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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended February 3, 2001.
Commission File Number 0-22102
CYGNE DESIGNS, INC.
-------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-2843286
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1410 Broadway, New York, New York 10018
- --------------------------------- -----
(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
----
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(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
--- ---
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 19, 2001 (based on the closing sale price for such shares as reported
by the OTC Bulletin Board: $1,741,325 Common Stock outstanding as of April 19,
2001: 12,438,038 shares.
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement for its 2001 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 career and casual apparel, serving principally The
Limited, Inc. 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.
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 purchase 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. For years 2000, 1999,
and 1998, sales to The Limited, Inc. (consisting primarily of Lerner) accounted
for 95%, 45%, and 59%, respectively, of the Company's net sales. For years 1999
and 1998, excluding sales of the Knit division which was sold in November 1999,
sales to The Limited, Inc. accounted for 98% and 94%, respectively, of the
Company's net sales. 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.
-2-
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 February 21, 2001, the Company leased a sales and marketing office in
Dallas, Texas pursuant to a lease which expires on September 30, 2002 with an
annual rent of approximately $50,232.
On November 15, 1999, the Company consummated the sale of its Knit business
to Jordache Limited ("Jordache"). The effective date of the sale was October 31,
1999. 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 M.T.G.I.-Textile Manufacturers Group
(Israel) Ltd. ("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 were all
obligations of MTGI under the contracts 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 $4,700,000. 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.
The Knit business had revenues of $32,008,000 and gross profit of
$1,480,000 in 1999 through October 31, 1999, the effective date of the sale to
Jordache. The Company recorded an impairment of Knit business assets of
$2,564,000 and $1,625,000 in 1998 and 1999, respectively. During 1998 and 1999,
the Knit business accounted for 60% and 58%, respectively, of Cygne's net sales.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the further restructuring 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 one segment of the apparel market:
women's career and casual apparel. During 2000, the Company's products 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 garments are not manufactured until purchase
orders are received from its customers. 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 2000, most of the Company's products were manufactured outside the
United States, either by non-affiliated contract manufacturers or at the
Company's own manufacturing facility located in Guatemala. The Company's
contract manufacturers are located in the Far East and Central America. During
2000, products representing approximately 5% of the Company's net sales were
produced in the Far East and approximately 91% 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.
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. Furthermore, the occurrence of
certain of these factors in Guatemala 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.
-4-
Cygne operates its own manufacturing facility 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 its 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.
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.
-5-
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.
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. 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.
-6-
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,
2001. 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.
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 ("AGOA"), which was
signed into law on May 18, 2000, provides for enhanced trade benefits, including
duty- and quota-free access, for various textile and apparel products imported
from eligible sub-Saharan countries. To date, South Africa, Kenya, Mauritius,
and Madagascar have been certified as eligible to participate in the AGOA
program. AGOA also amended the Caribbean Basin Economic Recovery Act to provide
duty-free and quota-free treatment to various textile and apparel
-7-
products imported from eligible countries, including Guatemala. The Company
currently imports the majority of its merchandise from Guatemala and is
exploring additional sourcing opportunities presented by AGOA.
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 1999. In June 2000, President Clinton
renewed the waiver. Congress can pass legislation disapproving the one-year
extension of NTR to China, but did not do so in 2000. 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 2001. 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.
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
-8-
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 February 3, 2001 the Company had unfilled confirmed customer orders of
$12,500,000, compared with $10,600,000 at January 29, 2000. 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, 2001, the Company had approximately 848 full-time employees,
including approximately 819 employees at its facilities in Guatemala. The
Company considers its relations with its employees to be satisfactory.
-9-
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Bernard M. Manuel 53 Director, Chairman of the Board and Chief Executive
Officer
Roy E. Green 68 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.
-10-
ITEM 2. PROPERTIES
During April 2000, the Company moved its executive and general offices from
680 Fifth Avenue to 1410 Broadway, New York. The Company's office now consists
of 6,100 square feet pursuant to a lease which expires on June 30, 2004 with an
annual rental expense of approximately $252,000.
On February 21, 2001, the Company leased a sales and marketing office in
Dallas, Texas pursuant to a lease which expires on September 30, 2002 with an
annual rent of approximately $50,232.
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 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
$3,964,000 for the expenses connected with the move of its executive and general
offices 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 $3,062,000.
Therefore, $902,000 of this provision is shown as a recoupment in 1998, and the
remaining unused balance of $186,000 of the original provision was reversed in
1999.
The Company owns a manufacturing 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 $16,000,000 (including some penalties but not interest).
-11-
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 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, and
cash flow.
