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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 2, 2002.
Commission File Number 0-22102
CYGNE DESIGNS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 04-2843286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1410 BROADWAY, NEW YORK, NEW YORK 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 997-7767
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the Registrant's Common Stock held by non-
affiliates at April 26, 2002 (based on the closing sale price for such shares as
reported by the OTC Bulletin Board: $995,043; Common Stock outstanding as of
April 26, 2002: 12,438,038 shares.
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement for its 2002 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 in 2001 principally
The Limited, Inc. and Associated Merchandising Corporation ("AMC"). 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 are expected to continue to be, to
various divisions of The Limited, Inc. For year 2001, sales to The Limited, Inc
(consisting primarily of Lerner), AMC and Dillard's accounted for 53%, 23%, and
13%, respectively, of the Company's net sales. For year 2001 excluding sales
from the knit clothing manufactured in Jordan, The Limited, Inc. (consisting
primarily of Lerner) accounted for 77% of the Company's net sales. For years
2000 and 1999, sales to The Limited, Inc. (consisting primarily of Lerner)
accounted for 95%, and 45%, respectively, of the Company's net sales. For year
1999, excluding sales of the Israeli Knit division which was sold in November
1999, sales to The Limited, Inc. accounted for 98%, 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
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sourcing capabilities and reducing its reliance on outside vendors, including
the Company, for these services.
On April 1, 2002, the Company signed a letter of intent to form a joint
venture ("JV") to sell knit clothing manufactured in Jordan (see "Significant
Financial and Business Developments"). The company anticipates that the JV will
be formed in the second quarter of 2002. If the JV is formed, Cygne will
contribute its knit clothing manufacturing and sourcing activities in Jordan to
the JV, and the JV will sell the knit clothing manufactured in Jordan. Since
Cygne will account for the JV using the equity method of accounting, these
future sales, and the related expenses, will not be reflected in Cygne's
consolidated financial statements. Cygne recorded sales of $12,928,000 from
products manufactured in Jordan in 2001.
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 April 1, 2002, Cygne Designs, Inc. ("Cygne") and Boscan Middle East
Investments Limited ("BMEI") signed a letter of intent to form a Joint Venture
("JV") to be the exclusive entity through which Cygne and BMEI will sell knit
clothing manufactured in Jordan (the "Business"). Both Cygne and BMEI are
currently doing business in Jordan as sellers and manufacturers of knit
clothing.
Cygne and BMEI will each contribute $250,000 in exchange for 50% ownership
in the JV. BMEI will make an additional contribution of fixed assets (property,
plant and equipment) with a book value of approximately $3,500,000. In addition,
Cygne will contribute all of its trade names, trademarks, order backlog,
know-how and customer contacts relating to the Business.
At the closing, anticipated to be during the second quarter of 2002, Cygne
will transfer to the JV (i) all of its knit customer purchase orders, (ii) all
of its vendor purchase orders relating to the customer purchase orders and (iii)
all customer letters of credit relating to customer purchase orders. In
addition, Cygne will sell to the JV all of its inventories applicable to the
transferred customer purchase orders.
Cygne will cease doing knit business in Jordan through Prosperity Textiles
Ltd., its Jordanian subsidiary ("Prosperity") within sixty days of the JV
closing date. As a result the unamortized goodwill of $180,000 relating to
Prosperity has been written off to expense in the year ended February 2, 2002.
Cygne will use the equity method of accounting to record its initial
investment and all future activities of the JV.
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On May 13, 2001, the Company acquired from Best Knits, L.L.C ("Best Knits")
the rights and obligation of all the customer purchase orders held by Best Knits
at the closing date and the trade name and domain name " Best Knits". Best
Knits, located in Irbid, Jordan, is a manufacturer of private label women's knit
tops for sale to retailers located in the United States. To produce these orders
under the terms of the Agreement, the Company (i) assumed all outstanding vendor
purchase orders issued by Best Knits directly related to the acquired customer
purchase orders, (ii) purchased from Best Knits all raw materials on hand
directly related to acquired customer purchase orders, (iii) entered into a
lease in Irbid, Jordan for the eighteen month period starting May 1, 2001 with
Best Knits, which includes 66,000 square feet of manufacturing and office space,
approximately 550 sewing machines, cutting and pressing equipment and office
furniture and equipment, (iv) hired substantially all of the approximately 650
employees employed by Best Knits and (v) paid Best Knits $500,000 for the trade
name and customer relationships, of which $200,000 was paid in cash at the
closing and the remaining $300,000 through the issuance of a non-interest
bearing note payable in fifteen monthly installments of $20,000 commencing
August 1, 2001. The Company recorded $200,000 in goodwill related to this
transaction during the third quarter of 2001. The resulting goodwill and other
intangible assets were being amortized over their estimated useful life of three
years, However, as the business being conducted by Prosperity is being
contributed to the Joint Venture, the Company wrote off the unamortized goodwill
of $180,000 at February 2, 2002.
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 $66,000. During October 2001, the Company closed it
sales and marketing office in Dallas and at February 2, 2002 recorded the
balance of the rent due of approximately $41,000.
On November 15, 1999, the Company consummated the sale of its Israeli Knit
business ("Knit Business") to Jordache Limited ("Jordache"). The effective date
of the sale was October 31, 1999. The assets transferred to Jordache consisted
of substantially all of the assets used by the Knit business in the manufacture
of women's knit clothing, including machinery, equipment, raw materials, leases,
rental agreements, supplies used in the business, furniture, computer hardware
and software, and certain operating data and the records of 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.
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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 in 1998 and $1,625,000 in 1999. However, The Company's actual
expenses were $3,230,000 and therefore $959,000 of the provision for
impairment of knit business assets was reversed in 2001. During 1999, the Knit
business accounted for 58% 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 2001, the Company's products included
woven jackets, skirts, pants and knit tops.
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.
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During 2001, substantially all of the Company's products were manufactured
outside the United States, either by non-affiliated contract manufacturers or at
the Company's manufacturing facilities located in Guatemala and Jordan. During
2001, products representing approximately 69% of the Company's net sales were
produced in Guatemala, approximately 31% in Jordan and less than 1% in China and
the United States. Following the formation of the Joint Venture, sales of
garments manufactured in Jordan will not be recognized as revenue in the
Company's financial statements. Therefore it is expected that during 2002, most
of the Company's products will be manufactured in Guatemala and a small amount
from China. 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, where Cygne owns a manufacturing
facility, could result in the impairment or loss of the Company's investment in
this country.
