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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended January 30, 1999.
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)
680 FIFTH AVENUE, NEW YORK, NEW YORK 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 489-3900
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 [_]
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 16, 1999 (based on the closing sale price for such shares as reported
by the OTC Bulletin Board: $1,216,252 Common Stock outstanding as of April 16,
1999: 12,438,038 shares.
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement for its 1999 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
merchandiser and manufacturer of women's apparel, serving principally The
Limited, Inc. The Company's products include woven and knit career and casual
women's apparel, although the Company has agreed, subject to stockholder
approval, to sell substantially all its assets relating to the Knit business. 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 purchasing commitments
have been obtained from customers. The Company believes that retailers,
including customers of the Company, are increasingly sourcing private label
products themselves rather than utilizing outside vendors like the Company.
The Company historically has been dependent on one or two key customers. A
significant portion of the Company's sales currently are, and are expected to
continue to be, to various divisions of The Limited, Inc. In 1998, sales to
divisions of The Limited, Inc. were $25.5 million or 59% of total Company sales.
Sales to The Limited, Inc. decreased in each of the last several years. There
can be no assurance that The Limited, Inc. will continue to purchase merchandise
from the Company in the future, or that the Company will be able to attract new
customers. The Company believes that The Limited, Inc., like other retailers, is
increasing its sourcing capabilities and reducing its reliance on outside
vendors, including the Company, for these services.
The principal executive offices of the Company are located at 680 Fifth
Avenue, New York, New York 10019 and its telephone number is (212) 489-3900.
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SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
The Company, which was formed in 1984 and went public in July 1993,
expanded rapidly in 1994 with the acquisition of Fenn, Wright & Manson,
Incorporated ("FWM") and the acquisition of GJM International's intimate apparel
and sleepwear operations (the "GJM Business"). During this period, Cygne's joint
venture sourcing arrangement ("CAT") with Ann Taylor Stores Corporation
(together with its affiliates, "Ann Taylor") also expanded rapidly. However,
retailers' diminishing reliance upon outside design, merchandising and sourcing
services and liquidity pressures in 1995 began to adversely affect the Company's
operating results. In response to these factors, the Company began to
restructure its operations by selling the United Kingdom subsidiary of FWM and
discontinuing the remaining operations of FWM.
In February 1996, the Company sold substantially all of the assets relating
to its GJM business to Warnaco Inc. for $12.5 million in cash and Warnaco
assumed certain liabilities of the business. The Company has agreed to indemnify
Warnaco for any claims for taxes arising out of the operation of the GJM
Business prior to the sale of the GJM Business to Warnaco. The Company incurred
a loss from the disposition of the GJM Business of approximately $31 million in
1995.
In September 1996 the Company sold to Ann Taylor (i) its interest in CAT
and (ii) the assets of its division that were used in sourcing merchandise for
Ann Taylor (the "Ann Taylor Disposition"). Cygne received 2,348,145 shares of
Ann Taylor common stock and approximately $8.9 million in cash. Ann Taylor also
assumed certain liabilities of the acquired operations. As a result of the
transaction, the Company realized a pre-tax gain of $29.6 million. Between
October 1996 and January 1997, the Company sold all of the 2,348,145 shares of
Ann Taylor common stock resulting in aggregate net proceeds of approximately
$44.3 million and a pre-tax gain of approximately $6.1 million.
Net sales to Ann Taylor during 1996 amounted to 67% of the Company's net
sales. Since the closing of the Ann Taylor Disposition, the Company has not had,
and does not anticipate that it will have, sales to Ann Taylor. If the Ann
Taylor Disposition had been consummated on February 4, 1996 (the first day of
the Company's 1996 fiscal year), the Company would have had pro forma net sales
of $84.8 million for 1996 and pro forma loss from operations would have been
$15.5 million. Pro forma net loss (excluding the gain on the Ann Taylor
Disposition and on the subsequent sale of the Ann Taylor common stock) for 1996
would have been $17.7 million and pro forma net loss per share for 1996 would
have been $1.42.
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The Limited, Inc. (consisting primarily of The Limited Stores and Lerner)
accounted for approximately 25%, 65%, and 59% of Cygne's net sales for 1996,
1997, and 1998, respectively.
The Company has agreed, subject to stockholder approval, to sell its Knit
business, which consists of (i) certain assets of M.T.G.I. - Textile
Manufacturers Group (Israel), Ltd. ("MTGI"), the Company's wholly-owned
subsidiary located in Israel, and (ii) the stock of Wear & Co. S.r.l. ("Wear"),
the Company's wholly-owned subsidiary located in Italy (collectively the "Knit
Disposition"). Cygne would retain all accounts receivable.
The purchase price to be paid in the transaction will be a dollar amount in
cash equal to the adjusted net book value (as defined) of the inventory, fixed
assets, advances to vendors, and investment in a dyehouse facility, plus
$100,000. Based on the book value of such assets at January 30, 1999, the price
would be approximately $4.7 million. The purchaser will also assume all customer
and vendor purchase orders and all lease obligations. In addition, the Purchaser
has agreed to pay Cygne commissions of 6% on orders for products included in the
assets, up to a maximum of $600,000, and a non-compete payment of $400,000. In
connection with the transaction Cygne will pay severance of $800,000 to the
person who runs the Knit business
The Knit business had revenues of $25.9 million and gross profit of $1.1
million, in 1998. The Company recorded an impairment of Knit business assets of
$2.6 million in 1998.
The Company used the cash proceeds received from the sales of the GJM
Disposition and the Ann Taylor Disposition, together with a substantial portion
of the cash proceeds from the sale of the shares of Ann Taylor common stock, to
pay off the outstanding indebtedness under its bank and trade credit facilities,
which facilities had been terminated. The Company has been using the balance of
such proceeds for working capital purposes.
During 1996 the Company incurred a reorganization expense of $4.8 million
as a result of the downsizing of the Company and the redeployment of assets
necessary to meet changes in customer needs. The major components of this
expense were costs in connection with early termination of leases for excess
space outside of New York, disposition of related fixed assets, and severance
costs related to the resignation of Mr. Benson, the Company's President, as an
officer and employee of the Company. All of such costs were paid prior to
January 31, 1998.
During 1997 the Company provided for lease termination expense of $4.0
million as a result of the Company's decision to relocate from its existing New
York office space to substantially smaller New York office space. On March 1,
1999, the Company moved its offices to smaller New York office space. The actual
expenses in connection with this lease termination approximated $3.1 million.
Therefore, the balance of $0.9 million of this provision has been reversed in
1998. Approximately $1.0 million of the provision had not been paid as of
January 30, 1999.
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During 1997 the Company discontinued its (i) design studio which had been
engaged primarily in the design and development of private label apparel
collections for certain Japanese retailers and (ii) our license agreements
entered into during the summer of 1996 with the Kenzo Group ("Kenzo") for the
manufacture and distribution in the United States, Canada and Mexico of the
Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines.
In December 1997, Mr. Manuel acquired 734,319 shares of Cygne Common Stock
from a limited partnership controlled by The Limited, Inc. Upon the closing of
the transaction, The Limited, Inc. did not own any shares of Cygne stock.
The Company is continuing to review its business operations and expects to
continue to incur additional costs in the future associated with the further
restructuring or downsizing of its operations.
See also "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 of Notes to Consolidated
Financial Statements of the Company.
PRODUCTS
The Company currently participates in two principal segments of the apparel
market: woven career and casual women's sportswear and knit career and casual
women's sportswear. During 1998 the Company's products included tops, jackets,
skirts and pants.
SOURCING, MANUFACTURING AND SALES
Cygne sources and manufactures garments for its customers which have been
designed and developed by the customer. In the past the Company also developed
and designed products for its customers.
Private label manufacturing usually operates on a tighter schedule than
brand name manufacturing because goods are not manufactured until purchase
orders are received and the Company's customers strive for quick response time
in order to react to market changes and test results. Delivery cycles vary
according to the type of products manufactured, but frequently occur within a
period of six weeks from fabric delivery to garment delivery. Meeting customer
delivery requirements is both essential and difficult given the global nature of
the manufacturing process.
During 1998 substantially all of the Company's products were manufactured
outside the United States, either by non-affiliated contract manufacturers or at
the Company's sewing
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facilities. Only 23% of the Company's net sales resulted from products which
were manufactured by Cygne in its sewing facilities and approximately 77%
resulted from products which were manufactured by non-affiliated contract
manufacturers. Cygne intends to continue to utilize foreign contract
manufacturers for a significant percentage of its manufacturing requirements.
The Company's contract manufacturers are located in several countries in the Far
East, the Middle East and Central America. In addition, the Company owns and
operates a manufacturing facility in Guatemala and leases and operates a
manufacturing facility in Israel. The Company is selling the assets of its
Israeli manufacturing facility in the Knit Disposition. During 1998 products
representing approximately 8% of the Company's net sales were produced in the
Far East, approximately 60% in the Middle East, approximately 29% in Central
America and approximately 3% in the U.S. The Company reviews its product
sourcing on an ongoing basis and may alter this allocation to meet changing
conditions and demands. In connection with the Knit Disposition, Cygne Designs,
Inc. and MTGI have agreed not to source products in Israel, Jordan, and the
Palestinian territories for a period of six months following the closing of the
Knit Disposition.
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 countries in which Cygne owns or leases and operates
manufacturing facilities could result in the impairment or loss of the Company's
investment in such countries. The loss of any one or more of its foreign
manufacturers could have an adverse effect on the Company's business until
alternative supply arrangements were secured.
The Company from time to time experiences difficulties in obtaining timely
delivery of products of acceptable quality which has resulted, in many cases, in
rejections or chargebacks by customers. During 1996 and 1997 the Company
experienced substantial rejections or cancellations by customers with respect to
certain of its products. During 1998, the Company continued to experience some
rejections but to a far lesser extent than in years 1996 and 1997. The Company
believes that in some cases these difficulties resulted from not having
sufficient access to and control over the manufacturing process for such
products as well as shortened
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manufacturing times attributable to delays in obtaining required raw materials
due to the liquidity pressures faced by the Company. There can be no assurance
that the Company will not continue to experience such difficulties in the
future. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."
During 1993, Cygne began operating its own sewing factories, located
outside the United States. Operating manufacturing facilities 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 factories. All of the Company's manufacturing operations
are located outside the U.S. and, accordingly, the Company is subject to many of
the same risks as relying on foreign contract manufacturers. The Company
currently operates manufacturing facilities in Guatemala and Israel, although it
will cease manufacturing in Israel following the closing of the Knit
Disposition. See "Item 2. Properties." In connection with the GJM Disposition,
the manufacturing facilities operated by the Company in the People's Republic of
China, the Philippines and Sri Lanka were sold or closed. The Company's Hong
Kong sourcing office was significantly downsized in 1996 and its operations were
closed in April 1997.