On October 31, 1999, the date of sale of the Company's Knit business, the
Company's wholly-owned subsidiary, M.T.G.I.-Textile Manufacturers Group (Israel)
Ltd. ("MTGI") had its Israeli tax-free status terminated retroactive to January
1, 1994. In June 2000, MTGI accepted and paid the Israeli Tax Authority
assessment, including interest, of approximately $412,000 due on account of the
termination of its tax-free status for the years ending December 31, 1994
through December 31, 1997.
The Company is subject to other ongoing tax audits in several
jurisdictions, including Israel for years 1998 and 1999 and Guatemala for years
1998, 1999, and 2000. 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, and cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Stockholders of Cygne Designs, Inc. was held on
December 5, 2000.
b. The amendment to the Company's restated certificate of incorporation that
imposes certain restrictions upon the transfer of shares of Cygne common
stock to designated persons that could result in the imposition of
limitations on the use, for federal, state, and city income tax purposes,
of Cygne's carryforwards of net operating losses and certain federal income
tax credits was approved and adopted at the Annual Meeting pursuant to the
following vote tabulation:
Votes For Votes Against Abstention Broker Non-Votes
--------- ------------- ---------- ----------------
6,445,569 244,525 0 4,923,122
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c. The following persons, comprising the entire board of directors, were
elected at the Annual Meeting pursuant to the following vote tabulation:
Name Votes For Votes Withheld
---- --------- --------------
James G. Groninger 11,483,041 130,175
Bernard M. Manuel 11,483,041 130,175
-13-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cygne Common Stock is 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
---- ---
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
FISCAL YEAR ENDED FEBRUARY 3, 2001
First Quarter $0.38 $0.22
Second Quarter $0.30 $0.20
Third Quarter $0.30 $0.19
Fourth Quarter $0.34 $0.16
The number of stockholders of record of Common Stock on April 20, 2001 was
approximately 100. The closing sale price of the Company's Common Stock on April
19, 2001 was $0.14 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.
Mr. Manuel, the Chairman of the Company, 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.
-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
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) see notes on next page 1996 1997 1998 1999 2000(1)
-------- -------- ------- ------- -------
(In thousands except per share amounts)
Income Statement Data
Net sales ...................................................... $254,313 $ 43,379 $43,013 $55,398 $28,381
Cost of goods sold ............................................. 226,456 43,063 42,753 50,657 24,852
-------- -------- ------- ------- -------
Gross profit ................................................... 27,857 316 260 4,741 3,529
Selling, general and administrative expenses ................... 27,251 10,331 4,381 3,874 3,508
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) -- -- -- --
Reorganization expense ......................................... 4,813 -- -- -- --
Amortization of intangibles .................................... 364 364 364 -- --
-------- -------- ------- ------- -------
Income (loss) from operations ................................. 25,017 (14,343) (6,147) (572) 21
Other income(2) ................................................ (6,864) -- -- -- --
Settlement of shareholder class
action and related legal expenses .............................. 2,627 -- -- -- --
Interest income ................................................ (80) (461) (428) (122) (277)
Interest expense ............................................... 3,340 378 337 530 89
-------- -------- ------- ------- -------
Income (loss) before income taxes and minority interests ...... 25,994 (14,260) (6,056) (980) 209
Provision for income taxes ..................................... 7,117 204 269 47 20
-------- -------- ------- ------- -------
Income (loss) before minority interests ........................ 18,877 (14,464) (6,325) (1,027) 189
Income attributable to minority interests ...................... 961 -- -- -- --
-------- -------- ------- ------- -------
Net income (loss) .............................................. $ 17,916 $(14,464) $(6,325) $(1,027) $ 189
======== ======== ======= ======= =======
Net income (loss) per share - basic and diluted ................ $ 1.44 $ (1.16) $ (0.51) $ (0.08) $ 0.02
======== ======== ======= ======= =======
Number of shares used in computation of net
income (loss) per share - basic and diluted .................... 12,438 12,438 12,438 12,438 12,438
======== ======== ======= ======= =======
-16-
Year (1)
----------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------ ------ ------
(In thousands)
Balance Sheet Data (as of end of period)
Cash ............................................. $22,246 $10,926 $3,686 $6,298 $2,378
Accounts receivable .............................. 7,239 6,012 8,242 1,853 3,633
Assets held for sale ............................. -- -- 4,700 -- --
Inventory ........................................ 5,109 4,012 2,705 2,421 5,225
Goodwill ......................................... 2,426 2,062 -- -- --
Total assets ..................................... 47,142 29,750 23,599 14,768 14,986
Stockholders' equity ............................. 26,959 12,379 6,046 5,143 5,332
(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, 2001 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, AN ADVERSE TAX RULING, RISK OF OPERATIONS AND
SUPPLIERS IN FOREIGN COUNTRIES, COMPETITION, AND 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
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 $36,000,000 (based on the average closing price of the
Ann Taylor common stock during the ten trading days prior to closing), and
approximately $8,900,000 (after post-closing adjustments) in cash in respect of
inventory (less related payables and advances and certain other assumed
liabilities), net fixed assets and accounts receivable of the Ann Taylor Woven
Division. Ann Taylor also assumed
-18-
certain liabilities of the acquired sourcing operations. As a result of the
transaction, the Company realized a pre-tax gain of $29,588,000. 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 $44,300,000. The
Company realized a pre-tax gain of approximately $6,100,000 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, the Company consummated the sale of its Knit business
to Jordache Limited ("Jordache"). The effective date of the sale was October 31,
1999. 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 M.T.G.I.-Textile Manufacturers Group
(Israel) Ltd. ("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 were all
obligations of MTGI under the contracts 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 $4,700,000. 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.