In 2001, Cygne operated manufacturing facilities located in Guatemala and
Jordan. It is anticipated that the Company's manufacturing operations in Jordan
will be transferred to the Joint Venture at the closing, anticipated to be in
the second quarter of 2002. 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 operations
are 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."
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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.
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. 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.
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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
During 2001, the Company sourced approximately 69% of its products from
Guatemala, approximately 31% from Jordan and less than 1% from China. 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. The quotas
affecting most of the products sourced by the Company are not likely to be
phased out until the end of the third and final stage, I.E., on January 1, 2005.
Once "phased-out," quotas cannot be imposed except in accordance with GATT
rules. These rules generally forbid bilateral quota agreements and other
discriminatory, country-specific restraints. However, some form of global quota
is still possible after completion of the ten year phase-out period. While it is
not possible to forecast the likelihood of exceeding global quotas, 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, 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. China became a full member of the WTO on December 11, 2001, and, as
such, will receive those benefits presently available to all other WTO members,
including quota phaseout.
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DUTY RATES
The products imported by the Company are subject to "Normal Trade Relations
(NTR)" or column 1 rates of duty which range from zero to 38% AD VALOREM. As a
result of the Uruguay Round Agreements Act, many of these rates will be reduced
over five to fifteen years resulting on average in a 12% reduction from current
rates of duty.
On December 8, 1993, Congress adopted the North American Free Trade
Agreement ("NAFTA") under which originating apparel and other products from
Mexico and Canada are immediately exempt from quota restrictions and subject to
duty rates which are being reduced to zero over the next ten years. Similar
tariff rate preferences and quota exemptions are being phased in for certain
non-originating apparel products cut and sewn in Mexico and Canada. 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. AGOA also amended the Caribbean Basin Economic Recovery Act to
provide duty-free and quota-free treatment to various textile and apparel
products imported from eligible countries, including Guatemala. The Company
currently sources much of its merchandise from Guatemala and is exploring
additional sourcing opportunities presented by AGOA.
In 2000, Congress authorized the extension of permanent normal trade relations
(NTR) with China upon its accession to the WTO. The President extended permanent
NTR treatment to the products of China, effective January 1, 2002, after its
accession to the WTO on December 11, 2001.
Imports from approved QIZ trade zones located in Jordan are subject to special
rules that allow products to enter the United States free of duty and quota
restrictions. All of the Company's production in Jordan is currently
manufactured in an approved QIZ zone.
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
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prevailing quotas or duty rates, which could adversely affect the Company's
operations and its ability to import products at current or increased levels.
The Company cannot predict the likelihood or frequency of any such events
occurring.
The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, allocation of production to merchandise categories where more quota is
available, and shifts of production among countries and manufacturers. The
Company also from time to time purchases quantities of temporary quota in
certain countries.
The Company's ability to import its products is subject to the cost and
availability of transportation to the U.S., the demand for production capacity
abroad by other manufacturers, economic or political instability resulting in
the disruption of trade from exporting countries, any significant fluctuation in
the value of the dollar against foreign currencies and restrictions on the
transfer of funds. The Company's operations have not been materially affected by
any of the foregoing factors to date, although there can be no assurance that
these factors will not adversely affect the Company in the future.
BACKLOG
At February 2, 2002 the Company had unfilled confirmed customer orders of
$6,800,000, compared with $12,500,000 at February 3, 2001. 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, 2002, the Company had approximately 1,441 full-time employees,
including approximately 828 employees at its facilities in Guatemala and
approximately 594 at its facilities in Jordan. The Company considers its
relations with its employees to be satisfactory.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
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Bernard M. Manuel ......... 54 Director, Chairman of the Board and
Chief Executive Officer
Roy E. Green .............. 69 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 "Institute d'Etudes Politiques" in Paris and an
M.B.A. with high honors (Baker Scholar) from the Harvard Business School, where
he was awarded both the Loeb Rhodes Fellowship for excellence in finance and the
Melvin T. Copeland prize for top performance in marketing.
ROY E. GREEN has served as Chief Financial Officer of the Company, as well
as in various additional executive capacities, since October 1987. He currently
serves as Senior Vice President-Chief Financial Officer, Treasurer and Secretary
of the Company. From 1974 until he joined the Company, Mr. Green was employed by
Cluett Peabody & Co., first as the Chief Financial Officer of its Arrow Co.
division until 1979, then as Vice President and Controller until 1985, and
finally as Chief Financial Officer. He has also worked as a certified public
accountant for J. K. Lasser & Co. and Hurdman & Cranstown. Mr. Green received a
Bachelor's degree in Business Administration from Rutgers University. Mr. Green
is a certified public accountant.
The Company's business is dependent upon its ability to attract and retain
qualified employees. The Company is dependent to a significant degree on the
efforts of Bernard M. Manuel, Chairman of the Board and Chief Executive Officer.
Mr. Manuel has an employment agreement with the Company which includes
restrictions on competition by him in certain circumstances after termination of
employment, subject to certain conditions. The loss of the services of Mr.
Manuel could have an adverse effect on the Company's business.
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ITEM 2. PROPERTIES
On May 13, 2001, the Company has entered into a lease with Best Knits in
Irbid Jordan for an eighteen month period ending October 2002 for 66,000 square
feet of manufacturing and office space, approximately 550 sewing machines,
cutting and pressing equipment and office furniture and equipment with an annual
rent of approximately $528,000.
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 $66,000. During October 2001, the Company closed
this office and at February 2, 2002 recorded the balance of the rent due of
approximately $41,000.
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 $265,000.
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
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GJM (US) Inc. of approximately $16,000,000 (including some penalties but not
interest). Depending on the amount of the deficiency, the amount of interest
could be significant. The outcome of the audit of GJM (US) Inc. cannot be
predicted at this time. Although the Company is disputing the proposed
adjustment and believes that it has established appropriate accounting 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 Israeli 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 2001, 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. As this settlement represented the final
transaction concerning the sale of the Israeli Knit business, the Company
reversed the balance of its unused provision for the impairment of Knit business
assets which amounted to $959,000.
The Company is subject to other ongoing tax audits in several
jurisdictions, including 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.
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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
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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
FISCAL YEAR ENDED FEBRUARY 2, 2002
First Quarter ................................. $0.25 $0.12
Second Quarter ................................ $0.18 $0.10
Third Quarter ................................. $0.16 $0.09
Fourth Quarter ................................ $0.15 $0.09
The number of stockholders of record of Common Stock on April 26, 2002 was
approximately 100. The closing sale price of the Company's Common Stock on April
26, 2002 was $0.08 per share.
