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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 May 3, 1997
or
[ ] TRANSACTION 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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 June 11, 1997.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
------------------
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
NO.
---
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at May 3, 1997
and February 1, 1997.........................................................................3
Condensed Consolidated Statements of Operations for the three months
ended May 3, 1997 and May 4, 1996 ...........................................................4
Condensed Consolidated Statements of Stockholders' Equity for the three
months ended May 3, 1997 ....................................................................5
Condensed Consolidated Statements of Cash Flows for the three months
ended May 3, 1997 and May 4, 1996 ...........................................................6
Notes to Condensed Consolidated Financial Statements ...........................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................17
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
--------- ---------
(In thousands,
except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 13,557 $ 19,720
Restricted cash.............................................. 4,291 2,526
Trade accounts receivable, net............................... 5,615 7,239
Inventory ................................................... 4,117 5,109
Other receivables and prepaid expenses ...................... 1,943 3,795
-------- --------
Total current assets ............................................ 29,523 38,389
Fixed assets, net................................................ 6,048 6,041
Other assets .................................................... 661 286
Goodwill, net.................................................... 2,335 2,426
-------- --------
Total assets .................................................... $ 38,567 $ 47,142
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................................... $ 1,763 $ 1,382
Accounts payable............................................... 1,624 4,382
Accrued expenses............................................... 5,994 6,816
Income taxes payable........................................... 6,035 5,984
Current portion of long-term debt.............................. -- 842
-------- --------
Total current liabilities........................................ 15,416 19,406
Deferred rent credits............................................ 796 777
-------- --------
Total liabilities................................................ 16,212 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 ........................................... (98,665) (94,083)
Foreign currency translation adjustment........................ (22) --
-------- --------
Total stockholders' equity....................................... 22,355 26,959
-------- --------
Total liabilities and stockholders' equity....................... $ 38,567 $ 47,142
======== ========
See accompanying notes.
</TABLE>
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
May 3, May 4,
1997 1996
---------- ---------
(In thousands,
except per share amounts)
<S> <C> <C>
Net sales ..................................................... $ 7,637 $83,756
Cost of goods sold ............................................ 8,296 73,044
------- -------
Gross (loss) profit ........................................... (659) 10,712
Selling, general and administrative
expenses .................................................... 3,876 9,159
Amortization of intangibles ................................... 91 91
------- -------
(Loss) income from operations ................................. (4,626) 1,462
Other income .................................................. -- 388
Interest (income) expense, net ................................ (95) 935
------- -------
(Loss) income before income taxes and
minority interests .......................................... (4,531) 915
Provision for income taxes .................................... 51 436
------- -------
(Loss) income before minority interests ....................... (4,582) 479
Income attributable to minority interests ..................... -- 448
------- -------
Net (loss) income ............................................. $(4,582) $ 31
======= =======
Net (loss) income per share ................................... $ (0.37) $ 0.00
======= =======
Weighted average number of common and
common equivalent shares outstanding ........................ 12,438 12,438
======= =======
</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 Transaction 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...................... -- -- -- (22) -- (22)
Net (loss) for the three months
ended May 3, 1997............... -- -- -- -- (4,582) (4,582)
------ ----- --------- --------- ---------- ---------
Balance at May 3, 1997............ 12,438 $ 124 $ 120,918 $ (22) $ (98,665) $ 22,355
====== ===== ========= ========== ========== =========
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
May 3, May 4,
1997 1996
---------- --------
(In thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income ....................................................... $ (4,582) $ 31
Adjustments to reconcile net (loss) income to net cash used
in operating activities
Depreciation and amortization ...................................... 265 489
Rent expense not currently payable ................................. 19 77
Amortization of intangibles ........................................ 91 91
Deferred income taxes .............................................. -- 3
Income attributable to minority interests .......................... -- 448
Changes in operating assets and liabilities:
Trade accounts receivable ........................................ 1,624 (5,392)
Inventory ........................................................ 992 16,559
Other receivables and prepaid expenses ........................... 1,852 1,457
Accounts payable ................................................. (2,758) (14,038)
Accrued expenses ................................................. (822) (967)
Income taxes payable ............................................. 51 201
---------- --------
Net cash used in operating activities ................................... (3,268) (1,041)
INVESTING ACTIVITIES
Purchase of fixed assets ................................................ (272) (161)
Other assets ............................................................ (375) 36
Sale of business ........................................................ -- 12,500
---------- --------
Net cash (used in) provided by investing activities ..................... (647) 12,375
FINANCING ACTIVITIES
Repayments of short-term borrowings, net ................................ (461) (8,275)
Credit facility outstanding, net ........................................ -- 165
Repayments of long-term debt, net ....................................... -- (206)
---------- --------
Net cash used in financing activities ................................... (461) (8,316)
Effect of exchange rate changes on cash ................................. (22) (32)
---------- --------
Net (decrease) increase in cash ......................................... (4,398) 2,986
Cash at beginning of period ............................................. 22,246 5,487
---------- --------
Cash at end of period ................................................... $ 17,848 $ 8,473
========== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ....................................................... $ -- $ 232
Interest paid ........................................................... 68 672
</TABLE>
See accompanying notes.
