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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File No. 0-22102
CYGNE DESIGNS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 04-2843286
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1372 BROADWAY, NEW YORK, NEW YORK 10018
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 354-6474
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value, 12,438,038 shares as of September 12, 1997.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
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INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at August 2, 1997
and February 1, 1997............................................ 3
Condensed Consolidated Statements of Operations for the three and
six months ended August 2, 1997 and August 3, 1996 ............. 4
Condensed Consolidated Statement of Stockholders' Equity for the
six months ended August 2, 1997 ................................ 5
Condensed Consolidated Statements of Cash Flows for the
six months ended August 2, 1997 and August 3, 1996 ............. 6
Notes to Condensed Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders................ 19
Item 5. Other Information.................................................. 19
Item 6. Exhibits and Reports on Form 8-K................................... 19
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<PAGE>
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
August 2, February 1,
1997 1997
--------- ---------
(In thousands,
except share amounts)
ASSETS
Current assets:
Cash ............................................. $ 7,328 $ 19,720
Restricted cash .................................. 3,412 2,526
Trade accounts receivable, net ................... 7,788 7,239
Inventory ........................................ 7,268 5,109
Other receivables and prepaid expenses ........... 3,019 3,795
--------- ---------
Total current assets ............................... 28,815 38,389
Fixed assets, net .................................. 5,891 6,041
Other assets ....................................... 807 286
Goodwill, net ...................................... 2,244 2,426
--------- ---------
Total assets ....................................... $ 37,757 $ 47,142
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ............................ $ 2,242 $ 1,382
Accounts payable ................................. 3,641 4,382
Accrued expenses ................................. 5,505 6,816
Income taxes payable ............................. 6,008 5,984
Current portion of long-term debt ................ -- 842
--------- ---------
Total current liabilities .......................... 17,396 19,406
Deferred rent credits .............................. 815 777
--------- ---------
Total liabilities .................................. 18,211 20,183
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 .............................. (101,470) (94,083)
Foreign currency translation adjustment .......... (26) --
--------- ---------
Total stockholders' equity ......................... 19,546 26,959
--------- ---------
Total liabilities and stockholders' equity ......... $ 37,757 $ 47,142
========= =========
See accompanying notes.
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<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales .................................................. $11,003 $75,886 $18,640 $159,642
Cost of goods sold ......................................... 10,907 66,212 19,203 139,256
------- ------- ------- --------
Gross profit (loss) ........................................ 96 9,674 (563) 20,386
Selling, general and administrative
expenses ................................................ 2,813 8,178 6,689 17,337
Amortization of goodwill ................................... 91 91 182 182
------- ------- ------- --------
(Loss) income from operations .............................. (2,808) 1,405 (7,434) 2,867
Other income ............................................... -- 166 -- 554
Interest (income) expense, net ............................. (54) 995 (149) 1,930
------- ------- ------- --------
(Loss) income before income taxes and
minority interests ...................................... (2,754) 576 (7,285) 1,491
Provision for income taxes ................................. 51 381 102 817
------- ------- ------- --------
(Loss) income before minority interests .................... (2,805) 195 (7,387) 674
Income attributable to minority interests .................. -- 283 -- 731
------- ------- ------- --------
Net (loss) ................................................. $(2,805) $ (88) $(7,387) $ (57)
======= ======= ======= ========
Net (loss) per share ....................................... $ (0.23) $ (0.01) $ (0.59) $ (0.00)
======= ======= ======= ========
Weighted average number of common and
common equivalent shares outstanding .................... 12,438 12,438 12,438 12,438
======= ======= ======= ========
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
<CAPTION>
Common Stock Foreign
-------------------- Currency
Number Paid-in Translation Accumulated
of Shares Amount Capital Adjustment Deficit Total
--------- ------ -------- ----------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1997 ........... 12,438 $ 124 $120,918 $-- $ (94,083) $ 26,959
Foreign currency translation
adjustment .......................... -- -- -- (26) -- (26)
Net (loss) for the six months
ended August 2, 1997 ................ -- -- -- -- (7,387) (7,387)
------ ----- -------- ----- --------- --------
Balance at August 2, 1997 ............. 12,438 $ 124 $120,918 $ (26) $(101,470) $(19,546)
====== ===== ======== ===== ========= ========
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
---------------------
August 2, August 3,
1997 1996
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net (loss) ............................................. $ (7,387) $ (57)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities
