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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended January 29, 2000.
Commission File Number 0-22102
CYGNE DESIGNS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 04-2843286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1410 BROADWAY, NEW YORK, NEW YORK 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 997-7767
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the Registrant's Common Stock held by non-affiliates
at April 14, 2000 (based on the closing sale price for such shares as reported
by the OTC Bulletin Board: $2,860,759 Common Stock outstanding as of April 14,
2000: 12,438,038 shares.
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement for its 2000 annual meeting of stockholders are incorporated by
reference into Part III of this report.
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ITEM 1. BUSINESS
UNLESS OTHERWISE NOTED, ALL REFERENCES TO A YEAR REFER TO THE FISCAL YEAR OF
THE COMPANY COMMENCING IN THAT CALENDAR YEAR AND ENDING ON THE SATURDAY NEAREST
JANUARY 31 OF THE FOLLOWING YEAR. UNLESS THE CONTEXT INDICATES OTHERWISE, THE
TERMS "COMPANY" OR "CYGNE" INCLUDES THE OPERATIONS OF THE COMPANY AND ITS
SUBSIDIARIES AS THEN IN EXISTENCE. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW.
GENERAL
Cygne Designs, Inc. (the "Company" or "Cygne") is a private label
manufacturer of women's apparel, serving principally The Limited, Inc. The
Company's products include women's woven career and casual apparel. As a private
label manufacturer, the Company produces apparel upon orders from its customers
for sale under the customers' own labels, rather than producing its own
inventory of apparel for sale under the Cygne name. Effective October 31, 1999,
the Company sold substantially all of the assets used in its Israel based
private label Knit clothing manufacturing business ("Knit business"). Since the
sale of the Knit business, the Company has contacted potential customers
concerning the sale of Knit products under the customers' own labels. In
addition, the Company has arrangements in place to produce Knit products in
Guatemala and China. While the Company has no confirmed orders at this time, the
Company expects that such orders will be forthcoming.
The manufacture of private label apparel is characterized by high volume
sales to a small number of customers at competitive prices. Although private
label gross margins are lower than in the brand name apparel industry,
collection and markdown costs are typically commensurably lower, and inventory
turns are generally higher. Inventory risks are also reduced because the
purchasing of fabric and other supplies begins only after purchasing commitments
have been obtained from customers. The Company believes that retailers,
including customers of the Company, are increasingly sourcing private label
products themselves rather than utilizing outside vendors like the Company.
The Company historically has been dependent on one or two key customers. A
significant portion of the Company's sales currently are, and are expected to
continue to be, to various divisions of The Limited, Inc. In 1999, sales to
divisions of The Limited, Inc. were $25.0 million or 45% of total Company sales.
If the sale of the Knit business had been consummated on January 31, 1999, sales
to The Limited, Inc. would have been $22.9 million or 98% of the Company's
proforma sales for 1999. There can be no assurance that The Limited, Inc. will
continue to purchase merchandise from the Company in the future, or that the
Company will be able to attract new customers. The Company believes that The
Limited, Inc., like other retailers, is increasing its sourcing capabilities and
reducing its reliance on outside vendors, including the Company, for these
services.
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The principal executive offices of the Company are located at 1410 Broadway,
New York, New York 10018 and its telephone number is (212) 997-7767.
SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
On November 15, 1999, with an effective date of October 31, 1999, Cygne
consummated the sale of its Knit business to Jordache Limited ("Jordache")
pursuant to the Amended and Restated Acquisition Agreement dated as of August 1,
1999, by and among M.T.G.I.-Textiles Manufacturers Group (Israel) Ltd. ("MTGI"),
MBS (Cygne) Company, A.C. Services Inc., all subsidiaries of Cygne, and Jordache
Limited.
The assets transferred to Jordache consisted of substantially all of the
assets used by the Knit business in the manufacture of women's knit clothing,
including machinery, equipment, raw materials, leases, rental agreements,
supplies used in the business, furniture, computer hardware and software, and
certain operating data and the records of MTGI and network equipment, as well as
all of the outstanding stock of Wear & Co. S.r.l. ("Wear"). MTGI was the
Company's wholly-owned Israeli subsidiary and Wear was the Company's
wholly-owned Italian subsidiary. The sale did not include cash, accounts
receivable, and certain other assets of the MTGI business. The liabilities
assigned to, and assumed by, Jordache are all obligations of MTGI under the
contracts and registration included within the assets sold to Jordache.
In consideration of the sale to Jordache of the assets, Jordache paid to
the Company cash equal to (A) the adjusted net book value of the inventory,
fixed assets, advances to vendors, and an investment in a dye house facility
owned by MTGI, less an amount equal to the difference between (1) the sum of (a)
$80,000 and (b) MTGI's income before taxes for the period from August 1, 1999 to
the effective closing date of the sale of the business to Jordache which was
October 31, 1999, and (2) the operating expenses of Wear and Wear & Co.
International, Inc., the U.S. marketing company for MTGI and (B) $100,000 for
the outstanding stock of Wear and assumed liabilities described above, with all
of the items subject to post closing adjustments. In addition, Jordache paid
Cygne a commission of $600,000 on unfilled orders for products included in the
assets and $400,000 for a non-compete agreement for a total of $4,694,000 before
transaction costs. The Company has used the proceeds from the sale, and together
with MTGI retained cash and collections of MTGI accounts receivable, to pay
transaction costs, repay bank borrowings related to MTGI, and to pay other MTGI
liabilities.
Effective August 1, 1999, in connection with the amended and restated
acquisition agreement, Cygne entered into an agreement pursuant to which an
affiliate of Jordache managed the Company's Knit business from August 1, 1999 to
October 31, 1999, the effective closing date of the sale of the Knit business to
Jordache. In addition Jordache also provided financing to the
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Company in connection with certain knit product purchase orders being
manufactured by MTGI during this period.
In connection with the Company's agreement to sell its Knit business, the
Company recorded in 1999 a provision for impairment of Knit business assets in
the amount of $1,625,000, consisting of a loss on assets to be sold, transaction
costs (including loss of certain foreign tax incentives) and reduction of the
purchase price by the adjusted income (as defined) of the Knit business from
August 1, 1999 through the effective closing date of the sale of the business to
Jordache which was October 31, 1999.
The Knit business had revenues of $25.9 million and $32.0 million and gross
profit of $1.1 million and $1.5 million in 1998 and 1999 (through October 31,
1999), respectively. The Company recorded an impairment of Knit business assets
of $2.6 million and $1.6 million in 1998 and 1999, respectively. During 1997,
1998, and 1999, the Knit business accounted for 67%, 60%, and 58%, respectively,
of Cygne's net sales.
The Limited, Inc. (consisting primarily of The Limited Stores and Lerner)
accounted for approximately 65%, 59%, and 45% of Cygne's net sales for 1997,
1998, and 1999, respectively. If the sale of the Knit business had been
consummated on January 31, 1999, sales to The Limited, Inc. for fiscal 1999
would have accounted for 98% of the Company's proforma sales.
Mr. Manuel owns approximately 40.0% of the outstanding Common Stock, and has
a significant influence over, and may in fact control, the outcome of all
matters submitted to a vote of stockholders.
The Company is continuing to review its business operations and expects to
continue to incur additional costs in the future associated with the further
restructuring or downsizing of its operations.
See also "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements of the Company.
PRODUCTS
The Company currently participates in the women's woven and knit career
and casual sportswear segments of the apparel market. During 1999 the Company's
products in woven and knit career and casual sportswear included jackets, skirts
and pants.
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SOURCING, MANUFACTURING AND SALES
Cygne currently sources and manufactures garments for its customers which
have been designed and developed by the customer.
Private label manufacturing usually operates on a tighter schedule than brand
name manufacturing because goods are not manufactured until purchase orders are
received and the Company's customers strive for quick response time in order to
react to market changes and test results. Delivery cycles vary according to the
type of products manufactured, but frequently occur within a period of six weeks
from fabric delivery to garment delivery. Meeting customer delivery requirements
is both essential and difficult given the global nature of the manufacturing
process.
During 1999 all of the Company's products were manufactured outside the
United States, either by non-affiliated contract manufacturers or at the
Company's sewing facility. The Company's contract manufacturers are located in
several countries in the Far East, Middle East, and Central America. In
addition, the Company owns and operates a manufacturing facility in Guatemala.
During 1999 products representing approximately 2% of the Company's net sales
were produced in the Far East, approximately 58% in the Middle East, and
approximately 40% in Central America. If the sale of the Knit business had been
consummated on January 31, 1999, approximately 47% of the Company's net sales
resulted from products which were manufactured by Cygne in its sewing facility
and approximately 53% resulted from products which were manufactured by
non-affiliated contract manufacturers principally in Central America. Cygne
intends to continue to utilize foreign contract manufacturers for a significant
percentage of its manufacturing requirements. The Company reviews its product
sourcing on an ongoing basis and may alter this allocation to meet changing
conditions and demands. In connection with the sale of the Knit business, Cygne
has agreed not to source products in Israel, Jordan, and the Palestinian
territories prior to May 15, 2000.
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays and interruptions, political instability,
foreign currency fluctuations, economic disruptions, expropriation,
nationalization, the imposition of tariffs and import and export controls,
changes in governmental policies (including U.S. policy toward these countries)
and other factors which could have an adverse effect on the Company's business.
In addition, the Company may be subject to risks associated with the
availability of and time required for the transportation of products from
foreign countries. The occurrence of certain of these factors may delay or
prevent the delivery of goods ordered by customers, and such delay or inability
to meet delivery requirements would have a severe adverse impact on the
Company's results of operations and could have an adverse effect on the
Company's relationships with its customers.
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Furthermore, the occurrence of certain of these factors in the country in which
Cygne owns a manufacturing facility could result in the impairment or loss of
the Company's investment in this country. The loss of any one or more of its
foreign contract manufacturers could have an adverse effect on the Company's
business until alternative supply arrangements were secured.
The Company from time to time experiences difficulties in obtaining timely
delivery of products of acceptable quality which has resulted, in many cases, in
rejections or chargebacks by customers. During 1996 and 1997 the Company
experienced substantial rejections or cancellations by customers with respect to
certain of its products. During 1998 and 1999, the Company continued to
experience some rejections but to a far lesser extent than in years 1996 and
1997. The Company believes that in some cases these difficulties resulted from
not having sufficient access to and control over the manufacturing process for
such products as well as shortened manufacturing times attributable to delays in
obtaining required raw materials due to the liquidity pressures faced by the
Company. There can be no assurance that the Company will not continue to
experience such difficulties in the future. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--General."
Cygne operates its own sewing factory in Guatemala. Operating a manufacturing
facility rather than contracting with independent manufacturers requires the
Company to maintain a higher level of working capital. In addition, reduced
sales have an even greater adverse impact on the Company's results in light of
the fixed costs needed to own and operate its own factory. Because the Company's
manufacturing operation is located outside the U.S., the Company is subject to
many of the same risks as relying on foreign contract manufacturers. See
"Item 2. Properties."
RAW MATERIALS
Cygne usually supplies the raw materials to foreign manufacturers. Otherwise,
the raw materials are purchased directly by the manufacturer in accordance with
the Company's specifications. Raw materials, which are in most instances made
and/or colored specifically to the Company's order, consist principally of
fabric and trim and are readily available from numerous domestic and foreign
sources.
Cygne's foreign raw materials and finished goods purchases are frequently
made on a letter of credit basis, while its domestic purchases are made on an
open order basis. The Company does not have formal long-term arrangements with
any of its suppliers. The Company has experienced little difficulty in
satisfying its raw material requirements and considers its sources of supply
adequate.