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<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 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 months
ended May 3, 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 months
ended May 3, 1997 and May 4, 1996, common stock equivalents are excluded as the
effect of their inclusion would be antidilutive.
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.
-7-
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MAY 3, 1997 (UNAUDITED)
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. The Company, Ann
Taylor and Mr. Manuel have 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 has notified the
Company that it intends to withhold 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 accounted for approximately 72% of the Company's
net sales for the quarter ended May 4, 1996.
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 $23,229,000 for the quarter ended May 4,
1996. Pro forma gross profit for the quarter ended May 4, 1996 would have been
$2,729,000. Pro forma loss from operations for the quarter ended May 4, 1996
would have been $2,162,000. Pro forma net loss for the quarter ended May 4, 1996
would have been $1,856,000. The pro forma net loss per share for the quarter
ended May 4, 1996 would have been $0.15.
-8-
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MAY 3, 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:
May 3, February 1,
1997 1997
------- -------
(In thousands)
Raw materials ............................. $ 3,997 $ 4,094
Finished goods ............................ 120 896
Finished goods-in-transit ................. -- 119
------- -------
$ 4,117 $ 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. Borrowings under these facilities were subject to certain borrowing base
limitations. Amounts outstanding under the agreements bore interest at 1.25%
above the prime rate through January 31, 1996 and between 1% and 1.75% above the
prime rate thereafter. The HS Bank facilities were secured by a first lien on
substantially all the assets of the Company.
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 May 3, 1997 the Company had restricted cash at a bank of $2,526,000 and
$4,291,000, respectively, to secure letters of credits.
Certain foreign subsidiaries have credit facilities aggregating
$4,000,000 at May 3, 1997. Borrowings under these facilities, which are payable
on demand, are secured by a lien on certain assets of these subsidiaries. At May
3, 1997, the balance outstanding under these facilities was $1,763,000.
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
-9-
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MAY 3, 1997 (UNAUDITED)
$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 seeks
unspecified money damages and alleges 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 April 1996, all of the defendants filed motions to
dismiss the complaint. The plaintiff filed oppositions to the motions to dismiss
in May 1996 and defendants filed their reply memoranda in June 1996.
In December 1996, the Company and all defendants other than Ernst &
Young LLP withdrew without prejudice their motions to dismiss. In January 1997,
the Company and all defendants other than Ernst & Young LLP tentatively settled
the class action subject to confirmatory discovery by the plaintiffs and to
judicial approval. The aggregate amount of the settlement is $5,750,000. The
Company will contribute approximately $2,100,000 to the settlement, which amount
was placed in an escrow account in January 1997. The balance of the settlement
fund, which has also been placed in escrow, will come from insurance and from
other parties to the litigation. The Amended Stipulation and Agreement of
Settlement was preliminarily approved by the Court in April 1997, but the
settlement remains subject to final approval by the Court. The Court is
currently scheduled to consider whether or not it should finally approve the
settlement in July 1997. There can be no assurance that the proposed settlement
will be finally approved by the Court. 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 continues to believe that the allegations in the complaint are without
merit. An adverse decision in the action could have a material adverse effect on
the Company's financial condition and results of operations.
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
-10-
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MAY 3, 1997 (UNAUDITED)
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). Part of this proposed deficiency is reflected by a "30 Day Letter"
issued to GJM (US) Inc. 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.
-11-
<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.
-12-
<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
continues to serve on the Board of Directors of the Company, has entered into a
consulting agreement with the Company pursuant to which he is providing services
to Cygne with respect to design, development and merchandising matters and
special projects. The Company, Ann Taylor and Mr. Manuel have 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 has notified the Company that it intends to
withhold 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 first quarter of 1997, The Limited, Inc. (consisting
primarily of The Limited Stores and Lerner) accounted for 71% of Cygne's net
sales and the Company had no sales to Ann Taylor. During the first quarter of
1996, The Limited, Inc. and Ann Taylor accounted for 19% and 72%, respectively,
of Cygne's net sales.
-13-
<PAGE>
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 for the quarter ended May 4, 1996 of
$23.2 million. Pro forma gross profit for the quarter ended May 4, 1996 would
have been $2.7 million. Pro forma loss from operations for the quarter ended May
4, 1996 would have been $2.2 million. Pro forma net loss for the quarter ended
May 4, 1996 would have been $1.9 million. The pro forma net loss per share for
the quarter ended May 4, 1996 would have been $0.15.
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 $5.4 million and $12.4 million for the quarters ended May 3, 1997
and May 4, 1996, respectively.
In June 1997 the Company announced that the license agreements
entered into last summer 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 agreed to return the $400,000
in pre-paid minimum royalty payments made on the signing of the license
agreements and to pay Cygne for certain raw materials related to the manufacture
of Kenzo products.
