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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 November 1, 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
- --------------------------------------------------------------------------------
(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 December 12, 1997.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
----------
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at November 1, 1997
and February 1, 1997............................................ 3
Condensed Consolidated Statements of Operations for the three and
nine months ended November 1, 1997 and November 2, 1996 ........ 4
Condensed Consolidated Statement of Stockholders' Equity for the
nine months ended November 1, 1997 ............................. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended November 1, 1997 and November 2, 1996 ........ 6
Notes to Condensed Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 11
PART II. OTHER INFORMATION
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
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<PAGE>
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
------------ -----------
(In thousands,
except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash (includes restricted cash of $1,823 and
$2,526)............................................ $ 9,650 $ 22,246
Trade accounts receivable, net.......................... 10,957 7,239
Inventory .............................................. 4,216 5,109
Other receivables and prepaid expenses ................. 2,016 3,795
------------ -----------
Total current assets ....................................... 26,839 38,389
Fixed assets, net........................................... 4,039 6,041
Other assets ............................................... 786 286
Goodwill, net............................................... 2,153 2,426
------------ -----------
Total assets ............................................... $ 33,817 $ 47,142
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 1,628 $ 1,382
Accounts payable.......................................... 3,824 4,382
Accrued expenses.......................................... 7,172 6,816
Income taxes payable...................................... 6,025 5,984
Current portion of long-term debt......................... -- 842
------------ -----------
Total current liabilities................................... 18,649 19,406
Deferred rent credits....................................... -- 777
------------ -----------
Total liabilities........................................... 18,649 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 ...................................... (105,759) (94,083)
Foreign currency translation adjustment................... (115) --
------------ -----------
Total stockholders' equity.................................. 15,168 26,959
------------ -----------
Total liabilities and stockholders' equity.................. $ 33,817 $ 47,142
============ ===========
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
------------ ------------ ----------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales .............................................. $ 15,729 $ 80,709 $ 34,369 $ 240,351
Cost of goods sold ..................................... 14,026 72,013 33,229 211,269
--------- --------- --------- ---------
Gross profit ........................................... 1,703 8,696 1,140 29,082
Selling, general and administrative expenses ........... 2,296 6,566 8,985 23,903
Provision for lease termination expense ................ 3,566 -- 3,566 --
Gain from sale of Ann Taylor Woven Division and
CAT ................................................. -- (29,588) -- (29,588)
Reorganization expense ................................. -- 4,813 -- 4,813
Amortization of goodwill ............................... 91 91 273 273
--------- --------- --------- ---------
(Loss) income from operations .......................... (4,250) 26,814 (11,684) 29,681
Other income ........................................... -- 739 -- 1,293
Interest (income) expense, net ......................... (12) 1,045 (161) 2,975
--------- --------- --------- ---------
(Loss) income before income taxes and
minority interests .................................. (4,238) 26,508 (11,523) 27,999
Provision for income taxes ............................. 51 6,307 153 7,124
--------- --------- --------- ---------
(Loss) income before minority interests ................ (4,289) 20,201 (11,676) 20,875
Income attributable to minority interests .............. -- 230 -- 961
--------- --------- --------- ---------
Net (loss) income ...................................... $ (4,289) $ 19,971 $ (11,676) $ 19,914
========= ========= ========= =========
Net (loss) income per share ............................ $ (0.34) $ 1.61 $ (0.94) $ 1.60
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding ................ 12,438 12,442 12,438 12,439
========= ========= ========= =========
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<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...................... -- -- -- (115) -- (115)
Net (loss) for the nine months
ended November 1, 1997.......... -- -- -- -- (11,676) (11,676)
------ ----- --------- ----- ---------- --------
Balance at November 1, 1997....... 12,438 $ 124 $ 120,918 $(115) $ (105,759) $ 15,168
====== ===== ========= ===== ========== ========
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
November 1, November 2,