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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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected financial information that
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 of the Company, which have been audited by independent auditors. The
acquisition of the business from Best Knits in May 2001 and sale of the Israeli
Knit business in November 1999 materially affect the comparability of the
financial data reflected below.
Fiscal Year (1)
------------------------------------------------------------
1997 1998 1999 2000 (1) 2001
-------- -------- -------- -------- --------
(In thousands except per share amounts)
INCOME STATEMENT DATA
Net sales ........................................... $ 43,379 $ 43,013 $ 55,398 $ 28,381 $ 41,177
Cost of goods sold .................................. 43,063 42,753 50,657 24,852 37,196
-------- -------- -------- -------- --------
Gross profit ........................................ 316 260 4,741 3,529 3,981
Selling, general and administrative expense ......... 10,331 4,381 3,874 3,508 4,394
(Reversal) provision for impairment of
Knit business assets (2) ...................... -- 2,564 1,625 -- (959)
Provision (reversal) for lease
termination expenses (3) ..................... 3,964 (902) (186) -- --
Amortization and write off of goodwill (4) .......... 364 364 -- -- 200
Amortization of intangibles ........................ -- -- -- -- 125
-------- -------- -------- -------- --------
(Loss) income from operations ....................... (14,343) (6,147) (572) 21 221
Interest income ..................................... (461) (428) (122) (277) (34)
Interest expense .................................... 378 337 530 89 432
-------- -------- -------- -------- --------
(Loss) income before taxes .......................... (14,260) (6,056) (980) 209 (177)
Provision for income taxes .......................... 204 269 47 20 44
-------- -------- -------- -------- --------
Net (loss) income ................................... $(14,464) $ (6,325) $ (1,027) $ 189 $ (221)
======== ======== ======== ======== ========
Net (loss) income per share-basic and diluted ....... ($ 1.16) $ (0.51) $ (0.08) $ 0.02 $ (0.02)
======== ======== ======== ======== ========
-16-
Fiscal Year (1)
------------------------------------------------------------
1997 1998 1999 2000 (1) 2001
-------- -------- -------- -------- --------
(In thousands)
BALANCE SHEET DATA (as of the end of period)
Cash ................................................ $ 10,926 $ 3,686 $ 6,298 $ 2,378 $ 2,558
Accounts receivables ................................ 6,012 8,242 1,853 3,633 5,472
Assets held for sale ................................ -- 4,700 -- -- --
Inventory ........................................... 4,012 2,705 2,421 5,225 3,733
Goodwill ............................................ 2,062 -- -- -- --
Total assets ........................................ 29,750 23,599 14,768 14,986 15,537
Stockholder's equity ................................ 12,379 6,046 5,143 5,332 5,111
- ----------
(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) In March 1999, the Company agreed to sell the Knit business. In connection
with the sale, during 1998, the Company established a provision of
$2,564,000 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. 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. During 2001, the Company
settled its remaining obligations related to its agreement to sell the Knit
Business and the actual expenses incurred were $3,230,000, therefore,
$959,000 of the provision for the impairment of the Knit business assets
was reversed in 2001.
-17-
(3) 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 at 1372 Broadway as well as an amount to be paid to the
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 reversal in 1998, and the remaining unused balance
of $186,000 of the original provision was reversed in 1999.
(4) At February 2, 2002, the Company wrote off unamortized goodwill of $180,000
incurred in connection with the purchase from Best Knits.
-18-
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
On May 13, 2001, the Company acquired from Best Knits, L.L.C ("Best Knits")
the rights and obligation of all the customer purchase orders held by Best Knits
at the closing date and the trade name and domain name " Best Knits". Best
Knits, located in Irbid, Jordan, is a manufacturer of private label women's knit
tops for sale to retailers located in the United States. To produce these orders
under the terms of the Agreement, the Company (i) assumed all outstanding vendor
purchase orders issued by Best Knits directly related to the acquired customer
purchase orders, (ii) purchased from Best Knits all raw materials on hand
directly related to acquired customer purchase orders, (iii) entered into a
lease in Irbid, Jordan for the eighteen month period starting May 1, 2001 with
Best Knits, which includes 66,000 square feet of manufacturing and office space,
approximately 550 sewing machines, cutting and pressing equipment and office
furniture and equipment, (iv) hired substantially all of the approximately 650
employees employed by Best Knits and (v) paid Best Knits $500,000 for the trade
name and customer relationships of which $200,000 was paid in cash at the
closing and the remaining $300,000 through the issuance of a non-interest
bearing note payable in fifteen monthly installments of $20,000 commencing
August 1, 2001. The Company recorded $200,000 in goodwill related to this
transaction during the third quarter of 2001. The resulting goodwill and other
intangible assets are being amortized over their estimated useful life of three
years. However, as the business is being contributed to the Joint Venture
(described herein), the Company wrote off the unamortized goodwill of $180,000
at February 2, 2002.
-19-
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 $66,000. During October 2001, the Company closed
its sales and marketing office in Dallas and recorded the balance of the rent
due of approximately $41,000.
On April 1, 2002, Cygne Designs, Inc. ("Cygne") and Boscan Middle East
Investments Limited ("BMEI") signed a letter of intent to form a Joint Venture
("JV") to be the exclusive entity through which Cygne and BMEI will sell knit
clothing manufactured in Jordan (the "Business"). Both Cygne and BMEI are
currently doing business in Jordan as sellers and manufacturers of knit
clothing.
Cygne and BMEI will each contribute $250,000 in exchange for 50% ownership
in the JV. BMEI will make an additional contribution of fixed assets (property,
plant and equipment) with a book value of approximately $3,500,000. In addition,
Cygne will contribute all of its, trade names, trademarks, order backlog,
know-how and customer contacts relating to the Business.
At the closing, anticipated to be during the second quarter 2002, Cygne
will transfer to the JV (i) all of its knit customer purchase orders (ii) all of
its vendor purchase orders relating to the customer purchase orders and (iii)
all customer letters of credit relating to customer purchase orders. In
addition, Cygne knits will sell to the JV all of its inventories applicable to
the transferred customer purchase orders.
Cygne will cease doing knit business in Jordan through Prosperity Textiles
Ltd. (its Jordanian subsidiary) within sixty days of the JV closing date. As a
result the umamortized goodwill of $180,000, relating to Prosperity has been
written off to expense in the year ended February 2, 2002.