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QUALITY ASSURANCE
The Company's quality assurance program is designed to ensure that its
products meet the quality standards of its customers. The Company requires its
overseas agents to employ qualified quality control personnel. Foreign
manufactured fabric is usually inspected both prior to shipment by the Company's
overseas agents as well as upon arrival at their manufacturing destination.
COMPETITION
The private label apparel industry is highly fragmented, and the Company
faces intense competition, including competition from its own customers
(including their affiliates) who have, or may establish, their own internal
product development and sourcing capabilities. Most of the Company's competitors
are larger in size and have greater resources than the Company. The Company
competes primarily on the basis of price, quality and short lead time high
volume manufacturing.
The Company believes that many of its own customers (including their
affiliates), who possess, to varying degrees, the know-how and internal
resources to develop and source directly a portion of their requirements,
constitute its major competition. For example, The Limited, Inc., through its
sourcing subsidiary, Mast Industries, Inc., procures directly a substantial
portion of its product requirements. In addition, apparel divisions of The
Limited, Inc. have formed product development groups as well as added direct
sourcing departments.
The Company believes that its business will depend upon its ability to
provide apparel products which are of good quality and meet its customers'
pricing and delivery requirements, as well as its ability to maintain
relationships with key customers. There can be no assurance that the Company
will be successful in this regard.
IMPORT RESTRICTIONS
The Company sources substantially all its products from Central America with
the balance of the products being sourced in the Far East. The Company's ability
to meet its customers' pricing requirements will depend, in large part, on its
ability to manufacture its products in countries where manufacturing costs are
low. However, because of quota limits, the Company's manufacturing flexibility
is reduced, increasing the risk that the Company will need to manufacture more
of its products in countries where manufacturing costs are higher.
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TEXTILE AGREEMENTS
Prior to January 1, 1995, apparel imports from most countries were subject to
bilateral textile agreements under the Multifiber Arrangement ("MFA") of the
General Agreement on Tariffs and Trade ("GATT") which allowed the imposition of
visa and quota restrictions on certain apparel and textile articles including a
significant portion of those currently sold by the Company. Under the Uruguay
Round Agreements Act, the United States agreed to phase out these bilateral
quotas in three stages over a ten year period. The agreement became effective on
January 1, 1995 for the 124 member countries of the World Trade Organization
("WTO"). Those textile quotas in effect on December 31, 1994 will remain in
effect until they are "phased-out" during the ten-year period. However, these
quotas are subject to a growth formula which uses as a basis the growth rate set
forth in the bilateral textile agreements in effect as of December 31, 1994 and
provides for additional growth of 16%, 25% and 27% of the base growth rate in
the respective phase-out periods. It is believed that the quotas affecting most
of the products imported by the Company are not likely to be phased out until
the end of the third and final stage, I.E., on January 1, 2005. Once
"phased-out," quotas cannot be imposed except in accordance with GATT rules.
These rules generally forbid bilateral quota agreements and other
discriminatory, country-specific restraints. However, some form of global quota
is still possible after completion of the ten year phase-out period. Under
limited circumstances, a new quota (called a "transitional safeguard") may be
imposed during the ten-year phase out period if there is demonstrable evidence
of serious damage, or actual threat of serious damage, to a domestic industry
producing like or competitive products due to a sharp and substantial increase
in imports of a particular product. The United States may also counteract
illegal transshipping practices by imposing new quotas, issuing chargebacks
against existing quotas or imposing embargoes. Such action can be taken against
both the actual country of origin and countries through which such merchandise
was transshipped. While it is not possible to forecast the likelihood of such
occurrences, the imposition of new quotas and/or chargebacks could impact the
Company's ability to source imported merchandise.
Textile and apparel imports from non-members of the WTO, such as the People's
Republic of China, will continue to be subject to bilateral textile agreements
negotiated under the MFA. Under these agreements, the United States may impose
quota restraints on importations of specific categories of merchandise not
presently subject to such quota restraints. The bilateral textile agreement with
The People's Republic of China expires on December 31, 2000. The People's
Republic of China is seeking membership in the WTO. Should its application be
approved, imports from The People's Republic of China may become subject to the
quota phase-outs discussed above or modifications thereof.
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DUTY RATES
The products imported by the Company are subject to "Normal Trade Relations
(NTR)" or column 1 rates of duty which range from zero to 38% AD VALOREM. As a
result of the Uruguay Round Agreements Act, many of these rates will be reduced
over five to fifteen years resulting on average in a 12% reduction from current
rates of duty.
On December 8, 1993, Congress adopted the North American Free Trade Agreement
("NAFTA") under which originating apparel and other products from Mexico and
Canada are immediately exempt from quota restrictions and subject to duty rates
which are being reduced to zero over the next ten years. Similar tariff rate
preferences and quota exemptions are being phased in for certain non-originating
apparel products cut and sewn in Mexico and Canada. Negotiations have begun to
expand NAFTA to possibly include certain Central and South American countries.
The African Growth and Opportunity Act (H.R. 434) is legislation that would
expand trade preferences for Sub-Saharan Africa (SSA) and countries subject to
the Caribbean Basin Economic Recovery Act (CBERA), including Guatemala. Both the
House of Representatives and the U.S. Senate have passed versions of H.R. 434.
The enhanced trade benefits could include duty and quota-free access for various
textile and apparel products imported from eligible countries. However, no
benefits will be available until after the two versions are reconciled and the
resulting legislation is passed by both houses of Congress and signed by the
President.
Imports from the People's Republic of China receive NTR duty rates under a
waiver of the Jackson-Vanik Amendment to the Trade Act of 1974. Under this
statute, certain countries and non-market economies are prohibited from
receiving NTR rates of duties and other trade benefits unless an annual waiver
is issued by the President. The People's Republic of China has received a
Jackson-Vanik Waiver annually since 1979. In May 1999 President Clinton renewed
the waiver. Congress can pass legislation disapproving the one-year extension of
NTR to China, but did not do so in 1999. If NTR for China is discontinued, goods
from China will be subject to "column 2" rates of duty, which range up to 90% AD
VALOREM. However, current duty rates will remain in effect at least until June
2000. The loss of NTR status for the People's Republic of China could adversely
affect the Company's ability to supply products to its customers.
ADDITIONAL RESTRICTIONS
In the ordinary course of its business the Company is, from time to time,
subject to claims by the U.S. Customs Service for additional duties and other
charges. Similarly, from time to time, the Company is entitled to refunds from
the U.S. Customs Service due to the overpayment of duties.
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The U.S. and other countries in which the Company's products are manufactured
or sold may, from time to time, impose new quotas, duties, tariffs, or other
restrictions, including trade sanctions or revocation of "Normal Trade
Relations" status, or adversely adjust presently prevailing quotas or duty
rates, which could adversely affect the Company's operations and its ability to
import products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, allocation of production to merchandise categories where more quota is
available, and shifts of production among countries and manufacturers. The
Company also from time to time purchases quantities of temporary quota in
certain countries.
The Company's ability to import its products is subject to the cost and
availability of transportation to the U.S., the demand for production capacity
abroad by other manufacturers, economic or political instability resulting in
the disruption of trade from exporting countries, any significant fluctuation in
the value of the dollar against foreign currencies and restrictions on the
transfer of funds. The Company's operations have not been materially affected by
any of the foregoing factors to date, although there can be no assurance that
these factors will not adversely affect the Company in the future.
BACKLOG
At January 29, 2000 the Company had unfilled confirmed customer orders of
$10.6 million, compared with $9.8 million at January 30, 1999, excluding the
Company's former Knit business. The amount of unfilled orders at a particular
time is affected by a number of factors, including the scheduling of manufacture
and shipping of the product which, in some instances, depends on the customer's
demands. Accordingly, a comparison of unfilled orders from period to period is
not necessarily meaningful and may not be indicative of eventual actual
shipments. The Company's experience has been that the cancellations, rejections
or returns of orders do not materially reduce the amount of sales realized from
its backlog.
EMPLOYEES
At March 31, 2000, the Company had approximately 654 full-time employees,
including approximately 639 employees at its facilities in Guatemala. The
Company considers its relations with its employees to be satisfactory.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position with the Company
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Bernard M. Manuel .......... 52 Director, Chairman of the Board
and Chief Executive Officer
Roy E. Green ............... 67 Senior Vice President-Chief Financial
Officer, Treasurer, and Secretary
BERNARD M. MANUEL has served as Chief Executive Officer and a director of
the Company, as well as in several additional executive positions, since he
joined the Company in October 1988. He currently serves as the Chairman of the
Board, Chief Executive Officer and a director. Mr. Manuel is a director of
several private companies in the U.S. and Europe. From 1983 until he joined the
Company, Mr. Manuel was involved, through Amvent, a company he founded, in the
transfer of technology between Europe and the U.S. and related venture capital
and merger and acquisition activities, as well as in the apparel industry. Mr.
Manuel earned a Bachelor's of Science in Mathematics and several graduate
degrees in Mathematics and in Economics from the University of Paris, an M.S. in
Political Science from the "Institut d'Etudes Politiques" in Paris and an M.B.A.
with high honors (Baker Scholar) from the Harvard Business School, where he was
awarded both the Loeb Rhodes Fellowship for excellence in finance and the Melvin
T. Copeland prize for top performance in marketing.
ROY E. GREEN has served as Chief Financial Officer of the Company, as well
as in various additional executive capacities, since October 1987. He currently
serves as Senior Vice President-Chief Financial Officer, Treasurer and Secretary
of the Company. From 1974 until he joined the Company, Mr. Green was employed by
Cluett Peabody & Co., first as the Chief Financial Officer of its Arrow Co.
division until 1979, then as Vice President and Controller until 1985, and
finally as Chief Financial Officer. He has also worked as a certified public
accountant for J. K. Lasser & Co. and Hurdman & Cranstown. Mr. Green received a
Bachelor's degree in Business Administration from Rutgers University. Mr. Green
is a certified public accountant.
The Company's business is dependent upon its ability to attract and retain
qualified employees. The Company is dependent to a significant degree on the
efforts of Bernard M. Manuel, Chairman of the Board and Chief Executive Officer.
Mr. Manuel has an employment agreement with the Company which includes
restrictions on competition by him in certain circumstances after termination of
employment, subject to certain conditions. The loss of the services of Mr.
Manuel could have an adverse effect on the Company's business.
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ITEM 2. PROPERTIES
On March 1, 1999, the Company moved its executive and general offices from
1372 Broadway, New York to substantially smaller space at 680 Fifth Avenue, New
York. During April 2000, the Company moved its executive and general offices to
1410 Broadway, New York. The Company's office now consists of 6,000 square feet
pursuant to a lease which expires on April 30, 2001 with an annual rental
expense of approximately $252,000.
In addition, on March 1, 1999, the Company paid $175,000 to the Landlord of
the 1372 Broadway premises to be released from any contingent rent liability on
the vacated executive and general offices described above as well as the
contingent rent liability on the 60,000 square feet of space previously
subleased at this location.
During 1997, the Company had provided for lease termination expense of $4.0
million for the expenses connected with the move of its executive and general
offices described above as well as an amount to be paid to landlord for release
of its contingent rent liabilities. At January 30, 1999, the Company determined
that the expenses contemplated by this provision would approximate $3.1 million.
Therefore, $0.9 million of this provision is shown as a recoupment in 1998, and
the remaining unused balance of $0.2 million of the original provision was
reversed in 1999.
The Company owns a sewing facility in Guatemala that it believes is well
maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business, none of which the Company believes could reasonably
be expected to have a material adverse effect on the Company's financial
condition or results of operations.
