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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional
Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.1a-12
CYGNE DESIGNS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
N/A
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2) Aggregate number of securities to which transaction applies:
N/A
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state
how it was determined):
$11,752,421, equal to the purchase price in the proposed sale by the
Registrant of substantially all of the assets and certain specified
liabilities of its women's knit clothing manufacturing business to
Jordache Limited.
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4) Proposed maximum aggregate value of transaction:
$11,752,421
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5) Total fee paid:
$2,350.49
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
CYGNE DESIGNS, INC.
680 Fifth Avenue
New York, New York 10019
(212) 489-3900
September 28, 1999
Dear Fellow Stockholder:
You are cordially invited to attend the Company's Annual Meeting of
Stockholders to be held at 9:30 a.m. (local time), on Tuesday, October 19, 1999,
at the offices of Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New
York.
At the Annual Meeting you will be asked to consider and vote upon the
following:
(a) approval and adoption of the Amended and Restated
Acquisition Agreement, dated as of August 1, 1999, by and among
M.T.G.I. - Textile Manufacturers Group (Israel) Ltd., an Israeli
corporation, MBS (Cygne) Company, a Delaware corporation, A.C.
Services, Inc., a Delaware corporation, and Jordache Limited, a
Delaware corporation, pursuant to which we propose to sell to Jordache
for cash substantially all the assets used in our women's private label
knit clothing manufacturing business;
(b) the election of two directors of Cygne; and
(c) approval and adoption of an amendment to our Certificate
of Incorporation to reduce the number of shares of Common Stock and
Preferred Stock we are authorized to issue.
In addition, I will be pleased to report on the affairs of Cygne and a
discussion period will be provided for questions and comments of general
interest to stockholders.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE
ACQUISITION AGREEMENT, HAS DETERMINED THAT THE SALE OF ITS KNIT CLOTHING
BUSINESS TO JORDACHE IS IN THE BEST INTERESTS OF CYGNE AND ITS STOCKHOLDERS AND
IS RECOMMENDING THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
ACQUISITION AGREEMENT. YOUR BOARD OF DIRECTORS ALSO BELIEVES THE ELECTION OF THE
NOMINEES FOR ELECTION TO CYGNE'S BOARD OF DIRECTORS IS IN THE BEST INTERESTS OF
CYGNE AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR EACH OF
THE PROPOSED NOMINEES. YOUR BOARD OF DIRECTORS ALSO BELIEVES THE APPROVAL AND
ADOPTION OF THE AMENDMENT OF CYGNE'S CERTIFICATE OF INCORPORATION IS IN THE BEST
INTERESTS OF CYGNE AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE APPROVAL AND ADOPTION OF THE AMENDMENT TO THE CYGNE'S CERTIFICATE OF
INCORPORATION.
Approval and adoption of the acquisition agreement and the amendment to
Cygne's Certificate of Incorporation requires the affirmative vote of the
holders of a majority of Cygne's issued and outstanding shares of Common Stock,
$.01 par value per share. The two nominees for election to Cygne's Board of
Directors receiving the highest number of affirmative votes of the shares
present in person or represented by proxy and entitled to vote for them shall be
elected as directors. Each share of Common Stock is entitled to one vote on all
matters to come before the Annual Meeting. The Common Stock constitutes the only
outstanding class of capital stock of Cygne.
Details of the proposed sale and the other matters to be considered at
the meeting appear in the accompanying proxy statement. Please give this
material your careful attention.
We look forward to greeting personally those stockholders who are able
to be present at the meeting; however, whether or not you plan to be with us at
the meeting, it is important that your shares be represented. Accordingly, you
are requested to sign and date the enclosed proxy and mail it in the envelope
provided at your earliest convenience.
Thank you for your cooperation.
Very truly yours,
BERNARD M. MANUEL
Chief Executive Officer
<PAGE>
CYGNE DESIGNS, INC.
680 Fifth Avenue
New York, New York 10019
(212) 489-3900
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 28, 1999
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The Annual Meeting of Stockholders of Cygne Designs, Inc. will be held
at the offices of Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New
York on Tuesday, October 19, 1999 at 9:30 a.m. (local time) for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt an
Amended and Restated Acquisition Agreement, dated as of August 1,
1999, by and among M.T.G.I. - Textile Manufacturers Group
(Israel) Ltd., an Israeli corporation, MBS (Cygne) Company, a
Delaware corporation, A.C. Services Inc., a Delaware corporation,
and Jordache Limited, a Delaware corporation, pursuant to which
we propose to sell to Jordache for cash substantially all the
assets used in connection with our women's private label knit
clothing manufacturing business, as more fully described in the
attached Proxy Statement.
2. To elect two Directors to serve until the next Annual Meeting of
Stockholders or until their respective successors shall have been
duly elected and qualified to serve.