-19-
In connection with an amendment to the Company's agreement to sell its Knit
business, the Company recorded in 1999 an additional provision for impairment of
the 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.
In March 1999, the Company agreed to sell the Knit business. In connection
with the sale, during 1998, the company established a provision of $2,625,000
for the impairment of the Knit business assets. The provision included the
unamortized goodwill of the Knit business ($1,700,000) loss on assets to be sold
and estimated transaction costs.
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 $23,390,000. Proforma gross profit for 1999 would have been
$3,261,000. 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 1999 and 1998 the Knit Business accounted for 58% and 60%,
respectively, of Cygne's net sales.
The Limited, Inc. (consisting primarily of Lerner) accounted for 95%, 45%,
and 59% of Cygne's net sales for 2000, 1999, and 1998, respectively. For years
1999 and 1998, excluding sales of the Knit division which was sold in November
1999, sales to The Limited, Inc. for 98% and 94%, respectively, of the Company's
net 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. 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.
-20-
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the further restructuring 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.
-21-
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
-------------------------------
2000 1999 1998
------ ------ ------
Net sales ..................................................... 100.0% 100.0% 100.0%
====== ====== ======
Gross profit .................................................. 12.4 8.6 0.6
Selling, general and administrative expenses .................. 12.4 7.0 10.2
Provision for impairment of Knit business assets .............. -- 2.9 6.0
Recoupment of lease termination expense ....................... -- (0.3) (2.1)
Amortization of intangibles ................................... -- -- 0.8
------ ------ ------
Income (loss) from operations ................................. 0.0 (1.0) (14.3)
Interest (income) expense, net ................................ (0.1) 0.8 (0.2)
Provision for income taxes .................................... 0.0 0.1 0.6
------ ------ ------
Net income (loss) ............................................. 0.1% (1.9%) (14.7%)
2000 Compared to 1999
The Company sold its Knit business with an effective date of October 31,
1999. Accordingly, the Company's results of operations for 2000 do not include
the results of the Knit business sold, whereas the results of operations through
October 1999 do include the results of the Knit business sold. As a result, a
comparison of 2000 and 1999 may not be meaningful to the extent effected by the
sale of the Knit business.
-22-
NET SALES
Net sales for 2000 were $28,381,000, a decrease of $27,017,000 or 49% from
$55,398,000 in 1999. Sales of the Knit division, which was sold on October 31,
1999, for 1999 were $32,008,000.
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 $23,390,000. The net sales for 2000 of $28,381,000 were greater than
the proforma sales for 1999 of $23,390,000 by $4,491,000 or 21%. The Limited,
Inc. accounted for 78% of the increase in sales with the balance of the increase
attributed to trial orders to new customers. The Limited, Inc. accounted for 95%
of the net sales for 2000 compared to 98% of the proforma net sales for 1999.
GROSS PROFIT
The gross profit for 2000 was $3,529,000, a decrease of $1,212,000 or 26%
from the gross profit of $4,741,000 for 1999. Gross profit of the Knit division,
which was sold on October 31, 1999, for 1999 was $1,480,000.
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 gross profit
for 1999 of $3,261,000. The gross profit for 2000 of $3,529,000 was greater than
the proforma gross profit of $3,261,000 by $268,000 or 8%. The increase in gross
profit in year 2000 compared to year 1999 was primarily attributable to
increased sales, favorable resolution of prior years' disputes, offset by
additional cost to service the increased sales volume.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for 2000 were $3,508,000, a
decrease of $366,000 or 9% from $3,874,000 in 1999. Selling, general, and
administrative expenses of the Knit division for 1999 were $685,000.
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 selling,
general, and administrative expenses of $3,189,000. The selling, general, and
administrative expenses for 2000 of $3,508,000 were greater than the proforma
expenses of 1999 of $3,189,000 by $319,000 or 10%. The increase in expenses in
2000 compared to year 1999 was primarily attributable to three factors: (i) the
establishment of a sales team to service a new customer; (ii) increase in
occupancy costs; and (iii) professional fees incurred investigating an
acquisition candidate.