1997 1996
------------- ------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income .............................................. $(11,676) $ 19,914
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
Depreciation and amortization ............................ 819 1,436
Write-off of fixed assets ................................ 1,857 1,231
Gain from sale of Ann Taylor Woven Division
and CAT ............................................. -- (29,588)
Gain on sale of Ann Taylor Common Stock .................. -- (739)
Provision for lease termination expense .................. 1,709 --
Rent expense not currently payable ....................... 57 173
Amortization of goodwill ................................. 273 273
Income attributable to minority interests ................ -- 961
Deferred income taxes .................................... -- 5,868
Interest on credit facility outstanding .................. -- 597
Changes in operating assets and liabilities:
Trade accounts receivable ............................. (3,718) (688)
Inventory ............................................. 893 15,274
Other receivables and prepaid expenses ................ 1,779 5,078
Accounts payable ...................................... (558) (14,658)
Accrued expenses ...................................... (2,187) (1,062)
Income taxes payable .................................. 41 2,126
-------- --------
Net cash (used in) provided by operating activities ............ (10,711) 6,196
INVESTING ACTIVITIES
Purchase of fixed assets ....................................... (674) (849)
Other assets ................................................... (500) (47)
Cash proceeds from sale of Ann Taylor Woven Division
and CAT ....................................................... -- 3,162
Cash proceeds from sale of Ann Taylor common stock ............. -- 3,982
Sale of business ............................................... -- 12,500
-------- --------
Net cash (used in) provided by investing activities ............ (1,174) 18,748
FINANCING ACTIVITIES
Short-term borrowings, net ..................................... 246 (26,741)
Repayments of long-term debt, net .............................. (842) (476)
-------- --------
Net cash (used in) financing activities ........................ (596) (27,217)
Effect of exchange rate changes on cash ........................ (115) 220
-------- --------
Net (decrease) in cash ......................................... (12,596) (2,053)
Cash at beginning of period .................................... 22,246 5,487
-------- --------
Cash at end of period .......................................... $ 9,650 $ 3,434
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid .............................................. $ 112 $ 326
Interest paid .................................................. -- 2,394
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 1, 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 nine
months ended November 1, 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 nine
months ended November 1, 1997 and November 2, 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 requires 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)
NOVEMBER 1, 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 AnnTaylor, 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.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOVEMBER 1, 1997 (UNAUDITED)
CAT and the Division collectively accounted for approximately 65% and
71% of the Company's net sales for the three and nine months ended November 2,
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 $28.2 million and $70.8 million for the
three and nine months ended November 2, 1996, respectively. Pro forma gross
profit would have been $2.7 million and $7.4 million for the three and nine
months ended November 2, 1996, respectively. Pro forma loss from operations
would have been $7.0 million and $10.8 million for the three and nine months
ended November 2, 1996, respectively. Pro forma net loss would have been $7.2
million and $10.9 million for the three and nine months ended November 2, 1996,
respectively. The pro forma net loss per share would have been $0.58 and $0.87
for the three and nine months ended November 2, 1996, respectively.
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:
November 1, February 1,
1997 1997
----------- --------
(In thousands)
Raw materials $ 3,375 $ 4,094
Finished goods 841 896
Finished goods-in-transit -- 119
----------- --------
$ 4,216 $ 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 November 1, 1997 the
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOVEMBER 1, 1997 (UNAUDITED)
Company had restricted cash at a bank of $2,526,000 and $1,823,000 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 November 1, 1997, outstanding
loans under this facility were $1,628,000 and letters of credit aggregating
$1,066,000 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
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. 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 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.
-11-
<PAGE>
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 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.
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.
During the three months and nine months ended November 1, 1997, The
Limited, Inc. (consisting primarily of The Limited Stores and Lerner) accounted
for 67% and 65% of Cygne's net sales and the Company had no sales to Ann Taylor.