3. To consider and vote upon a proposal to approve and adopt an
amendment to the Company's Certificate of Incorporation to reduce
the number of shares of Common Stock and Preferred Stock we are
authorized to issue.
4. To transact such other business as may properly come before the
Annual Meeting.
The full text of the acquisition agreement is included as APPENDIX A to
the attached proxy statement and is incorporated herein by reference. The full
text of the amendment to the Certificate of Incorporation is included as
APPENDIX B to the attached proxy statement and is incorporated herein by
reference. THE BOARD OF DIRECTORS OF CYGNE UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR APPROVAL AND ADOPTION OF THE ACQUISITION AGREEMENT, VOTE FOR THE ELECTION OF
THE DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS AND VOTE FOR THE APPROVAL AND
ADOPTION OF THE AMENDMENT TO CYGNE'S CERTIFICATE OF INCORPORATION.
Only stockholders of record at the close of business on September 15,
1999 will be entitled to notice of, and to vote at, the Annual Meeting of
Stockholders. A list of stockholders eligible to vote at the meeting will be
available for inspection at the meeting and for a period of ten days prior to
the meeting during regular business hours at our corporate headquarters at the
address specified above.
Whether or not you expect to attend the Annual Meeting, your proxy vote
is important. To assure your representation at the meeting, please sign and date
the enclosed proxy card and return it promptly in the enclosed envelope, which
requires no additional postage if mailed in the United States or Canada.
By Order of the Board of Directors
ROY E. GREEN
Secretary
September 28, 1999
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IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE COMPLETED AND
RETURNED PROMPTLY
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<PAGE>
CYGNE DESIGNS, INC.
680 Fifth Avenue
New York, New York 10019
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PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
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TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT THE SALE........................................ 3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............................. 7
SUMMARY..................................................................... 8
The Annual Meeting................................................. 8
The Sale........................................................... 10
Summary Selected Pro Forma Condensed Financial Information......... 12
THE ANNUAL MEETING.......................................................... 17
Quorum; Shares Entitled to Vote.................................... 17
Vote Required...................................................... 17
Voting of Proxies.................................................. 17
Solicitation of Proxies............................................ 18
PROPOSAL NO. 1 - THE SALE................................................... 19
Background of the Sale............................................. 19
Reasons for the Sale; Recommendation of the Board of Directors..... 20
Use of Proceeds.................................................... 21
No Payment, Dividend or Distribution to Holders of Common Stock.... 21
Absence of Dissenters' Rights of Appraisal......................... 22
The Acquisition Agreement.......................................... 22
Non-Competition Agreement.......................................... 25
Commission Agreement............................................... 26
Severance Arrangement with Jonathan Kafri.......................... 26
Management Agreement............................................... 26
Purchase Order Financing Arrangement............................... 26
Accounting Treatment of the Sale................................... 27
Interests of Certain Persons in the Sale........................... 27
ADDITIONAL INFORMATION ABOUT CYGNE.......................................... 28
Business........................................................... 28
Executive Officers................................................. 36
Risk Factors....................................................... 37
Selected Financial Information..................................... 39
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 41
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Page
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PROPOSAL NO. 2 -- ELECTION OF DIRECTORS..................................... 53
General............................................................ 53
Information Regarding Nominees for Election as Directors........... 53
PROPOSAL NO. 3 -- DECREASE OF AUTHORIZED COMMON STOCK AND
PREFERRED STOCK.................................................... 54
EXECUTIVE COMPENSATION...................................................... 55
CERTAIN TRANSACTIONS........................................................ 61
BENEFICIAL OWNERSHIP OF COMMON STOCK........................................ 62
PERFORMANCE GRAPH........................................................... 63
INDEPENDENT AUDITORS........................................................ 64
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................... 64
STOCKHOLDER PROPOSALS....................................................... 64
OTHER MATTERS............................................................... 65
INDEX TO FINANCIAL STATEMENTS............................................... F-1
Appendix A Amended and Restated Acquisition Agreement, dated as of
August 1, 1999, by and among M.T.G.I. - Textile
Manufacturers Group (Israel) Ltd., MBS (Cygne) Company,
A.C. Services Inc. and Jordache Limited....................... A-1
Appendix B Amendment to Certificate of Incorporation....................... B-1
2
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QUESTIONS AND ANSWERS ABOUT THE SALE
Q: WHO IS SOLICITING MY PROXY?
A. The Board of Directors of Cygne Designs, Inc.
Q: WHEN AND WHERE IS THE ANNUAL MEETING?
A: The Annual Meeting will take place on Tuesday, October 19, 1999 at 9:30
a.m. (local time) at the offices of Fulbright & Jaworski L.L.P., 666 Fifth
Avenue, New York, New York.
Q: WHAT PROPOSALS WILL I BE VOTING ON AT THE ANNUAL MEETING?