Raw Materials
Cygne supplies the raw materials to its domestic manufacturers and usually
supplies the raw materials to foreign manufacturers. Otherwise, the raw
materials are purchased directly by the manufacturer in accordance with the
Company's specifications. Raw materials, which are in most instances made and/or
colored specifically to the Company's order, consist principally of fabric and
trim and are readily available from numerous domestic and foreign sources.
Cygne's foreign raw materials and finished goods purchases are frequently
made on a letter of credit basis, while its domestic purchases are made on an
open order basis. The Company does not have formal long-term arrangements with
any of its suppliers. The Company has experienced little difficulty in
satisfying its raw material requirements and considers its sources of supply
adequate.
Quality Assurance
The Company's quality assurance program is designed to ensure that its
products meet the quality standards of its customers. The Company employs
inspectors in its overseas offices and requires its overseas agents to employ
similarly qualified quality control personnel. Foreign manufactured fabric is
usually inspected both prior to shipment by the Company's overseas
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offices or agents as well as upon arrival at their manufacturing destination.
COMPETITION
The private label apparel industry is highly fragmented, and the Company
faces intense competition, including competition from its own customers
(including their affiliates) who have, or may establish, their own internal
product development and sourcing capabilities. Most of the Company's competitors
are larger in size and have greater resources than the Company. The Company
competes primarily on the basis of price, quality and short lead time high
volume manufacturing.
The Company believes that many of its own customers (including their
affiliates), who possess, to varying degrees, the know-how and internal
resources to develop and source directly a portion of their requirements,
constitute its major competition. For example, The Limited, Inc., through its
sourcing subsidiary, Mast Industries, Inc., procures directly a substantial
portion of its product requirements. In addition, apparel divisions of The
Limited, Inc. have formed product development groups as well as added direct
sourcing departments.
The Company believes that its business will depend upon its ability to
provide apparel products which are of good quality and meet its customers'
pricing and delivery requirements, as well as its ability to maintain
relationships with key customers. There can be no assurance that the Company
will be successful in this regard.
IMPORT RESTRICTIONS
The Company sources substantially all its products from a number of foreign
countries in the Far East, the Middle East and Central America. 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
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in three stages over a ten year period. The agreement became effective on
January 1, 1995 for the 124 member countries of the World Trade Organization
("WTO"). Those textile quotas in effect on December 31, 1994 will remain in
effect until they are "phased-out" during the ten-year period. However, these
quotas are subject to a growth formula which uses as a basis the growth rate set
forth in the bilateral textile agreements in effect as of December 31, 1994 and
provides for additional growth of 16%, 25% and 27% of the base growth rate in
the respective phase-out periods. It is believed that the quotas affecting most
of the products imported by the Company are not likely to be phased out until
the end of the third and final stage, i.e., on January 1, 2005. Once
"phased-out," quotas cannot be imposed except in accordance with GATT rules.
These rules generally forbid bilateral quota agreements and other
discriminatory, country-specific restraints. However, some form of global quota
is still possible after completion of the ten year phase-out period. Under
limited circumstances, a new quota (called a "transitional safeguard") may be
imposed during the ten-year phase out period if there is demonstrable evidence
of serious damage, or actual threat of serious damage, to a domestic industry
producing like or competitive products due to a sharp and substantial increase
in imports of a particular product. The United States may also counteract
illegal transshipping practices by imposing new quotas, issuing chargebacks
against existing quotas or imposing embargoes. Such action can be taken against
both the actual country of origin and countries through which such merchandise
was transshipped. While it is not possible to forecast the likelihood of such
occurrences, the imposition of new quotas and/or chargebacks could impact the
Company's ability to source imported merchandise.
Textile and apparel imports from non-members of the WTO, such as the
People's Republic of China, will continue to be subject to bilateral textile
agreements negotiated under the MFA. Under these agreements, the United States
may impose quota restraints on importations of specific categories of
merchandise not presently subject to such quota restraints. The bilateral
textile agreement with The People's Republic of China expires on December 31,
2000. The People's Republic of China is seeking membership in the WTO. Should
its application be approved, imports from The People's Republic of China may
become subject to the quota phase-outs discussed above or modifications thereof.
Duty Rates
The products imported by the Company are subject to "Most Favored Nation
(MFN)" 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
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immediately exempt from quota restrictions and subject to duty rates which are
being reduced to zero over the next ten years. Similar tariff rate preferences
and quota exemptions are being phased in for certain non-originating apparel
products cut and sewn in Mexico and Canada. Negotiations have begun to expand
NAFTA to possibly include certain Central and South American countries.
Additionally, "NAFTA Parity" legislation may be introduced to confer similar
quota and duty benefits on countries subject to the Caribbean Basin Economic
Recovery Act (CBERA) including Guatemala.
Imports from the People's Republic of China receive MFN duty rates under a
waiver of the Jackson-Vanik Amendment to the Trade Act of 1974. Under this
statute, certain countries and non-market economies are prohibited from
receiving MFN rates of duties and other trade benefits unless an annual waiver
is issued by the President. The People's Republic of China has received a
Jackson-Vanik Waiver annually since 1979. In May 1998 President Clinton renewed
the waiver. Congress can pass legislation disapproving the one-year extension of
MFN to China, but did not do so in 1998. If MFN for China is discontinued, goods
from China will be subject to "column 2" rates of duty, which range up to 90% ad
valorem. However, current duty rates will remain in effect at least until June
3, 1999. The loss of MFN status for the People's Republic of China could
adversely affect the Company's ability to supply products to its customers.
Additional Restrictions
In the ordinary course of its business the Company is, from time to time,
subject to claims by the U.S. Customs Service for additional duties and other
charges. Similarly, from time to time, the Company is entitled to refunds from
the U.S. Customs Service due to the overpayment of duties.
The U.S. and other countries in which the Company's products are
manufactured or sold may, from time to time, impose new quotas, duties, tariffs,
or other restrictions, including trade sanctions or revocation of "most favored
nation" status, or adversely adjust presently prevailing quotas or duty rates,
which could adversely affect the Company's operations and its ability to import
products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, the maintenance of overseas offices, 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.
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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.
In February 1999, the U.S. Customs Service commenced an audit of the
Company's import operations for 1995, 1996, and 1997. It is not possible at this
time to predict the outcome of this audit.
BACKLOG
At January 30, 1999 the Company had unfilled confirmed customer orders of
$12.8 million for the Knit division and $9.8 million for the Woven division,
compared with $2.9 million for the Knit division and $2.3 million for the Woven
division of such orders at January 31, 1998. 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, 1999, the Company had approximately 607 full-time employees,
including approximately 531 employees at its facilities in Guatemala and 59
employees at its facilities in Israel and Italy. 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
---- --- -------------------------
Bernard M. Manuel 51 Director, Chairman of the Board and
Chief Executive Officer
Roy E. Green 66 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 has been a director of
Designs, Inc., a retailer selling exclusively apparel and accessories
manufactured or licensed by Levi Strauss & Co., Inc., since 1990 and is a
director of several private companies in the U.S. and Europe. From 1983 until he
joined the Company, Mr. Manuel was involved, through Amvent, a company he
founded, in the transfer of technology between Europe and the U.S. and related
venture capital and merger and acquisition activities, as well as in the apparel
industry. Mr. Manuel earned a Bachelor's of Science in Mathematics and several
graduate degrees in Mathematics and in Economics from the University of Paris,
an M.S. in Political Science from the "Institut d'Etudes Politiques" in Paris
and an M.B.A. with high honors (Baker Scholar) from the Harvard Business School,
where he was awarded both the Loeb Rhodes Fellowship for excellence in finance
and the Melvin T. Copeland prize for top performance in marketing.
Roy E. Green has served as Chief Financial Officer of the Company, as well
as in various additional executive capacities, since October 1987. He currently
serves as Senior Vice President-Chief Financial Officer, Treasurer and Secretary
of the Company. From 1974 until he joined the Company, Mr. Green was employed by
Cluett Peabody & Co., first as the Chief Financial Officer of its Arrow Co.
division until 1979, then as Vice President and Controller until 1985, and
finally as Chief Financial Officer. He has also worked as a certified public
accountant for J. K. Lasser & Co. and Hurdman & Cranstown. Mr. Green received a
Bachelor's degree in Business Administration from Rutgers University. Mr. Green
is a certified public accountant.
The Company's business is dependent upon its ability to attract and retain
qualified employees. The Company is dependent to a significant degree on the
efforts of Bernard M. Manuel, Chairman of the Board and Chief Executive Officer.
Mr. Manuel has an employment agreement with the Company which includes
restrictions on competition by him in certain circumstances after termination of
employment, subject to certain conditions. See "Item 11. Executive
Compensation--Employment Agreements." The loss of the services of Mr. Manuel
could have an adverse effect on the Company's business.
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ITEM 2. PROPERTIES
On March 1, 1999, the Company moved its executive and general offices from
1372 Broadway, New York to 680 Fifth Avenue, New York. The Company's office now
consists of 6,000 square feet pursuant to a lease which expires at December 31,
1999 with an annual rental expense of approximately $156,000.
In addition, on March 1, 1999, the Company paid $175,000 to the Landlord of
the 1372 Broadway premises to be released from any contingent rent liability on
the vacated executive and general offices described above as well as the
contingent rent liability on the 60,000 square feet of space previously
subleased to Ann Taylor in 1996 at this location.
During 1997, the Company had provided for lease termination expense of $4.0
million for the expenses connected with the move of its executive and general
offices described above as well as an amount to be paid to landlord for release
of its contingent rent liabilities. At January 30, 1999, the Company determined
that the expenses contemplated by this provision will approximate $3.1 million
and as such, the balance of $0.9 million of this provision is shown as a
recoupment of the 1997 provision.
The Company also leases an office and manufacturing facility in Israel,
although it plans to transfer this lease in connection with the sale of the Knit
Business. The Company owns a sewing facility in Guatemala. The Company believes
that its existing facilities are 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. for its taxable years
ending December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was
acquired by the Company). To date, the IRS has informally proposed a Federal
income tax deficiency against GJM (US) Inc. of approximately $16 million
(including some penalties but not interest). Depending on the amount of the
deficiency, the amount of interest could be significant. The outcome of the
audit of GJM (US) Inc. cannot be predicted at this time. Although the Company is
disputing the proposed
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adjustment and believes that it has established appropriate accounting reserves
with respect to this matter, an adverse decision in this matter could have a
material adverse impact on the Company and its financial condition, results of
operations, or cash flows.