Cygne will use the equity method of accounting to record its initial
investment and all future activities of the JV.
On November 15, 1999, the Company consummated the sale of its Israeli Knit
business ("Knit business") to Jordache Limited ("Jordache"). The effective date
of the sale was October 31, 1999. The assets transferred to Jordache consisted
of substantially all of the assets used by the Knit business in the manufacture
of women's knit clothing, including machinery, equipment, raw materials, leases,
rental agreements, supplies used in the business, furniture, computer hardware
and software, and certain operating data and the records of 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.
-20-
In consideration of the sale to Jordache of the assets, Jordache paid the
Company approximately $4,700,000. The Company 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 March 1999 agreement to sell the knit business, the
Company during 1998 established a provision of $2,564,000 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. 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. During 2001, the Company
settled its remaining obligations related to its agreement to sell the Knit
business. The actual expenses incurred were $3,230,000. Therefore $959,000 of
the provision for the impairment of the Knit business assets was reversed in
2001.
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 the Knit Business accounted for 58%, of Cygne's net sales.
The Limited, Inc. (consisting primarily of Lerner) accounted for 53%, 95%,
and 45% of Cygne's net sales for 2001, 2000, and 1999, respectively. For year
1999, excluding sales of the Knit division which was sold in November 1999,
sales to The Limited, Inc. were 98% of the Company's net sales. For the year
2001, excluding sales from knit clothing manufactured in Jordan, The Limited,
Inc. (consisting primarily of Lerner) accounted for 77% 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
-21-
to be a major competitor of the Company with respect to the Company's business
with The Limited, Inc.
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.
-22-
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements
of operations and expresses for the periods indicated certain income data as a
percentage of net sales.
PERCENTAGE OF NET SALES
-----------------------------
YEAR
-----------------------------
2001 2000 1999
----- ----- -----
Net sales .................................. 100.0% 100.0% 100.0%
===== ===== =====
Gross profit ............................... 9.7 12.4 8.6
Selling, general and administrative
expenses ................................ 10.7 12.4 7.0
(Reversal) provision for impairment
of Knit business assets ................ (2.3) -- 2.9
Reversal of lease termination expense ...... -- -- (0.3)
Write off and amortization of goodwill ..... 0.5 -- --
Amortization of other intangibles .......... 0.3 -- --
----- ----- -----
Income (loss) from operations .............. 0.5 0.0 (1.0)
Interest expense (income), net ............ 0.9 (0.1) 0.8
Provision for income taxes ................. 0.1 0.0 0.1
----- ----- -----
Net (loss) income .......................... (0.5)% 0.1% (1.9)%
===== ===== =====
2001 COMPARED TO 2000
NET SALES
Net sales for 2001 were $41,177,000 an increase of $12,796,000 or 45% from
$28,381,000 in 2000. The increase in sales for 2001 were primarily attributed to
sales to new customers: AMC of $9,480,000, Dillard's of $5,632,000, Kmart of
$2,491,000, and JC Penney of $957,000, offset by a decrease in sales to The
Limited, Inc. of $5,018,000 and other customers of $746,000. The sales to new
customers are not necessarily indicative of future sales. The Limited, Inc.
accounted for 53% of the net sales in 2001 compared to 95% in the comparable
period in 2000.
-23-
GROSS PROFIT
The gross profit for 2001 was $3,981,000, an increase of $452,000 or 13%
from the gross profit of $3,529,000 for 2000.
The increase in gross profit in year 2001 compared to 2000 was primarily
attributed to increased sales and favorable settlements of prior years disputes.
The decrease in gross margin (9.7% vs 12.4%) was attributable to variances at
the Company's factory in Jordan and allowances to customers of its Jordan
subsidiary.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2001 were $4,394,000 an
increase of $886,000 or 25% from $3,508,000 in 2000. The increase in selling,
general and administrative expenses was primarily attributable to the
establishment of sales and marketing teams to service new customers.
REVERSAL OF IMPAIRMENT FOR KNIT BUSINESS ASSETS
In 2001, the Company settled its remaining obligations related to its
agreement to sell the knits business, and reversed the balance of its unused
provision for the impairment of Israeli knit business assets which amounted to
$959,000.
WRITE OFF AND AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles which arose in connection with the May 2001
acquisition of the business of Best Knits, L.L.C were being amortized over
thirty six months. The amortization expense for 2001 is $145,000, consisting of
$20,000 of goodwill and $125,000 of other intangibles. The remaining goodwill of
$180,000 was written off as the business being conducted by Prospectus is being
contributed to the proposed Joint Venture-(see "General" above and Note 13 of
Notes to Consolidated Financial Statements of the Company).
INTEREST
Interest income for 2001 was $34,000, compared to interest income of
$277,000 in 2000. The decrease in interest income in 2001 compared to 2000 was
attributable to increased working capital requirements as result of the
acquisition of the Jordanian operations.
Interest expense for 2001 was $432,000, compared to $89,000 in 2000. The
increase in interest expense in 2001 compared to 2000 was primarily attributable
to increased borrowings to fund the increased working capital requirements as a
result of the acquisition of the Jordanian operations and the establishment of a
domestic credit facility.
-24-
PROVISION FOR INCOME TAXES
The provision for income taxes of $44,000 for 2001 represents a provision
for minimum state and foreign income taxes. As of February 2, 2002, 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 more than a 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 2, 2002, 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.
2000 COMPARED TO 1999
The Company sold its Israeli Knit business ("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.
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
-25-
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.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the Company's agreement to sell its Knit business in
1999, the Company recorded an additional 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.
REVERSAL OF LEASE TERMINATION EXPENSES
During 1997 the Company provided for lease termination expense of
$3,964,000 relating to the move of it executive and general offices as well as
an amount to be paid to the landlord for release of contingent rent liability.
In 1999, the Company reversed the balance of its unused provision for lease
termination expense which amounted to $186,000.
INTEREST
Interest income for 2000 was $277,000 compared to interest income of
$122,000 for 1999. The increase in interest income for 2000 compared to 1999 was
primarily attributable to additional cash on hand as a result of the sale of the
Knit business.
Interest expense for 2000 was $89,000 compared to interest expense of
$530,000 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.
-26-
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
more than a 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has obtained letters of credit through use of a cash deposit to
secure the letters of credit and through its credit facility. The Company had
restricted cash at a bank of $146,000 at February 2, 2002 and $1,000,000 at
February 3, 2001, to secure letters of credit from a domestic bank. The total
outstanding letters of credit from domestic banks at February 2, 2002 were
$146,000.