TAX AUDITS
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the
U.S. Federal income tax returns filed by GJM (US) Inc., a wholly-owned
subsidiary, for its taxable years ending December 31, 1990 through October 7,
1994 (the date GJM (US) Inc. was acquired by the Company). To date, the IRS has
informally proposed a Federal income tax deficiency against GJM (US) Inc. of
approximately $16 million (including some penalties but not interest). Depending
on the amount of the deficiency, the amount of interest could be significant.
The outcome of the audit of GJM (US) Inc. cannot be predicted at this time.
Although the Company is disputing the proposed adjustment and believes that it
has established appropriate accounting
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reserves with respect to this matter, an adverse decision in this matter would
have a material adverse impact on the Company and its financial condition,
results of operations, or cash flows.
On October 31, 1999, the date of sale of the Company's Knit business, the
Company's wholly-owned Israeli subsidiary, M.T.G.I.--Textile Manufacturers Group
(Israel) Ltd. ("MTGI"), had its Israeli tax free status terminated retroactive
to January 1, 1994. The Israeli Tax Authority ("Authority") is in the process of
assessing the tax due by MTGI on account of the termination of MTGI's tax free
status for the years ending December 31, 1994 through December 31, 1997. To
date, the Authority has not issued a report detailing the MTGI tax assessment
for this period. Although the Company believes that it has established
appropriate accounting reserves with respect to this matter, an adverse decision
in this matter could have a material adverse impact on the Company and its
financial condition, results of operations, or cash flows.
The Company is subject to other ongoing tax audits in several jurisdictions
in the United States. Although there can be no assurances, the Company believes
any adjustments that may arise as a result of these other audits will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on The Nasdaq National Market under
the symbol "CYDS" until May 29, 1998. On that date, the Company's Common Stock
was delisted from The Nasdaq National Market because the Company did not meet
certain continued listing requirements of the Nasdaq National Market, including
the maintenance of a minimum bid price of at least $1 per share. Cygne Common
Stock is now quoted on the OTC Bulletin Board. There are no assurances that the
OTC Bulletin Board will continue to give quotes on the Cygne Company Stock. The
following table sets forth for the periods indicated the high and low reported
sale prices per share for the Cygne Common Stock as reported by the OTC Bulletin
Board.
High Low
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FISCAL YEAR ENDED JANUARY 30, 1999
First Quarter ........................................ $0.38 $0.22
Second Quarter ....................................... $0.25 $0.13
Third Quarter ........................................ $0.16 $0.06
Fourth Quarter ....................................... $0.17 $0.08
FISCAL YEAR ENDED JANUARY 29, 2000
First Quarter ........................................ $0.22 $0.08
Second Quarter ....................................... $0.23 $0.16
Third Quarter ........................................ $0.22 $0.13
Fourth Quarter ....................................... $0.38 $0.17
The number of stockholders of record of Common Stock on April 14, 2000 was
approximately 96. The closing sale price of the Company's Common Stock on April
14, 2000 was $0.23 per share.
-14-
Cygne has never declared or paid a cash dividend on its Common Stock. The
Company anticipates that all future earnings will be retained by the Company for
the development of its business. Accordingly, Cygne does not anticipate paying
cash dividends on the Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions.
-15-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected financial information which should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements
and notes thereto of the Company included elsewhere herein. The selected financial information has been derived from the
consolidated financial statements of the Company, which have been audited by independent auditors. The acquisition of Fenn Wright &
Manson, Inc. ("FWM") in April 1994 and GJM International's intimate apparel and sleepwear operations ("GJM") in October 1994, the
sale of FWM's United Kingdom subsidiary and certain brand name rights in April 1995, the discontinuance of the remaining operations
of FWM in 1995, the sale of GJM in February 1996, the sale of its interest in its joint venture with Ann Taylor and the assets of
its division that were used in sourcing merchandise for Ann Taylor in September 1996, and the sale of the Knit business in November
1999 materially affect the comparability of the financial data reflected below. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations"
Year (1)
----------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(in thousands except per share amounts)
INCOME STATEMENT DATA
Net sales ............................................... $ 540,063 $ 254,313 $ 43,379 $ 43,013 $ 55,398
Cost of goods sold ...................................... 510,761 226,456 43,063 42,753 50,657
--------- --------- --------- --------- ---------
Gross profit ............................................ 29,302 27,857 316 260 4,741
Selling, general and administrative expenses ............. 72,182 27,251 10,331 4,381 3,874
Provision for impairment of Knit business
assets ............................................... -- -- -- 2,564 1,625
Provision (recoupment) for lease termination
expenses ............................................. -- -- 3,964 (902) (186)
Gain from sale of Ann Taylor Woven
Division and CAT ...................................... -- (29,588) -- -- --
Gain from sale of subsidiary, net ....................... (4,742) -- -- -- --
Loss from sale of GJM business, net ..................... 31,239 -- -- -- --
Reorganization expense .................................. -- 4,813 -- -- --
Write-off of goodwill ................................... 48,949 -- -- -- --
Amortization of intangibles ............................. 3,425 364 364 364 --
--------- --------- --------- --------- ---------
(Loss) income from operations .......................... (121,751) 25,017 (14,343) (6,147) (572)
Other income(2) ......................................... -- (6,864) -- -- --
Settlement of shareholder class
action and related legal expenses..................... -- 2,627 -- -- --
Interest income.......................................... -- (80) (461) (428) (122)
Interest expense......................................... 8,813 3,340 378 337 530
--------- --------- --------- --------- ---------
(Loss) income before income taxes and
minority interests..................................... (130,564) 25,994 (14,260) (6,056) (980)
(Benefit) provision for income taxes .................... (6,216) 7,117 204 269 47
--------- --------- --------- --------- ---------
(Loss) income before minority interests ................. (124,348) 18,877 (14,464) (6,325) (1,027)
Income attributable to minority interests ............... 1,710 961 -- -- --
--------- --------- --------- --------- ---------
Net (loss) income ....................................... $(126,058) $ 17,916 $ (14,464) $ (6,325) $ (1,027)
========= ========= ========= ========= =========
Net (loss) income per share - basic ..................... $ (10.04) $ 1.44 $ (1.16) $ (0.51) $ (0.08)
========= ========= ========= ========= =========
Number of shares used in computation of net
(loss) income per share - basic ................... 12,550 12,438 12,438 12,438 12,438
========= ========= ========= ========= =========
Net (loss) income per share - diluted ................... $ (10.04) $ 1.44 $ (1.16) $ (0.51) $ (0.08)
========= ========= ========= ========= =========
Number of shares used in computation of net
(loss) income per share - diluted ................ 12,550 12,439 12,438 12,438 12,438
========= ========= ========= ========= =========
See Notes on next page
-16-
Year (1)
----------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA (as of end of period)
Cash .................................................... $ 5,487 $ 22,246 $ 10,926 $ 3,686 $ 7,020
Accounts receivable ..................................... 35,117 7,239 6,012 8,242 1,853
Assets held for sale .................................... 15,200 -- -- 4,700 --
Inventory ............................................... 29,999 5,109 4,012 2,705 2,421
Goodwill ................................................ 2,790 2,426 2,062 -- --
Total assets ............................................ 117,145 47,142 29,750 23,599 14,768
Long-term debt .......................................... 1,562 -- -- -- --
Stockholders' equity .................................... 9,046 26,959 12,379 6,046 5,143
- ----------------
(1) References to a year are to the fiscal year of the Company commencing in that calendar year and ending on the Saturday nearest
January 31 of the following year. The fiscal year ended February 3, 1996 consisted of 53 weeks. All other years presented
consist of 52 weeks. The Company has never declared or paid cash dividends on its Common Stock.
(2) Principally from the gain on the sale of shares of Ann Taylor common stock.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
UNLESS OTHERWISE NOTED, ALL REFERENCES TO A YEAR ARE TO THE FISCAL YEAR OF
THE COMPANY COMMENCING IN THAT CALENDAR YEAR AND ENDING ON THE SATURDAY NEAREST
JANUARY 31 OF THE FOLLOWING YEAR.
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K CONCERNING THE COMPANY'S
BUSINESS OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED RESULTS OF
OPERATIONS, REVENUES, EXPENSES OR OTHER FINANCIAL ITEMS; PRIVATE LABEL AND BRAND
NAME PRODUCTS, AND PLANS AND OBJECTIVES RELATED THERETO; AND STATEMENTS
CONCERNING ASSUMPTIONS MADE OR EXPECTATIONS AS TO ANY FUTURE EVENTS, CONDITIONS,
PERFORMANCE OR OTHER MATTERS, ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS
DEFINED UNDER THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS. SUCH RISKS,
UNCERTAINTIES AND FACTORS INCLUDE, BUT ARE NOT LIMITED TO, A DECLINE IN DEMAND
FOR MERCHANDISE OFFERED BY THE COMPANY OR CHANGES AND DELAYS IN CUSTOMER
DELIVERY PLANS AND SCHEDULES, SIGNIFICANT REGULATORY CHANGES, INCLUDING
INCREASES IN THE RATE OF IMPORT DUTIES OR ADVERSE CHANGES IN EXPORT QUOTAS,
DEPENDENCE ON A KEY CUSTOMER, RISK OF OPERATIONS AND SUPPLIERS IN FOREIGN
COUNTRIES, COMPETITION, GENERAL ECONOMIC CONDITIONS, AS WELL AS OTHER RISKS
DETAILED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of the Company's common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, the Company sold FWM's U.K. subsidiary
to FWM N.V. for 600,000 shares of the Company's common stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. In connection with the elimination of
the FWM operations, the Company wrote-off the remaining $44.5 million of
goodwill in fiscal 1995.
On October 7, 1994, Cygne acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of common stock, $10,000 in
cash and the assumption of approximately $1.9 million of debt owed by GJM
International to The Limited, Inc., as well as non-compete payments aggregating
$3.2 million. Additional costs related to this acquisition approximated $1.7
million. The excess of the purchase price over the fair value of the net assets
-18-
acquired of approximately $27.7 million was recorded as goodwill and was being
amortized over a twenty-five year period.
In February 1996, the Company sold the GJM Business to Warnaco. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. The Company is obligated to indemnify Warnaco
for any claims for taxes arising out of the operation of the GJM Business prior
to the sale of the GJM Business to Warnaco. The Company used all the proceeds of
the sale to repay outstanding senior bank indebtedness.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sourced products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of common stock and $3.1 million in cash. Additional
costs related to this acquisition approximated $730,000. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$4.5 million was recorded as goodwill and was being amortized over a twenty-five
year period. In January 1996, the Company determined to close TSA. As a result,
the Company recorded a loss of approximately $6.4 million in fiscal 1995,
primarily resulting from the write-off of goodwill associated with the
acquisition. The Company terminated these operations during the third quarter of
1996.
The acquisitions of FWM, GJM and TSA were accounted for under the purchase
method and, accordingly, the operating results of FWM, GJM and TSA were included
in the consolidated operating results since their respective dates of
acquisition.
In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with Ann Taylor to source products exclusively for Ann
Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20%
interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT increased
to 40%. As a result of such change in ownership, Ann Taylor had, prior to the
consummation of the Ann Taylor Disposition, a 40% interest in the net income of
CAT, which interest was reflected in Cygne's consolidated statements of income
as "income attributable to minority interests."