In February 1999, the U.S. Customs Service commenced an audit of the
Company's import operations for 1995, 1996, and 1997. It is not possible at this
time to predict the outcome of this audit.
The Company is subject to other ongoing tax audits in several jurisdictions
in the United States and Israel. Although there can be no assurances, the
Company believes any adjustments that may arise as a result of these other
audits will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
-14-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on The Nasdaq National Market under
the symbol "CYDS" until May 29, 1998. On that date, the Company's Common Stock
was delisted from The Nasdaq National Market because the Company does not meet
certain continued listing requirements of the Nasdaq National Market, including
the maintenance of a minimum bid price of at least $1 per share. Cygne Common
Stock is now quoted on the OTC Bulletin Board. There are no assurances that the
OTC Bulletin Board will continue to give quotes on the Cygne Company Stock. The
following table sets forth for the periods indicated the high and low reported
sale prices per share for the Cygne Common Stock as reported by the Nasdaq
National Market through May 28, 1998 and the OTC Bulletin Board from May 29,
1998.
HIGH LOW
----- -----
FISCAL YEAR ENDED JANUARY 31, 1998
First Quarter $1.13 $0.38
Second Quarter $0.63 $0.31
Third Quarter $0.50 $0.28
Fourth Quarter $0.50 $0.25
FISCAL YEAR ENDED JANUARY 30, 1999
First Quarter $0.38 $0.22
Second Quarter $0.25 $0.13
Third Quarter $0.16 $0.06
Fourth Quarter $0.17 $0.08
The number of stockholders of record of Common Stock on April 16, 1999 was
approximately 86. The closing sale price of the Company's Common Stock on April
16, 1999 was $0.15 per share.
-15-
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.
-16-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected financial information which
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto of the Company included elsewhere herein. The
selected financial information has been derived from the consolidated financial
statements of the Company, which have been audited by independent auditors. The
acquisition of FWM in April 1994 and GJM in October 1994, the sale of FWM's
United Kingdom subsidiary and certain brand name rights in April 1995, the
discontinuance of the remaining operations of FWM in 1995, the GJM Disposition
in February 1996 and the Ann Taylor Disposition in September 1996, materially
affect the comparability of the financial data reflected below.
YEAR(1)
-----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- --------- -------- --------
(in thousands except per share amounts)
INCOME STATEMENT DATA
Net sales $516,105 $ 540,063 $ 254,313 $ 43,379 $ 43,013
Cost of goods sold 433,700 510,761 226,456 43,063 42,753
-------- --------- --------- -------- --------
Gross profit 82,405 29,302 27,857 316 260
Selling, general and administrative expenses 54,261 72,182 27,251 10,331 4,381
Provision for impairment of Knit business assets -- -- -- -- 2,564
Provision (recoupment) for lease termination -- -- -- 3,964 (902)
expenses
Gain from sale of Ann Taylor Woven
Division and CAT -- -- (29,588) -- --
Gain from sale of subsidiary, net -- (4,742) -- -- --
Loss from sale of GJM business, net -- 31,239 -- -- --
Reorganization expense -- -- 4,813 -- --
Write-off of goodwill -- 48,949 -- -- --
Amortization of intangibles 2,505 3,425 364 364 364
-------- --------- --------- -------- --------
Income (loss) from operations 25,639 (121,751) 25,017 (14,343) (6,147)
Other income(2) -- -- (6,864) -- --
Settlement of shareholder class
action and related legal expenses -- -- 2,627 -- --
Interest income -- -- (80) (461) (428)
Interest expense 7,620 8,813 3,340 378 337
-------- --------- --------- -------- --------
Income (loss) before income taxes and
minority interests 18,019 (130,564) 25,994 (14,260) (6,056)
Provision (benefit) for income taxes 5,568 (6,216) 7,117 204 269
-------- --------- --------- -------- --------
Income (loss) before minority interests 12,451 (124,348) 18,877 (14,464) (6,325)
Income attributable to minority interests 1,642 1,710 961 -- --
-------- --------- --------- -------- --------
Net income (loss) $ 10,809 $(126,058) $ 17,916 $(14,464) $ (6,325)
======== ========= ========= ======== ========
Net income (loss) per share - basic $ 0.95 $ (10.04) $ 1.44 $ (1.16) $ (0.51)
======== ========= ========= ======== ========
Number of shares used in computation of net
income (loss) per share - basic 11,352 12,550 12,438 12,438 12,438
======== ========= ========= ======== ========
Net income (loss) per share - diluted $ 0.93 $ (10.04) $ 1.44 $ (1.16) $ (0.51)
======== ========= ========= ======== ========
Number of shares used in computation of net
income (loss) per share - diluted 11,658 12,550 12,439 12,438 12,438
======== ========= ========= ======== ========
See notes on next page
-17-
YEAR (1)
------------------------------------------------
1994 1995 1996 1997 1998
(in thousands)
Balance Sheet Data
(as of end of period)
Cash $14,202 $ 5,487 $22,246 $10,926 $3,686
Accounts receivable 64,921 35,117 7,239 6,012 8,242
Assets held for sale -- 15,200 -- -- 4,700
Inventory 57,570 29,999 5,109 4,012 2,705
Goodwill 76,659 2,790 2,426 2,062 --
Total assets 253,528 117,145 47,142 29,750 23,599
Long-term debt 1,460 1,562 -- -- --
Stockholders' equity 141,692 9,046 26,959 12,379 6,046
(1) References to a year are to the fiscal year of the Company commencing in
that calendar year and ending on the Saturday nearest January 31 of the
following year. The fiscal year ended February 3, 1996 consisted of 53
weeks. All other years presented consist of 52 weeks. The Company has never
declared or paid cash dividends on its Common Stock.
(2) Principally from the gain on the sale of shares of Ann Taylor common stock.
-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, risk of operations and suppliers in foreign
countries, competition, general economic conditions, as well as other risks
detailed in the Company's filings with the Securities and Exchange Commission,
including this Annual Report on Form 10-K.
General
On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of the Company's common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, the Company sold FWM's U.K. subsidiary
to FWM N.V. for 600,000 shares of the Company's common stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. In connection with the elimination of
the FWM operations, the Company wrote-off the remaining $44.5 million of
goodwill in fiscal 1995.
On October 7, 1994, Cygne acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of common stock, $10,000 in
cash and the assumption of approximately $1.9 million of debt owed by GJM
International to The Limited, Inc., as well as non-compete payments aggregating
$3.2 million. Additional costs related to this acquisition approximated $1.7
million. The excess of the purchase price over the fair value of the net assets
acquired of approximately $27.7 million was recorded as goodwill and was being
amortized over a twenty-five year period.
In February 1996, the Company sold the GJM Business to Warnaco. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. The Company is obligated to indemnify Warnaco
for any claims for taxes arising out of the operation of the GJM Business prior
to the sale of the GJM Business to Warnaco. The Company used all the proceeds of
the sale to repay outstanding senior bank indebtedness.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sourced products in Brazil for export, primarily to the United
States. The purchase price for TSA was
-19-
approximately $3.8 million, consisting of 53,038 unregistered shares of common
stock and $3.1 million in cash. Additional costs related to this acquisition
approximated $730,000. The excess of the purchase price over the fair value of
the net assets acquired of approximately $4.5 million was recorded as goodwill
and was being amortized over a twenty-five year period. In January 1996, the
Company determined to close TSA. As a result, the Company recorded a loss of
approximately $6.4 million in fiscal 1995, primarily resulting from the
write-off of goodwill associated with the acquisition. The Company terminated
these operations during the third quarter of 1996.
The acquisitions of FWM, GJM and TSA were accounted for under the purchase
method and, accordingly, the operating results of FWM, GJM and TSA were included
in the consolidated operating results since their respective dates of
acquisition.
In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with Ann Taylor to source products exclusively for Ann
Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20%
interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT increased
to 40%. As a result of such change in ownership, Ann Taylor had, prior to the
consummation of the Ann Taylor Disposition, a 40% interest in the net income of
CAT, which interest was reflected in Cygne's consolidated statements of income
as "income attributable to minority interests."
The Company completed the Ann Taylor Disposition on September 20, 1996. In
the transaction the Company sold to Ann Taylor Cygne's 60% interest in CAT and
the assets of Cygne's Ann Taylor Woven Division that were used in sourcing
merchandise for Ann Taylor. On the closing of the transaction, Cygne received
2,348,145 shares of Ann Taylor common stock, having a value of $36 million
(based on the average closing price of the Ann Taylor common stock during the
ten trading days prior to closing), and approximately $8.9 million (after
post-closing adjustments) in cash in respect of inventory (less related payables
and advances and certain other assumed liabilities), net fixed assets and
accounts receivable of the Ann Taylor Woven Division. Ann Taylor also assumed
certain liabilities of the acquired sourcing operations. As a result of the
transaction, the Company realized a pre-tax gain of $29.6 million. Between
October 1996 and January 1997, the Company sold all of the 2,348,145 shares of
Ann Taylor common stock received upon the closing of the transaction at various
prices resulting in aggregate net proceeds of approximately $44.3 million. The
Company realized a pre-tax gain of approximately $6.1 million as a result of the
sale of the shares of Ann Taylor common stock, which is reflected in "Other
income" in the Company's Consolidated Statements of Operations.
In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the Company's then President and a director, to
facilitate the integration of CAT and the Division into Ann Taylor's operations.
These agreements, which required an annual fee of $225,000 for the services of
each of Messrs. Benson and Manuel, provided for automatic assignment to the
consultant if his employment with the Company were terminated for any reason.
Mr. Benson's consulting agreement was assigned to him in connection with his
resignation as an officer and employee of the Company on November 29, 1996. Mr.
Benson, who founded the Company's predecessor in 1975 and continued to serve on
the Board of Directors of the Company, entered into a consulting agreement with
the Company in November 1996 pursuant to which he provided services to Cygne
with respect to design, development and merchandising matters and special
projects. The consulting agreement between Mr. Benson and the Company was
terminated in September 1997 and Mr. Benson resigned as a director
-20-
of the Company on September 4, 1997. During 1997 the consulting agreement with
Ann Taylor for the services of Mr. Manuel was bought out in consideration of the
payment by Ann Taylor to the Company of approximately $477,000.
During 1996, Ann Taylor accounted for 66.7% of Cygne's net sales, and The
Limited, Inc. (consisting primarily of The Limited Stores and Lerner) accounted
for 24.6%, 64.8% and 59.2% of Cygne's net sales for 1996, 1997 and 1998,
respectively. The Company had no sales to Ann Taylor since the Ann Taylor
Disposition.
If the Ann Taylor Disposition had been consummated on February 4, 1996 (the
first day of fiscal 1996), the Company would have had pro forma net sales for
1996 of $84.8 million. Pro forma gross profit for 1996 would have been $6.2
million. Pro forma loss from operations for 1996 would have been $15.5 million.