-23-
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the Company's agreement to sell its Knit business in
1999, the Company recorded a provision for impairment of Knit business assets in
the amount of $1,625,000 which consists of a loss on assets to be sold,
transaction costs, 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.
RECOUPMENT OF LEASE TERMINATION EXPENSES
In 1999, the Company recouped the balance of its unused provision for lease
termination expense which amounted to $186,000.
INTEREST
Net interest income for 2000 was $188,000 compared to net interest expense
of $408,000 for 1999. The decrease in interest expense for 2000 compared to 1999
was primarily attributable to decreased borrowings as a result of the sale of
the Knit business.
PROVISION FOR INCOME TAXES
The provision for income taxes of $20,000 for 2000 represents a provision
for minimum state income taxes. As of February 3, 2001, based upon tax returns
filed and to be filed, the Company reported a net operating loss carryforward
for U.S. Federal income tax purposes of approximately $113,000,000. If unused,
these loss carryforwards will expire in the Company's taxable years ending 2011
through 2019. 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 in any three-year period, the Company's loss carryforwards for
U.S. Federal and New York State and City tax purposes would be virtually
eliminated.
As of February 3, 2001, based upon tax returns filed and to be filed, the
Company reported net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $74,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2019.
-24-
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 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.
-25-
The Knit division had a gross profit for 1999 of $1.5 million, an increase
of $0.4 million or 41% 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.
The Woven division expenses for 1999 were $2.0 million, an increase of $0.5
million, or 34% 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 42% from $2.0 million in 1998. The decrease for 1999 was primarily
attributable to the termination of most of the corporate staff in 1998.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the amended and restated acquisition agreement to sell
its Knit business, the Company recorded a provision for impairment of Knit
business assets in 1999 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.
-26-
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 OF 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.
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 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.
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.
-27-
In 1999, the Company received proceeds of approximately $4,700,000 from the
sale of the Knit business ("MTGI"). In addition, the retained cash and accounts
receivable and certain other assets of the Knit business aggregated
approximately $4,500,000. The Company has used the cash proceeds from the sale
together with MTGI's cash and the collection of MTGI's accounts receivable to
pay transaction costs (including the Israeli Tax Authority assessment for the
termination of MTGI's tax-free status) related to the sale, repay MTGI's bank
borrowings, and to pay other MTGI liabilities. The excess cash received from the
transaction is being used for general working capital purposes.
Since February 1, 1997, the Company has not had a domestic credit facility,
and Cygne has obtained letters of credit issued from a domestic bank secured by
a cash deposit from the Company. At February 3, 2001, the Company had restricted
cash at a bank of $1,000,000 as collateral for letters of credit.
Net cash used in operating activities for 2000 was $3,804,000 compared to
cash provided by operating activities of $3,471,000 in 1999. The increase in net
cash used in operating activities was primarily the result of increased working
capital requirements. Net cash used in investing activities for 2000 of $116,000
was for the purchase of fixed assets compared to net cash provided by investing
activities in 1999 of $2,543,000 which consisted of fixed assets purchases of
$84,000 offset by net proceeds from Knit disposition.
The Company's financial performance for 2001 will depend on a variety of
factors, including the amount of sales to The Limited, Inc. If the company has
significant operating losses or an adverse decision in its federal tax audit of
GJM (US) Inc. or its Israeli tax audit, which would require the company to pay a
significant amount of tax, the Company will face severe liquidity pressures
which would adversely affect the Company's financial condition and results of
operations and cash flow. The Company is continuing to review its business
operations and could incur additional costs in the future associated with the
restructuring 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
-28-
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.
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.
The Company sold its Knit Business with an effective date of October 31,
1999. Accordingly, the Company's results of operations for 2000 do not include
the results of the Knit business sold, whereas the results of operations through
October 1999 do include the results of the Knit business sold. As a result, a
comparison of 2000 and 1999 may not be meaningful to the extent effected by the
sale of the Knit business.
-29-
2000 1999
Qtr. 1 Qtr. 2 Qtr. 3 Qtr.4(1) Qtr.1 Qtr. 2 Qtr 3 Qtr.4 (1)
------ ------ ------ -------- ----- ------ ----- ---------
(In thousands except per share amounts)
Net sales $5,117 $6,771 $8,350 $8,143 $13,561 $13,166 $22,799 $5,872
Gross profit 763 807 902 1,057 1,163 1,531 1,220 827
Provision for impairment of
Knit business assets -- -- -- -- -- 886 530 209
Operating profit (loss) 65 (19) 79 (104) 243 (459) (396) 40
Net income (loss) 93 14 118 (36) 79 (665) (470) 29
Net income (loss) per share-
basic and diluted $0.01 $0.00 $0.01 $0.00 $0.01 $(0.05) $(0.04) $0.00
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 provisions for lease termination expense of
$186,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-30-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The section entitled "Proposal No. 1 - 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.