On September 20, 1996, the Company sold to Ann Taylor Cygne's 60% interest
in CAT and the assets of Cygne's Ann Taylor Woven Division that were used in
sourcing merchandise for Ann Taylor (the "Ann Taylor Disposition"). On the
closing of the transaction, Cygne received 2,348,145 shares of Ann Taylor common
stock, having a value of $36 million (based on the average closing price of the
Ann Taylor common stock during the ten trading days prior to closing), and
approximately $8.9 million (after post-closing adjustments) in cash in respect
of inventory (less related payables and advances and certain other assumed
liabilities), net fixed
-19-
assets and accounts receivable of the Ann Taylor Woven Division. Ann Taylor also
assumed certain liabilities of the acquired sourcing operations. As a result of
the transaction, the Company realized a pre-tax gain of $29.6 million. Between
October 1996 and January 1997, the Company sold all of the 2,348,145 shares of
Ann Taylor common stock received upon the closing of the transaction at various
prices resulting in aggregate net proceeds of approximately $44.3 million. The
Company realized a pre-tax gain of approximately $6.1 million as a result of the
sale of the shares of Ann Taylor common stock, which is reflected in "Other
income" in the Company's Consolidated Statements of Operations.
In June 1997 the Company terminated by mutual agreement the license
agreements entered into during the summer of 1996 with the Kenzo Group for the
manufacture and distribution in the United States, Canada and Mexico of the
Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines. In connection with the
termination the Kenzo Group returned the $400,000 in pre-paid minimum royalty
payments made on the signing of the license agreements and agreed to pay Cygne
for certain raw materials related to the manufacture of Kenzo products.
On November 15, 1999, with an effective date of October 31, 1999, Cygne
consummated the sale of its Knit business to Jordache Limited ("Jordache")
pursuant to the Amended and Restated Acquisition Agreement dated as of August 1,
1999, by and among M.T.G.I.-Textiles Manufacturers Group (Israel) Ltd. ("MTGI"),
MBS (Cygne) Company, A.C. Services Inc., all subsidiaries of Cygne, and Jordache
Limited.
The assets transferred to Jordache consisted of substantially all of the
assets used by the Knit business in the manufacture of women's knit clothing,
including machinery, equipment, raw materials, leases, rental agreements,
supplies used in the business, furniture, computer hardware and software, and
certain operating data and the records of MTGI and network equipment, as well as
all of the outstanding stock of Wear & Co. S.r.l. ("Wear"). MTGI was the
Company's wholly-owned Israeli subsidiary and Wear was the Company's
wholly-owned Italian subsidiary. The sale did not include cash, accounts
receivable, and certain other assets of the MTGI business. The liabilities
assigned to, and assumed by, Jordache are all obligations of MTGI under the
contracts and registration included within the assets sold to Jordache.
In consideration of the sale to Jordache of the assets, Jordache paid
to the Company cash equal to (A) the adjusted net book value of the inventory,
fixed assets, advances to vendors, and an investment in a dye house facility
owned by MTGI, less an amount equal to the difference between (1) the sum of (a)
$80,000 and (b) MTGI's income before taxes for the period from August 1, 1999 to
the effective closing date of the sale of the business to Jordache which was
October 31, 1999, and (2) the operating expenses of Wear and Wear & Co.
International, Inc., the U.S. Marketing company for MTGI and (B) $100,000 for
the outstanding stock of Wear and
-20-
assumed liabilities described above, with all of the items subject to post
closing adjustment. In addition, Jordache paid Cygne a commission of $600,000 on
unfilled orders for products included in the assets and $400,000 for a
non-compete agreement for a total of $4,694,000. The Company has used the
proceeds from the sale, and together with MTGI retained cash and collections of
MTGI accounts receivable, to pay transaction costs, repay bank borrowings
related to MTGI, and to pay other MTGI liabilities.
Effective August 1, 1999, in connection with the amended and restated
acquisition agreement, Cygne entered into an agreement pursuant to which an
affiliate of Jordache managed the Company's Knit business from August 1, 1999 to
October 31, 1999 the effective closing date of the sale of the Knit business to
Jordache. In addition Jordache also provided financing to the Company in
connection with certain knit product purchase orders being manufactured by MTGI
during this period.
In connection with the Company's agreement to sell its Knit business, the
Company recorded in 1999 provision for impairment of Knit business assets in the
amount of $1,625,000, consisting of a loss on assets to be sold, transaction
costs (including taxes) and reduction of the purchase price by the adjusted
income (as defined) of the Knit business from August 1, 1999 through the
effective closing date of the sale of the business to Jordache which was October
31, 1999.
If the sale of the Knit business had been consummated on January 31, 1999
(the first day of fiscal 1999), the Company would have had proforma net sales
for 1999 of $23.4 million. Proforma gross profit for 1999 would have been $3.3
million. Proforma income from operations for 1999 would have been $258,000. The
proforma net income would have been $254,000. The proforma net income per share
would have been $0.02.
During 1997, 1998, and 1999 the Knit Business accounted for 67%, 60%,
and 58%, respectively, of Cygne's net sales.
The Limited, Inc. (consisting primarily of The Limited Stores and Lerner)
accounted for 65%, 59%, and 45% of Cygne's net sales for 1997, 1998, and 1999,
respectively. If the sale of the Knit business had been consummated on January
31, 1999, sales to The Limited, Inc. for 1999 would have accounted for 98% of
the proforma Company sales.
Although Cygne has a long established relationship with The Limited, Inc.,
its key customer, Cygne does not have long-term contracts with any of its
customers, including The Limited, Inc. The Company has been dependent on its key
customers and its future success will be dependent upon its ability to attract
new customers and to maintain its relationship with The Limited, Inc.
-21-
There can be no assurance that The Limited, Inc. will continue to purchase
merchandise from the Company at the same rate or at all in the future, or that
the Company will be able to attract new customers. In addition, as a result of
the Company's dependence on The Limited, Inc. The Limited, Inc. has the ability
to exert significant control over the Company's business decisions, including
prices. Furthermore, The Limited, Inc. procures directly a substantial portion
of its apparel product requirements through its sourcing subsidiary, and such
subsidiary will continue to be a major competitor of the Company with respect to
the Company's business with The Limited, Inc. In addition, the apparel divisions
of The Limited, Inc. have formed direct sourcing departments. In December 1997 a
limited partnership controlled by The Limited, Inc. sold its 734,319 shares of
Cygne stock to Mr. Manuel, the Company's Chairman and Chief Executive Officer.
Upon the closing of the transaction, The Limited, Inc. did not own any shares of
Cygne stock.
The Company is continuing to review its business operations and expects to
incur additional costs in the future associated with the further restructuring
or downsizing of its operations.
The apparel industry is highly competitive and historically has been
subject to substantial cyclical variation, with purchases of apparel and related
goods tending to decline during recessionary periods when disposable income is
low. This could have a material adverse effect on the Company's business.
Retailers, including customers of the Company, are increasingly sourcing private
label products themselves rather than utilizing outside vendors like the
Company.
-22-
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements of
operations and expresses for the periods indicated certain income data as a
percentage of net sales.
Percentage of Net Sales
-------------------------------
Year
-------------------------------
1999 1998 1997
------ ------ ------
Net sales .................................. 100.0% 100.0% 100.0%
===== ===== =====
Gross profit ............................... 8.6 0.6 0.7
Selling, general and administrative
expenses ................................. 7.0 10.2 23.8
Provision for impairment of Knit
business assets .......................... 2.9 6.0 --
(Recoupment) provision for lease
termination expense ...................... (0.3) (2.1) 9.1
Amortization of intangibles ................ -- 0.8 0.8
----- ----- -----
Loss from operations ....................... (1.0) (14.3) (33.0)
Interest expense (income), net ............. 0.8 (0.2) (0.2)
Provision for income taxes ................. 0.1 0.6 0.5
----- ----- -----
Net (loss) ................................. (1.9%) (14.7%) (33.3%)
===== ===== =====
1999 COMPARED TO 1998
The Company sold its Knit business effective October 31, 1999. Accordingly,
the Company's results of operations for 1999 only include the results of the
Knit business through October 31, 1999, while the 1998 results of operations
include the results of the Knit business for the entire year. As a result, a
comparison of 1998 and 1999 results may not be meaningful to the extent effected
by the sale of the Knit business.
NET SALES
Net sales for 1999 were $55.4 million, an increase of $12.4 million or 29%
from $43.0 million for 1998. The increase in net sales for 1999 compared to 1998
was primarily attributable to an
-23-
increase in sales of the Woven division of $6.3 million and the Knit division of
$6.1 million.
During 1999 and 1998, the Knit business accounted for 58% and 60%,
respectively, of Cygne's net sales.
Woven division sales for 1999 were $23.4 million, an increase of $6.3
million or 37% from $17.1 million for 1998. The increase in Woven division sales
to The Limited, Inc. for 1999 compared to the comparable period in 1998 of $6.9
million was partially offset by a decrease in sales to other customers. The
Limited, Inc. accounted for 98% of the Woven division sales for 1999 compared to
94% in 1998.
Knit division sales for 1999 were $32.0 million, an increase of $6.1
million or 24% from $25.9 million in 1998. The increase in Knit division sales
for 1999 compared to 1998 was primarily attributable to an increase in sales to
its new customer, Wal-Mart, partially offset by the sale of the Knit division as
of October 31, 1999, which had sales of $6.4 million in the fourth quarter of
1998.
GROSS PROFIT
The gross profit for 1999 was $4.7 million, an increase of $4.4 million
from the gross profit of $0.3 million for 1998.
The Woven division had a gross profit for 1999 of $3.3 million compared to
a gross loss of $0.8 million in 1998. The gross margin for 1999 was 14%. The
gross profit increase for 1999 compared to 1998 was primarily due to its Central
American operation earning a profit in 1999 compared to a significant loss in
1998.
The Knit division had a gross profit for 1999 of $1.5 million, an increase
of $0.4 million or 36% increase from the gross profit of $1.1 million in 1998.
The increase in the gross profit for 1999 was primarily attributable to a gross
profit increase on higher sales than the prior comparable period, plus by the
sale of the Knit division as of October 31, 1999 which had a gross loss of $0.7
million in the fourth quarter of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for 1999 were $3.9 million, a
decrease of $0.5 million or 12% from $4.4 million in 1998. The decrease in
expenses for 1999 compared to 1998 was attributed to a reduction of $0.9 million
in corporate expenses, offset by an increase in the Woven division expenses of
$0.5 million and Knit division expenses of $0.2 million, primarily as a result
of the sale of the Knit division effective prior to the commencement of the
fourth quarter of 1999.
-24-
The Woven division expenses for 1999 were $2.0 million, an increase of $0.2
million, or 33% from $1.5 million in 1998. The increase for 1999 compared to
1998 was attributable to increased staff to support the Woven division sales
increase of $6.2 million from 1998.
The Knit division expenses for 1999 were $0.7 million, a decrease of $0.2
million compared to 1998. The decrease was primarily attributable to an increase
in travel to service its new customer offset by the sale of the Knit division as
of October 31, 1999, which had expenses of $0.3 million in the fourth quarter of
1998.
The corporate expenses for 1999 were $1.2 million, a decrease of $0.9
million, or 45% from $2.0 million in 1998. The decrease for 1999 was primarily
attributable to the termination of most of the corporate staff in 1998.
INTEREST
Net interest expense for 1999 was $408,000 as compared to net interest
income of $91,000 in 1998. The increase in interest expense for 1999 compared to
1998 was primarily attributable to increased borrowings used to fund the Knit
division's operation.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the amended and restated acquisition agreement to sell
its Knit business, the Company recorded in 1999 a provision for impairment of
Knit business assets in the amount of $1.6 million, which consists of a loss on
assets to be sold, transaction costs (including loss of certain foreign tax
incentives), and a reduction of the purchase price by the adjusted net income
(as defined) of the Knit business from August 1, 1999 through October 31, 1999.