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC ("GMACCC"). The Agreement provides for
a Revolving Facility of $8,000,000 ("Facility"), including a letter of credit
sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings under
this Facility bear a rate of interest of the lesser of (i) LIBOR plus 3% or (ii)
the prime rate plus 0.5% and are secured by substantially all of the Company's
assets. In addition, the Facility is subject to various financial covenants
including requirements for tangible net worth and fixed charge coverage ratios,
among others. At February 2, 2002 the Company is in compliance with all the
covenants. The facility terminates on May 10, 2004, but can be terminated
earlier by GMACCC upon default under the Agreement. At February 2, 2002 the
Company had no borrowings but could have borrowed or had issued letters of
credit in the aggregate amount of approximately $934,000, based on the borrowing
base formula.
In August 2001, Prosperity Textiles Ltd. ( "Prosperity") a wholly owned
subsidiary of the Company located in Jordan, entered into an informal credit
facility arrangement with the Egyptian Arab Land Bank. Formal documentation of
this credit facility arrangement was completed in December 2001. This
arrangement can be terminated by either party at any time. The aggregate credit
facility is $2,800,000 and can be used for both short-term borrowings and the
issuance of documentary letters of credit subject to a borrowing base formula.
The security for this facility is the customers' letters of credit and trade
accounts receivables. At February 2, 2002, the Company had borrowings of
$2,260,000 and letters of credit of $244,000 outstanding under this facility.
-27-
The Company is the lessee under various operating leases through 2004.
Future minimum payments under these operating leases for years 2002, 2003 and
2004 were $661,000, $265,000 and $111,000 respectively.
Net cash used in operating activities for 2001 was $1,154,000 compared to
cash used in operating activities of $2,804,000 in 2000. The decrease in net
cash used in operating activities was primarily the result of decreased working
capital requirements. Net cash used in investing activities for 2001 of $922,000
was for the purchase of goodwill and other intangibles of $540,000 and fixed
assets of $386,000 compared to net cash used in investing activities in 2000 of
$116,000 which consisted of fixed assets purchases.
The Company's financial performance for 2002 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., 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.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements is in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Actual results could differ materially from
those estimates. The items in our financial statements requiring significant
estimates and judgments are as follows:
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.
-28-
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
$188,000 and $289,000 at February 2, 2002 and February 3, 2001, respectively.
FOREIGN CURRENCY EXCHANGE
The Company negotiates substantially all its purchase orders with its
foreign manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in
foreign currencies, the Company's cost for any purchase order is not subject to
change after the time the order is placed. However, the weakening of the U.S.
dollar against local currencies could lead certain manufacturers to increase
their U.S. dollar prices for products. The Company believes it would be able to
compensate for any such price increase.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto which begin on page F-1 of
this Annual Report on Form 10-K which contain accounting policies and other
disclosures required by generally accepted accounting principles.
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 acquired its Jordanian operations in May 2001 and the results
of operation from May 1, 2001 to February 2, 2002 are included in the Company's
results of operations for 2001. As a result, a comparison of 2001 and 2000 may
not be meaningful to the extent effected by the acquisition of the Jordanian
operations.
-29-
2001 2000
----------------------------------------- --------------------------------------------
QTR. 1 QTR. 2 QTR. 3 QTR.4 QTR. 1 QTR. 2 QTR. 3 QTR. 4(1)
------- ------- ------- -------- ------- -------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales ............................ $10,230 $ 9,230 $11,810 $ 9,907 $ 5,117 $ 6,771 $ 8,350 $ 8,143
Gross profit ......................... 1,342 1,281 1,223 135 763 807 902 1,057
Reversal for impairment
of Knit business assets ............ -- -- -- 959 -- -- -- --
Operating profit (loss) .............. 48 159 136 (122) 65 (19) 79 (104)
Net income (loss) .................... 61 71 13 (366) 93 14 118 (36)
Net income (loss) per
share-basic and diluted ............ $ 0.00 $ 0.00 $ 0.00 $ (0.02) $ 0.01 $ 0.00 $ 0.01 $ 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 reversal 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. 10.1, 10.2,
10.3, 10.4 and 10.5 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. *(1)
2.2 Agreement dated May 9, 2001 between Cygne Designs, Inc. and
Best Knits, LLC. (8)
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.*(2)
3.2 Certificate of Amendment to Restated Certificate of
Incorporation.(3)
3.3 By-laws.*(4)
4 Specimen Stock Certificate.*(4)
10.1 Amended and Restated Employment Agreement, dated as of January
1, 1995, between the Company and Bernard M. Manuel.*(5)
10.2 Employment Agreement, dated as of May 1, 1993, between the
Company and Roy Green.*(4)
-32-
10.3 1993 stock option plan, as amended, through June 28, 1994.*(2)
10.4 Form of Stock Option Agreement.*(4)
10.5 Stock Option Plan for Non-Employee Directors.*(4)
10.6 Management Agreement, dated August 1, 1999, by and between
M.T.G.I.-Textile Manufacturers Group (Israel) Ltd., T.S Wear
Me & Co. (1)
10.7 Letter Agreement, dated as of August 1, 1999, between
Sportswear International (USA), Inc. and Jordache Limited, as
amended *(1)
10.8 Lease between the Company and L.H. Charney Associates, L.P. (6)
10.9 Lease Extension and Modification between the Company and L.H.
Charney Associates, L.P. amendment.(7)
10.10 Revolving Credit and Security agreement, dated as of May 11,
2001, between GMAC Commercial Credit LLC, as lender, and Cygne
Designs, Inc. (8)
10.11 Letter of Intent-Joint Venture Agreement by and among Boscan
Middle East Investments Limited and Cygne Designs, Inc.
10.12 Credit agreement between Prosperity Textiles Ltd. and Egyptian
Arab Land Bank.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP.
- ----------
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from the following documents:
(1) Company's Quarterly Report on Form 10-Q for the quarter ended July 31,
1999.
(2) Company's Quarterly Report on Form 10Q for the quarter ended July 30, 1994
(3) Company's Report in Form 8-K dated December 5, 2000
-33-
(4) Company's Registration Statement of Form S-1 (Registration No. 33-64358)
(5) Company's Annual Report on Form 10-K for the fiscal year ended January 28,
1995.
(6) Company's Annual Report on Form 10-K for fiscal year ended January 29,
2000.
(7) Company's Annual Report on Form 10-K for the fiscal year ended February 3,
2001.