A: You will be asked to consider a resolution to approve the sale of
substantially all of the assets of our women's private label knit clothing
manufacturing business to Jordache for cash consideration equal to the
adjusted net book value of the assets we are selling less the amount by
which the adjusted income before tax of the business from August 1, 1999 to
the closing date exceeds $20,000. We have agreed to place in escrow an
amount equal to 10% of the inventory included in the assets pending
preparation and agreement of the adjusted net book vale of the assets sold
and the adjusted income before tax of the business from August 1, 1999 to
the closing date. If we had closed the sale on July 31, 1999, the last day
of our latest full fiscal quarter, we would have received approximately
$10.8 million for the assets, of which approximately $1,000,000 would have
been placed in escrow. In addition, we will receive commissions of 6% on
orders for products included in the assets sold, up to a maximum of
$600,000, and a non- compete payment of $400,000. We will retain the cash,
accounts receivable and certain other assets of the knit business (which
aggregated approximately $4.7 million at July 31, 1999). We will use
proceeds from the transaction, together with retained cash and collections
on accounts receivable of the knit business, to pay transaction expenses
and taxes of approximately $2.1 million, including severance of $800,000,
to repay bank borrowings related to the knit business (which aggregated
approximately $7.5 million at July 31, 1999) and pay a portion of
outstanding accounts payable and accrued expenses of the knit business
(which aggregated approximately $3.2 million at July 31, 1999). The
purchase price mechanism, which reduces the purchase price by the adjusted
income before tax of the knit business from August 1, 1999 to the closing
date, has the effect of treating the knit business as if it were sold
effective July 31, 1999. Our knit business had revenues of $25.9 million
and gross profit of $1.1 million in 1998, while the remainder of our
business had revenues of $17.1 million and gross loss of $0.8 million. In
our first fiscal half, ended July 31, 1999, the knit business had revenues
of $14.0 million and gross profit of $0.8 million, while the remainder of
our business had revenues of $12.8 million and gross profit of $1.9
million.
You will also be asked to elect two directors of Cygne to serve until the
next Annual Meeting of Stockholders, or until their successors are duly
elected and qualified to serve. The nominees for directors are James G.
Groninger and Bernard M. Manuel, the current directors of Cygne.
You will also be asked to approve and adopt an amendment to Cygne's
Certificate of Incorporation to reduce the number of shares of Common Stock
and Preferred Stock we are authorized to issue.
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Q: WHAT WILL CYGNE'S BUSINESS BE AFTER THE SALE?
A: As a result of the sale to Jordache, we will no longer manufacture women's
private label knit clothing, although we are not precluded from pursuing
such business in the future, subject to a six-month non-compete with
Jordache which prevents us from sourcing knit clothing in certain
countries. After the sale, we will continue our efforts to develop our
women's private label woven clothing manufacturing business. We may also
pursue acquisitions of or investments in other businesses which we believe
have the potential to increase stockholder value.
Q: WHY IS CYGNE'S BOARD OF DIRECTORS RECOMMENDING THE SALE TO JORDACHE?
A: The Board of Directors has determined that the sale of the knit business is
in the best interests of Cygne's stockholders. In reaching this conclusion,
they considered a number of factors, including:
o the limited growth opportunities for the knit business;
o the historical financial performance of the knit business, which
has been erratic;
o the cash requirements of the knit business, which uses a
substantial portion of our cash resources and thus limits our
ability to use the cash elsewhere, particularly in our growing
woven business;
o the purchase price for the knit business, which will allow us to
recover all the cash we currently have invested in the business;
and
o the possibility that Jonathan Kafri, who runs the knit business
and on whom the knit business is dependent, might leave, in which
event our ability to sell the knit business as an ongoing
operation would be adversely affected.
We discuss the background and reasons for the sale in greater detail
beginning on page 19.
Q: WHAT ARE CYGNE'S PLANS IF THE SALE AND THE ACQUISITION AGREEMENT ARE NOT
APPROVED BY THE STOCKHOLDERS?
A: If the acquisition agreement is not adopted and approved by our
stockholders, the sale to Jordache will not be consummated and we will
retain the assets proposed to be sold. Although we may continue to operate
this business, the same reasons why we recommend the sale to Jordache would
likely cause us to liquidate the knit business in an orderly manner. In
such event, however, it is unlikely that we would be successful in
achieving the same amount as Jordache is willing to pay, and certain
liabilities that Jordache is assuming in the sale, such as rent on our
facility in Israel, will remain our obligation for their remaining term of
approximately 17 months at a cost of approximately $340,000. In addition,
this liquidation would distract the attention of management from the woven
business, and would use cash resources that could be better deployed
elsewhere.
Q: WILL I RECEIVE ANY PAYMENT AS A RESULT OF THE SALE?