Pro forma net loss (excluding the gain on the Ann Taylor Disposition and on the
subsequent sale of the Ann Taylor common stock) for 1996 would have been $17.7
million. The pro forma net loss per share for 1996 would have been $1.42.
In June 1997 the Company terminated by mutual agreement the license
agreements entered into during the summer of 1996 with the Kenzo Group for the
manufacture and distribution in the United States, Canada and Mexico of the
Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines. In connection with the
termination the Kenzo Group returned the $400,000 in pre-paid minimum royalty
payments made on the signing of the license agreements and agreed to pay Cygne
for certain raw materials related to the manufacture of Kenzo products.
In March 1999, the Company agreed, subject to stockholder approval, to sell
its Knit Business (the "Knit Disposition"), which consists of (i) certain assets
of M.T.G.I. - Textile Manufacturers Group (Israel), Ltd. ("MTGI"), the Company's
wholly-owned subsidiary located in Israel, and (ii) the stock of Wear & Co.
S.r.l. ("Wear"), the Company's wholly-owned subsidiary located in Italy
(collectively the "Knit Disposition"). Cygne would retain all accounts
receivable.
The purchase price to be paid in the transaction will be a dollar amount in
cash equal to the adjusted net book value (as defined) of the inventory, fixed
assets, advances to vendors, and investment in a dyehouse facility, plus
$100,000. Based on the book value of such assets at January 30, 1999, the price
would be approximately $4.7 million. The purchaser will also assume all customer
and vendor purchase orders and all lease obligations. In addition, the purchaser
has agreed to pay Cygne commissions of 6% on orders for products included in the
assets, up to a maximum of $600,000, and a non-compete payment of $400,000. In
connection with the transaction Cygne will pay severance of $800,000 to the
person who runs the Knit business.
During 1996, 1997, and 1998 the Knit Business accounted for 16%, 67%, and
60%, respectively, of Cygne'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. Since the consummation of the Ann Taylor
Disposition, the Company has not had and does not anticipate that it will have
sales to Ann Taylor. The Company has been dependent on its key customers and
with the loss of Ann Taylor as a customer, 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., particularly after
the Ann Taylor Disposition, The Limited, Inc. has the ability to exert
significant control over the Company's
-21-
business decisions, including prices. Furthermore, The Limited, Inc. procures
directly a substantial portion of its apparel product requirements through its
sourcing subsidiary, and such subsidiary will continue to be a major competitor
of the Company with respect to the Company's business with The Limited, Inc. In
addition, the apparel divisions of The Limited, Inc. have formed direct sourcing
departments. In 1995, sales to certain divisions of The Limited, Inc. decreased
significantly and, in 1996, 1997, and 1998 sales to certain divisions of The
Limited, Inc. with which the Company continues to do business decreased. In
December 1997 a limited partnership controlled by The Limited, Inc. sold its
734,319 shares of Cygne stock to Mr. Manuel, the Company's Chairman and Chief
Executive Officer. Upon the closing of the transaction, The Limited, Inc. did
not own any shares of Cygne stock.
The Company is continuing to review its business operations and expects to
incur additional costs in the future associated with the further restructuring
or downsizing of its operations.
The apparel industry is highly competitive and historically has been
subject to substantial cyclical variation, with purchases of apparel and related
goods tending to decline during recessionary periods when disposable income is
low. This could have a material adverse effect on the Company's business.
Retailers, including customers of the Company, are increasingly sourcing private
label products themselves rather than utilizing outside vendors like the
Company.
-22-
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements
of operations and expresses for the periods indicated certain income data as a
percentage of net sales.
Percentage of Net Sales
----------------------------------
Year
----------------------------------
1998 1997 1996
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Gross profit 0.6 0.7 11.0
Selling, general and administrative
expenses 10.2 23.8 10.7
Provision for impairment of Knit
business assets 6.0 -- --
(Recoupment) provision for lease
termination expense (2.1) 9.1 --
Gain from sale of Ann Taylor
Woven Division and CAT -- -- (11.5)
Reorganization expense -- -- 1.9
Amortization of intangibles 0.8 0.8 0.1
----- ----- -----
(Loss) income from operations (14.3) (33.0) 9.8
Other income -- -- (2.7)
Settlement of shareholder class action
and related legal expenses -- -- 1.0
Interest (income) expense, net (0.2) (0.2) 1.3
Provision for income taxes 0.6 0.5 2.8
----- ----- -----
(Loss) income before minority
interests (14.7) (33.3) 7.4
Income attributable to minority
interests -- -- 0.4
----- ----- -----
Net (loss) income (14.7%) (33.3%) 7.0%
===== ===== =====
-23-
1998 COMPARED TO 1997
Net Sales
Net sales for 1998 were $43.0 million, a decrease of $0.4 million or 0.8%
from $43.4 million in 1997. The decrease in net sales for 1998 compared to 1997
was primarily attributable to decreases in sales to divisions of The Limited,
Inc. of $2.6 million, which was offset by sales to new customers.
Woven division sales for 1998 were $17.1 million, an increase of $2.8
million or 19.8% from $14.3 million in 1997. The increase in sales to The
Limited, Inc. of $6.2 million was offset by a decrease in sales to other
customers.
Knit division sales for 1998 were $25.9 million, a decrease of $3.0 million
or 10.4% from $28.9 million in 1997. The decrease in sales to The Limited, Inc.
of $8.8 million was offset by an increase in sales to other customers.
Kenzo, a discontinued division, had $0.2 million in sales in 1997.
Gross Profit
Gross profit was $0.3 million in both 1998 and 1997.
The woven division had gross loss of $0.8 million, a $1.6 million decrease
from the 1997 gross profit of $0.8 million. The increase in the 1998 loss over
1997 was mainly attributable to the loss of $2.8 million at the Company's
Central American operation. The loss at the Central American operation was
caused by under-absorption of manufacturing overhead during the first nine
months of 1998 and severance costs for work force reduction.
The Knit division had a gross profit of $1.1 million, an increase of $0.4
million from the $0.7 million in 1997. The gross margin for 1998 was 4.1%
compared to 2.3% in 1997
The discontinued division in 1997 had a gross loss of $1.2 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 were $4.4 million, a
decrease of $5.9 million or 57.6% from the $10.3 million in 1997.
The Knit division SG&A expenses decreased $0.4 million from 1997 as a
result of expense reduction programs initiated during 1998.
The $2.6 million decrease in corporate SG&A expenses from 1997 resulted
from less severance expense in 1998 than 1997, when a significant portion of the
downsizing of the Company occurred.
-24-
The Kenzo division in 1997 had SG&A expenses of $2.9 million.
Provision for Impairment of Knit Business Assets
In March 1999 the Company agreed to sell the Knit business. In connection
with the sale, during 1998 the Company established a provision of $2.6 million
for the impairment of the Knit business assets. This provision includes the
unamortized goodwill of the Knit business ($1.7 million), loss on assets to be
sold ($0.3 million) and estimated transaction expenses ($0.6 million). The
provision excludes the Knit division's 1999 results of operations.
(Recoupment) Provision for Lease Termination Expenses
In 1997, the Company provided for lease termination expenses of $3,964,000
as a result of the Company's decision to relocate from its existing New York
Office and to seek substantially smaller new York office space. On March 1,
1999, the Company completed its relocation from its existing New York office and
the Landlord released the Company from any contingent rent liability on its New
York space and on its leases assumed by Ann Taylor in 1996. The actual expenses
in connection with this lease termination approximated $3,063,000. Therefore,
the balance of $902,000 of this provision has been reversed in 1998.
Interest
Net interest income for 1998 was $91,000 compared to net interest income of
$83,000 in 1997. Net interest income for 1998 of $428,000 includes $155,000 in
interest income from a federal tax refund. Excluding the interest received on
the tax refund, the decreases in net interest income for 1998 compared to 1997
was primarily attributable to a reduction in the Company's cash balance which
was used to fund the Company's losses.
Provision for Income Taxes
The provision for income taxes in 1998 primarily represents provision for
minimum state income taxes and taxes payable to foreign countries for income
earned in the foreign countries. At January 30, 1999, the Company had net
operating loss carryforwards of approximately $108 million, which may be used to
offset future United States taxable income.
1997 COMPARED TO 1996
Net Sales
Net sales for 1997 were $43.4 million, a decrease of $210.9 million or
82.9% from $254.3 million in 1996.
Woven division sales for 1997 were $14.3 million, a decrease of $27.8
million or 66.0% from $42.1 million in 1996. Sales to The Limited, Inc. in 1997
decreased by $24.8 million from 1996 levels.
Knit division sales for 1997 were $28.9 million, a decrease of $12.2
million or 29.7% from $41.1 million in 1996. The decrease in sales was mostly
attributable to the discontinuation of the sweater product line.
-25-
The discontinued business sales decrease of $170.9 million was mostly
attributable to the decrease in sales to Ann Taylor as a result of the Ann
Taylor Disposition in 1996.
Gross Profit
Gross profit for 1997 was $316,000, a decrease of $27.5 million or 98.9%
from $27.9 million in 1996. The decrease in gross profit for 1997 compared to
1996 was primarily attributable to operations sold in the Ann Taylor
Disposition, which had gross profit of $21.7 million, lower sales and lower
gross margins on the remaining sales in 1997 compared to 1996, and a $500,000
markdown on fabric purchased for the Kenzo Jeans and Kenzo Studio brand name
products which were discontinued in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1997 were $10.3 million, a
decrease of $16.9 million or 62.1% from the $27.3 million in 1996. The decrease
for 1997 compared to 1996 was primarily attributable to a decrease in expenses
of $10.8 million as a result of the Ann Taylor Disposition, and a decrease in
all other expenses of $10.1 million as a result of downsizing the Company,
offset in part by expenses of $2.9 million, related to the Kenzo Jeans and Kenzo
Studio brand name products and their discontinuance (including severance costs)
and other severance costs of $1.1 million.
Provision for Lease Termination Expense
During 1997 the Company provided for lease termination expense of $4.0
million as a result of the Company's decision to relocate from its existing New
York office space and to seek substantially smaller New York office space.
Reorganization Expense
The reorganization expense of $4.8 million during 1996 was the result of
the downsizing of the Company and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were:
costs in connection with early termination of leases outside New York for excess
space, disposition of related fixed assets, and severance costs related to the
Company's then President's resignation as an officer and employee of the
Company. All such costs were paid prior to January 31, 1998.