During the three months and nine months ended November 2, 1996, The Limited,
Inc. accounted for 29% and 22%,
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<PAGE>
respectively, of Cygne's net sales and Ann Taylor accounted for 65% and 71%,
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 $28.2 million and $70.8 million for the
three and nine months ended November 2, 1996, respectively. Pro forma gross
profit would have been $2.7 million and $7.4 million for the three and nine
months ended November 2, 1996, respectively. Pro forma loss from operations
would have been $7.0 million and $10.8 million for the three and nine months
ended November 2, 1996, respectively. Pro forma net loss would have been $7.2
million and $10.9 million for the three and nine months ended November 2, 1996,
respectively. The pro forma net loss per share would have been $0.58 and $0.87
for the three and nine months ended November 2, 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 $22.4 million and $43.1 million for the nine months ended November
1, 1997 and November 2, 1996, respectively, and $10.5 million and $20.0 million
for the three months ended November 1, 1997 and November 2, 1996, respectively.
As previously announced, in November 1997 Mr. Manuel agreed to acquire 734,319
shares of Cygne stock from a limited partnership controlled by The Limited, Inc.
Upon the closing of the transaction, which occurred in early December 1997, The
Limited, Inc. did not own any shares of Cygne stock.
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.
-13-
<PAGE>
The Company 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.
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 nine months ended November 1, 1997 and November 2, 1996
expressed as a percentage of net sales are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Gross profit 10.8 10.8 3.3 12.1
Selling, general and administrative
expenses 14.6 8.1 26.1 10.0
Provision for lease termination expense 22.7 -- 10.4 --
Gain from sale of Ann Taylor Woven
Division and CAT -- (36.6) -- (12.3)
Reorganization expense -- 6.0 -- 2.0
Amortization of goodwill 0.5 0.1 0.8 0.1
----- ----- ----- -----
(Loss) income from operations (27.0) 33.2 (34.0) 12.3
Other income -- 0.9 -- 0.5
Interest (income) expense, net (0.1) 1.3 (0.5) 1.2
------ ----- ------ -----
(Loss) income before minority interests (26.9) 32.8 (33.5) 11.6
Provision for income taxes 0.4 7.8 0.5 2.9
----- ----- ----- -----
Net (loss) income before minority
interests (27.3) 25.0 (34.0) 8.7
Income attributable to minority interests -- 0.3 -- 0.4
------ ----- ----- -----
Net (loss) income (27.3) 24.7 (34.0) 8.3
====== ===== ====== =====
</TABLE>
-14-
<PAGE>
NET SALES
Net sales for the third quarter of 1997 were $15.7 million, a decrease
of $65.0 million or 80.5% from $80.7 million in the comparable period in 1996.
Net sales for the nine months of 1997 were $34.4 million, a decrease of $206.0
million or 85.7% from $240.4 million in the comparable period in 1996. The
decreases in net sales for the third quarter and the nine months of 1997 were
primarily attributable to decreases in sales to Ann Taylor of $52.5 million and
$169.6 million, respectively, as a result of the Ann Taylor Disposition and to
discontinued customers and product lines which generated sales of $5.0 million
and $20.9 million, respectively, in the third quarter and the nine months of
1996, offset in part by increases in sales to customers other than The Limited,
Inc. and Ann Taylor of $2.0 million and $5.2 million, respectively. In addition,
sales to those divisions of The Limited, Inc. with which the Company continues
to do business decreased by $9.5 million and $20.7 million, respectively, in the
third quarter and the nine 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 third quarter of 1997 was $1.7 million, a decrease
of $7.0 million or 80.4% from $8.7 million in the comparable period in 1996.