Depreciation and amortization ..................... 535 1,004
Rent expense not currently payable ................ 38 127
Amortization of goodwill ......................... 182 182
Deferred income taxes ............................. -- (3)
Income attributable to minority interests ......... -- 731
Interest on credit facility outstanding ........... -- 419
Changes in operating assets and liabilities:
Trade accounts receivable ....................... (549) 2,528
Inventory ....................................... (2,159) 8,080
Other receivables and prepaid expenses .......... 776 3,372
Accounts payable ................................ (741) (11,033)
Accrued expenses ................................ (1,311) (2,047)
Income taxes payable ............................ 24 582
-------- --------
Net cash (used in) provided by operating activities .... (10,592) 3,885
INVESTING ACTIVITIES
Purchase of fixed assets ............................... (385) (610)
Other assets ........................................... (521) (57)
Sale of business ....................................... -- 12,500
-------- --------
Net cash (used in) provided by investing activities .... (906) 11,833
FINANCING ACTIVITIES
Short-term borrowings, net ............................. 860 (17,909)
Repayments of long-term debt, net ...................... (842) (518)
-------- --------
Net cash provided by (used in) financing activities .... 18 (18,427)
Effect of exchange rate changes on cash ................ (26) 37
-------- --------
Net (decrease) in cash ................................. (11,506) (2,672)
Cash at beginning of period ............................ 22,246 5,487
-------- --------
Cash at end of period .................................. $ 10,740 $ 2,815
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ...................................... $ 78 $ 596
Interest paid .......................................... -- 2,125
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 1997 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended August 2, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ended January 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 1, 1997. The
balance sheet at February 1, 1997 has been derived from the audited financial
statements at that date.
The Company's fiscal year ends on the Saturday nearest to January 31.
Earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding. For the three and six
months ended August 2, 1997 and August 3, 1996, common stock equivalents are
excluded as the effect of their inclusion would be antidilutive.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which is not effective until the first quarter of the
Company's fiscal 1998. This new standard requires dual presentation of basic and
diluted earnings per share ("EPS") on the face of the statement of income and
requires a reconciliation of the numerators and denominators of basic and
diluted EPS calculations. The results would not materially differ from earnings
per share as presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This new standard will require that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. This new standard
will be effective in the Company's 1998 fiscal year. The Company has not
determined the effects, if any, that SFAS No. 130 will have on its consolidated
financial statements.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
August 2, 1997 (Unaudited)
2. PURCHASES AND DISPOSITIONS OF COMPANIES
In February 1996, the Company sold substantially all of the assets of its
GJM intimate apparel and sleepwear business (the "GJM Business") to Warnaco Inc.
(the "GJM Disposition"). In the transaction, Warnaco paid Cygne $12,500,000 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 U.S. In
January 1996, the Company determined to close TSA. As a result, the Company
recorded a loss of approximately $6,400,000 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.
CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," began
operations in June 1992. Effective April 30, 1993, CAT became a 60% owned
subsidiary of Cygne with Ann Taylor, Inc. (including its affiliates, "Ann
Taylor") owning the remaining 40% interest.
On September 20, 1996, the Company sold to Ann Taylor Cygne's 60% interest
in CAT, Cygne's former sourcing joint venture arrangement with Ann Taylor, and
the assets of Cygne's Ann Taylor Woven Division (the "Division") that were used
in sourcing merchandise for Ann Taylor (the "Ann Taylor Disposition"). On the
closing of the transaction, Cygne received 2,348,145 shares of Ann Taylor common
stock, having a value of $36,000,000 (based on the average closing price of the
Ann Taylor common stock during the ten trading days prior to closing), and
approximately $8,900,000 (after post-closing adjustments) in cash in respect of
inventory (less related payables and advances and certain other assumed
liabilities), net fixed assets and accounts receivable of the 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 $29,600,000.
Between October 1996 and January 1997, the Company sold all of the shares of Ann
Taylor common stock received upon the closing of the transaction at various
prices resulting in aggregate net proceeds of approximately $44,300,000. The
Company realized a pre-tax gain of $6,100,000 in connection with the sale of the
Ann Taylor common stock.
In connection with 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 resigned
as a director of the Company on September 4, 1997. The Company, Ann Taylor and
Mr. Manuel agreed to the buyout of the consulting agreement with Ann Taylor for
the services of Mr. Manuel in consideration of the payment by Ann Taylor to the
Company of approximately $477,000. Ann
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
August 2, 1997 (Unaudited)
Taylor is withholding approximately $296,000 of this consideration pending
resolution of a disagreement between Ann Taylor and the Company regarding
certain indemnification issues related to the Ann Taylor Disposition.