Interest
Net interest income for 1997 was $83,000 compared to net interest expense
of $3.3 million in 1996. The decrease in interest expense for 1997 compared to
1996 was primarily attributable to the repayment of the Company's debt with the
proceeds from the Ann Taylor Disposition and the sale of the Ann Taylor common
stock received in connection therewith.
Provision for Income Taxes
The provision for income taxes in 1997 primarily represents provision for
minimum state and local income taxes.
-26-
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company had historically financed its operations
primarily through financing from lending institutions, financing from customers
and third party trade credit facilities, cash from operations and the issuance
of debt and equity securities.
Since February 1, 1997, the Company has not had a domestic credit facility.
Since the expiration of its prior bank domestic credit facility, Cygne has
obtained letters of credit issued from domestic banks secured by a cash deposit
from the Company. At January 30, 1999 the Company had restricted cash at banks
of $0.7 million as collateral for letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $3.2 million; letters of credit not to exceed $3.2 million;
overdraft facility not to exceed $500,000; and bank guarantee for Israeli custom
duties not to exceed $500,000. Borrowings under this facility generally bear
interest at 1.5% over the prime rate, except that borrowings against trade
accounts receivable bear interest at 1.25% over the LIBOR rate. Borrowings under
this facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing,
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. There can be no assurance that the bank will continue to make this
facility available. Termination by the bank of this facility could have a
material adverse effect on the Company's financial condition and results of
operations. At January 30, 1999, outstanding loans under this facility were $2.6
million and letters of credit aggregating $1.5 million had been issued. This
facility will terminate upon the closing of the sale of the Knit business.
In September 1998 the Israeli bank made an additional $150,000 loan to the
same Israeli subsidiary which is also secured by a lien on its assets. Principal
payments under this loan are due in monthly installments of $6,250 through
October 2000 and the loan bears interest of 7.2% payable monthly. At January 30,
1999 the outstanding balance was $125,000. This facility will terminate upon the
closing of the Knit disposition.
Net cash used in operating activities was $8.4 million in 1998 compared to
$9.0 million in 1997. Cash used in operating activities for 1998 was due to the
cash loss from operations of $2.9 million, increase in accounts receivable and
inventory and a reduction of liabilities.
Prior to the Ann Taylor Disposition in September, 1996, the Company
experienced significant liquidity pressures primarily as a result of the
negative cash flow caused by the Company's operating losses. Although the
proceeds from the Ann Taylor Disposition alleviated the liquidity pressures then
faced by the Company, the Company continues to have losses from operations.
The Company's financial performance for 1999 will depend upon a variety of
factors, including the amount of sales to The Limited, Inc., and the completion
of the Knit Disposition. If the Company is unable to eliminate its operating
losses, the Company will face severe liquidity pressures in 1999 which would
adversely affect the Company's financial condition and results of operations.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the restructuring or downsizing
of its operations.
-27-
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which have been experienced in the U.S., where it competes, have had a
significant effect on its net sales or profitability.
FOREIGN CURRENCY EXCHANGE
The Company negotiates substantially all its purchase orders with its
foreign manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in
foreign currencies, the Company's cost for any purchase order is not subject to
change after the time the order is placed. However, the weakening of the U.S.
dollar against local currencies could lead certain manufacturers to increase
their U.S. dollar prices for products. The Company believes it would be able to
compensate for any such price increase.
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.
(In thousands except per share amounts)
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ ----------------------------------------
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4(1) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
Net sales $6,245 $8,509 $13,158 $15,101 $7,637 $11,003 $15,729 $9,010
Gross (loss) profit (238) 399 (312) 411 (659) 96 1,703 (824)
Operating (loss) (1,345) (1,048) (1,511) (2,243) (4,626) (2,808) (4,250) (2,659)
Net (loss) (1,328) (1,127) (1,484) (2,386) (4,582) (2,805) (4,289) (2,788)
Net (loss) per share - basic
and diluted (0.11) (0.09) (0.12) (0.19) (0.37) (0.23) (0.34) (0.22)
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 provision for impairment of Knit Business assets of $2,564,000 and
recoupment of lease termination expense provisions of $902,000.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has determined that it will be required to replace portions of its
software so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The Company continues to have
communications with its significant suppliers and large customers to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 will not pose significant operations problems for
its computer systems. The Company, using both internal and external resources,
has begun to upgrade, replace and test its computer systems and equipment so as
to be able to operate without disruption due to Year 2000 issues. The Company
expects to complete its remediation efforts by mid-1999. The Company anticipates
completing the Year 2000 project prior to any anticipated impact on its
operating systems. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 issue could have a material adverse
effect on the operations of the Company. Likewise, there can be no assurance
that the systems of other companies on which the Company's systems rely will be
timely converted and would not have a material adverse effect on the Company's
systems.
The cost of the Year 2000 systems evaluation and remediation is being funded
through operating cash flows and the Company is expensing these costs. While the
total cost to obtain Year 2000 compliance is not known at this time, the Company
currently expects the cost to be less than $20,000, of which
-28-
approximately 50% had been expended through January 30, 1999. The actual cost,
however, could exceed this estimate. These costs are not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
-29-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 Company's interest income and interest expense are not materially
sensitive to changes in general level of interest rates. In this regard, changes
in interest rates will not materially affect the interest earned on the
Company's cash as well as interest paid on its debt.
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. 2 - Election of Directors" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
Executive Officers
See PART I - Executive Officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
-31-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page F-1.
(3) Exhibits
Certain exhibits presented below contain information that has been granted
subject to a request for confidential treatment Such information has been
omitted from the exhibit. Exhibit Nos. 10.2, 10.3, 10.4, 10.5, 10.6, 10.8, 10.9,
10.23, 10.29 and 10.31 are management contracts, compensatory plans or
arrangements.
Exhibit No. Description
- --------------------------------------------------------------------------------
2.1 Acquisition Sale Agreement, dated as of March 25, 1999 by and among
M.T.G.I. - Textile Manufacturers Group (Israel), Limited, MBS Company, AC
Services Inc. and Jordache Limited.*(10)
3.1 Restated Certificate of Incorporation, as amended by Certificate of
Amendment filed August 5, 1994 with the Secretary of State of the State of
Delaware.*(1)
3.2 By-laws.*(2)
4 Specimen Stock Certificate.*(2)
10.1 Agreement, dated as of April 30, 1993, among the Company, Bernard Manuel,
Irving Benson, CIL, Belton Limited and certain other parties.*(2)
-32-
10.2 Amended and Restated Employment Agreement, dated as of January 1, 1995,
between the Company and Bernard M. Manuel.*(7)
10.3 Consulting and Severance Agreement dated as of November 27, 1996 between
the Company and Irving Benson.*(8)
10.4 Employment Agreement, dated as of May 1, 1993, between the Company and Roy
Green.*(2)
10.5 Employment Agreement, dated as of May 1, 1993, between the Company and
Gary Smith.*(2)
10.6 Consulting Agreement, dated as of September 20, 1996, between AnnTaylor
Stores Corporation, AnnTaylor, Inc., Cygne Designs, Inc. and Mr. Bernard
M. Manuel.*(8)
10.7 Consulting Agreement, dated as of September 20, 1996, between AnnTaylor
Stores Corporation, AnnTaylor, Inc., Cygne Designs, Inc. and Mr. Irving
Benson.*(8)
10.8 Employment Agreement, dated April 4, 1994, between the Company and Paul D.
Baiocchi.*(3)
10.9 Employment Agreement, dated as of April 7, 1994, among the Company, Fenn,
Wright and Manson, Incorporated, and Trevor J. Wright.*(3)
10.10 Purchase Agreement, dated as of October 7, 1994, by and among Cygne
Designs, Inc., G.J.M. Manufacturing Limited, G.J.M. Purchasing Limited,
G.J.M. Sales Limited, G.J.M. (Sales), Inc. and G.J.M. International
Limited.*(6)
-33-
10.11 Registration Rights Agreement, dated as of April 6, 1994, between the
Company and Fenn Wright and Manson (Antilles) N.V.*(3)
10.12 Agreement, dated as of March 24, 1995, by and among Cygne Designs, Inc.,
Fenn Wright and Manson (Antilles) N.V., Fenn, Wright and Manson
Incorporated and Colin Fenn.*(7)
10.13 Financing Contract in Value with Personal Mortgage Guarantees, dated
January 21, 1994.*(3)
10.14 Agreement, dated as of September 30, 1993, among Jonathan Kafri, Simona
Kafri, Cygne Designs F.E. Limited, T. Wear Company S.r.l. and Cygne
Designs, Inc.*(4)
10.15 Agreement, dated as of September 30, 1993, among Lancaster Enterprises
Limited, Jonathan Kafri, Simona Kafri, Cygne Designs F.E. Limited,
M.T.G.I. Textile Manufacturers Group (Israel) Limited, Cygne TW Inc. and
Cygne Designs, Inc.*(4)
10.16 Stock and Asset Purchase Agreement, dated as of June 7, 1996, as amended
as of August 27, 1996, by and between Cygne Designs, Inc., Cygne Group
(F.E.) Limited, AnnTaylor Stores Corporation and AnnTaylor, Inc.*(9)
10.17 License Agreement, dated as of July 26, 1996, by and between Cygne
Designs, Inc. and Kenzo S.A. pertaining to the KENZO STUDIO license.*(9)
10.18 License Agreement, dated as of July 26, 1996, by and between Cygne
Designs, Inc. and Kenzo S.A. pertaining to the KENZO JEANS license.*(9)
-34-
10.19 Form of Indemnification Agreement.*(2)
10.20 Assumption Agreement, dated October 7, 1994, by and between G.J.M.
International Limited and Cygne Designs, Inc.*(5)
10.21 Registration Rights Agreement, dated as of October 7, 1994, by and
between Cygne Designs, Inc. and G.J.M. International Limited.*(5)
10.22 Amendment No. 1 to the Registration Rights Agreement, dated as of October
6, 1994, amending the registration rights agreement, dated as of July 29,
1993 between Cygne Designs, Inc. and Limited Direct Associates, L.P.*(5)
10.23 Employment Agreement, dated as of February 3, 1997, between the Company
and Jonathan Kafri.*(11)
10.24 Agreement of Lease, dated August 7, 1991, between the Company and
Nineteen New York Properties Limited Partnership, as amended by the First
Amendment of Lease, dated as of January 1, 1993.*(2)
10.25 Second Amendment of Lease, dated May 31, 1993, between Nineteen New York
Properties Limited Partnership and the Company.*(2)
10.26 Third Amendment of Lease, dated as of December 1, 1993, between Nineteen
New York Properties Limited Partnership and the Company.*(3)
10.27 Amended and Restated Credit Agreement, dated as of September 20, 1996, by
and between Cygne Designs, Inc. and The Hongkong and Shanghai Banking
Corporation Limited.*(8)
-35-
10.28 Amended and Restated Security Agreement, dated as of September 20, 1996,
between Cygne Designs, Inc. and The Hongkong and Shanghai Banking
Corporation Limited.*(8)
10.29 1993 Stock Option Plan, as amended, through June 28, 1994.*(1)
10.30 Form of Stock Option Agreement.*(2)
10.31 Stock Option Plan for Non-Employee Directors.*(2)
10.32 Form of Registration Rights Agreement between the Company and Limited
Direct Associates, L.P.*(2)
10.33 Memorandum of Understanding, dated as of June 1, 1993, among the Company,
Cygne Knits Limited, T. Wear Company S.r.l. and certain other
parties.*(2)
10.34 Amended and Restated Lease Assignment, made as of February 11, 1999, by
and between Cygne Designs, Inc. and Onsite Ventures, LLC, relating to the
1372 Broadway premises.
10.35 General release, made as of March 1, 1999, among Cygne Designs, Inc.,
Fenn Wright and Manson Incorporated at S.L. Green Operating Partnership,
L.P.