A: No, you will not receive any payment as a result of the sale. We will
use all the net proceeds from the sale to pay expenses of the
transaction, including severance of $800,000, repay bank loans and pay
other liabilities of the business.
4
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Q: CAN I STILL SELL MY SHARES OF CYGNE COMMON STOCK?
A: Neither the sale nor the acquisition agreement will affect your right to
sell or otherwise transfer your shares of Common Stock.
Q: WHAT IS THE REQUIRED VOTE TO APPROVE AND ADOPT THE ACQUISITION AGREEMENT?
A: The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to approve and adopt the Acquisition Agreement.
Bernard Manuel, our chairman and chief executive officer, owns
approximately 40.0% of our outstanding shares. He has agreed with Jordache
to vote all his shares in favor of the sale.
Q. WHY IS CYGNE PROPOSING TO AMEND ITS CERTIFICATE OF INCORPORATION?
A: The purpose of the amendment is to reduce our authorized capital stock,
which will reduce the annual franchise tax we pay in the State of Delaware,
where we are incorporated. The reduction in franchise tax will save us
approximately $25,000 per year.
Q: WHAT IS THE REQUIRED VOTE TO APPROVE AND ADOPT THE AMENDMENT TO CYGNE'S
CERTIFICATE OF INCORPORATION?
A: The affirmative vote of the holders at a majority of the outstanding shares
of Common Stock is required to approve and adopt the amendment to Cygne's
Certificate of Incorporation.
Q: WHAT IF I WANT TO CHANGE MY VOTE?
A: To change your vote, just send in a written revocation or a later-dated,
completed and signed proxy card before the Annual Meeting or attend the
Annual Meeting in person and vote.
Q: IF MY SHARES OF COMMON STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL
MY BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of Common Stock ONLY if you instruct your
broker how to vote. Your broker should mail information to you that will
explain how to give instructions to your broker. If you fail to instruct
your broker how to vote, you will be considered to have voted against the
sale and the amendment to the Certificate of Incorporation. We urge you to
instruct your broker to vote your shares held in street name.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE SALE?
A: No, you will not owe any federal income tax as a result of the sale.
However, if you decide to sell your shares of Common Stock at any time you
may owe certain taxes at that time. Please contact your own tax advisor.
Q: WHEN DO YOU EXPECT THE SALE TO BE COMPLETED?
A: Cygne and Jordache are working toward completing the sale as quickly as
possible, with the goal of completing the sale as soon as possible after
the date of the Annual Meeting.
5
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Q: WILL I HAVE APPRAISAL RIGHTS?
A: Under the Delaware General Corporation Law, you do not have appraisal
rights in connection with the sale.
Q: WHAT DO I NEED TO DO NOW?
A: Please complete and mail your signed proxy card in the enclosed return
envelope as soon as possible, so that your shares of Common Stock may be
represented at the Annual Meeting. In addition, you may attend and vote at
the Annual Meeting in person, whether or not you have completed, signed and
mailed your proxy card.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A. If you have any questions about the sale, please call Roy E. Green, our
Senior Vice President - Chief Financial Officer and Secretary, at (212)
489-3900.
6
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements including
statements containing the words "believes," "anticipates," "expects," "intends"
and words of similar import. These statements involve known and unknown risks
and uncertainties that may cause our actual results or outcomes to be materially
different from those anticipated and discussed herein. Important factors that we
believe might cause such differences include: our reliance on divisions of The
Limited, Inc. for a substantial portion of our business, our dependence on
foreign operations, the cyclicality of the apparel industry, the competitiveness
of the apparel industry, the potential for substantial fluctuations in our
results of operations and our need for additional capital. In assessing
forward-looking statements contained herein, you are urged to read carefully all
cautionary statements contained in this Proxy Statement.
7
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. THIS
SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THE SALE FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS
OF THE SALE, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER
DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND ADDITIONAL
INFORMATION " AT PAGE 62 OF THIS PROXY STATEMENT. THE ACTUAL TERMS OF THE SALE
ARE CONTAINED IN THE ACQUISITION AGREEMENT WHICH IS INCLUDED IN THIS PROXY
STATEMENT AS APPENDIX A.
THE ANNUAL MEETING
TIME, PLACE, AND PURPOSE
The Annual Meeting of Stockholders of Cygne Designs, Inc. will be held
on October 19, 1999, at 9:30 a.m. (local time) at the offices of Fulbright &
Jaworski L.L.P., 666 Fifth Avenue, New York, New York, to vote upon the approval
and adoption of the Acquisition Agreement, the election of two directors of
Cygne and the approval and adoption of an amendment to the Certificate of
Incorporation and to transact such other business as may properly come before
the Annual Meeting or any adjournment thereof. Copies of this Proxy Statement,
the attached Notice of Annual Meeting of Stockholders and the enclosed proxy
card are being mailed to stockholders on or about September 28, 1999.