-31-
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,
10.4, 10.6, and 10.28 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 Certificate of Amendment to Restated Certificate
of Incorporation. Incorporate by reference to
Current Report in Form 8-K dated December 5, 2000.
3.3 By-laws.*(2)
4 Specimen Stock Certificate.*(2)
-32-
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)
10.4 Employment Agreement, dated as of May 1, 1993,
between the Company and Roy Green.*(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)
10.10 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)
10.13 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)
-33-
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)
10.27 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)
10.32 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.
10.35 Lease Extension and Modification between the
Company and L.H. Charney Associates, L.P.
amendment.
23 Consent of Ernst & Young LLP.
-34-
* 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 November 2,
1996.
(2) Company's Quarterly Report on Form 10-Q for the quarter ended August 3,
1996.
(3) 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
December 5, 2000 report announcing that the stockholders of Cygne
Designs, Inc. had approved and adopted an amendment to the Company's
Restated Certificate of Incorporation that imposes certain
restrictions upon the transfer of shares of Cygne common stock.
(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.
-35-
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 30, 2001
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 30, 2001
- ---------------------- Chief Executive Officer and Director
Bernard M. Manuel (principal executive officer)
/s/ Roy E. Green Senior Vice President, Chief Financial April 30, 2001
- ---------------------- Officer, and Treasurer (principal
Roy E. Green financial and accounting officer) and
Secretary
/s/ James G. Groninger Director April 30, 2001
- ----------------------
James G. Groninger
-36-
Cygne Designs, Inc. and Subsidiaries
Consolidated Financial Statements
Index to Consolidated Financial Statements
Page
Report of Independent Auditors ............................................ F-2
Consolidated Balance Sheets as of February 3, 2001 and
January 29, 2000 ........................................................ F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended February 3, 2001 .............................. F-4
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended February 3, 2001 ........ F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended February 3, 2001 .................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
Schedule
Schedule II - Valuation and Qualifying Accounts ........................... F-21
F-1
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 February 3, 2001 and January 29, 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 3, 2001. Our
audit also included the financial statement schedule listed in the Index on page
F-1. 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 February 3, 2001 and January 29, 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 3, 2001, 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
March 30, 2001
F-2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets
February January
3, 2001 29, 2000
--------- ---------
(In thousands, except share and
per share amounts)
Assets
Current assets:
Cash ............................................................................ $ 2,378 $ 6,298
Trade accounts receivable, net .................................................. 3,633 1,853
Inventory ....................................................................... 5,225 2,421
Other receivables and prepaid expenses .......................................... 453 402
--------- ---------
Total current assets ................................................. 11,689 10,974
Fixed assets, net ................................................................... 2,255 2,472
Other assets (includes restricted cash of $1,000 and $722, respectively) ............ 1,042 1,322
--------- ---------
Total assets ......................................................... $ 14,986 $ 14,768
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................................. $ 2,108 $ 1,200
Accrued expenses .................................................................. 2,004 2,448
Income taxes payable .............................................................. 5,542 5,977
--------- ---------
Total current liabilities ............................................ 9,654 9,625
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 ............................................................... (115,710) (115,899)
--------- ---------
Total stockholders' equity ............................................ 5,332 5,143
--------- ---------
Total liabilities and stockholders' equity ............................ $ 14,986 $ 14,768
========= =========
See accompanying notes.
F-3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations
February January January
3, 2001 29, 2000 30, 1999
-------- -------- --------
(In thousands except
per share amounts)
Net sales ...................................... $28,381 $55,398 $43,013
Cost of goods sold ............................. 24,852 50,657 42,753
------- ------- -------
Gross profit ................................... 3,529 4,741 260
Selling, general and administrative expenses ... 3,508 3,874 4,381
Provision for impairment of Knit business
assets ......................................... -- 1,625 2,564
Recoupment of lease termination expenses ....... -- (186) (902)
Amortization of intangibles .................... -- -- 364
------- ------- -------
Income (loss) from operations .................. 21 (572) (6,147)
Interest income ................................ (277) (122) (428)
Interest expense ............................... 89 530 337
------- ------- -------
Income (loss) before income taxes .............. 209 (980) (6,056)
Provision for income taxes ..................... 20 47 269
------- ------- -------
Net income (loss) .............................. $ 189 $(1,027) $(6,325)
======= ======= =======
Net income (loss) per share - basic and
dilutive ....................................... $ 0.02 $ (0.08) $ (0.51)
======= ======= =======
Weighted average number of common
shares outstanding ............................. 12,438 12,438 12,438
======= ======= =======
See accompanying notes.