In March 1999, the Company agreed to sell the Knit business. In connection
with the sale, during 1998, the Company established a provision of $2.6 million
for the impairment of the Knit business assets. The provision included the
unamortized goodwill of the Knit business ($1.7 million), loss on assets to be
sold and estimated transaction costs.
(RECOUPMENT) FOR LEASE TERMINATION EXPENSE
In 1998, the Company recouped $902,000 of its 1997 provision for lease
termination expense. In 1999, the Company recouped the remaining unused balance
of $186,000.
-25-
PROVISION FOR INCOME TAXES
The provision for income taxes for 1999 represents provision for minimum
state income taxes and taxes payable to foreign countries for income earned in
foreign countries. As of January 29, 2000, based upon tax returns filed and to
be filed for the fiscal year ended January 29, 2000, the Company reported a net
operating loss carryforward for U.S. Federal income tax purposes of
approximately $114,000,000. If unused, these loss carryforwards will expire in
the Company's taxable years ending 2011 through 2015. Under Section 382 of the
U.S. Internal Revenue Code, if there is a more than 50% ownership change (as
defined therein) with respect to the Company's stock, the Company's loss
carryforwards for U.S. Federal and New York State and City tax purposes would be
virtually eliminated.
As of January 29, 2000, based upon tax returns filed and to be filed for
the fiscal year ended January 29, 2000, the Company reported net operating loss
carryforwards for New York State and City tax purposes (on a separate company
basis) of approximately $74,800,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2014.
1998 COMPARED TO 1997
NET SALES
Net sales for 1998 were $43.0 million, a decrease of $0.4 million or 0.8%
from $43.4 million in 1997. The decrease in net sales for 1998 compared to 1997
was primarily attributable to decreases in sales to divisions of The Limited,
Inc. of $2.6 million, which was offset by sales to new customers.
Woven division sales for 1998 were $17.1 million, an increase of $2.8
million or 19.8% from $14.3 million in 1997. The increase in sales to The
Limited, Inc. of $6.2 million was offset by a decrease in sales to other
customers.
Knit division sales for 1998 were $25.9 million, a decrease of $3.0 million
or 10.4% from $28.9 million in 1997. The decrease in sales to The Limited, Inc.
of $8.8 million was offset by an increase in sales to other customers.
Kenzo, a discontinued division, had $0.2 million in sales in 1997.
GROSS PROFIT
Gross profit was $0.3 million in both 1998 and 1997.
-26-
The woven division had gross loss of $0.8 million, a $1.6 million decrease
from the 1997 gross profit of $0.8 million. The increase in the 1998 loss over
1997 was mainly attributable to the loss of $2.8 million at the Company's
Central American operation. The loss at the Central American operation was
caused by under-absorption of manufacturing overhead during the first nine
months of 1998 and severance costs for work force reduction.
The Knit division had a gross profit of $1.1 million, an increase of $0.4
million from the $0.7 million in 1997. The gross margin for 1998 was 4.1%
compared to 2.3% in 1997.
The discontinued division in 1997 had a gross loss of $1.2 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1998 were $4.4 million, a
decrease of $5.9 million or 57.6% from the $10.3 million in 1997.
The Knit division SG&A expenses decreased $0.4 million from 1997 as a
result of expense reduction programs initiated during 1998.
The $2.6 million decrease in Corporate SG&A expenses from 1997 resulted
from less severance expense in 1998 than 1997, when a significant portion of the
downsizing of the Company occurred.
The Kenzo division in 1997 had SG&A expenses of $2.9 million.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In March 1999 the Company agreed to sell the Knit business. In connection
with the sale, during 1998 the Company established a provision of $2.6 million
for the impairment in the Knit business assets. This provision includes the
unamortized goodwill of the Knit business ($1.7 million), loss on assets to be
sold, and estimated transaction costs. The provision excludes the Knit group
1999 results of operations.
(RECOUPMENT) FOR LEASE TERMINATION EXPENSES
In 1997, the Company provided for lease termination expenses of $3,964,000
as a result of the Company's decision to relocate from its existing New York
Office and to seek substantially smaller new York office space. On March 1,
1999, the Company completed its relocation from its existing
-27-
New York office and the Landlord released the Company from any contingent rent
liability on its New York space and on its leases assumed by Ann Taylor in 1996.
The Company determined that the expenses contemplated by this provision would
approximate $3,063,000. Therefore, $902,000 of this provision is shown as a
recoupment in 1998, and the remaining unused balance of the $186,000 of the
original provision was reversed in 1999.
INTEREST
Net interest income for 1998 was $91,000 compared to net interest income of
$83,000 in 1997. Net interest income for 1998 of $428,000 includes $155,000 in
interest income from a federal tax refund. Excluding the interest received on
the tax refund, the decreases in net interest income for 1998 compared to 1997
was primarily attributable to a reduction in the Company's cash balance which
was used to fund the Company's losses.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1998 primarily represents provision for
minimum state income taxes and taxes payable to foreign countries for income
earned in the foreign countries. At January 30, 1999, the Company had net
operating loss carryforwards of approximately $108 million, which may be used to
offset future United States taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company had historically financed its operations
primarily through financing from lending institutions, financing from customers
and third party trade credit facilities, cash from operations and the issuance
of debt and equity securities.
The Company received proceeds of approximately $4.7 million before
transaction costs, subject to post closing adjustments, from the consummation of
the sale of the Knit business. In addition, the retained cash and accounts
receivable and certain other assets of the Knit business aggregated
approximately $4.5 million at October 30, 1999. The Company has used the cash
proceeds from the sale, the collection of MTGI's accounts receivable to pay the
transaction costs (including loss of certain foreign tax incentives) related to
the sale, repay bank borrowings related to MTGI, and to pay other MTGI
liabilities. The excess cash received from the transaction will be used for
general working capital purposes.
Since February 1, 1997, the Company has not had a domestic credit facility.
Since the expiration of its prior bank domestic credit facility, Cygne has
obtained letters of credit issued from domestic banks secured by a cash deposit
from the Company. At January 29, 2000 the Company had
-28-
restricted cash at banks of $0.7 million as collateral for letters of credit.
The Company had a credit facility with an Israeli bank to finance the Knit
operations. On November 4, 1999, the outstanding balance under this facility was
repaid and the facility was terminated.
Net cash provided by operating activities was $3.5 million in 1999 compared
to net cash used in operating activities of $8.4 million in 1998. The increase
in net cash provided by operating activities was primarily the result of $5.3
million decrease in net loss, $7.2 million decrease in working capital
requirements, offset by a decrease of $0.6 million non-cash provisions.
The Company's financial performance for 2000 will depend upon a variety of
factors, including the amount of sales to The Limited, Inc. If the Company has
significant operating losses or adverse decisions in either its federal tax
audit of GJM (US) Inc. or the Israeli tax assessment of MTGI, which required the
Company to pay significant amounts of tax, the Company will face severe
liquidity pressures in 2000 which would adversely affect the Company's financial
condition and results of operations. The Company is continuing to review its
business operations and could incur additional costs in the future associated
with the restructuring or downsizing of its operations.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which have been experienced in the U.S., where it competes, have had a
significant effect on its net sales or profitability.
FOREIGN CURRENCY EXCHANGE
The Company negotiates substantially all its purchase orders with its
foreign manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in
foreign currencies, the Company's cost for any purchase order is not subject to
change after the time the order is placed. However, the weakening of the U.S.
dollar against local currencies could lead certain manufacturers to increase
their U.S. dollar prices for products. The Company believes it would be able to
compensate for any such price increase.
IMPACT OF THE YEAR 2000
The Year 2000 problem (the "Year 2000 Problem" or "Year 2000") was to have
resulted from competer programs and devices that did not differentiate between
the year 1900 and the year 2000 because they were written using two digits
rather than four to define the applicable year; accordingly,
-29-
computer systems that have time-sensitive calculations potentially would not
properly recognize the year 2000. This could have resulted in system failures or
miscalculations causing disruptions of the Company's operation, including,
without limitation, manufacturing, distribution, and other business activities.
The Year 2000 Problem potentially affected substantially all of Cygne's business
activities. The Company believes that as a result of its Year 2000 remediation
and planning programs, the Year 2000 Problem has not, as of April 20, 2000, had
a material adverse effect on the operations or financial results of the Company.
As of January 29, 2000, the Company estimates that it had incurred approximately
$20,000 in its Year 2000 efforts, including, without limitation, outside
consulting fees and computer systems upgrades but excluding internal staff
costs, all of which has been expensed. It is possible that Cygne will experience
Year 2000 related problems in the future, particularly with its non-business
critical systems, which may result in failures of miscalculations resulting in
inacuracies in computer output or disruptions of operations. However, Cygne
believes that the Year 2000 Problem will not pose significant operational
problems for its business critical computer systems and equipment. The financial
impact of future remediation actuvities that may becaome necessary, if any,
cannot be known precisely at this time, but it is not expected to be material.
QUARTERLY OPERATING RESULTS
The following table sets forth selected unaudited quarterly financial data
for the most recent eight quarters. The quarterly financial data reflects, in
the opinion of the Company, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such periods. Results of any one or more quarters are not necessarily indicative
of annual results or continuing trends.
-30-
($ In thousands except per share amounts)
------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ---------------------------------------
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4(1) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4(2)
------- ------- ------- ------ ------ ------ ------- -------
Net sales ......................... $13,561 $13,166 $22,799 $5,872 $6,245 $8,509 $13,158 $15,101
Gross profit (loss) ............... 1,163 1,531 1,220 827 (238) 399 (312) 411
Provision for impairment of
Knit business assets .............. -- 886 530 209 -- -- -- 2,564
Operating profit (loss) ........... 243 (459) (396) 40 (1,345) (1,048) (1,511) (2,243)
Net income (loss) ................. 79 (665) (470) 29 (1,328) (1,127) (1,484) (2,386)
Net income (loss) per share--
basic and diluted ................. $ 0.01 $ (0.05) $ (0.04) $ 0.00 $(0.11) $(0.09) $(0.12) $(0.19)
Weighted average number
of common shares
outstanding ....................... 12,438 12,438 12,438 12,438 12,438 12,438 12,438 12,438
- ----------
(1) Includes recoupment of lease termination expense provisions of $186,000.
(2) Includes recoupment of lease termination expense provisions of $902,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-31-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The section entitled "Proposal No. 2 -- Election of Directors" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
Executive Officers
See PART I -- Executive Officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
-32-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page F-1.
(3) Exhibits
Certain exhibits presented below contain information that has been
granted subject to a request for confidential treatment Such
information has been omitted from the exhibit. Exhibit Nos. 10.2,
10.3, 10.4, 10.5, 10.6, 10.8, 10.9, 10.23, 10.28 and 10.30 are
management contracts, compensatory plans or arrangements.