10.36 Sub-Sublease, made as of February 15, 1999, between PLD Telekom Inc. and
Cygne Designs, Inc.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only).
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the following documents:
(1) Company's Quarterly Report on Form 10-Q for the quarter ended July 30,
1994.
(2) Company's Registration Statement on Form S-1 (Registration No. 33-64358).
(3) Company's Annual Report on Form 10-K for the fiscal year ended January
29, 1994.
-36-
(4) Company's Quarterly Report on Form 10-Q for the quarter ended October 30,
1993.
(5) Company's Quarterly Report on Form 10-Q for the quarter ended October 29,
1994.
(6) Company's Current Report on Form 8-K dated October 7, 1994.
(7) Company's Annual Report on Form 10-K for the fiscal year ended January
28, 1995.
(8) Company's Quarterly Report on Form 10-Q for the quarter ended November 2,
1996.
(9) Company's Quarterly Report on Form 10-Q for the quarter ended August 3,
1996.
(10) Company's Current Report on Form 8-K dated March 25, 1999.
(11) Company's Annual Report on Form 10-K for the fiscal year ended February
1, 1997.
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
March 25, 1999 report announcing that Cygne Designs, Inc. had entered
into an agreement with Jordache Limited pursuant to which Jordache
will acquire Cygne's Knit business.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedule
See "Index to Consolidated Financial Statements and Supplemental Schedule"
appearing on page F-1. Schedules not included herein are omitted because they
are not applicable or the required information appears in the Consolidated
Financial Statements or notes thereto.
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Cygne Designs, Inc.
(Registrant)
By: /s/ Bernard M. Manuel
---------------------
Bernard M. Manuel
(Chairman and Chief Executive Officer)
Date: April 26, 1999
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 26, 1999
- ----------------------- Directors, Chief Executive Officer
Bernard M. Manuel and Director (principal executive
officer)
/s/ Roy E. Green
- ---------------------- Senior Vice President, Chief April 26, 1999
Roy E. Green Financial Officer, and Treasurer
(principal financial and
accounting officer) and
Secretary
/s/ James G. Groninger Director April 26, 1999
- ----------------------
James G. Groninger
-38-
Cygne Designs, Inc. and Subsidiaries
Consolidated Financial Statements
Index to Consolidated Financial Statements
Consolidated Financial Statements
Report of Independent Auditors ............................................ F-2
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 ... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended January 30, 1999 .............................. F-4
Consolidated Statements of Stockholders' Equity for Each of
the Three Years in the Period Ended January 30, 1999 .................... F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended January 30, 1999 .............................. F-6
Notes to Consolidated Financial Statements ................................ F-8
Schedule
Schedule II - Valuation and Qualifying Accounts ........................... F-25
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 January 30, 1999 and January 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 30, 1999. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cygne
Designs, Inc. and Subsidiaries at January 30, 1999 and January 31, 1998 and the
consolidated results of their operations, changes in their stockholders' equity
and their cash flows for each of the three years in the period ended January 30,
1999, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 26, 1999
F-2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets
JANUARY JANUARY
30, 1999 31, 1998
---------- ---------
(In thousands, except share
and per share amounts)
ASSETS
Current assets:
Cash (includes restricted cash of $669 and $1,098,
respectively $ 3,686 $ 10,926
Trade accounts receivable, net 8,242 6,012
Inventory 2,705 4,012
Assets held for sale 4,700 --
Other receivables and prepaid expenses 996 1,979
--------- ---------
Total current assets 20,329 22,929
Fixed assets, net 2,720 3,972
Other assets 550 787
Goodwill, net -- 2,062
--------- ---------
Total assets $ 23,599 $ 29,750
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $2,754 $1,319
Accounts payable 4,579 3,348
Accrued expenses 4,140 6,636
Income taxes payable 6,080 6,068
--------- ---------
Total current liabilities 17,553 17,371
Stockholders' equity:
Preferred Stock, $0.01 par value; 4,000,000
shares authorized: none issued and outstanding -- --
Common Stock, $0.01 par value; 75,000,000 shares
authorized: 12,438,038 shares issued and
outstanding 124 124
Paid-in capital 120,918 120,918
Accumulated deficit (114,872) (108,547)
Foreign currency translation adjustment (124) (116)
--------- ---------
Total stockholders' equity 6,046 12,379
--------- ---------
Total liabilities and stockholders' equity $ 23,599 $ 29,750
========= =========
See accompanying notes.
F-3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED
-----------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
--------- --------- ---------
(In thousands, except per share amounts)
Net sales $ 43,013 $ 43,379 $ 254,313
Cost of goods sold 42,753 43,063 226,456
--------- --------- ---------
Gross profit 260 316 27,857
Selling, general and administrative expenses 4,381 10,331 27,251
Provision for impairment of Knit business assets 2,564 -- --
(Recoupment) provision for lease termination
expenses (902) 3,964 --
Gain from sale of Ann Taylor Woven
Division and CAT -- -- (29,588)
Reorganization expense -- -- 4,813
Amortization of intangibles 364 364 364
--------- --------- ---------
(Loss) income from operations (6,147) (14,343) 25,017
Other income, principally from the gain on
sale of Ann Taylor common stock -- -- (6,864)
Settlement of shareholder class
action and related legal expenses -- -- 2,627
Interest income (428) (461) (80)
Interest expense 337 378 3,340
--------- --------- ---------
(Loss) income before income taxes and
minority interests (6,056) (14,260) 25,994
Provision for income taxes 269 204 7,117
--------- --------- ---------
(Loss) income before minority interests (6,325) (14,464) 18,877
Income attributable to minority interests -- -- 961
--------- --------- ---------
Net (loss) income $ (6,325) $ (14,464) $ 17,916
========= ========= =========
Net (loss) income per share - basic $ (0.51) $ (1.16) $ 1.44
========= ========= =========
Weighted average number of common shares
outstanding 12,438 12,438 12,438
========= ========= =========
Net (loss) income per share assuming dilution $ (0.51) $ (1.16) $ 1.44
========= ========= =========
Weighted average number of common shares
and dilutive securities 12,438 12,438 12,439
========= ========= =========
See accompanying notes.
F-4
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
COMMON STOCK FOREIGN
---------------------- CURRENCY
NUMBER OF PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- --------- --------- --------- --------- ---------
(In thousands)
Balance at February 3, 1996 12,438 $124 $120,918 $ 3 $(111,999) $ 9,046
Foreign currency translation adjustment -- -- -- (3) -- (3)
Net income for year ended February 1, 1997 -- -- -- -- 17,916 17,916
Comprehensive income for year ended --------
January 30, 1997 -- -- -- -- -- 17,913
------ ---- -------- ----- --------- --------
Balance at February 1, 1997 12,438 124 120,918 -- (94,083) 26,959
Foreign currency translation adjustment (116) (116)
Net loss for year ended January 31, 1998 (14,464) (14,464)
Comprehensive loss for year ended --------
January 30, 1998 -- -- -- -- -- (14,580)
------ ---- -------- ----- --------- --------
Balance at January 31, 1998 12,438 124 120,918 (116) (108,547) 12,379
Net loss for year ended January 30, 1999 (6,325) (6,325)
Foreign currency translation adjustment -- -- -- (8) -- (8)
Comprehensive loss for year ended --------
January 30, 1999 -- -- -- -- -- (6,333)
------ ---- -------- ----- --------- --------
Balance at January 30, 1999 12,438 $124 $120,918 $(124) $(114,872) $ 6,046
====== ==== ======== ===== ========= ========
See accompanying notes
F-5
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED
--------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
-------- -------- --------
($ in thousands)
OPERATING ACTIVITIES
Net (loss) income $ (6,325) $(14,464) $ 17,916
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Provision for impairment of Knit business assets 2,564 -- --
Net gain from sale of Ann Taylor Woven Division and CAT -- -- (29,588)
Gain from sale of Ann Taylor Common Stock -- -- (6,134)
Depreciation and amortization 833 1,330 2,079
Write-off of fixed assets -- 1,857 1,359
(Recoupment) provision for lease termination expense -- 2,107 --
Rent expense not currently payable -- 57 190
Deferred income taxes -- -- 6,154
Income attributable to minority interests -- -- 961
Changes in operating assets and liabilities:
Trade accounts receivable (2,300) 1,227 6,605
Inventory (2,120) 1,097 17,462
Other receivables and prepaid expenses 621 1,816 4,194
Accounts payable 835 (1,034) (16,301)
Accrued expenses (2,496) (3,121) (5,486)
Income taxes payable 12 84 2,145
-------- -------- --------
Net cash (used in) provided by operating activities (8,376) (9,044) 1,556
INVESTING ACTIVITIES
Purchase of fixed assets (279) (754) (1,186)
Sale of fixed assets -- -- 2,089
Other assets (12) (501) 164
Proceeds from sale of Ann Taylor Woven Division
and CAT -- -- 3,162
Proceeds from sale of Ann Taylor Common Stock -- -- 44,291
Sale of subsidiary, net -- -- 12,500
-------- -------- --------
Net cash (used in) provided by investing activities (291) (1,255) 61,020
FINANCING ACTIVITIES
Short-term borrowings, net 1,435 (63) (34,455)
Credit facility outstanding, net -- -- (8,945)
(Decrease) in long-term debt, net -- (842) (2,117)
Net cash provided by (used in) financing activities 1,435 (905) (45,517)
-------- -------- --------
Effect of exchange rate changes on cash (8) (116) (300)
-------- -------- --------
Net (decrease) increase in cash (7,240) (11,320) 16,759
Cash at beginning of period 10,926 22,246 5,487
-------- -------- --------
Cash at end of period $ 3,686 $ 10,926 $ 22,246
======== ======== ========
F-6
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
YEAR ENDED
--------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
-------- -------- --------
($ in thousands)
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 264 $ 120 $ 307
Interest paid 336 310 3,678
See accompanying notes.