As previously announced, 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's loss in the second quarter ending August 2, 1997 will also be
affected by severance and other costs associated with the termination of the
Kenzo licenses. 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
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<PAGE>
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 months ended May 3, 1997 and May 4, 1996 expressed as a
percentage of net sales are as follows:
Three Months Ended
----------------------
May 3, May 4,
1997 1996
----- -----
Net sales 100.0% 100.0%
====== ======
Gross (loss) profit ................................ (8.6) 12.8
Selling, general and administrative
expenses ........................................ 50.8 10.9
Amortization of intangibles ........................ 1.2 0.1
----- -----
(Loss) income from operations ...................... (60.6) 1.8
Other income ....................................... -- 0.4
Interest (income) expense, net ..................... (1.2) 1.1
------ -----
(Loss) income before minority interests ............ (59.4) 1.1
Provision for income taxes ......................... 0.6 0.6
---- -----
Net (loss) income before minority interests ........ (60.0) 0.5
Income attributable to minority interests .......... -- 0.5
----- -----
Net (loss) ......................................... (60.0) 0.0
NET SALES
Net sales for the first quarter of 1997 decreased by 90.9% to $7.7
million from $83.8 million for the comparable period in 1996. The $76.1 million
decrease in net sales for the first quarter of 1997 was primarily attributable
to a decrease in sales to Ann Taylor of $60.6 million as a result of the Ann
Taylor Disposition and to discontinued customers and product lines which
generated sales of $9.5 million in the first quarter of 1996. In addition, sales
to those divisions of The Limited, Inc. with which the Company continues to do
business decreased by $7.0 million, offset in part by increase in sales to other
customers. The Company anticipates that sales to The Limited, Inc. will continue
to decrease during 1997 as compared to comparable periods in 1996.
GROSS PROFIT
The first quarter of 1997 had gross loss of $0.6 million as compared to
a gross profit of $10.7 in the comparable period of 1996, for a decrease of
$11.4 million. The decrease in gross profit was primarily attributable to
operations sold in the Ann Taylor Disposition, which had
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<PAGE>
gross profit of $8.0 million in the first quarter of 1996, and lower sales and
lower gross margins on the remaining sales than the comparable period of 1996,
as well as a $0.5 million 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 first quarter of
1997 were $3.9 million, a decrease of $5.3 million or 58% from the comparable
prior period in 1996. The decrease was primarily attributable to the Ann Taylor
Disposition ($4.4 million) and reductions in the Company's other overhead ($2.8
million), offset by an increase of $1.9 million in connection with the start-up
expenses related to the KENZO JEANS and KENZO STUDIO brand name products.
INTEREST EXPENSE
Interest income for the first quarter of 1997 was $95,000, compared to
interest expense of $935,000 in the comparable prior period. The decrease in
interest expense is primarily attributable to the repayment of the Company's
short-term debt with the proceeds from the Ann Taylor Disposition and the sale
of the Ann Taylor common stock.
PROVISION FOR INCOME TAXES
The provision for income taxes of $51,000 in the first quarter of 1997
primarily represents provision for minimum state and federal income taxes as
compared to the income taxes on a pre-tax profit of $915,000 in the comparable
period of 1996. At February 3, 1996, 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 credit facility, Cygne has
obtained letters of credit issued from domestic banks secured by a cash deposit
from the Company. At May 3, 1997 the Company had restricted cash at banks of
$4.3 million as collateral for letters of credit.
Certain foreign subsidiaries have credit facilities aggregating $4.0
million at May 3, 1997. Borrowings under these facilities, which are payable on
demand, are secured by a lien on certain assets of these subsidiaries. The
Company is currently in negotiation with several foreign banks for a new foreign
credit facility. However, there can be no assurance that such a facility can be
obtained on favorable credit terms or at all.
The Company previously had 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. The debt was repaid at April 30, 1997.
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<PAGE>
Net cash used in operating activities for the first quarter of 1997 was
$3.3 million compared to $1.0 million in the comparable prior period of 1996.
Net purchases of fixed assets aggregated approximately $0.3 million for the
first quarter of 1997 compared to $0.2 million for the comparable prior period
in 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 closing of its Kenzo operations and further restructuring or
downsizing of its operations.
PART II OTHER INFORMATION
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.
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<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)
June 16, 1997 By: /s/ Bernard M. Manuel
---------------------
Bernard M. Manuel, Chairman of the
Board and Chief Executive Officer
June 16, 1997 By: /s/ Roy E. Green
----------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
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<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
- -----------
27. Financial Data Schedule
<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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-3-1997
<CASH> 17,848
<SECURITIES> 0
<RECEIVABLES> 5,615
<ALLOWANCES> 0
<INVENTORY> 4,117
<CURRENT-ASSETS> 29,523
<PP&E> 6,048
<DEPRECIATION> 0
<TOTAL-ASSETS> 38,567
<CURRENT-LIABILITIES> 15,416
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,567
<SALES> 7,637
<TOTAL-REVENUES> 7,637
<CGS> 8,296
<TOTAL-COSTS> 8,296
<OTHER-EXPENSES> 3,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (95)
<INCOME-PRETAX> (4,531)
<INCOME-TAX> 51
<INCOME-CONTINUING> (4,582)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,582)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