Exhibit No. Description
----------- ---------------
2.1 Amended and Restated Acquisition Agreement, dated as of August
1, 1999 by and among M.T.G.I. - Textile Manufacturers Group
(Israel), Limited, MBS Company, AC Services Inc. and Jordache
Limited. *(10)
3.1 Restated Certificate of Incorporation, as amended by Certificate of
Amendment filed August 5, 1994 with the Secretary of State of the
State of Delaware.*(1)
3.2 By-laws.*(2)
4 Specimen Stock Certificate.*(2)
-33-
10.1 Agreement, dated as of April 30, 1993, among the Company,
Bernard Manuel, Irving Benson, CIL, Belton Limited and certain
other parties.*(2)
10.2 Amended and Restated Employment Agreement, dated as of January
1, 1995, between the Company and Bernard M. Manuel.*(7)
10.3 Consulting and Severance Agreement dated as of November 27, 1996
between the Company and Irving Benson.*(8)
10.4 Employment Agreement, dated as of May 1, 1993, between the
Company and Roy Green.*(2)
10.5 Employment Agreement, dated as of May 1, 1993, between the
Company and Gary Smith.*(2)
10.6 Consulting Agreement, dated as of September 20, 1996, between
AnnTaylor Stores Corporation, AnnTaylor, Inc., Cygne Designs,
Inc. and Mr. Bernard M. Manuel.*(8)
10.7 Consulting Agreement, dated as of September 20, 1996, between
AnnTaylor Stores Corporation, AnnTaylor, Inc., Cygne Designs,
Inc. and Mr. Irving Benson.*(8)
10.8 Employment Agreement, dated April 4, 1994, between the
Company and Paul D. Baiocchi.*(3)
10.9 Employment Agreement, dated as of April 7, 1994, among the
Company, Fenn, Wright and Manson, Incorporated, and Trevor J.
Wright.*(3)
-34-
10.10 Purchase Agreement, dated as of October 7, 1994, by and among
Cygne Designs, Inc., G.J.M. Manufacturing Limited, G.J.M.
Purchasing Limited, G.J.M. Sales Limited, G.J.M. (Sales), Inc. and
G.J.M. International Limited.*(6)
10.11 Registration Rights Agreement, dated as of April 6, 1994,
between the Company and Fenn Wright and Manson (Antilles)
N.V.*(3)
10.12 Agreement, dated as of March 24, 1995, by and among Cygne
Designs, Inc., Fenn Wright and Manson (Antilles) N.V., Fenn,
Wright and Manson Incorporated and Colin Fenn.*(7)
10.13 Financing Contract in Value with Personal Mortgage Guarantees,
dated January 21, 1994.*(3)
10.14 Agreement, dated as of September 30, 1993, among Jonathan Kafri,
Simona Kafri, Cygne Designs F.E. Limited, T. Wear Company S.r.l.
and Cygne Designs, Inc.*(4)
10.15 Agreement, dated as of September 30, 1993, among Lancaster
Enterprises Limited, Jonathan Kafri, Simona Kafri, Cygne Designs
F.E. Limited, M.T.G.I. - Textile Manufacturers Group (Israel)
Limited, Cygne TW Inc. and Cygne Designs, Inc.*(4)
10.16 Stock and Asset Purchase Agreement, dated as of June 7, 1996, as
amended as of August 27, 1996, by and between Cygne Designs,
Inc., Cygne Group (F.E.) Limited, AnnTaylor Stores Corporation
and AnnTaylor, Inc.*(9)
10.17 License Agreement, dated as of July 26, 1996, by and between
Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO
STUDIO license.*(9)
-35-
10.18 License Agreement, dated as of July 26, 1996, by and between
Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO
JEANS license.*(9)
10.19 Form of Indemnification Agreement.*(2)
10.20 Assumption Agreement, dated October 7, 1994, by and between
G.J.M. International Limited and Cygne Designs, Inc.*(5)
10.21 Registration Rights Agreement, dated as of October 7, 1994, by and
between Cygne Designs, Inc. and G.J.M. International Limited.*(5)
10.22 Amendment No. 1 to the Registration Rights Agreement, dated as of
October 6, 1994, amending the registration rights agreement, dated as
of July 29, 1993 between Cygne Designs, Inc. and Limited Direct
Associates, L.P.*(5)
10.23 Employment Agreement, dated as of February 3, 1997, between the
Company and Jonathan Kafri.
10.24 Agreement of Lease, dated August 7, 1991, between the Company
and Nineteen New York Properties Limited Partnership, as amended
by the First Amendment of Lease, dated as of January 1, 1993.*(2)
10.25 Second Amendment of Lease, dated May 31, 1993, between
Nineteen New York Properties Limited Partnership and the
Company.*(2)
10.26 Third Amendment of Lease, dated as of December 1, 1993, between
Nineteen New York Properties Limited Partnership and the
Company.*(3)
-36-
10.27 Amended and Restated Credit Agreement, dated as of September 20,
1996, by and between Cygne Designs, Inc. and The Hongkong and
Shanghai Banking Corporation Limited.*(8)
10.28 1993 Stock Option Plan, as amended, through June 28, 1994.*(1)
10.29 Form of Stock Option Agreement.*(2)
10.30 Stock Option Plan for Non-Employee Directors.*(2)
10.31 Memorandum of Understanding, dated as of June 1, 1993, among the
Company, Cygne Knits Limited, T. Wear Company S.r.l. and certain
other parties.*(2)
10.32 Management Agreement, dated August 1, 1999, by and between
M.T.G.I.-Textile Manufacturers Group (Israel) Ltd., MBS (Cygne)
Company, A.C. Services, Inc., and Jordache Limited
10.33 Letter Agreement, dated as of August 1, 1999, between
Sportswear International (USA), Inc. And Jordache Limited, as
amended *(10)
10.34 Lease between the Company and L.H. Charney Associates, L.P.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only).
- ----------
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the following documents:
(1) Company's Quarterly Report on Form 10-Q for the quarter ended July 30,
1994.
-37-
(2) Company's Registration Statement on Form S-1 (Registration No. 33-64358).
(3) Company's Annual Report on Form 10-K for the fiscal year ended January 29,
1994.
(4) Company's Quarterly Report on Form 10-Q for the quarter ended October 30,
1993.
(5) Company's Quarterly Report on Form 10-Q for the quarter ended October 29,
1994.
(6) Company's Current Report on Form 8-K dated October 7, 1994.
(7) Company's Annual Report on Form 10-K for the fiscal year ended January 28,
1995.
(8) Company's Quarterly Report on Form 10-Q for the quarter ended November 2,
1996.
(9) Company's Quarterly Report on Form 10-Q for the quarter ended August 3,
1996.
(10) Company's Quarterly Report on Form 10Q for the quarter ended July 31, 1999.
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the Company will be
provided with copies of these exhibits upon written request to the Company.
(b) Reports on Form 8-K
November 15, 1999 report announcing that Cygne Designs, Inc. had
consummated the sale of its Knit business to Jordache Limited.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedule
See "Index to Consolidated Financial Statements and Supplemental
Schedule" appearing on F-1. Schedules not included herein are omitted
because they are not applicable or the required information appears in
the Consolidated Financial Statement or notes thereto.
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CYGNE DESIGNS, INC.
(Registrant)
By: /s/ BERNARD M. MANUEL
----------------------------------
Bernard M. Manuel
(Chairman and Chief
Executive Officer)
Date: April 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ BERNARD M. MANUEL Chairman of the Board of Directors, April 26, 2000
- ---------------------- Chief Executive Officer and Director
Bernard M. Manuel (principal executive officer)
/s/ ROY E. GREEN Senior Vice President, Chief April 26, 2000
- ---------------------- Financial Officer, and Treasurer
Roy E. Green (principal financial and accounting
officer) and Secretary
/s/ JAMES G. GRONINGER Director April 26, 2000
- ----------------------
James G. Groninger
-39-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
- ----
Consolidated Financial Statements
Report of Independent Auditors ........................................ F-2
Consolidated Balance Sheets as of January 29, 2000
and January 30, 1999 ................................................. F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended January 29, 2000 .......................... F-4
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended January 29, 2000 .... F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended January 29, 2000 ................................ F-6
Notes to Consolidated Financial Statements ............................ F-7
Schedule
Schedule II--Valuation and Qualifying Accounts ........................ F-20
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Cygne Designs, Inc.
We have audited the accompanying consolidated balance sheets of Cygne Designs,
Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 29, 2000. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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
fairly, in all material respects, the consolidated financial position of Cygne
Designs, Inc. and Subsidiaries at January 29, 2000 and January 30, 1999 and the
consolidated results of their operations, changes in their stockholders' equity
and their cash flows for each of the three years in the period ended January 29,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
April 7, 2000
F-2
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY JANUARY
29, 2000 30, 1999
---------- ----------
(In thousands,
except share and
per share amounts)
ASSETS
Current assets:
Cash (includes restricted cash of $722 and $669,
respectively)..................................... $ 7,020 $ 3,686
Trade accounts receivable, net .................... 1,853 8,242
Inventory ......................................... 2,421 2,705
Assets held for sale .............................. -- 4,700
Other receivables and prepaid expenses ............ 402 996
------- -------
Total current assets ........................ 11,696 20,329
Fixed assets, net ..................................... 2,472 2,720
Other assets .......................................... 600 550
------- -------
Total assets ................................ $14,768 $23,599
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................. $ -- $ 2,754
Accounts payable ................................... 1,200 4,579
Accrued expenses ................................... 2,448 4,140
Income taxes payable ............................... 5,977 6,080
------- -------
Total current liabilities ................... 9,625 17,553
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000
shares authorized: none issued and outstanding ... -- --
Common Stock, $0.01 par value; 25,000,000 shares
authorized: 12,438,038 shares issued and
outstanding ....................................... 124 124
Paid-in capital ..................................... 120,918 120,918
Accumulated deficit ................................. (115,899) (114,872)
Foreign currency translation adjustment ............. -- (124)
------- -------
Total stockholders' equity .................. 5,143 6,046
------- -------
Total liabilities and stockholders' equity .. $14,768 $23,599
======= =======
SEE ACCOMPANYING NOTES.
F-3
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
January January January
29, 2000 30, 1999 31, 1998
--------- --------- ---------
($ in thousands
except per share amounts)
Net sales ................................ $55,398 $43,013 $43,379
Cost of goods sold ....................... 50,657 42,753 43,063
------- ------- --------
Gross profit ............................. 4,741 260 316
Selling, general and administrative
expenses ................................ 3,874 4,381 10,331
Provision for impairment of Knit
business assets ......................... 1,625 2,564 --
(Recoupment) provision for lease
termination expenses .................... (186) (902) 3,964
Amortization of intangibles .............. -- 364 364
------- ------- --------
Loss from operations ..................... (572) (6,147) (14,343)
Interest income .......................... (122) (428) (461)
Interest expense ......................... 530 337 378
------- ------- --------
Loss before income taxes ................. (980) (6,056) (14,260)
Provision for income taxes ............... 47 269 204
------- ------- --------
Net loss ................................. ($1,027) ($6,325) ($14,464)
======= ======= ========
Net loss per share -- basic .............. $(0.08) $(0.51) $ (1.16)
======= ======= ========
Weighted average number of common
shares outstanding ....................... 12,438 12,438 12,438
======= ======= ========
Net loss per share assuming dilution ..... $(0.08) $(0.51) $ (1.16)
======= ======= ========
Weighted average number of common
shares and dilutive securities .......... 12,438 12,438 12,438
======= ======= ========
SEE ACCOMPANYING NOTES.