Gross profit for the nine months of 1997 was $1.1 million, a decrease of $28.0
million or 96.1% from $29.1 million in the comparable period in 1996. The
decreases in gross profit for the third quarter and the nine months of 1997 were
primarily attributable to operations sold in the Ann Taylor Disposition, which
had gross profit of $6.0 million and $21.7 million in the third quarter and the
nine months of 1996, respectively, lower sales and lower gross margins on the
remaining sales than in the comparable periods in 1996, and, for the nine 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 third quarter of
1997 were $2.3 million, a decrease of $4.3 million or 65.0% from the $6.6
million in the comparable period in 1996. Selling, general and administrative
expenses for the nine months of 1997 were $9.0 million, a decrease of $14.9
million or 62.4% from $23.9 million in the comparable period in 1996. The
decreases for the third quarter and the nine months of 1997 were primarily
attributable to decreases in expenses of $1.8 million and $10.8 million,
respectively, as a result of the Ann Taylor Disposition, decreases in all other
expenses of $2.8 million and $8.1 million, respectively, as a result of
downsizing the Company, offset in part by expenses for the nine months of 1997
of $2.9 million, related to the Kenzo Jeans and Kenzo Studio brand name products
and their discontinuance (including severance costs) and, for the nine months of
1997, other severance costs of $1.0 million. Severance costs in the third
quarter of 1997 amounted to approximately $0.3 million and were primarily
related to the discontinuance of the Company's design studio which had been
engaged in the design and development of apparel collections for certain
Japanese retailers.
-15-
<PAGE>
PROVISION FOR LEASE TERMINATION EXPENSE
During the third quarter of 1997 the Company provided for lease
termination expense of $3.6 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. Although the Company believes that the amount of
this charge is adequate to cover the financial effect of this relocation
decision, no assurance can be given in this regard.
REORGANIZATION EXPENSE
The reorganization expense of $4.8 million during the third quarter and
nine months ended November 2, 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 for excess space, disposition of related fixed
assets, and severance costs related to Irving Benson's resignation as an officer
and employee of the Company.
INTEREST EXPENSE
Interest income for the third quarter of 1997 was $12,000, compared to
interest expense of $1.0 million in the comparable period in 1996. Interest
income for the nine months of 1997 was $161,000, compared to interest expense of
$3.0 million in the comparable period in 1996. The decrease in interest expense
for the third quarter and the nine 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 third quarter and the nine 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.
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 November 1, 1997 the Company had restricted cash at
banks of $1.8 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
-16-
<PAGE>
$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
November 1, 1997, outstanding loans under this facility were $1,628,000 and
letters of credit aggregating $1,066,000 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 nine months of 1997 was
$10.7 million compared to net cash provided by operations of $6.2 million in the
comparable prior period of 1996. Cash used in operating activities for the nine
months of 1997 was principally due to the loss for the period.
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.
-17-
<PAGE>
PART II OTHER INFORMATION
Item 5. Other Information
The Nasdaq Stock Market, on which the Company's common stock is
currently traded, has adopted changes to its continued listing requirements
which are scheduled to become effective on February 23, 1998. The Company does
not currently meet the new requirements for continued listing with respect to a
minimum bid price of $1 per share and a $5 million market value of public float.
As a result, the Company anticipates that, after implementation by the Nasdaq
Stock Market of the new standards, the Company's common stock will no longer be
eligible for trading on the Nasdaq Stock Market. However, the Company believes
that in such event the Company's common stock would be eligible for quotation on
the OTC Bulletin Board, although no assurance can be given in this regard. The
Company cannot predict what effect its delisting from the Nasdaq National Market
will have on the market price and liquidity of the Company's common stock.
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.
-18-
<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)
December 15, 1997 By: /s/ BERNARD M. MANUEL
---------------------
Bernard M. Manuel, Chairman of
the Board and Chief Executive Officer
December 15, 1997 By: /s/ ROY E. GREEN
----------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
-19-
<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> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 9,650
<SECURITIES> 0
<RECEIVABLES> 10,957
<ALLOWANCES> 0
<INVENTORY> 4,216
<CURRENT-ASSETS> 26,839
<PP&E> 4,039
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,817
<CURRENT-LIABILITIES> 18,649
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33,817
<SALES> 34,369
<TOTAL-REVENUES> 34,369
<CGS> 33,229
<TOTAL-COSTS> 33,229
<OTHER-EXPENSES> 12,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (161)
<INCOME-PRETAX> (11,523)
<INCOME-TAX> 153
<INCOME-CONTINUING> (11,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,676)
<EPS-PRIMARY> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