F-4
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
COMMON STOCK FOREIGN
------------------ CURRENCY
NUMBER OF PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- ------ -------- ----------- ----------- -------
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 0 (115,899) 5,143
Net income for year ended February 3, 2001 .... -- -- -- -- 189 189
------ ---- -------- ----- --------- -------
Balance at February 3, 2001 ................... 12,438 $124 $120,918 $ 0 $(115,710) $ 5,332
====== ==== ======== ===== ========= =======
See Accompanying notes
F-5
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended
---------------------------------
February January January
3, 2001 29, 2000 30, 1999
--------- --------- ---------
(In thousands)
Operating activities
Net income (loss) ............................................................ $ 189 $(1,027) $(6,325)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities
Provision for impairment of Knit business assets ........................ -- 1,625 2,564
Amortization of goodwill ................................................ -- -- 364
Depreciation ............................................................ 333 449 469
Recoupment of lease termination expense ................................. -- (186) (902)
Changes in operating assets and liabilities:
Trade accounts receivable .......................................... (1,780) 6,409 (2,300)
Inventory .......................................................... (2,804) 2,168 (2,120)
Other receivables and prepaid expenses ............................. (51) (302) 621
Other assets ....................................................... 280 (772) (12)
Accounts payable ................................................... 908 (3,376) 835
Accrued expenses ................................................... (444) (2,186) (1,594)
Income taxes payable ............................................... (435) (103) 12
------- ------- -------
Net cash (used in) provided by operating activities .......................... (3,804) 2,699 (8,388)
Investing activities
Proceeds from Knit Disposition, net .......................................... -- 2,627 --
Purchase of fixed assets ..................................................... (116) (84) (279)
------- ------- -------
Net cash (used in) provided by investing activities .......................... (116) 2,543 (279)
Financing activities
Short-term borrowings, net ................................................... -- (2,754) 1,435
------- ------- -------
Net cash (used in) provided by financing activities ......................... -- (2,754) 1,435
Effect of exchange rate changes on cash ...................................... -- 124 (8)
------- ------- -------
Net (decrease) increase in cash .............................................. (3,920) 2,612 (7,240)
Cash at beginning of year .................................................... 6,298 3,686 10,926
------- ------- -------
Cash at end of year .......................................................... $ 2,378 $ 6,298 $ 3,686
======= ======= =======
Supplemental disclosures
Income taxes paid ............................................................ $ 27 $ 445 $ 264
======= ======= =======
Interest paid ................................................................ $ 89 $ 530 $ 337
======= ======= =======
See accompanying notes
F-6
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
February 3, 2001
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 career and casual apparel.
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. The fiscal year
ended February 3, 2001 consisted of 53 weeks. All other fiscal years have 52
weeks.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cygne and its
subsidiaries. All material intercompany balances and transactions were
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
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.
F-7
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$289,000 and $212,000 at February 3, 2001 and January 29, 2000, respectively.
FOREIGN CURRENCY TRANSLATION
As of February 3, 2001, 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.
NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with Financial
Accounting Standards Board SFAS No. 128, "Earnings per Share". In computing
dilutive income (loss) per share for the years ended February 3, 2001, January
29, 2000 and January 30, 1999, no effect has been given to outstanding options
since the exercise of any of these items would have an antidilutive effect on
net income (loss) per share.
RECLASSIFICATION
Certain financial statement items have been reclassed to conform to current
year's presentation.
F-8
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 M.T.G.I. - Textile
Manufacturers Group (Israel) Ltd. ("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 were all obligations of MTGI under the contracts 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 $4,700,000. 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. In 1998, the
Company established a provision of $2,625,000 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.
3. RECOUPMENT OF LEASE TERMINATION EXPENSES
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.
F-9
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVENTORY
Inventory consists of the following:
February January
3, 2001 29, 2000
------- --------
(In thousands)
Raw materials and Work-in-Process $4,263 $2,186
Finished goods 962 235
------ ------
$5,225 $2,421
====== ======
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:
February January Estimated
3, 2001 29, 2000 Useful Lives
------- -------- ------------
(In thousands)
Land and building ...................... $ 902 $ 902 20 years
Equipment, furniture, and fixtures ..... 2,184 2,069 2-10 years
Leasehold improvements ................. 925 924 Term of lease
Vehicles ............................... 78 78 5 years
------ ------
4,089 3,973
Less accumulated depreciation
and amortization ....................... 1,834 1,501
------ ------
$2,255 $2,472
====== ======
F-10
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At February 3, 2001 and January 29, 2000 the Company
had deposits of $1,000,000 and $722,000, respectively, to secure letters of
credit and are recorded in other assets.
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.
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 exercisable on November 15, 1999.
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 February 3, 2001 the company's income would have decreased $1,362
or 0.00 per share. 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 year ended January 30, 1999, the Company's net loss and net loss per share
would have increased by $1,000 or $0.00 per share.