F-4
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK Foreign
------------ PAID-IN Currency
NUMBER OF ------- Translation (Accumulated
SHARES AMOUNT CAPITAL Adjustment Deficit) TOTAL
------ ------ ------- ---------- -------- -----
($ In thousands)
Balance at February 1, 1997 .......................... 12,438 $124 $120,918 $ -- $(94,083) $26,959
Foreign currency translation adjustment ........... -- -- -- (116) -- (116)
Net loss for year ended January 31, 1998 .......... -- -- -- -- (14,464) (14,464)
------ ---- -------- ----- -------- -------
Comprehensive loss for year ended January 31, 1998 ... -- -- -- -- -- (14,580)
------ ---- -------- ----- -------- -------
Balance at January 31, 1998 .......................... 12,438 124 120,918 (116) (108,547) (12,379)
-
Foreign currency translation adjustment ............ -- -- -- (8) -- (8)
------ ---- -------- ----- -------- -------
Net loss for year ended January 30, 1999 ........... -- -- -- -- (6,325) (6,325)
-------
Comprehensive loss for year ended January 30, 1999 ... -- -- -- -- -- (6,333)
Balance at January 30, 1999 .......................... 12,438 124 120,918 (124) (114,872) 6,046
Foreign currency translation adjustment ........... -- -- -- 124 -- 124
Net loss for year ended January 29, 2000 .......... -- -- -- -- (1,027) (1,027)
-------
Comprehensive loss for year ended January 29, 2000 ... -- -- -- -- -- (903)
------ ---- -------- ----- -------- -------
Balance at January 29, 2000 .......................... 12,438 $124 $120,918 $ -- $(115,899) $ 5,143
====== ==== ======== ===== ======== =======
SEE ACCOMPANYING NOTES
F-5
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-----------------------------------
January January January
29, 2000 30, 1999 31, 1998
-------- -------- ---------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net loss ............................................ $(1,027) $(6,325) $(14,464)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Provision for impairment of Knit
business assets ............................... 1,625 2,564 --
Amortization of goodwill ....................... -- 364 364
Depreciation ................................... 449 469 966
Write-off of fixed assets ...................... -- -- 1,857
(Recoupment) provision for lease
termination expense ........................... (186) (902) 2,107
Rent expense not currently payable ............. -- -- 57
Changes in operating assets and liabilities:
Trade accounts receivable ................... 6,409 (2,300) 1,227
Inventory ................................... 2,168 (2,120) 1,097
Other receivables and prepaid
expenses ................................... (302) 621 1,816
Accounts payable ............................ (3,376) 835 (1,034)
Accrued expenses ............................ (2,186) (1,594) (3,121)
Income taxes payable ........................ (103) 12 84
------- ------- --------
Net cash provided by (used in) operating
activities ......................................... 3,471 (8,376) (9,044)
INVESTING ACTIVITIES
Proceeds from Knit Disposition, net ................. 2,627 -- --
Purchase of fixed assets ............................ (84) (279) (754)
Other assets ........................................ (50) (12) (501)
------- ------- --------
Net cash provided by (used in) investing
activities ......................................... 2,493 (291) (1,255)
FINANCING ACTIVITIES
Short-term borrowings, net .......................... (2,754) 1,435 (63)
(Decrease) in long-term debt, net ................... -- -- (842)
------- ------- --------
Net cash (used in) provided by financing activities (2,754) 1,435 (905)
Effect of exchange rate changes on cash ............. 124 (8) (116)
------- ------- --------
Net increase (decrease) in cash ..................... 3,334 (7,240) (11,320)
Cash at beginning of year ........................... 3,686 10,926 22,246
------- ------- --------
Cash at end of year ................................. $7,020 $3,686 $10,926
======= ======= ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ................................... $445 $264 $120
Interest paid ....................................... 530 336 310
SEE ACCOMPANYING NOTES
F-6
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the "Company")
are engaged in private label manufacturing of women's woven career and casual
apparel.
Since the sale of the Israel-based Knit business, the Company has contacted
potential customers concerning the sale of Knit products under the customers'
own labels. In addition, the Company has arrangements in place to produce Knit
products in Guatemala and China. While the Company has no confirmed orders at
this time, the Company expects that such orders will be forthcoming. Therefore,
the Company has not recorded the Knit business as a discontinued operation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to January 31. A year
refers to the fiscal year of the Company commencing in that calendar year and
ending on the Saturday nearest January 31 of the following year.
ORGANIZATION AND PRINCIPLES OF COMBINATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Cygne and its
subsidiaries. All material intercompany balances and transactions were
eliminated in consolidation and combination.
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.
CASH EQUIVALENTS
The Company considers all highly-liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. Restricted cash
represents cash committments under ceratin letters of credit.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
F-7
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the term of the related lease.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales returns and allowances. Such reserves amounted to
$212,000 and $102,000 at January 29, 2000 and January 30, 1999, respectively.
FOREIGN CURRENCY TRANSLATION
As of January 29, 2000, the functional currency for the Company's foreign
operations is the U.S. Dollar. In prior years, the functional currency for
certain of the Company's foreign operations was the applicable foreign currency
of the country in which it operated. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term debt approximates fair value.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with Financial Accounting
Standards Board SFAS No. 128, "Earnings per Share". In computing dilutive loss
per share for the years ended January 29, 2000, January 30, 1999 and January 31,
1998, no effect has been given to outstanding options since the exercise of any
of these items would have an antidilutive effect on net loss per share.
F-8
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill included the excess of cost over fair value of net assets acquired.
In 1998, management, as a result of the proposed sale of the Knit business,
determined that the remaining goodwill (relating to the Knits business) was
impaired. The write-off of the goodwill is included in the 1998 Statement of
Operations under the caption "Provision for impairment of Knit business assets."
2. DISPOSITION OF COMPANIES
On November 15, 1999, the Company consummated the sale of its Knit business to
Jordache Limited ("Jordache").The assets transfered to Jordache consisted of
substantially all of the assets used by the Knit business in the manufacture of
women's knit clothing, including machinery, equipment, raw materials, leases,
rental agreements, supplies used in the business, furniture, computer hardware
and software, and certain operating data and the records of MTGI and network
equipment, as well as all of the outstanding stock of Wear & Co. S.r.l.
("Wear"). MTGI was the Company's wholly-owned Israeli subsidiary and Wear was
the Company's wholly-owned Italian subsidiary. The sale did not include cash,
accounts receivable and certain other assets of the MTGI business. The
liabilities assigned to, and assumed by, Jordache are all obligations of MTGI
under the contracts and registration included within the assets sold to
Jordache. Jordache provided financing to the Company in connection with certain
knit product purchase orders being manufactured by MTGI prior to the closing.
In consideration of the sale to Jordache of the assets, Jordache paid the
Company approximately $4.7 million before transaction costs. The Company has
used the proceeds from the sale together with MTGI retained cash and collections
of MTGI accounts receivable to pay transaction costs, repay MTGI bank
borrowings, and to pay other MTGI liabilities.
In connection with the Company's agreement to sell its Knit business, the
Company recorded on the 1999 consolidated statements of operations a provision
of impairment of Knit business assets in the amount of $1,625,000.
F-9
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. (RECOUPMENT) PROVISION FOR LEASE TERMINATION EXPENSES
In 1997, the Company provided for lease termination expenses of $3,964,000 as a
result of the Company's decision to relocate from its existing New York office
and to seek substantially smaller New York office space. On March 1, 1999, the
Company completed its relocation from its existing New York office and the
Landlord released the Company from any contingent rent liability on its New York
space it sublet. The actual expenses in connection with this lease termination
approximated $2,876,000. Therefore, $902,000 of this provision was reversed in
1998, and the remaining unused balance of $186,000 of the original provision was
reversed in 1999.
4. INVENTORY
Inventory consists of the following:
JANUARY January
29, 2000 30, 1999(1)
--------- ------------
($ IN THOUSANDS)
Raw materials and Work-in-Process .......... $2,186 $2,310
Finished goods ............................. 235 395
------ ------
$2,421 $2,705
====== ======
(1) Excludes $3,426,000 of inventory of the Knit business classified as assets
held for sale.
5. FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization
and are summarized below together with estimated useful lives used in computing
depreciation and amortization:
F-10
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY JANUARY ESTIMATED
29, 2000 30, 1999(1) USEFUL LIVES
-------- ----------- ------------
($ IN THOUSANDS)
Land and building ................ $ 902 $ 902 30 years
Equipment, furniture, and
fixtures ........................ 2,069 1,999 2-10 years
Leasehold improvements ........... 924 924 Term of lease
Vehicles ......................... 78 78 5 years
------ ------
3,973 3,903
Less accumulated depreciation
and amortization ................ 1,501 1,183
------ ------
$2,472 $2,720
====== ======
(1) Excludes $842,000 of net fixed assets of the Knit business classified as
assets held for sale.
6. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At January 29, 2000 and January 30, 1999 the Company
had restricted cash at a bank of $722,000 and $669,000, respectively, to secure
letters of credit.
The Company had a credit facility with an Israeli bank to finance the Knit
operations. On November 4, 1999, the outstanding balance under this facility was
repaid and the facility terminated.
7. STOCK OPTIONS
Pursuant to an employee Stock Option Plan, as amended, the Company may grant to
eligible individuals incentive stock options as defined in the Internal Revenue
Code ("IRC") and non-qualified stock options. An aggregate of 1,700,000 shares
of common stock have been reserved for issuance under the Plan. The exercise
price for incentive options may not be less than 100% (110% for holders of 10%
or more of the Company's outstanding shares) of the fair market value of the
shares on the date of grant, and at least par value of the common stock with
respect to the non-qualified stock options, have a ten-year term (five years for
holders of 10% or more of the Company's outstanding shares in the case of
incentive stock options) and vest at the discretion of the Board of Directors.
F-11
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April 15,
1993, the Company will automatically grant to eligible non-employee directors
options to purchase 10,000 shares of Common Stock upon the directors' initial
appointment to the Board of Directors and options to purchase 2,000 shares of
Common Stock on each individual director's anniversary date from initial
appointment. Options granted under the Directors' Plan do not qualify as
incentive stock options under the IRC. The options have an exercise price of
100% of fair market value on the date of grant, have a ten-year term and vest,
pro-rata, over four years.
The sale of the Knit business constituted a "change in control of the Company"
for purposes of the Company's stock option plans. As a result, all outstanding
stock options became immediately exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Had compensation cost been determined based upon the fair value at the grant
date for awards consistent with the methodology prescribed by SFAS No. 123 for
the year ended January 29, 2000 the Company's net loss and net loss per share
would have increased by $1,680 or $0.00 per share. For the years ended January
30, 1999 and January 31, 1998, the Company's net loss and net loss per share
would have increased by $1,000 or $0.00 per share.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1999,
1998, and 1997: risk-free interest rate of 5%; volatility factor of the expected
market price of the Company's common stock of 1.69 for January 29, 2000, 1.527
for January 30, 1999, and 0.76 for January 31, 1998; expected life of 6 years;
and a dividend yield of zero.
As any options granted in the future will also be subject to the fair value pro
forma calculations, the pro forma adjustments for fiscal years 1999, 1998, and
1997 may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1999, 1998 and 1997 is $0.15, $0.28 and
$0.34, respectively. Exercise prices for options issued between February 1, 1997
through January 29, 2000 ranged from $0.12 to $23.50. The weighted-average
remaining contractual life of those options is 3.1 years.