CAT and the Division collectively accounted for approximately 75% and 73%
of the Company's net sales for the three and six months ended August 3, 1996,
respectively.
If the Ann Taylor Disposition had been consummated on February 4, 1996 (and
excluding the gain on the Ann Taylor Disposition and on the subsequent sale of
the Ann Taylor common stock acquired in connection therewith), the Company would
have had pro forma net sales of $19.3 million and $42.6 million for the three
and six months ended August 3, 1996, respectively. Pro forma gross profit would
have been $2.0 million and $4.7 million for the three and six months ended
August 3, 1996, respectively. Pro forma loss from operations would have been
$1.7 million and $3.9 million for the three and six months ended August 3, 1996,
respectively. Pro forma net loss would have been $1.8 million and $3.7 million
for the three and six months ended August 3, 1996, respectively. The pro forma
net loss per share would have been $0.15 and $0.29 for the three and six months
ended August 3, 1996, respectively.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
August 2, 1997 (Unaudited)
3. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Inventory consists of the following:
August 2, February 1,
1997 1997
-------- ----------
(In thousands)
Raw materials ................................ $4,992 $4,094
Finished goods ............................... 1,493 896
Finished goods-in-transit .................... 783 119
------ ------
$7,268 $5,109
====== ======
4. FINANCING ARRANGEMENTS
In 1995, Cygne and CAT each entered into a Credit Agreement with The
Hongkong and Shanghai Banking Corporation Limited New York Branch ("HS Bank")
which modified and consolidated the previous credit arrangements with the HS
Bank. On September 20, 1996, the Company entered into an amended and restated
credit agreement with HS Bank which replaced the Company's prior facility. The
amended facility provided a committed facility of up to $17,500,000 until
October 30, 1996, which reduced to $12,500,000 at October 31, 1996, to
$7,500,000 at November 30, 1996 and $5,000,000 at December 30, 1996. This
facility expired on January 31, 1997. Borrowings under this facility were
subject to borrowing base limitations and a requirement to comply with certain
financial covenants as well as various other restrictions. The Company had
pledged substantially all of its assets as security for its obligations under
the credit facility.
Since January 31, 1997 the Company has obtained letters of credit from
domestic banks secured by a cash deposit from the Company. At February 1, 1997
and August 2, 1997 the Company had restricted cash at a bank of $2,526,000 and
$3,412,000, 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: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; 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. At August 2, 1997, outstanding
loans under
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
August 2, 1997 (Unaudited)
this facility were $2,242,000 and letters of credit aggregating $1,206,000 had
been issued.
The Company had existing mortgages relating to a foreign office building
which bore interest at LIBOR plus 2%. In January 1997, this building was sold
and the mortgages of $842,000 at February 1, 1997 were converted to short term
debt which was repaid on April 30, 1997.
5. LITIGATION
On December 11, 1995, a shareholder class action complaint was filed
against the Company, certain of the Company's officers and directors, Ernst &
Young LLP, the underwriters of the Company's June 1994 secondary public offering
of stock and certain financial analysts who followed the Company, in the United
States District Court, Southern District of New York. The action was purportedly
filed on behalf of a class of purchasers of the Company's stock during the
period September 28, 1993 through April 28, 1995. The complaint sought
unspecified money damages and alleged that the Company and the other defendants
violated federal securities laws in connection with various public statements
made by the Company and certain of its officers and directors during the
putative class period.
In January 1997, the Company and all defendants other than Ernst & Young
LLP tentatively settled the class action subject to judicial approval. On July
30, 1997 the Court finally approved the settlement, which provides for an
aggregate settlement amount of $5,750,000. The Company contributed approximately
$2,100,000 to the settlement, which amount was placed in an escrow account in
January 1997. The balance of the settlement fund came from insurance and from
other parties to the litigation. In May 1997, the Court granted Ernst & Young
LLP's motion to dismiss the amended complaint, and denied the plaintiff's
request for leave to file an amended complaint against Ernst & Young LLP.
The Company is involved in various other 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. See Note 6 for information
regarding tax audits.
6. INCOME 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). The audit of GJM (US) Inc. is still
in its early stages and its outcome cannot be predicted at this time. Although
the Company intends to dispute 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.
The Company is subject to other ongoing tax audits in several
jurisdictions. Although
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
August 2, 1997 (Unaudited)
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.
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<PAGE>
ITEM 2. 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.