F-7
Cygne Designs, Inc. and Subsidiaries
Consolidated Financial Statements
January 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the "Company")
are engaged in private label manufacturing of woven and knit career and casual
women's 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.
ORGANIZATION AND PRINCIPLES OF COMBINATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Cygne and its
subsidiaries. All material intercompany balances and transactions were
eliminated in consolidation and combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
F-8
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
$102,000 and $109,000 at January 30, 1999 and January 31, 1998, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the applicable
foreign currency of the country in which it operates for which the functional
currency is the U.S. Dollar. 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. The gains and
losses from the changes in exchange rates from year to year have been reported
separately as a component of stockholders' equity.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term debt approximates fair value.
NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with Financial
Accounting Standards Board SFAS No. 128, "Earnings per Share". In computing
dilutive loss per share for the years ended January 30, 1999 and January 31,
1998, no effect has been given to outstanding options since the exercise of any
of these items would have an antidilutive effect on net loss per share.
F-9
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1998 the Company adopted the Financial Accounting Standards Board SFAS No.
130, "Reporting Comprehensive Income", which established standards for reporting
and display of comprehensive income and its components. The adoption had no
effect on the Company's net income.
Effective February 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which supersedes SFAS
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise".
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See note 6.
GOODWILL
Goodwill includes the excess of cost over fair value of net assets acquired. The
Company assesses the recoverability of its intangible assets by determining
whether amortization over the remaining lives can be recovered through
undiscounted future operating cash flows of the acquired operation and other
considerations. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
In 1998, management, as a result of the Knit disposition, determined that the
remaining goodwill (relating to the Knits business) was impaired. The write-off
of the goodwill is included in the 1998 Statement of Operations under the
caption "Provision for impairment of Knit business assets."
2. PURCHASES AND DISPOSITIONS OF COMPANIES
In September 1996 the Company sold to Ann Taylor (i) its interest in a sourcing
joint venture arrangement with Ann Taylor, and (ii) the assets of its Ann Taylor
Woven Division that were used in sourcing merchandise for Ann Taylor. On the
closing of the transaction, Cygne received 2,348,145 shares of Ann Taylor common
stock, and approximately $8,900,000 in cash. Ann Taylor also assumed certain
liabilities. As a result of the transaction, the Company realized a pre-tax gain
of $29,600,000. Between October 1996 and January 1997, the Company sold all of
the 2,348,145 shares of Ann Taylor common stock, resulting in aggregate net
proceeds of approximately $44,300,000 and a pre-tax gain of $6,100,000.
In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the
F-10
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Company's then President and a director, to facilitate the integration of CAT
and the Division into Ann Taylor's operations. Mr. Benson's consulting agreement
was assigned to him in connection with his resignation as an officer and
employee of the Company on November 29, 1996. During 1997 the consulting
agreement for the services of Mr. Manuel was bought out in consideration of the
payment by Ann Taylor to the Company of approximately $477,000.
The businesses sold to Ann Taylor accounted for approximately 67% of the
Company's net sales for the year ended February 1, 1997. If the sale of the
businesses had been consummated on February 4, 1996, the Company would have had
pro forma net sales of $84,756,000 for the year ended February 1, 1997. Pro
forma gross profit for that year would have been $6,189,000. Pro forma loss from
operations for that year would have been $15,503,000. Pro forma net loss for
that year (excluding the gain on the Ann Taylor Disposition and on the
subsequent sale of the Ann Taylor common stock) would have been $17,660,000. The
pro forma net loss per share for that year would have been $1.42.
3. REORGANIZATION EXPENSE
The reorganization expense in 1996 of $4,813,000 was the result of the
downsizing of the Company and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were
costs in connection with early termination of leases for excess space outside of
New York, disposition of related fixed assets, and severance costs related to
the Company's then President's resignation as an officer and employee of the
Company. All of such costs were paid prior to January 31, 1998.
4. PROVISION FOR LEASE TERMINATION EXPENSES
In 1997, the Company provided for lease termination expenses of $3,964,000 as a
result of the Company's decision to relocate from its existing New York Office
and to seek substantially smaller New York office space. On March 1, 1999, the
Company completed its relocation from its existing New York office and the
Landlord released the Company from any contingent rent liability on its New York
space and on its leases assumed by Ann Taylor in 1996. The actual expenses in
connection with this lease termination approximated $3,063,000. Therefore, the
balance of $902,000 of this provision has been reversed in 1998. Approximately
$950,000 of the provision had not been paid as of January 30, 1999.
F-11
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INVENTORY
Inventory consists of the following:
JANUARY JANUARY
30, 1999(1) 31, 1998
----------- --------
($ In thousands)
Raw materials and Work-in-Process $2,310 $3,593
Finished goods 395 419
------ ------
$2,705 $4,012
====== ======
- ----------
(1) Excludes $3,426,000 of inventory of the Knit business being sold.
6. FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization
and are summarized below together with estimated useful lives used in computing
depreciation and amortization:
JANUARY JANUARY ESTIMATED
30, 1999(1) 31, 1998 USEFUL LIVES
----------- -------- ------------
($ in thousands)
Land and building $ 902 $ 902 20-30 years
Equipment, furniture, and fixtures 1,999 3,042 3-10 years
Leasehold improvements 924 1,088 Term of lease
Vehicles 78 194 3-5 years
------ ------
3,903 5,226
Less accumulated depreciation
and amortization 1,183 1,254
------ ------
$2,720 $3,972
====== ======
- ----------
(1) Excludes $842,000 of net fixed assets of the Knit business being sold
F-12
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At January 30, 1999 and January 31, 1998 the Company
had restricted cash at a bank of $669,000 and $1,098,000, respectively, to
secure letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $3,200,000; letters of credit not to exceed $3,200,000; overdraft
facility not to exceed $500,000; and bank guarantee for Israeli custom duties
not to exceed $500,000. Borrowings under this facility generally bear interest
at 1.5% over the prime rate, except that borrowings against trade accounts
receivable bear interest at 1.25% over the LIBOR rate. Borrowings under this
facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. At January 30, 1999, outstanding loans under this facility were
$2,629,000 and letters of credit aggregating $1,480,000 had been issued. This
facility will terminate upon the closing of the sale of the Knit business.
In September 1998 the Israeli bank made an additional $150,000 loan to the
Company's Israeli subsidiary which is also secured by a lien on its assets.
Principal payments under this loan are due in monthly installments of $6,250
through October 2000 and the loan bears interest of 7.2% payable monthly. At
January 30, 1999 the outstanding balance was $125,000. This facility will
terminate upon the closing of the sale of the Knit business
The loans to the Israeli subsidiary will be repaid from the proceeds from the
Knit Disposition and this credit facility will terminate.
8. STOCK OPTIONS
Pursuant to an employee Stock Option Plan, as amended, the Company may grant to
eligible individuals incentive stock options as defined in the Internal Revenue
Code ("IRC") and non-qualified stock options. An aggregate of 1,700,000 shares
of common stock have been reserved for issuance under the Plan. The exercise
price for incentive options may not be less than 100% (110% for holders of 10%
or more of the Company's outstanding shares) of the fair market value of the
shares on the date of grant, and at least par value of the common stock with
respect to the non-qualified stock options, have a ten-year term (five years for
holders of 10% or more of the Company's outstanding shares in the case of
incentive stock options) and vest at the discretion of the Board of Directors.
F-13
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April 15,
1993, the Company will automatically grant to eligible non-employee directors
options to purchase 10,000 shares of Common Stock upon the directors' initial
appointment to the Board of Directors and options to purchase 2,000 shares of
Common Stock on each individual director's anniversary date from initial
appointment. Options granted under the Directors' Plan do not qualify as
incentive stock options under the IRC. The options have an exercise price of
100% of fair market value on the date of grant, have a ten-year term and vest,
pro-rata, over four years.
The 1996 sale of business to Ann Taylor constituted a "change in control of the
Company" for purposes of the Company's stock option plans. As a result, all then
outstanding stock options became immediately exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Had compensation cost been determined based upon the fair value at the grant
date for awards consistent with the methodology prescribed by SFAS No. 123, for
each of the years ended January 30, 1999, and January 31, 1998 the Company's net
loss and net loss per share would have increased by $1,000 or $0.00 per share.
For the year ended February 1, 1997, the Company's net income would have
decreased by $322,000 or $0.03 per share.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1998, 1997
and 1996: risk-free interest rate of 5%; volatility factor of the expected
market price of the Company's common stock of 1.527 for January 30, 1999, 0.076
for January 31, 1998 and 0.082 for February 1, 1997; 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 1998, 1997 and
1996 may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1998, 1997 and 1996 is $0.28, $0.34 and
$0.77, respectively. Exercise prices for options issued between February 4, 1996
through January 30, 1999 ranged from $0.12 to $10. The weighted-average
remaining contractual life of those options is 3.1 years.
F-14
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
I. STOCK OPTIONS (CONTINUED)
The following summarizes stock option transactions:
EMPLOYEE STOCK NON-EMPLOYEE
OPTION PLAN DIRECTORS PLAN
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE EXERCISE NUMBER EXERCISE EXERCISE
OF SHARES PRICE RANGE PRICE OF SHARES PRICE RANGE PRICE
--------- ----------- ------- --------- ----------- --------
Options outstanding at February 3, 1996 1,192,500 $2.00-$22.75 33,500 $3.25-$23.50
Options granted in 1996 40,000 $1.00 $1.00 4,000 $1.13-$1.75 $1.44
Options canceled in 1996 (512,000) $2.00-$18.00 $5.50 (5,500) $4.00-$22.50 $7.64
--------- ------
Options outstanding at February 1, 1997 720,500 $1.00-$22.75 32,000 $1.13-$23.50
Options granted in 1997 -- 4,000 $0.28-$0.69 $0.49
Options canceled in 1997 (215,250) $2.00-$22.75 $4.07 --
--------- ------
Options outstanding at January 31, 1998 505,250 $1.00-$13.38 36,000 $0.28-$23.50
Options granted in 1998 20,000 $0.31 $0.31 4,000 $0.12-$0.28 $0.20
Options canceled in 1998 (93,250) $2.00 --
------
Options outstanding at January 30, 1999 432,000 $0.31-$13.88 40,000 $0.12-$23.50
========= ======
At January 30, 1999 options exercisable 412,000 33,000
========= ======
OTHER STOCK OPTION
ARRANGEMENTS WEIGHTED
------------------------ AVERAGE TOTAL
NUMBER EXERCISE EXERCISE NUMBER
OF SHARES PRICE RANGE PRICE OF SHARES
--------- ----------- ----- ---------
Options outstanding at February 3, 1996 230,250 $2.00-$22.50 1,456,250
Options granted in 1996 -- 44,000
Options canceled in 1996 (105,250) $2.00 $2.00 (622,750)
------- ---------
Options outstanding at February 1, 1997 125,000 $2.00-$22.50 877,500
Options granted in 1997 -- 4,000
Options canceled in 1997 -- (215,250)
------- ---------
Options outstanding at January 31, 1998 125,000 $2.00-$22.50 666,250
Options granted in 1998 -- 24,000
Options canceled in 1998 -- (93,250)
------- ---------
Options outstanding at January 30, 1999 125,000 $2.00-$22.50 597,000
======= ========
At January 30, 1999 options exercisable 125,000 570,000
======= ========
F-15
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. CONCENTRATIONS OF RISK
For years 1998, 1997 and 1996, sales to The Limited, Inc. accounted for 59%,
65%, and 25%, respectively, of the Company's net sales. At January 30, 1999 and
January 31, 1998, The Limited, Inc. accounted for 56% and 65%, respectively, of
trade accounts receivable.