PROPOSALS
At the meeting, stockholders will consider and vote upon:
(i) A proposed resolution in favor of the approval and
adoption of the Amended and Restated Acquisition Agreement dated as of
August 1, 1999, by and among M.T.G.I. - Textile Manufacturers Group
(Israel) Ltd., an Israeli corporation, MBS (Cygne) Company, a Delaware
corporation, A.C. Services, Inc., a Delaware corporation, and Jordache
Limited, a Delaware corporation. A vote in favor of the approval and
adoption of the Acquisition Agreement will be considered a vote in
favor of the sale to Jordache of substantially all of the assets of our
women's private label knit clothing manufacturing business for an
aggregate cash consideration equal to the adjusted net book value of
the assets being sold less the amount by which the adjusted income
before tax of the business from August 1, 1999 to the closing date
exceeds $20,000, a portion of which will be placed in escrow pending
preparation and agreement of the adjusted net book vale of the assets
sold and the adjusted income before tax of the business from August 1,
1999 to the closing date, as well as commissions of up to $600,000 and
a non-compete payment of $400,000, all as more fully described herein.
We will retain the cash, accounts receivable and certain other assets
of the knit business (which aggregated approximately $4.7 million at
July 31, 1999). If we had closed the sale on July 31, 1999, the last
day of our latest full fiscal quarter, we would have received
approximately $10.8 million for the assets, of which approximately
$1,000,000 would have been placed in escrow. We will use the proceeds
from the transaction, together with the retained cash and collections
on accounts receivable of the knit business, to pay transaction
expenses and taxes of approximately $2.1 million, including severance
of $800,000, repay bank borrowings related to the business (which
aggregated approximately $7.5 million at July 31, 1999) and pay a
portion of outstanding accounts payables and accrued expenses of the
knit business (which aggregated approximately $3.2 million at July 31,
1999). The purchase price mechanism, which reduces the purchase price
by the adjusted income before tax of the knit business from August 1,
1999 to the closing date, has the effect of treating the knit business
as if it were sold effective July 31, 1999.
8
<PAGE>
(ii) The election of two directors of Cygne.
(iii) A proposed amendment to our Certificate of Incorporation
to reduce the number of shares of Common Stock and Preferred Stock we
are authorized to issue.
VOTING OF PROXIES
All shares entitled to vote and represented by properly executed
proxies received prior to the Annual Meeting, and not revoked, will be voted at
the Annual Meeting in accordance with the instructions indicated on those
proxies. Unless contrary instructions are given, the persons named on the proxy
card intend to vote the shares of Common Stock so represented FOR (i) approval
and adoption of the Acquisition Agreement, (ii) election of the proposed
nominees and (iii) approval and adoption of the amendment of the Certificate of
Incorporation. If any other matters are properly presented for consideration at
the Annual Meeting, including, among other things, consideration of a motion to
adjourn the Annual Meeting to another time or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the enclosed proxy and acting thereunder will have discretion to vote on
those matters in accordance with their best judgment. We do not currently
anticipate that any other matters will be raised at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. A proxy may be revoked (i) by
filing with the Secretary of Cygne, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation or a duly executed proxy, in
either case dated later than the prior proxy relating to the same shares or (ii)
by attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not of itself revoke a proxy). Any written notice of
revocation or subsequent proxy must be received by the Secretary of Cygne prior
to the taking of the vote at the Annual Meeting. Such written notice of
revocation or subsequent proxy should be hand delivered to the Secretary of
Cygne or should be sent to Cygne Designs, Inc., 680 Fifth Avenue, New York, New
York 10019, Attention: Roy E. Green, Secretary, so as to be delivered prior to
the taking of the vote at the Annual Meeting.
SOLICITATION OF PROXIES
Execution and return of the enclosed proxy card are being solicited by
and on behalf of our Board of Directors for the purposes set forth in the
foregoing notice of meeting. We will bear the costs incidental to the
solicitation and obtaining of proxies, including the cost of reimbursing banks
and brokers for forwarding proxy materials to their principals. Proxies may be
solicited, without extra compensation, by our officers and employees by mail,
telephone, telefax, personal interviews and other methods of communication.
Although we have no present plans to hire paid solicitors to assist us in
obtaining proxies, we may do so if we determine it will be helpful in obtaining
stockholder approval of the transaction. We will pay all the fees and expenses
of any firm engaged by us.
SHARES ENTITLED TO VOTE
Only holders of record of our Common Stock at the close of business on
September 15, 1999 are entitled to notice of and to vote at the Annual Meeting.
Such stockholders are entitled to cast one vote for each share of Common Stock
held as of such date on all matters properly submitted for the vote of
stockholders at the Annual Meeting. As of September 15, 1999, there were
12,438,038 shares of our Common Stock outstanding and entitled to be voted at
the Annual Meeting. See "The Meeting-Quorum; Shares Entitled to Vote."
