favorable payment terms, we may be unable to locate alternative suppliers in a timely manner or unable to obtain similarly favorable payment terms. In fiscal 2010 and the six months ended January 1, 2011, the KCP License Agreement accounted for approximately 50% of our revenues and we have agreed to an early termination of this agreement effective June 1, 2011. While the Company entered into the Camuto License Agreement on November 18, 2010, there can be no assurances that we will be able to derive revenue from this agreement sufficient to offset the loss in revenue resulting from the termination of the KCP license agreement.
     The foregoing discussion contains forward-looking statements which are based upon current expectations and involve a number of uncertainties, including our ability to maintain our borrowing capabilities, maintain our current arrangement with CTG and replace the revenues which will be lost as a result of the termination of the KCP License Agreement. Should any of these events fail to occur, this could result in a material adverse effect on our business, liquidity and financial condition.
Critical Accounting Policies and Estimates
     Significant accounting policies are more fully described in Note 1 to our consolidated financial statements, which are included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate.

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Significant accounting policies include:
     Revenue Recognition — Sales are recognized upon shipment of products to customers since title and risk of loss passes upon shipment. Revenue relating to goods sold on a consignment basis is recognized when we have been notified that the buyer has resold the product. Provisions for estimated uncollectible accounts, discounts and returns and allowances are provided when sales are recorded based upon historical experience and current trends. While such amounts have been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same rates as in the past.
     Factoring Agreement and Accounts Receivable — We have a factoring agreement with CIT whereby substantially all of our receivables are factored. The factoring agreement is a non-recourse factoring arrangement whereby CIT, based on credit approved orders, assumes the accounts receivable risk of our customers in the event of insolvency or non-payment. We assume the accounts receivable risk on sales factored to CIT but not approved by CIT as non-recourse factored receivables, which approximated $0.5 million at January 1, 2011, $0.7 million at July 3, 2010, and $0.6 million at December 31, 2009. We receive payment on non-recourse factored receivables from CIT as of the earliest of: a) the date that CIT has been paid by our customers; b) the date of the customer’s longest maturity if the customer is in bankruptcy or insolvency proceedings; or c) the last day of the third month following the customer’s longest maturity date if the receivable remains unpaid. All receivable risks for customer deductions that reduce the customer receivable balances are retained by us, including, but not limited to, allowable customer markdowns, operational chargebacks, disputes, discounts, and returns. These deductions totaling $2.5 million as of January 1, 2011, $2.2 million as of July 3, 2010 and $2.6 million as of December 31, 2009 have been recorded as reductions of either accounts receivable — factored or accounts receivable-net based on the classification of the respective customer balance to which they pertain. We also assume the risk on accounts receivable not factored to CIT which is shown as Accounts Receivable-net on the accompanying balance sheets.
     Inventories — Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. The majority of our inventory purchases are shipped FOB shipping point from our suppliers. We take title and assume the risk of loss when the merchandise is received at the boat or airplane overseas. We record inventory at the point of such receipt at the boat or airplane overseas. Reserves for slow moving and aged merchandise are provided to adjust inventory costs based on historical experience and current product demand. Inventory reserves were $0.4 million at January 1, 2011, $0.5 million at July 3, 2010, and $0.4 million at December 31, 2009. Inventory reserves are based upon the level of excess and aged inventory and estimated recoveries on the sale of the inventory. While markdowns have been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same level of markdowns as in the past.
     Valuation of Long-Lived Assets and Trademarks — We conduct impairment testing annually in the fourth quarter of each fiscal year, or sooner if events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows including market participant assumptions, when available. The review of trademarks and long lived assets is based upon projections of anticipated future undiscounted cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect evaluations. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates. There were no impairment charges for the three and six months ended January 1, 2011 or December 31, 2009.
     Income Taxes — Results of operations have generated a federal tax NOL carryforward of approximately $73.1 million as of July 3, 2010. Approximately 45% of the Company’s NOL carryforward expires between 2011 and 2012. Generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that we will not be able to utilize it to offset future taxable income. We periodically review our historical and projected taxable income and consider available information and evidence to determine if it is more likely than not that a portion of the deferred tax assets will be realized. A valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized. As of January 1, 2011, based upon our evaluation of our historical and projected results of operations, the current business environment and the magnitude of the net operating loss, we recorded a full valuation allowance on our deferred tax assets including NOL’s. If the we determine that it is more likely than not that a portion of the deferred tax assets will be realized in the future, that portion of the valuation allowance will be reduced and we will provide for an income tax benefit in our Statement of Operations at our estimated effective tax rate. Subsequent revisions to the estimated net realizable value of