F-11
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 2000,
1999, and 1998: risk-free interest rate of 5%; volatility factor of the expected
market price of the Company's common stock of 0.68 for February 3, 2001, 1.69
for January 29, 2000 and 1.527 for January 30, 1999; 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 2000, 1999, and
1998 may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 2000, 1999, and 1998 is $0.15, $0.15, and
$0.28, respectively. Exercise prices for options issued between February 1, 1998
through February 3, 2001 ranged from $0.12 to $0.31. The weighted-average
remaining contractual life of those options is 3.1 years.
F-12
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
The following summarizes stock option transactions:
EMPLOYEE STOCK NON-EMPLOYEE
OPTION PLAN DIRECTORS PLAN
----------- --------------
WEIGHTED
AVERAGE
NUMBER EXERCISE EXERCISE NUMBER EXERCISE
OF SHARES PRICE RANGE PRICE OF SHARES PRICE RANGE
--------- ----------- ----- --------- -----------
Options outstanding at January 31, 1998 505,250 $1.00-$13.38 $2.42 36,000 $0.28-$23.50
Options granted in 1998 20,000 $0.31 $0.31 4,000 $0.12-$0.28
Options canceled in 1998 (93,250) $2.00 --
-------
Options outstanding at January 30, 1999 432,000 $0.31-$13.88 $2.38 40,000 $0.12-$23.50
Options granted in 1999 -- 2,000 $0.16
Options canceled in 1999 (134,000) $2.00 (20,000) $0.12-$22.50
------- -------
Options outstanding in January 29, 2000 298,000 $0.31-$13.88 $2.54 22,000 $0.16-$23.50
Options granted in 2000 -- 2,000 $0.23
Options canceled in 2000 10,000 $2.00 --
-------
Options outstanding at February 3, 2001 288,000 $0.31-$13.88 $2.56 24,000 $0.16-$23.50
------- =======
At February 3, 2001 options exercisable 288,000 22,000
======= =======
OTHER EMPLOYEE STOCK
OPTION ARRANGEMENTS
-------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE TOTAL
EXERCISE NUMBER EXERCISE EXERCISE NUMBER
PRICE OF SHARES PRICE RANGE PRICE OF SHARES
----- --------- ----------- ----- ---------
Options outstanding at January 31, 1998 $9.30 125,000 $2.00-$22.50 $8.56 666,250
Options granted in 1998 $0.20 -- 24,000
Options canceled in 1998 -- (93,250)
------- --------
Options outstanding at January 30, 1999 $8.39 125,000 $2.00-$22.50 $8.56 597,000
Options granted in 1999 $0.16 -- 2,000
Options canceled in 1999 (65,000) $2.00-$22.50 (219,000)
------- --------
Options outstanding in January 29, 2000 $4.70 60,000 $2.00 $2.00 380,000
Options granted in 2000 $0.23 --
Options canceled in 2000 --
Options outstanding at February 3, 2001 $4.33 60,000 $2.00 $2.00 372,000
======= ========
At February 3, 2001 options exercisable 60,000 370,000
======= ========
F-13
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. CONCENTRATIONS OF RISK
For years 2000, 1999, and 1998, sales to The Limited, Inc. accounted for 95%,
45%, and 59%, respectively, of the Company's net sales. For years 1999 and 1998,
excluding sales of the Knit division, which was sold in November 1999 sales to
The Limited Inc. accounted for 98%, and 94%, respectively, of the Company's net
sales. At February 3, 2001 and January 29, 2000, The Limited, Inc. accounted for
79% and 82%, respectively, of trade accounts receivable.
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). The occurrence of
certain of these factors in Guatemala in which Cygne owns a manufacturing
facility could result in the impairment or loss of the Company's investment in
this country.
9. LEASES, COMMITMENTS AND LITIGATION
LEASES
The Company is the leasee under various operating leases through 2004. Future
minimum payments under operating leases consisted of the following at February
3, 2001:
2001 $263,947
2002 298,760
2003 265,272
2004 110,530
--------
$938,509
========
Total rent expense under the operating leases for the years ended February 3,
2001, January 29, 2000, and January 30, 1999, amounted to approximately
$264,000, $355,000, and $968,000, respectively.
COMMITMENTS
The Company has employment agreements with certain officers through 2002. Future
minimum aggregate annual payments under these agreements amount to approximately
$870,000 in 2001 and $220,000 in 2002. 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.
F-14
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 and cash flow. See Note 10 for information regarding
tax audits.