9
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VOTE REQUIRED
Approval of 6,219,020 shares of our Common Stock, representing a
majority of the 12,438,038 shares of our Common Stock outstanding on September
15, 1999, is required for the approval and adoption of the acquisition agreement
and the amendment of our Certificate of Incorporation in order to comply with
the provisions of applicable law. Abstentions and broker non-votes will be
counted as votes against the approval and adoption of the Acquisition Agreement.
A broker non-vote results from your failure to give your broker instructions on
how to vote your shares if your shares are not held in your name. The two
nominees for election to our Board of Directors receiving the highest number of
affirmative votes of the shares present in person or represented by proxy and
entitled to vote for them shall be elected as directors. See "The
Meeting-Quorum; Shares Entitled to Vote."
VOTING AGREEMENT BY PRINCIPAL STOCKHOLDER
Bernard Manuel, our chairman and chief executive officer, owns
4,946,975 shares of our outstanding Common Stock, representing approximately
40.0% of the outstanding Common Stock. In connection with the Acquisition
Agreement, Mr. Manuel agreed to vote his shares of Common Stock in favor of the
Acquisition Agreement. "See Beneficial Ownership of Common Stock."
NO APPRAISAL RIGHTS
Under the Delaware General Corporation Law, stockholders do not have
appraisal rights in connection with the sale.
THE SALE
TERMS OF THE SALE
Pursuant to the terms of the Acquisition Agreement, we have agreed to
sell to Jordache substantially all the assets of our women's private label knit
clothing manufacturing business. Jordache has agreed to pay for such assets an
amount of cash consideration equal to the adjusted net book value of the
inventory, fixed assets, advances to vendors and investment in a dye house
facility less the amount by which the adjusted income before tax of the business
from August 1, 1999 exceeds $20,000. We have agreed to place in escrow an amount
equal to 10% of the inventory included in the assets pending preparation and
agreement of the adjusted net book value of the assets sold and the adjusted net
income before tax of the business from August 1, 1999 to the closing date. The
only liabilities being assumed by Jordache are certain liabilities related to
the assets being sold to Jordache. The assets being sold do not include any
cash, accounts receivable or certain other assets of our knit business. Had we
sold the knit business on July 31, 1999 (the last day of latest full fiscal
quarter), the purchase price would have totaled approximately $10.8 million, of
which approximately $1,000,000 would have been placed in escrow, and at that
date our cash, accounts receivable and other assets related to the knit business
which are not being sold aggregated approximately $4.7 million. In addition,
Jordache has agreed to pay us commissions of 6% on orders for products included
in the assets, up to a maximum of $600,000, and a non-compete payment of
$400,000. We have agreed to pay Mr. Kafri, who runs our knit business, severance
of $800,000 upon consummation of the sale. We will use the proceeds from the
transaction, together with the retained cash and collections on accounts
receivable of the knit business, to pay transaction expenses and taxes of
approximately $2.1 million, including the $800,000 severance payment to Mr.
Kafri, repay bank borrowings related to the knit business (which aggregated
approximately $7.5 million at July 31, 1999) and pay a portion of outstanding
accounts payable and accrued expenses related to the knit business which totaled
approximately $3.2 million at July 31, 1999). The assets being sold constitute
10
<PAGE>
substantially all the assets used in our private label women's knit clothing
manufacturing business. The purchase price mechanism, which reduces the purchase
price by the adjusted income before tax of the knit business from August 1, 1999
to the closing date, has the effect of treating the knit business as if it were
sold effective July 31, 1999. For a more detailed description of the Acquisition
Agreement and the assets and liabilities to be transferred to, and assumed by,
Jordache, and the assets and liabilities to be retained by us, see "The Sale-The
Acquisition Agreement."
Consummation of the sale is subject to the satisfaction of a number of
conditions, including obtaining the approval of our stockholders. See "The
Sale-The Acquisition Agreement-Conditions to the Sale."
REASONS FOR THE SALE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Our Board of Directors has determined that the terms of the sale are
fair to, and in the best interests of, our stockholders, and has unanimously
approved the Acquisition Agreement. Accordingly, the Board of Directors
unanimously recommends that the stockholders vote to approve and adopt the
Acquisition Agreement. In reaching its conclusion, the Board of Directors
considered a number of factors, including:
o the limited growth opportunities for the knit business;
o the historical financial performance of the knit business, which
has been erratic;
o the cash requirements of the knit business, which uses a
substantial portion of our cash resources and thus limits our
ability to use the cash elsewhere, particularly in our growing
woven business;
o the purchase price for the knit business, which will allow us to
recover all the cash we currently have invested in the business;
and
o the possibility that Jonathan Kafri, who runs the knit business
and on whom the knit business is dependent, might leave, in which
event our ability to sell the knit business as an ongoing
operation would be adversely affected.