(8) Company's Quarterly Report on Form 10-Q form the quarter ended May 5, 2001
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
None
(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.
-34-
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, 2002
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 April 30, 2002
----------------------- Directors, Chief Executive
Bernard M. Manuel Officer and Director
(principal executive
officer)
/s/ ROY E. GREEN
----------------------- Senior Vice President, April 30, 2002
Roy E. Green Chief Financial Officer,
and Treasurer (principal
financial and accounting
officer) and Secretary
/s/ JAMES G. GRONINGER Director April 30, 2002
----------------------
James G. Groninger
-35-
Cygne Designs, Inc. and Subsidiaries
Consolidated Financial Statements
Index to Consolidated Financial Statements
Report of Independent Auditors .......................................... F-2
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001 . F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended February 2, 2002 ............................. F-4
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended February 2, 2002 ....... F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended February 2, 2002 ................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
Financial Schedule
Schedule II ........................................................... F-23
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 2, 2002 and February 3, 2002
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
February 2, 2002. 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 2, 2002 and
February 3, 2001 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended February
2, 2002, 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.
/S/ ERNST & YOUNG LLP
New York, New York
April 2, 2002
F-2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets
FEBRUARY FEBRUARY
2, 2002 3, 2001
--------- ----------
(In thousands, except
share and
per share amounts)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 2,558 $ 2,378
Restricted cash .................................... 146 1,000
Trade accounts receivable, net ..................... 5,472 3,633
Inventory .......................................... 3,733 5,225
Other receivables and prepaid expenses ............. 944 453
--------- ---------
Total current assets .......................... 12,853 12,689
Fixed assets, net ...................................... 2,261 2,255
Other intangibles, net ................................. 375 --
Other assets ........................................... 48 42
--------- ---------
Total assets .................................. $ 15,537 $ 14,986
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ................................ $ 2,260 --
Accounts payable ..................................... 1,541 $ 2,108
Accrued expenses ..................................... 1,070 2,004
Income taxes payable ................................. 5,555 5,542
--------- ---------
Total current liabilities ..................... 10,426 9,654
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 .................................. (115,931) (115,710)
--------- ---------
Total stockholders' equity .................... 5,111 5,332
--------- ---------
Total liabilities and stockholders' equity .... $ 15,537 $ 14,986
========= =========
See accompanying notes.
F-3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations
February February January
2, 2002 3, 2001 29, 2000
------- -------- --------
(In thousands except
per share amounts)
Net sales .................................. $ 41,177 $ 28,381 $ 55,398
Cost of goods sold ......................... 37,196 24,852 50,657
-------- -------- --------
Gross profit ............................... 3,981 3,529 4,741
Selling, general and administrative expenses 4,394 3,508 3,874
(Reversal) provision for impairment of Knit
business assets .......................... (959) -- 1,625
Reversal of lease termination expenses ..... -- -- (186)
Write off and amortization of goodwill ..... 200 -- --
Amortization of other intangibles .......... 125 -- --
-------- -------- --------
Income (loss) from operations .............. 221 21 (572)
Interest income ............................ (34) (277) (122)
Interest expense ........................... 432 89 530
-------- -------- --------
(Loss) income before income taxes .......... (177) 209 (980)
Provision for income taxes ................. 44 20 47
-------- -------- --------
Net (loss) income .......................... $ (221) $ 189 $ (1,027)
======== ======== ========
Net (loss) income per share - basic and
dilutive ................................. $ (0.02) $ 0.02 $ (0.08)
======== ======== ========
Weighted average number of common
shares outstanding ....................... 12,438 12,438 12,438
======== ======== ========
See accompanying notes.
F-4
COMMON STOCK FOREIGN
-------------------- CURRENCY
NUMBER OF PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- ------ -------- ---------- ----------- -------
(In thousands)
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
Net loss for year ended February 2, 2002 ...... -- -- -- -- (221) (221)
------ ---- -------- ----- --------- -------
Balance at February 2, 2002 ................... 12,438 $124 $120,918 $ 0 $(115,931) $ 5,111
====== ==== ======== ===== ========= =======
SEE ACCOMPANYING NOTES
F-5
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
---------------------------------------
February February January
2, 2002 3, 2001 29, 2000
--------- --------- ----------
(In thousands)
OPERATING ACTIVITIES
Net (loss) income ............................................................... $ (221) $ 189 $(1,027)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities
(Reversal) provision for impairment of Knit business assets ................... (959) -- 1,625
Write off and amortization of goodwill ........................................ 200 -- --
Amortization of other intangibles ............................................. 125 -- --
Depreciation .................................................................. 380 333 449
Reversal of lease termination expense ......................................... -- -- (186)
Changes in operating assets and liabilities:
Restricted cash ............................................................. 854 (278) (722)
Trade accounts receivable ................................................... (1,839) (1,780) 6,409
Inventory ................................................................... 1,492 (2,804) 2,168
Other receivables and prepaid expenses ...................................... (491) (51) (302)
Other assets ................................................................ (6) 558 (50)
Accounts payable ............................................................ (567) 908 (3,376)
Accrued expenses ............................................................ (135) (444) (2,186)
Income taxes payable ........................................................ 13 (435) (103)
------- ------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............................. (1,154) (3,804) 2,699
INVESTING ACTIVITIES
Proceeds from Israeli Knit Disposition, net ..................................... -- -- 2,627
Purchase of goodwill and other intangibles ...................................... (540) -- --
Purchase of fixed assets ........................................................ (386) (116) (84)
------- ------- -------
Net cash (used in) provided by investing activities ............................. (926) (116) 2,543
FINANCING ACTIVITIES
Short-term borrowings (repayments), net ......................................... 2,260 -- (2,754)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................. 2,260 -- (2,754)
Effect of exchange rate changes on cash ......................................... -- -- 124
------- ------- -------
Net increase (decrease) in cash and cash equivalents ............................ 180 (3,920) 2,612
Cash and cash equivalents at beginning of year .................................. 2,378 6,298 3,686
------- ------- -------
Cash and cash equivalents at end of year ........................................ $ 2,558 $ 2,378 $ 6,298
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid ............................................................... $ 31 $ 27 $ 445
------- ------- -------
Interest paid ................................................................... $ 432 $ 89 $ 530
======= ======= =======
See accompanying notes
F-6
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2002
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 AND 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.