On September 20, 1996, the Company sold its 60% interest in its joint
venture arrangement with Ann Taylor and the assets of Cygne's Ann Taylor Woven
Division (the "Ann Taylor Disposition"). The Ann Taylor Disposition materially
affects the comparability of the Company's quarterly financial data.
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
is continuing in three principal segments of the women's apparel market: career
sportswear, casual sportswear and dresses. The Company has been dependent on its
key customers (The Limited, Inc. and Ann Taylor) and, with the loss of Ann
Taylor as a customer, its business is dependent upon maintaining its
relationship with The Limited, Inc. and its ability to attract new customers.
However, there can be no assurance that the Company will be able to do so. The
Company anticipates that it will have a net loss for 1997.
Statements in this report 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 product development 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 its Annual Report on Form
10-K for the year ended February 1, 1997.
GENERAL
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. 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.
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
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<PAGE>
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 is 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,
Cygne's former sourcing joint venture arrangement with Ann Taylor, 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. As a result of the
transaction, the Company realized a pre-tax gain of $29.6 million. Ann Taylor
also assumed certain liabilities of the acquired sourcing operations. 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.
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 of the
Company on September 4, 1997. The Company, Ann Taylor and Mr. Manuel agreed
to the buyout of the consulting agreement with Ann Taylor for the services of
Mr. Manuel in consideration of the payment by Ann Taylor to the Company of
approximately $477,000. Ann Taylor is withholding approximately $296,000 of this
consideration pending resolution of a disagreement between Ann Taylor and the
Company regarding certain indemnification issues related to the Ann Taylor
Disposition.
During 1994, 1995 and 1996, Ann Taylor accounted for 37.5%, 42.9% and 66.7%
of Cygne's net sales, respectively, and The Limited, Inc. (consisting primarily
of The Limited Stores and Lerner) accounted for 36.8%, 34.1% and 24.6% of
Cygne's net sales, respectively. The Limited, Inc. beneficially owns through an
affiliated partnership 6.9% of the outstanding Cygne common stock.
During the three months and six months ended August 2, 1997, The Limited,
Inc. (consisting primarily of The Limited Stores and Lerner) accounted for 59%
and 64% of Cygne's net sales and the Company had no sales to Ann Taylor. During
the three months and six months ended August 3, 1996, The Limited, Inc.
accounted for 17% and 18%, respectively, of
-14-
<PAGE>
Cygne's net sales and Ann Taylor accounted for 75% and 73%, respectively, of
Cygne's net sales.
If the Ann Taylor Disposition had been consummated on February 4, 1996 (and
excluding the gain on the Ann Taylor Disposition and on the subsequent sale of
the Ann Taylor common stock acquired in connection therewith), the Company would
have had pro forma net sales of $19.3 million and $42.6 million for the second
quarter and six months ended August 3, 1996, respectively. Pro forma gross
profit would have been $2.0 million and $4.7 million for the second quarter and
six months ended August 3, 1996, respectively. Pro forma loss from operations
would have been $1.7 million and $3.9 million for the second quarter and six
months ended August 3, 1996. Pro forma net loss would have been $1.8 million and
$3.7 million for the second quarter and six months ended August 3, 1996,
respectively. The pro forma net loss per share would have been $0.15 and $0.29
for the second quarter and six months ended August 3, 1996, respectively.
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 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 internal design and product development groups
as well as added direct sourcing departments. In 1995, sales to certain
divisions of The Limited, Inc. decreased significantly and, in 1996 and 1997,
sales to certain divisions of The Limited, Inc. with which the Company continues
to do business decreased. The Company expects sales to The Limited, Inc. to
continue to decrease, particularly with respect to woven products. Sales to
those divisions of The Limited, Inc. with which the Company continues to do
business were $11.9 million and $23.2 million for the six months ended August 2,
1997 and August 3, 1996, respectively.
In June 1997 the Company announced that 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 had been terminated by mutual agreement.
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.
The Company anticipates that it will have a net loss for 1997. The extent
of the net loss will depend, among other things, on the amount of sales and
related gross profit from sales to The Limited, Inc. 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.