See "The Sale-Background of the Sale," and "-Reasons for the Sale;
Recommendation of the Board of Directors."
CONDUCT OF BUSINESS AFTER THE SALE; USE OF PROCEEDS
As a result of the sale, we will have sold substantially all of our
assets relating to our business of manufacturing women's private label knit
clothing. We estimate that the expenses incurred by us in connection with the
sale (including accounting, legal and printing fees, severance payments and
taxes related to the termination of our Approved Enterprise status in Israel in
connection with the sale), will aggregate approximately $2.1 million. We will
use the remaining proceeds from the sale, as well as the cash and collections on
accounts receivable of the knit business, to pay outstanding bank loans and
other liabilities of the knit business, which aggregated approximately $10.7
million at July 31, 1999.
NO PAYMENTS TO HOLDERS OF COMMON SHARES
The stockholders will not receive any payments as a result of the sale.
11
<PAGE>
ACCOUNTING TREATMENT OF THE SALE
For accounting purposes, the sale will be presented as a sale of assets
transaction. Upon the consummation of the sale, the excess, if any, of the book
value of the assets sold over the purchase price received by us will be
recognized as a loss on our books. In 1998 we established a provision of $2.6
million for the impairment of the knit business assets as a result of the
proposed sale of the business to Jordache. This provision includes the write-off
of the unamortized goodwill of the business ($1.7 million), the loss on assets
to be sold ($0.3 million) and estimated transaction expenses ($0.6 million). In
the first half of 1999 we established an additional provision of $0.9 million
for the impairment of the knit business assets, representing an additional loss
on the assets to be sold ($0.4 million) and additional transaction costs,
including taxes ($0.5 million).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The sale will not have any Federal income tax consequences to our
stockholders. We do not anticipate that we will incur any Federal income tax
liability as a result of the sale.
INTERESTS OF CERTAIN PERSONS IN THE SALE
All of our executive officers and directors own shares of our Common
Stock and/or options to purchase shares of our Common Stock and, to that extent,
their interest in the sale is the same as that of other stockholders of Cygne.
The consummation of the sale will constitute a "change in control of
the Company" for purposes of employment agreements with our executive officers
and our stock option plans. As a result, if we fail to renew the employment
agreement of any executive officer for a period of two years following the
closing of the sale, such executive will be entitled to certain specified
severance payments. In addition, all options will become immediately exercisable
upon consummation of the sale. See "Executive Compensation - Employment
Agreements."
SUMMARY SELECTED PRO FORMA CONDENSED CONSOLIDATED INFORMATION
The following table contains selected pro forma condensed consolidated
financial information which reflects our sale of substantially all of the assets
relating to our women's private label knit clothing manufacturing and
merchandising business to Jordache for aggregate cash consideration equal to the
adjusted net book value of the assets sold less the amount by which the adjusted
income before tax of the business from August 1, 1999 exceeds $20,000. We have
agreed to place in escrow an amount equal to 10% of the inventory included in
the assets pending preparation and agreement of the adjusted net book vale of
the assets sold and the adjusted net income before tax of the business from
August 1, 1999 to the closing date.
The pro forma adjustments are based upon available information and
certain assumptions that we believe are reasonable. These pro forma amounts are
not necessarily indicative of (i) our financial condition had we completed the
sale of our knit business to Jordache as of July 31, 1999, (ii) the results of
operations that would have actually occurred had we completed the sale as of
January 31, 1998 or (iii) the future results of operations or financial
condition of Cygne.
12
<PAGE>
The unaudited pro forma condensed combined statements of operations and
the unaudited pro forma condensed combined balance sheet do not reflect:
O Our results of operations since July 31, 1999
O The effect of the reduction of the purchase price for the
adjusted income before tax of our knit business from August 1,
1999 to the closing date
O The effect of our sale of certain accounts receivable to Jordache
pursuant to the purchase order financing arrangements discussed
below
The purchase price mechanism, which reduces the purchase price by the adjusted
income before tax of the knit business from August 1, 1999 to the closing date,
has the effect of treating the knit business as if it were sold effective July
31, 1999.
On August 11, 1999, Jordache purchased an account receivable of the
knit business for $4,019,903, of which $3,642,141.20 was paid to MTGI's lender,
pursuant to the purchase order financing arrangements described below under the
caption "Proposal No. 1 - The Sale-Purchase Order Financing Arrangement." The
pro forma financial statements do not reflect this transaction.