F-15
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
--------------------
February January
3, 2001 29, 2000
-------- ---------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards ..... $43,600 $43,800
------- -------
Valuation allowance ..................... (43,600) (43,800)
======= =======
Total deferred tax assets ................. $ 0 $ 0
======= =======
For financial reporting purposes, income (loss) before income taxes includes the
following components:
Year Ended
-------------------------------------------
February January January
3, 2001 29, 2000 30, 1999
-------- -------- --------
(In thousands)
Pretax income (loss):
United States $133 $2,468 $ (3,555)
Foreign 76 (3,448) (2,501)
---- ------ --------
$209 $ (980) $ (6,056)
==== ====== ========
F-16
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
-------------------------------------------
February January January
3, 2001 29, 2000 30, 1999
------- -------- --------
(In thousands)
Current:
Foreign $ -- $ 17 $ 182
State and local 20 30 87
---- ------ --------
Total $ 20 $ 47 $ 269
==== ====== ========
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
Year Ended
-----------------------------------------------------
February January January
3, 2001 29, 2000 30, 1999
-------- -------- --------
(In thousands)
Tax at U.S. statutory rates $71 34.0% $(333) (34.0%) $(2,059) (34.0%)
Loss, no benefit provided -- -- 333 34.0 2,059 34.0
Reversal of valulation
allowance (71) (34.0) -- -- -- --
Foreign and state income
taxes 20 10.6 47 4.8 269 4.4
--- ---- ----- ---- ------- ----
$20 10.6% $ 47 4.8% $ 269 4.4%
=== ==== ===== ==== ======= ====
As of February 3, 2001, 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 $113,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2019. 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-17
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As of February 3, 2001, 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 $74,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2019.
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 ended 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 accounting 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 and cash flow.
On October 31, 1999, the date of sale of the Company's Knit business, the
Company's wholly-owned subsidiary, M.T.G.I. - Textile Manufacturers Group
(Israel) Ltd. ("MTGI") had its Israeli tax free status terminated retroactive to
January 1, 1994. In June 2000, MTGI accepted and paid the Israeli Tax Authority
assessment, including interest, of approximately $412,000 due on account of the
termination of its tax-free status for the years ended December 31, 1994 through
December 31, 1997.
The Company is subject to other ongoing tax audits in several jurisdictions,
including Israel for years 1998 and 1999 and Guatemala for the years ended 1998,
1999 and 2000. 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, and cash flow.
11. SEGMENT INFORMATION
During the years 1998 and 1999, based on the criteria in SFAS No. 131, the
Company operated in two segments of the apparel market: woven career and casual
women's sportswear and knit career and casual women's sportswear. The Company
sold its Knit business in 1999. (see Note 2). Starting in the year 2000 the
Company operated in one segment of the apparel market: women's career and casual
apparel.
F-18
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Net sales to unaffiliated customers and identifiable assets were as follows:
Knit Woven
Division Division Corporate Total
-------- -------- --------- -------
Year ended January 29, 2000 (In thousands)
Net sales ......................................................... $32,008 $23,390 $ -- $55,398
Gross profit ...................................................... 1,480 3,261 -- 4,741
Selling, general and administrative expenses ...................... 685 2,005 1,184 3,874
Provision for impairment of Knit business assets .................. 1,625 -- -- 1,625
Recoupment of lease termination expenses .......................... -- -- (186) (186)
------- ------- ------ -------
(Loss) income from operations ..................................... $ (830) $ 1,256 $ (998) (572)
======= ======= ======
Interest income ................................................... 122
Interest expense .................................................. 530
-------
(Loss) before income 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
Division Division Corporate Total
-------- -------- --------- -------
Year ended January 30, 1999 (In thousands)
Net sales ......................................................... $25,891 $17,122 $ -- $43,013
Gross profit (loss) ............................................... 1,053 (793) -- 260
Selling, general and administrative expenses ...................... 841 1,493 2,047 4,381
Amortization of intangibles ....................................... 364 -- -- 364
Provision for impairment of Knit business assets .................. 2,564 -- -- 2,564
Recoupment of lease termination expenses .......................... -- -- (902) (902)
------- ------- -------- -------
(Loss) from operations ............................................ $(2,716) $(2,286) $ (1,145) (6,147)
======= ======= ========
Interest income ................................................... 428
Interest expense .................................................. 337
-------
(Loss) before income 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-19
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS
The Company does not provide any post employment or post retirement benefits 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.
Total contributions for the years ended February 3, 2001, January 29, 2000 and
January 30, 1999 amounted to approximately $5,000, $6,000 and $12,000,
respectively.
F-20
Cygne Designs, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
BALANCE AT CHARGE TO
BEGINNING OF COSTS AND DEDUCTION BALANCE AT
DESCRIPTION PERIOD EXPENSES (DESCRIBE)* END OF PERIOD
- ----------- ------------ --------- --------- -------------
Reserves for returns and allowances:
Year ended January 30, 1999 109 641 648 102
Year ended January 29, 2000 102 1,081 971 212
Year ended February 3, 2001 212 365 288 289
*Write-off of uncollectible amounts
F-21