F-7
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the term of the related lease.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales returns and allowances. Such reserves amounted to
$188,000 and $289,000 at February 2, 2002 and February 3, 2001, 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 (LOSS) INCOME 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 2, 2002, February
3, 2001, and January 29, 2000, no effect has been given to outstanding options
since the exercise of any of these items would have an antidilutive effect on
net (loss) income per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued statement of
Financial Accounting Standard No. No. 142 "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill will no longer be amortized but will be subject to an annual
impairment test in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
F-8
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. During fiscal
2002, the Company will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets, which is still being evaluated,
as of February 3, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
RECLASSIFICATION
Certain financial statement items have been reclassed to conform to current
year's presentation.
2. ACQUISITION AND DISPOSITION OF COMPANIES
On May 13, 2001, the Company acquired from Best Knits, L.L.C ("Best Knits") the
rights and obligation of all the customer purchase orders held by the Best Knits
at the closing date and the trade name and domain name " Best Knits". Best
Knits, located in Irbid, Jordan, is a manufacturer of private label women's knit
tops for sale to retailers located in the United States. To produce these orders
under the terms of the Agreement, the Company (i) assumed all outstanding vendor
purchase orders issued by Best Knits directly related to the acquired customer
purchase orders, (ii) purchased from Best Knits all raw materials on hand
directly related to acquired customer purchase orders, (iii) entered into a
lease in Irbid, Jordan for the eighteen month period starting May 2001 with Best
Knits, which includes 66,000 square feet of manufacturing and office space,
approximately 550 sewing machines, cutting and pressing equipment and office
furniture and equipment, (iv) hired substantially all of the approximately 650
employees employed by Best Knits and (v) paid Best Knits $500,000 for the trade
name and customer relationships of which $200,000 was paid in cash at the
closing and the remaining $300,000 through the issuance of a non- interest
bearing note payable in fifteen monthly installments of $20,000 commencing
August 1, 2001. The Company accounted for this transaction as a purchase. The
results of operation from May 1, 2001 to February 2, 2002 are included in the
Company's results of operations for 2001. The Company recorded $200,000 in
goodwill related to this transaction during the third quarter of 2001. The
resulting goodwill and other intangible assets are being amortized over their
estimated useful life of three years. However, as this business is expected to
be contributed the Joint Venture (see Note 13- Subsequent event) the Company
wrote off the unamortized goodwill of $180,000 at February 2, 2002.
On November 15, 1999, the Company consummated the sale of its Israeli Knit
business ("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
F-9
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION AND DISPOSITION OF COMPANIES (CONTINUED)
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 1998, the Company established a provision of $2,564,000 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. 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. During 2001, the Company settled its remaining obligations related
to its agreement to sell its Knit business. The actual expenses in connection
with the transaction were $3,230,000. Therefore, $959,000 of the remaining
provision for the impairment of the Knit business assets was reversed.
3. REVERSAL 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-10
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORY
Inventory consists of the following:
FEBRUARY FEBRUARY
2, 2002 3, 2001
------- -------
(In thousands)
Raw materials and Work-in-Process ......... $1,831 $4,263
Finished goods ............................ 1,902 962
------ ------
$3,733 $5,225
====== ======
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 FEBRUARY ESTIMATED
2, 2002 3, 2001 USEFUL LIVES
-------- -------- ------------
(In thousands)
Land and building ......................... $1,827 $1,827 20 years
Equipment, furniture, and fixtures ........ 2,549 2,184 2-10 years
Vehicles .................................. 103 78 5 years
------ ------
4,479 4,089
Less accumulated depreciation
and amortization ......................... 2,218 1,834
------ ------
$2,261 $2,255
====== ======
F-11
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CREDIT FACILITIES
The Company has obtained letters of credit through use of a cash deposit to
secure the letters of credit and through its credit facility. The Company had
restricted cash at a bank of $146,000 at February 2, 2002 and $1,000,000 at
February 3, 2001, respectively, to secure letters of credit from a domestic
bank. The total outstanding letters of credit from domestic banks at February 2,
2002 were $146,000.
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC. ("GMACCC"). The Agreement provides
for a Revolving Facility of $8,000,000 ("Facility"), including a letter of
credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings
under this Facility bear a rate of interest of the lesser of (i) LIBOR plus 3%
or (ii) the prime rate plus 0.5% and are secured by substantially all of the
Company's assets. In addition, the Facility is subject to various financial
covenants including requirements for tangible net worth and fixed charge
coverage ratios, among others. At February 2, 2002 the Company is in compliance
with all the covenants. The facility terminates on May 10, 2004, but can be
terminated earlier by GMACCC upon default under the Agreement. At February 2,
2002 the Company had no borrowings but could have borrowed or had issued letters
of credit in the aggregate amount of approximately $934,000, based on the
borrowing base formula.
In August 2001, Prosperity Textiles Ltd. ("Prosperity") a wholly owned
subsidiary of the Company located in Jordan, entered into an informal credit
facility arrangement with the Egyptian Arab Land Bank. Formal documentation of
this credit facility arrangement was completed in October 2001. This arrangement
can be terminated by either party at any time. The aggregate credit facility is
$2,800,000 and can be used for both short-term borrowings and the issuance of
documentary letters of credit. The security for this facility is (i) 50% of the
sales value of customers' letters of credit for garments to be shipped by
Prosperity and (ii) 80% of its trade receivables for which the Bank has the
letters of credit. At February 2, 2002, the Company had borrowings of $2,260,000
and letters of credit of $244,000 outstanding under this facility.
F-12
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2, 2002, the Company's net loss and net loss per share
would have increased by $1,431 or $0.00 per share. 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.
F-13
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (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 2001, 2000
and 1999, risk-free interest rate of approximately 5%; volatility factor of the
expected market price of the Company's common stock of 0.98 for February 2, 2002
of 0.68 for February 3, 2001, and 1.69 for January 29, 2000 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 2001, 2000, and
1999, may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 2001, 2000, and 1999, is $0.11, $0.15, and
$0.15, respectively. Exercise prices for options issued between February 1, 1999
through February 2, 2002 ranged from $0.14 to $0.23. The weighted-average
remaining contractual life of those options is 8.2 years.