-15-
<PAGE>
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. The
Company believes that the weakness in retail sales of women's apparel adversely
affected its operating results. The effect of these factors has been increased
competition and reduced operating margins for both the retailers and their
suppliers. Retailers, including customers of the Company, are increasingly
designing and sourcing private label products themselves rather than utilizing
outside vendors like the Company.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Certain captions of the Condensed Consolidated Statements of Operations for
the three and six months ended August 2, 1997 and August 3, 1996 expressed as a
percentage of net sales are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit (loss) ........................... 0.9 12.7 (3.0) 12.8
Selling, general and administrative
expenses ................................... 25.6 10.7 35.9 10.9
Amortization of intangibles ................... 0.8 0.1 1.0 0.1
----- ----- ----- -----
(Loss) income from operations ................. (25.5) 1.9 (39.9) 1.8
Other income .................................. -- 0.2 -- 0.3
Interest (income) expense, net ................ (0.5) 1.3 (0.8) 1.1
----- ----- ----- -----
(Loss) income before minority interests ....... (25.0) 0.8 (39.1) 1.0
Provision for income taxes .................... 0.5 0.5 0.5 0.5
----- ----- ----- -----
Net (loss) income before minority interests ... (25.5) 0.3 (39.6) 0.5
Income attributable to minority interests ..... -- 0.4 -- 0.5
----- ----- ----- -----
Net (loss) .................................... (25.5) (0.1) (39.6) (0.0)
===== ===== ===== =====
</TABLE>
NET SALES
Net sales for the second quarter of 1997 were $11.0 million, a decrease of
$64.9 million or 85.5% from $75.9 million in the comparable period in 1996. Net
sales for the first six months of 1997 were $18.6 million, a decrease of $141.0
million or 88.3% from $159.6 million in the comparable period in 1996. The
decreases in net sales for the second quarter and the first six months of 1997
were primarily attributable to decreases in sales to Ann Taylor of $56.7 million
and $117.1 million, respectively, as a result of the Ann Taylor Disposition and
to discontinued customers and product lines which generated sales of $6.4
million and $15.9 million, respectively, in the second quarter and first six
months of 1996, offset in part by increases in sales to other customers. In
addition, sales to those divisions of The Limited, Inc. with which the Company
continues to do business decreased by $4.2 million and $11.2 million,
-16-
<PAGE>
respectively, in the second quarter and first six months of 1997. The Company
anticipates that sales to The Limited, Inc. will continue to decrease during
1997 as compared to comparable periods in 1996.
GROSS PROFIT
Gross profit for the second quarter of 1997 was $0.1 million, a decrease of
$9.6 million or 99.0% from $9.7 million in the comparable period in 1996. Gross
loss for the first six months of 1997 was $0.6 million, a decrease of $20.9
million or 102.8% from $20.4 million in the comparable period in 1996. The
decreases in gross profit for the second quarter and first six months of 1997
were primarily attributable to operations sold in the Ann Taylor Disposition,
which had gross profit of $7.7 million and $15.7 million in the second quarter
and first six months of 1996, respectively, lower sales and lower gross margins
on the remaining sales than in the comparable periods in 1996, and, for the
first six months of 1997, a $500,000 markdown on fabric purchased for the Kenzo
Jeans and Kenzo Studio brand name products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of 1997
were $2.8 million, a decrease of $5.4 million or 65.6% from the $8.2 million in
the comparable period in 1996. Selling, general and administrative expenses for
the first six months of 1997 were $6.7 million, a decrease of $10.6 million or
61.4% from $17.3 million in the comparable period in 1996. The decreases for the
second quarter and first six months of 1997 were primarily attributable to
decreases in expenses of $4.6 million and $9.0 million, respectively, as a
result of the Ann Taylor Disposition, decreases in all other expenses of $2.5
million and $5.2 million, respectively, as a result of downsizing the Company,
offset in part by expenses in the second quarter and first six months of 1997 of
$1.0 million and $2.9 million, respectively, related to the Kenzo Jeans and
Kenzo Studio brand name products and their discontinuance (including severance
costs) and, in the second quarter of 1997, additional severance costs of
$740,000.
INTEREST EXPENSE
Interest income for the second quarter of 1997 was $54,000, compared to
interest expense of $1.0 million in the comparable period in 1996. Interest
income for the first six months of 1997 was $149,000, compared to interest
expense of $1.9 million in the comparable period in 1996. The decrease in
interest expense for the second quarter and the first six months of 1997 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 the second quarter and first six months
of 1997 primarily represents provision for minimum state and federal income
taxes. At February 1, 1997, the Company had net operating loss carryforwards of
approximately $90 million, which may be used to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has 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.
-17-
<PAGE>
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 August 2, 1997 the Company had restricted cash at banks of
$3.4 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: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; 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. At August 2, 1997, outstanding
loans under this facility were $2,242,000 and letters of credit aggregating
$1,206,000 had been issued.