F-12
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes stock option transactions:
EMPLOYEE STOCK NON-EMPLOYEE OTHER EMPLOYEE STOCK
OPTION PLAN DIRECTORS PLAN OPTION ARRANGEMENTS
-------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE NUMBER AVERAGE AVERAGE TOTAL
NUMBER EXERCISE EXERCISE OF EXERCISE EXERCISE NUMBER EXERCISE EXERCISE NUMBER
OF SHARES PRICE RANGE PRICE SHARES PRICE RANGE PRICE OF SHARES PRICE RANGE PRICE OF SHARES
--------- ----------- -------- ------ ----------- -------- --------- ----------- -------- ---------
Options outstanding at
February 1, 1997 ........ 720,500 $1.00-$22.75 32,000 $1.13-$23.50 125,000 $2.00-$22.50 877,500
Options granted in 1997 .. -- 4,000 $0.28-$0.69 $0.49 -- 4,000
Options canceled in 1997 . (215,250) $2.00-$22.75 $4.07 -- (215,250)
-------- ------ ------- --------
Options outstanding at
January 31, 1998 ........ 505,250 $1.00-$13.38 36,000 $0.28-$23.50 125,000 $2.00-$22.50 666,250
Options granted in 1998 .. 20,000 $0.31 $0.31 4,000 $0.12-$0.28 $0.20 -- 24,000
Options canceled in 1998 . (93,250) $2.00 -- -- (93,250)
-------- ------- ------- --------
Options outstanding
at January 30, 1999 ..... 432,000 $0.31-$13.88 40,000 $0.12-$23.50 125,000 $2.00-$22.50 597,000
Options granted in 1999 .. -- 2,000 $0.16 -- 2,000
Options canceled in 1999 . (134,000) $2.00 (20,000) $0.12-$22.50 (65,000) $2.00-$22.50 (219,000)
-------- ------- ------- --------
Options outstanding at
January 29, 2000 ........ 298,000 $0.31-$13.88 22,000 $0.16-$23.50 60,000 $2.00 380,000
======= ====== ====== =======
At January 29, 2000
options exercisable ..... 298,000 22,000 60,000 380,000
======= ====== ====== =======
F-13
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONCENTRATIONS OF RISK
For years 1999, 1998, and 1997, sales to The Limited, Inc. accounted for 45%,
59%, and 65%, respectively, of the Company's net sales. For years 1999, 1998,
and 1997, excluding sales of the Knit division, sales to The Limited Inc.
accounted for 98%, 94%, and 68%, respectively, of the Company's net sales. At
January 29, 2000 and January 30, 1999, The Limited, Inc. accounted for 82% and
56%, respectively, of trade accounts receivable. At January 29, 2000 and January
30, 1999, excluding the Knit division, The Limited Inc. accounted for 82% and
100%, respectively, of trade accounts receivable.
9. LEASES, COMMITMENTS AND LITIGATION
LEASES
At January 29, 2000, the Company's lease commitment was $75,000 through April
30, 2000. Effective May 1, 2000, the Company entered into a new lease with a
lease commitment through April 30, 2001 of $252,000.
Total rent expense under the operating leases for the years ended January 29,
2000, January 30, 1999, and January 31, 1998, amounted to approximately
$355,000, $968,000 and $1,036,000, respectively.
COMMITMENTS
The Company has employment agreements with certain officers and key employees
through 2001. Future minimum aggregate annual payments under these agreements
amount to approximately $827,000 in 2000 and $208,000 in 2001. Certain of the
officers and employees may receive additional compensation based upon the
income, as defined, of the Company or one or more of its subsidiaries.
LEGAL PROCEEDINGS
In 1998 the Company settled a shareholder class action lawsuit. As part of the
settlement, the Company contributed approximately $2,100,000 to the settlement.
The Company also incurred legal fees of approximately $500,000 in connection
with this lawsuit.
The Company is involved in various legal proceedings that are incidental to the
conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition
or results of operations or cash flows. See Note 10 for information regarding
tax audits.
F-14
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
Income taxes are provided using the liability method. Under this method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment. Significant components of the
Company's deferred tax assets are as follows:
YEAR ENDED
----------------------------
JANUARY January
29, 2000 30, 1999
---------- ---------
($ IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ...... $44,000 $42,000
------- -------
Valuation allowance ................... (44,000) (42,000)
======= =======
Total deferred tax assets ................. $0 $0
== ==
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED
------------------------------------------
JANUARY JANUARY JANUARY
29, 2000 30, 1999 31, 1998
-------- -------- ---------
($ IN THOUSANDS)
Pretax income (loss):
United States ............ $2,468 $(3,555) $(13,901)
Foreign .................. (3,448) (2,501) (359)
------ ------- --------
$(980) $(6,056) $(14,260)
====== ======= ========
F-15
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows:
YEAR ENDED
----------------------------------------
JANUARY JANUARY JANUARY
29, 2000 30, 1999 31, 1998
-------- --------- ---------
($ IN THOUSANDS)
Current:
Federal ............... $ -- $ -- $ --
Foreign ............... 17 182 --
State and local ....... 30 87 204
------ ------- ------
Total ..................... $ 47 $ 269 $ 204
====== ======= ======
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
YEAR ENDED
-------------------------------------------------------
JANUARY JANUARY JANUARY
29, 2000 30, 1999 31, 1998
--------------- ------------- --------------
($ IN THOUSANDS)
Tax at U.S. statutory ......
rates $(333) (34.0%) $(2,059) (34.0%) $(4,848) (34.0)%
Loss, no benefit provided .. 333 34.0 2,059 34.0 4,848 34.0
Foreign and state income
taxes, net of federal
tax benefit ............... 47 4.8 269 4.4 204 1.4
----- --- ------- --- ------- ---
$ 47 4.8% $ 269 4.4% $ 204 1.4%
===== === ======= === ======= ===
As of January 29, 2000, based upon tax returns filed and to be filed the Company
expects to report a net operating loss carryforward for U.S. Federal income tax
purposes of approximately $114,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2015. Under Section
382 of the U.S. Internal Revenue Code, if there is a more than 50% ownership
change (as defined therein) with respect to the Company's stock, the Company's
loss carryforwards for U.S. Federal and New York State and City tax purposes
would be virtually eliminated.
F-16
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of January 29, 2000, based upon tax returns filed and to be filed the Company
expects to report net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $75,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
TAX AUDITS
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc., a wholly-owned subsidiary,
for its taxable years ending December 31, 1990 through October 7, 1994 (the date
GJM (US) Inc. was acquired by the Company). To date, the IRS has informally
proposed a Federal income tax deficiency against GJM (US) Inc. of approximately
$16 million (including some penalties but not interest). Depending on the amount
of the deficiency, the amount of interest could be significant. The outcome of
the GJM (US) Inc. audit cannot be predicted at this time. Although the Company
is disputing the proposed adjustment, and believes that it has established
appropriate reserves with respect to this matter, an adverse decision in this
matter would have a material adverse impact on the Company and its financial
condition, results of operations or cash loss.
On October 31, 1999, the date of sale of the Company's Knit business, the
Company's wholly-owned Israeli subsidiary, M.T.G.I.--Textile Manufacturers Group
(Israel) Ltd. ("MTGI"), had its Israeli tax free status terminated retroactive
to January 1, 1994. The Israeli Tax Authority ("Authority") is in the process of
assessing the tax due by MTGI on account of the termination of MTGI's tax free
status for years ending December 31, 1994 through December 31, 1997. To date,
the Authority has not issued a report detailing the MTGI tax assessment for this
period. Although the Company believes that it has established appropriate
accounting reserves with respect to this matter, an adverse decision in this
matter could have a material adverse impact on the Company and its financial
condition, results of operations, or cash flow.
The Company is subject to other ongoing tax audits in several jurisdictions.
Although there can be no assurances, the Company believes any adjustments that
may arise as a result of these other audits will not have a material adverse
effect on the Company's financial position.
11. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments of
the apparel market: woven career and casual women's sportswear and knit career
and casual women's sportswear. The Company sources and manufacturers garments
which have been designed and developed by the customer. The Company sold its
Knit business on November 15, 1999, effective as of October 31, 1999 (see Note
2).
F-17
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net sales to unaffiliated customers and identifiable assets were as follows:
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -----
($ IN THOUSANDS)
YEAR ENDED JANUARY 29, 2000
Net sales ........................... $ 32,008 $ 23,390 $ -- $ -- $ 55,398
Gross profit ........................ 1,480 3,261 -- -- 4,741
Selling, general and administrative . 685 2,005 1,184 -- 3,874
Provision for impairment of
Knit business assets ................ 1,625 -- -- -- 1,625
(Recoupment) provision for lease
termination ......................... -- -- (186) -- (186)
-------- -------- -------- --------- --------
(Loss) from operations .............. $ (830) $ 1,256 $ (998) -- (572)
======== ======== ======== ========= ========
Interest income ..................... 122
Interest expense .................... 530
--------
(Loss) income before taxes .......... (980)
Provision for income taxes .......... 47
--------
Net (loss) .......................... $ (1,027)
========
Depreciation expense ................ $ 131 $ 303 $ 15 -- $ 449
-------- -------- -------- --------- --------
Identifiable assets ................. -- $ 6,919 $ 7,849 -- $ 14,768
======== ======== ======== ========= ========
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -----
($ IN THOUSANDS)
YEAR ENDED JANUARY 30, 1999
Net sales ........................... $ 25,891 $ 17,122 $ -- $ -- $ 43,013
Gross profit (loss) ................. 1,053 (793) -- -- 260
Selling, general and administrative . 841 1,493 2,047 -- 4,381
Amortization of intangibles ......... 364 -- -- -- 364
Provision for impairment of
Knit business assets ............... 2,564 -- -- -- 2,564
(Recoupment) provision for lease
termination ....................... -- -- (902) -- (902)
-------- -------- -------- --------- --------
(Loss) from operations .............. $ (2,716) $ (2,286) $ (1,145) -- (6,147)
========
Interest income ..................... 428
Interest expense .................... 337
--------
(Loss) income before taxes .......... (6,056)
Provision for income taxes .......... 269
--------
Net (loss) .......................... $ (6,325)
Depreciation expense ................ $ 173 $ 296 -- -- $ 469
========
Identifiable assets ................. $ 10,326 $ 9,705 $ 3,568 -- $ 23,599
======== ======== ======== ========= ========
F-18
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -----
($ IN THOUSANDS)
YEAR ENDED JANUARY 31, 1998
Net sales ........................... $ 28,886 $ 14,290 $ -- $ 203 $ 43,379
Gross profit (loss) ................. 656 814 -- (1,154) 316
Selling, general and administrative . 1,292 1,462 4,665 2,912 10,331
Amortization of intangibles ......... 364 -- -- -- 364
Provision for lease termination ..... -- -- 3,964 -- 3,964
--------
(Loss) from operations .............. $ (1,000) $ (648) $ (8,629) $ (4,066) (14,343)
========
Interest income ..................... (461)
Interest expense .................... 378
--------
(Loss) before income tax ............ (14,260)
Provision for income taxes .......... 204
--------
Net (loss) .......................... $(14,464)
========
Depreciation expense ................ $ 240 $ 291 -- $ 433 966
======== ======== ======== ========= ========
Identifiable assets ................. $ 10,873 $ 7,249 $ 11,628 $ -- $ 29,750
======== ======== ======== ========= ========
12. EMPLOYEE BENEF IT PLANS
The Company does not provide any post employment or post retirement b enefits to
its current or former employees. The Company implemented a 401(k) plan for
domestic employees on February 2, 1997. The Company will match 33% of the
employee's contributions up to 3% of the employee's voluntary contribution.
13. RELATED PARTY TRANSACTIONS
During 1997, a company controlled by a shareholder paid the Company $292,000 for
design fees and commissions.
F-19
CYGNE DESIGNES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning of Costs and Deductions Balance at
Description Period Expenses (Describe)* End of Period
----------- ------------ ----------- ---------- -------------
($ in thousands)
Reserves for returns and allowances:
Year ended January 31, 1998 .............. $1,542 $1,526 $2,959 $ 109
Year ended January 30, 1999 .............. 109 641 648 102
Year ended January 29, 2000 .............. 102 1,081 971 212
- -----------------
*Write-off of uncollectible amounts
F-20