F-14
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 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 at 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
-------- -------
Option granted in 2001 ................... -- 2,000 $0.14
Option canceled in 2001 .................. (40,000) $1.00 $1.00 --
-------- -------
Options outstanding at February 2, 2002 . 248,000 $0.31-$13.88 $2.99 26,000 $0.14-$23.50
======== =======
At February 2, 2002 options exercisable .. 248,000 22,500
======== =======
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 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 at January 29, 2000 .. 5.12 60,000 $2.00 $2.00 380,000
Options granted in 2000 .................. $0.23 -- 2,000
Options canceled in 2000 ................. -- (10,000)
------- -------
Options outstanding at February 3, 2001 .. $4.72 60,000 $2.00 $2.00 372,000
Option granted in 2001 ................... $0.14 -- 2,000
Option canceled in 2001 .................. -- (40,000)
------- -------
Options outstanding at February 2, 2002 . $4.37 60,000 $2.00 $2.00 334,000
======= =======
At February 2, 2002 options exercisable .. 60,000 330,500
======= =======
F-15
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONCENTRATIONS OF RISK
For year 2001, sales to The Limited, Inc., Associated Merchandising Corporation
("AMC") and Dillard's accounted for 53%, 23% and 13%, respectively, of the
Company's net sales. For years 2000 and 1999, sales to The Limited, Inc.
accounted for 95%, and 45%, respectively, of the Company's net sales. For year
1999 , excluding sales of the Knit division, which was sold in November 1999
sales to The Limited Inc. accounted for 98%, of the Company's net sales. At
February 2, 2002 AMC and The Limited, Inc. accounted for 53% and 21%,
respectively, of trade accounts receivable. At February 3, 2001, The Limited,
Inc. accounted for 79% 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 or Jordan in which Cygne owns or leases a
manufacturing facilities 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 lessee under various operating leases through 2004. Future
minimum payments under operating leases consisted of the following at February
2, 2002:
2002 ................. $661,000
2003 ................. 265,000
2004 ................. 111,000
----------
$1,037,000
==========
Total rent expense under the operating leases for the years ended February 2,
2002, February 3, 2001, and January 29, 2000, amounted to approximately
$673,000, $264,000, and $355,000, respectively.
F-16
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASES, COMMITMENTS AND LITIGATION (Continued)
COMMITMENTS
The Company has employment agreements with certain officers through 2003. Future
minimum aggregate annual payments under these agreements amount to approximately
$912,000 in 2002 and $231,000 in 2003. Certain of the officers and employees may
receive additional compensation based upon the income, as defined, of the
Company or one or more of its subsidiaries.
LEGAL PROCEEDINGS
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-17
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 FEBRUARY
2, 2002 3, 2001
-------- --------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards ........... $ 44,000 $ 43,600
Valuation allowance ........................ (44,000) (43,600)
-------- --------
Total deferred tax assets ........................ $ 0 $ 0
======== ========
For financial reporting purposes, income (loss) before income taxes includes the
following components:
YEAR ENDED
--------------------------------------
FEBRUARY FEBRUARY JANUARY
2, 2002 3, 2001 29, 2000
-------- -------- --------
(In thousands)
Pretax (Loss) Income:
United States .................. $ (154) $ 133 $ 2,468
Foreign ........................ (23) 76 (3,448)
------- ------- -------
$ (177) $ 209 $ (980)
======= ======= =======
F-18
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 FEBRUARY JANUARY
2, 2002 3, 2001 29, 2000
------- ------- --------
(In thousands)
Current:
Foreign ............................. $24 $-- $17
State and local ..................... 20 20 30
--- --- ---
Total ................................... $44 $20 $47
=== === ===
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
YEAR ENDED
---------------------------------------------------------------
FEBRUARY FEBRUARY JANUARY
2, 2002 3, 2001 29, 2000
------------------ ------------------ -----------------
(In thousands)
Tax at U.S. statutory rates ................. $(129) (34.0%) $71 34.0% $(333) (34.0%)
Loss, no benefit provided ................... 129 34.0 -- -- 333 34.0
Reversal of valuation allowance ............. -- -- (71) (34.0) -- --
Foreign and state income taxes .............. 44 24.9 20 9.6 47 4.8
----- ---- --- --- --- ---
$ 44 24.9% $20 9.6% $47 4.8%
===== ==== === === === ===
F-19
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
As of February 2, 2002, 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.
As of February 2, 2002, 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 Israeli 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 2001, 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 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.
F-20
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION
During the year, 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
Israeli 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. During 2001, based on how the Company runs its business, the Company
considers the acquisition of its business from Best Knits as an addition to its
existing operations. Even though the Company primarily has most of its operating
assets in Guatemala and Jordan, the Company still operates in one segment of the
apparel market: women's career and casual apparel.
Net sales to unaffiliated customers and identifiable assets were as follows:
Israeli-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
Reversal 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
======= ====== =======
F-21
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 2, 2002, February 3, 2001, and
January 29, 2000 amounted to approximately $10,000, $5,000, and $6,000 and
respectively.
13. SUBSEQUENT EVENT
On April 1, 2002, Cygne Designs, Inc. ("Cygne") and Boscan Middle East
Investments Limited ("BMEI") signed a letter of intent to form a Joint Venture
("JV") to be the exclusive entity through which Cygne and BMEI will sell knit
clothing manufactured in Jordan (the "Business"). Both Cygne and BMEI are
currently doing business in Jordan as sellers and manufacturers of knit
clothing.
Cygne and BMEI will each contribute $250,000 in exchange for 50% ownership in
the JV. BMEI will make an additional contribution of fixed assets (property,
plant and equipment) with a book value of approximately $3,500,000. In addition,
Cygne will contribute all of its trade names, trademarks, order backlog,
know-how and customer contacts relating to the Business.
At the closing, anticipated to be in the second quarter of 2002, Cygne will
transfer to the JV (i) all of its knit customer purchase orders (ii) all of its
vendor purchase orders relating to the customer purchase orders and (iii) all
customer letters of credit relating to customer purchase orders. In addition,
Cygne knits will sell to the JV all of its inventories applicable to the
transferred customer purchase orders.
Cygne will cease doing knit business in Jordan through Prosperity Textiles Ltd.
(its Jordanian subsidiary) within sixty days of the JV closing date. All the
umamortized goodwill of $180,000, relating to Prosperity has been written off to
expense in the year ended February 2, 2002.
Cygne will use the equity method of accounting to record its initial investment
and all future activities of the JV.
F-22
CYGNE DESIGNS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning of Costs and Deductions Balance at
Description Period Expenses (Describe)* End of Period
----------- ------------ ------------ ----------- -------------
(In thousands)
Reserves for returns and allowances:
Year ended January 29, 2000 ........ $ 102 $1,081 $ 971 $212
Year ended February 3, 2001 ........ 212 365 288 289
Year ended February 2, 2002 ........ 289 568 669 188
*Write-off of uncollectible amounts
F-23