The Company had existing mortgages relating to a foreign office building
which bore interest at LIBOR plus 2%. In January 1997, this building was sold
and the mortgages of $842,000 at February 1, 1997 were converted to short term
debt which was repaid on April 30, 1997.
Net cash used in operating activities for the first six months of 1997 was
$10.6 million compared to net cash provided by operations of $3.9 million in the
comparable prior period of 1996.
The Company experienced liquidity pressures primarily as a result of the
negative cash flow caused by the Company's operating losses. The Company
believes that the proceeds from the GJM Disposition and the Ann Taylor
Disposition have alleviated on a near term basis the liquidity pressures faced
by the Company. However, the Company continues to have losses from operations
and no assurances can be given the Company will not experience liquidity
pressures again in the future. The Company is continuing to review its business
operations and expects to continue to incur additional costs in the future
associated with the restructuring or downsizing of its operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 11, 1995, a shareholder class action complaint was filed
against the Company, certain of the Company's officers and directors, Ernst &
Young LLP, the underwriters of the Company's June 1994 secondary public offering
of stock and certain financial analysts who followed the Company, in the United
States District Court, Southern District of New York. The action was purportedly
filed on behalf of a class of purchasers of the Company's stock during the
period September 28, 1993 through April 28, 1995. The complaint sought
unspecified money damages and alleged that the Company and the other defendants
violated federal securities laws in connection with various public statements
made by the Company and certain of its officers and directors during the
putative class period.
-18-
<PAGE>
In January 1997, the Company and all defendants other than Ernst & Young
LLP tentatively settled the class action subject to judicial approval. On July
30, 1997 the Court finally approved the settlement, which provides for an
aggregate settlement amount of $5,750,000. The Company contributed approximately
$2,100,000 to the settlement, which amount was placed in an escrow account in
January 1997. The balance of the settlement fund came from insurance and from
other parties to the litigation. In May 1997, the Court granted Ernst & Young
LLP's motion to dismiss the amended complaint, and denied the plaintiff's
request for leave to file an amended complaint against Ernst & Young LLP.
The Company is involved in various other 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. See Note 6 of Notes to Condensed
Consolidated Financial Statements for information regarding tax audits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a. The Annual Meeting of Stockholders of Cygne Designs, Inc. was held on
June 20, 1997.
c. The following persons, comprising the entire board of directors, were
elected at the Annual Meeting pursuant to the following vote tabulation:
Name Votes For Votes Withheld
---- --------- --------------
Irving Benson ............................. 10,224,686 224,623
James G. Groninger ........................ 10,248,119 201,190
Stuart B. Katz ............................ 10,247,819 201,490
Bernard M. Manuel ......................... 10,247,819 201,490
ITEM 5. OTHER INFORMATION
Effective September 6, 1997, the Company terminated the consulting
agreement entered into in November 1996 with Mr. Irving Benson, who founded the
Company's predecessor in 1975. As a result of the termination and in accordance
with the terms of the consulting agreement, Mr. Benson is entitled to severance
in the aggregate amount of $210,000 payable in 12 monthly installments. Mr.
Benson resigned as a director of the Company on September 4, 1997.
Effective June 20, 1997, the Company terminated the employment of Mr.
Trevor Wright, the Executive Vice President - Design of the Company and a former
director of the Company. As a result of the termination of his employment
agreement, Mr. Wright received a lump sum severance payment of $430,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27. Financial Data Schedule (For SEC use only)
b. Reports on Form 8-K
None.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYGNE DESIGNS, INC.
(Registrant)
September 15, 1997 By: /s/ BERNARD M. MANUEL
----------------------------------
Bernard M. Manuel,
Chairman of the Board and
Chief Executive Officer
September 15, 1997 By: /s/ ROY E. GREEN
----------------------------------
Roy E. Green,
Senior Vice President,
Chief Financial Officer and Treasurer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Condensed Consolidated Balance Sheets and Condensed Consolidated
Statements of Operations and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 10,740
<SECURITIES> 0
<RECEIVABLES> 7,788
<ALLOWANCES> 0
<INVENTORY> 7,268
<CURRENT-ASSETS> 28,815
<PP&E> 5,891
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,757
<CURRENT-LIABILITIES> 17,396
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,757
<SALES> 18,640
<TOTAL-REVENUES> 18,640
<CGS> 19,203
<TOTAL-COSTS> 19,203
<OTHER-EXPENSES> 6,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149)
<INCOME-PRETAX> (7,285)
<INCOME-TAX> 102
<INCOME-CONTINUING> (7,387)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,387)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