For 1996 AnnTaylor accounted for 67% of the Company's net sales.
10. LEASES, COMMITMENTS AND LITIGATION
LEASES
At January 30, 1999, the Company leased manufacturing and office facilities
under operating lease agreements which expire through 2010. On March 1, 1999,
one of the Company's office facility leases was cancelled and the Landlord
released the Company from its contingent liability on leases assumed by Ann
Taylor.
On March 25, 1999, the Company agreed to sell its Knit business, subject to
stockholder approval. The Knit business has an operating lease for manufacturing
and office space requiring annual payments of $193,000 through the year 2000.
The purchaser of the Knit business will assume this lease.
Total rent expense under the operating leases for the years ended January 30,
1999, January 31, 1998 and February 1, 1997 amounted to approximately $968,000,
$1,036,000 and $2,220,000, respectively.
As of January 30, 1999, after giving effect to the lease cancellation and the
sale of the Knits business, the Company's lease commitment was $138,000 through
the period ending December 1999.
F-16
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
COMMITMENTS
The Company has employment agreements with certain officers and key employees
through 2000. Future minimum aggregate annual payments under these agreements
amount to approximately $1,051,000 in 1999 and $220,000 in 2000. Certain of the
officers and employees may receive additional compensation based upon the
income, as defined, of the Company or one or more of its subsidiaries.
LEGAL PROCEEDINGS
In 1998 the Company settled a shareholder class action lawsuit. As part of the
settlement, the Company contributed approximately $2,100,000 to the settlement.
The Company also incurred legal fees of approximately $500,000 in connection
with this lawsuit.
The Company is involved in various legal proceedings that are incidental to the
conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition
or results of operations or cash flows. See Note 11 for information regarding
tax audits.
In February 1999, the U.S. Customs Service commenced an audit of the Company's
import operations. It is not possible at this time to predict the outcome of
this audit.
F-17
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES
Income taxes are provided using the liability method. Under this method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment. Significant components of the
Company's deferred tax assets are as follows:
YEAR ENDED
-----------------------
JANUARY JANUARY
30, 1999 31, 1998
-------- --------
($ In thousands)
Deferred tax assets:
Capitalization of expenses $ -- $ 51
Other reserves -- 924
Net operating loss carryforwards 42,000 33,800
-------- ------
Subtotal 42,000 34,775
Valuation allowance (42,000) (34,775)
-------- --------
Total deferred tax assets $ -- $ --
======== ========
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED
--------------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
-------- -------- -------
($ In thousands)
Pretax income (loss):
United States (3,555) $(13,901) $16,928
Foreign (2,501) (359) 9,066
-------- -------- -------
$(6,056) $(14,260) $25,994
======== ========= =======
F-18
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Significant components of the provision for income taxes are as follows:
YEAR ENDED
--------------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
-------- -------- -------
($ In thousands)
Current:
Federal $ -- $ -- $ 682
Foreign 182 -- 224
State and local 87 204 343
---- ---- ------
Total current 269 204 1,249
---- ---- ------
Deferred:
Federal -- -- 4,367
Foreign -- -- 311
State and local -- -- 1,190
---- ---- ------
Total deferred -- -- 5,868
---- ---- ------
Tax provision $269 $204 $7,117
==== ==== ======
F-19
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The reconciliation of income tax at the U.S. federal statutory
tax rates to income tax expense is as follows:
YEAR ENDED
-----------------------------------------------------------------------
JANUARY JANUARY FEBRUARY
30, 1999 31, 1998 1, 1997
----------------------- ------------------- -----------------
($ In thousands)
Tax at U.S. statutory rates $(2,059) (34.0%) $(4,848) (34.0)% $8,838 34.0%
Benefit of operating loss
carryforward -- -- -- -- 2,922 (10.5)
Loss, no benefit provided 2,059 34.0 4,848 34.0 -- --
Foreign and state income taxes,
net of federal tax benefit 269 4.4 204 1.4 1,142 4.4
Lower effective income tax
rates of foreign jurisdictions -- -- -- -- (235) (0.9)
Amortization of intangibles -- -- -- -- 124 0.5
Other 0 -- 0 -- 170 0.7
------- ----- ------- ----- ------ ----
$ 269 4.4% $ 204 1.4% $7,117 28.2%
======= ===== ======= ===== ====== ====
As of January 30, 1999, 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 $108,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2014. Under Section
382 of the U.S. Internal Revenue Code, if there is a more than 50% ownership
change (as defined therein) with respect to the Company's stock, the Company's
loss carryforwards for U.S. Federal and New York State and City tax purposes
would be virtually eliminated.
As of January 30, 1999, 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 $70,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
Tax Audits
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc. for its taxable years ending
December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was acquired
by the Company). To date, the IRS has informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16 million (including some
penalties but not interest). Depending on the amount of the deficiency, the
amount of interest could be significant. The outcome of the GJM (US) Inc. audit
cannot be predicted at this time.
F-20
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 could have a material adverse impact on the
Company and its financial condition, results of operations or cash loss.
The Company is subject to other ongoing tax audits in several jurisdictions.
Although there can be no assurances, the Company believes any adjustments that
may arise as a result of these other audits will not have a material adverse
effect on the Company's financial position.
12. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments of
the apparel market: woven career and casual women's sportswear and knit career
and casual women's sportswear. The Company sources and manufacturers garments
which have been designed and developed by the customer.
Net sales to unaffiliated customers and identifiable assets were as follows:
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -------
YEAR ENDED JANUARY 30, 1999
Net sales $25,891 $17,122 -- -- $43,013
Gross profit (loss) 1,053 (793) -- -- 260
Selling, general and administrative 841 1,493 2,047 -- 4,381
Amortization of intangibles 364 -- -- -- 364
Provision for impairment of
Knit business assets 2,564 -- -- -- 2,564
(Recoupment) provision for
lease termination -- -- (902) -- (902)
------- -------
(Loss) from operations $(2,716) $(2,286) $(1,145) -- (6,147)
======= ======= =======
Interest income (428)
Interest expense 337
-------
(Loss) income before taxes (6,056)
Provision for income taxes 269
Net (loss) $(6,325)
=======
Identifiable assets $10,326 $ 9,705 $ 3,568 -- $23,599
======= ======= ======= =======
F-21
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -------
YEAR ENDED JANUARY 31, 1998
Net sales $ 28,886 $14,290 -- $ 203 $ 43,379
Gross profit (loss) 656 814 -- (1,154) 316
Selling, general and
administrative 1,292 1,462 4,665 2,912 10,331
Amortization of intangibles 364 -- -- -- 364
Provision for lease termination -- -- 3,964 -- 3,964
------- --------
(Loss) from operations $(1,000) $ (648) $(8,629) $ (4,066) (14,343)
======== ======= ======= ========
Interest income (461)
Interest expense 378
--------
(Loss) before income tax (14,260)
Provision for income taxes 204
--------
Net (loss) $(14,464)
========
Identifiable assets $ 10,873 $ 7,249 $11,628 -- $ 29,750
=-====== ======= ======= ========
F-22
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- -------
YEAR ENDED FEBRUARY 1, 1997
Net sales $41,138 $42,085 -- $171,090 $254,313
Gross profit 2,099 4,688 -- 21,070 27,857
Selling, general and
administrative 2,023 3,361 9,801 12,066 27,251
Amortization of intangibles 364 -- -- -- 364
Gain from sale of Ann Taylor
woven division and CAT -- -- -- 29,588 29,588
Reorganization expense -- -- 4,813 -- 4,813
-------- --------
(Loss) income from operations $ (288) $ 1,327 $(14,614) $ 38,592 25,017
======= ======= ======== ========
Other income, principally from
the gain on sale of Ann Taylor
common stock (6,864)
Settlement of shareholder class
action and related legal expenses 2,627
Interest income (80)
Interest expense 3,340
--------
Income before income taxes and
minority interest 25,994
Provision for income taxes 7,117
--------
Income before minority interest 18,877
Income attributable to minority
interest 961
--------
Net income $ 17,916
========
Identifiable assets $13,364 $ 8,815 $ 24,963 -- $ 47,142
======= ======= ======== ========
13. 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 new 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.
14. RELATED PARTY TRANSACTIONS
During 1997, a company controlled by a shareholder paid the Company $292,000 for
design fees and commissions.
15. SUBSEQUENT EVENT
On March 25, 1999, the Company entered into an agreement, subject to stockholder
approval,
F-23
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
pursuant to which it will sell substantially all of the assets of Cygne's Knit
business. The purchase price consideration in the transaction consists of a
dollar amount in cash equal to the adjusted net book value of inventory, fixed
assets, advances to vendors, and investment in a dye house facility plus
$100,000. The purchaser will also assume all customer and vendor purchase orders
and all lease obligations. In addition, the purchaser has agreed to pay Cygne
commissions of 6% on orders for products included in the assets, up to a maximum
of $600,000, and a non-compete payment of $400,000. In connection with the
transaction Cygne will pay severance of $800,000 to the person who runs the Knit
Business.
F-24
Cygne Designs, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
PERIOD EXPENSES (DESCRIBE)* END OF PERIOD
------ -------- ----------- -------------
($ in thousands)
Reserves for returns and allowances:
Year ended February 1, 1997 $2,183 $8,896 $9,537 $1,542
Year ended January 31, 1998 1,542 1,526 2,959 109
Year ended January 30, 1999 109 641 648 102
- ----------
* Sales returns and write-off of uncollectible amounts
F-25