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the deferred tax asset could cause our provision for income taxes to vary from period to period, although our cash payments would remain unaffected until the benefit of the NOL is utilized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Interest Rate Risk — We are subject to market risk from exposure to changes in interest rates based primarily on our financing activities. The market risk inherent in the financial instruments represents the potential loss in earnings or cash flows arising from adverse changes in interest rates. These debt obligations with interest rates tied to the prime rate are described in “Financial Position, Liquidity and Capital Resources,” as well as in Note 3 of our consolidated financial statements. We manage these exposures through regular operating and financing activities. We have not entered into any derivative financial instruments for hedging or other purposes. The following quantitative disclosures are based on the prevailing prime rate. These quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ from these estimates.
     At January 1, 2011 and December 31, 2009, the carrying amounts of our revolving credit borrowings approximated fair value. As of January 1, 2011, our revolving credit borrowings bore interest at a rate of 6.25%. As of January 1, 2011, a hypothetical immediate 10% adverse change in prime interest rates relating to our revolving credit borrowings and term loan would have less than $0.1 million unfavorable impact on our earnings and cash flows over a one-year period.
Item 4. Controls and Procedures
     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Company’s Chairwoman along with the Company’s Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
     Each fiscal quarter the Company carries out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chairwoman and Chief Executive Officer (“CEO”), along with the Company’s Interim Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this evaluation, our management, with the participation of the CEO and CFO, concluded that, as of January 1, 2011, our internal controls over financial reporting were effective.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
     There are many factors that affect our business and the results of our operations. In addition to the other information set forth in this quarterly report, you should carefully read and consider “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, of our Annual Report on Form 10-K for the year ended July 3, 2010, which contain descriptions of significant factors that might materially affect our business, financial condition or future results.
     There have been no material changes with respect to the Company’s risk factors previously disclosed in our Annual Report on Form 10-K for the year ended July 3, 2010. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
  (a)   The Annual Meeting of Stockholders of the Company was held on December 7, 2010 at 11:00 a.m.
 
  (c)   At such meeting, the Stockholders voted on the election of four directors of the Company to serve until the next Annual Meeting of Stockholders and until their respective successors have been elected and qualified.
                 
      For       Withheld  
Philip G. Barach
    33,711,344       220,448  
David Stiffman
    33,663,149       268,643  
Josephine Chaus
    33,662,650       269,142  
Robert Flug
    33,451,623       480,169  
Item 5. Other Information.
     On February 4, 2011, David Stiffman, a director and Chief Operating and Financial Officer of the Company, notified the Company of his resignation as a director and Chief Operating and Financial Officer of the Company, effective as of February 4, 2011. The Company’s board of directors appointed William P. Runge, the Company’s Director of Financial Planning and Control, to serve as the Company’s Interim Chief Financial Officer, effective immediately upon Mr. Stiffman’s resignation, until a successor is named. Mr. Runge, 56, has been the Company’s Director of Financial Planning and Control since joining the Company in March 2009. Prior to joining the Company, from 1988 until 2008, Mr. Runge held positions of increasing responsibility with Popular Club Plan, Inc. and was its Vice President-Finance from 2004 until 2008.

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Item 6. Exhibits (filed herewith)
31.1   Certification of Chief Executive Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certification of Interim Chief Financial Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Josephine Chaus, Chairwoman of the Board and Chief Executive Officer of Bernard Chaus, Inc.
 
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by William P. Runge, Interim Chief Financial Officer of Bernard Chaus, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  BERNARD CHAUS, INC.
 
 
Date: February 10, 2011  By:   /s/ Josephine Chaus    
    JOSEPHINE CHAUS   
    Chairwoman of the Board, and
Chief Executive Officer 
 
 
     
Date: February 10, 2011  By:   /s/ William P. Runge    
    William P. Runge   
    Interim Chief Financial Officer   

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BERNARD CHAUS, INC. AND SUBSIDIARIES
         
         
Exhibit Number   Exhibit Title
       
 
  31.1    
Certification of Chief Executive Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of Interim Chief Financial Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Josephine Chaus, Chairwoman of the Board and Chief Executive Officer of Bernard Chaus, Inc.
       
 
  32.2    
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by William P. Runge, Interim Chief Financial Officer of Bernard Chaus, Inc.

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