13
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JULY 31, 1999
($ in thousands)
<CAPTION>
As Reported Adjustments Pro Forma
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................................. $ 3,950 $ 3,950
Trade accounts receivable ........................................ 5,505 5,505
Inventory ........................................................ 1,733 1,733
Assets held for sale ............................................. 10,752 ($10,752) 0
Other receivables and prepaid expenses ........................... 1,763 1,763
------- ------- -------
Total current assets ....................................... 23,703 (10,752) 12,951
Fixed assets, net ................................................ 2,604 2,604
Other assets ..................................................... 550 550
------- ------- -------
Total assets ............................................... $26,857 ($10,752) $16,105
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Short-term borrowing ............................................. $7,501 ($7,501)(a) $0
Accounts payable and accrued expenses ............................ 7,824 (3,051) 4,773
Income taxes payable ............................................. 6,072 6,072
------- -------- -------
Total current liabilities .................................. 21,397 (10,552) 10,845
Stockholders' Equity ................................................ 5,460 (200)(b) 5,260
----- ----- -------
Total liabilities and stockholders' equity ............. $26,857 ($10,752) $16,105
======= ========= =======
</TABLE>
- ----------
(a) Cash proceeds from sale of assets, including $400,000 non-compete payment,
used first to pay amounts outstanding under our Israeli bank facility and
transaction expenses, then outstanding accounts payable and accrued
expenses.
(b) Consists of
o Our payment of $800,000 in severance to Mr. Kafri, who runs our knit
business.
o Our receipt of a commission payment of $600,000 from Jordache.
14
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED JANUARY 30, 1999
(In thousands, except per share amounts)
<CAPTION>
As Knit Pro Forma
Reported Operations Adjustments Pro Forma
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales .................................... $ 43,013 $ 25,891 $ -- $ 17,122
Cost of goods sold ........................... 42,753 24,838 -- 17,915
-------- -------- ----- --------
Gross profit (loss) .......................... 260 1,053 -- (793)
Selling, general and administrative
expenses .................................. 4,381 841 -- 3,540
Provision for impairment of Knit
business assets ........................... 2,564 2,564 -- --
Provision (recoupment) for lease
termination expenses ...................... (902) -- -- (902)
Amortization of intangibles .................. 364 364 -- --
-------- -------- ----- --------
(Loss) from operations ....................... (6,147) (2,716) -- (3,431)
Interest income (expense), net ............... 91 (272) -- 363
-------- -------- ----- --------
(Loss) before income taxes ................... (6,056) (2,988) -- (3,068)
Provision for income taxes ................... 269 171 -- 98
-------- -------- ---- --------
Net (loss) income ............................ ($ 6,325) ($ 3,159) ($ --) ($ 3,166)
======== ======== ===== ========
Net (loss) per share -- basic ................ ($ 0.51) ($ 0.25)
======= ========
Weighted average number of
common shares outstanding ................. 12,438 12,438
======= ========
Net (loss) per share assuming dilution ....... ($ 0.51) ($ 0.25)
======= ========
Weighted average number of
common shares and dilutive
securities ................................ 12,438 12,438
====== ======
</TABLE>
15
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 31, 1999
($ in thousands, except per share amounts)
<CAPTION>
As Knit Pro Forma
Reported Operations Adjustments Pro Forma
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales ................................... $ 26,727 $ 13,970 $ -- $ 12,757
Cost of goods sold .......................... 24,033 13,177 -- 10,856
-------- -------- -------- --------
Gross profit ................................ 2,694 793 -- 1,901
Selling, general and administrative
expenses ................................. 2,024 440 -- 1,584
Provision for impairment of Knit
business assets .......................... 886 886 -- 0
-------- -------- -------- --------
(Loss) income from operations ............... (216) (533) -- 317
Interest income (expense), net .............. (326) (306) -- (20)
-------- -------- -------- --------
(Loss) income before income taxes ........... (542) (839) -- 297
Provision for income taxes .................. 44 17 -- 27
-------- -------- -------- --------
Net (loss) income ........................... $ (586) $ (856) $ -- $ 270
======== ======== ======== ========
Net (loss) income per share -- basic ........ $ (0.05) $ 0.02
======== ========
Weighted average number of
common shares outstanding ................ 12,438 12,438
======== ========
Net (loss) income per share assuming
dilution ................................. $ (0.05) $ 0.02
======== ========
Weighted average number of
common shares and dilutive
securities ............................... 12,438 12,438
======== ========
</TABLE>
16
<PAGE>
THE ANNUAL MEETING
QUORUM; SHARES ENTITLED TO VOTE
As of September 15, 1999 (the "Record Date"), there were 12,438,038
shares of our Common Stock outstanding and entitled to be voted at the Annual
Meeting. The holders of 6,219,020 shares of Common Stock, representing a
majority of the outstanding shares of Common Stock, present in person or
represented by proxy, will constitute a quorum at the Annual Meeting.
Abstentions and broker non-votes will be counted as present in determining
whether the quorum requirement is satisfied. A broker non-vote occurs when a
broker or other nominee holding shares for a beneficial owner does not vote on a
proposal because the broker or nominee does not have discretionary voting power
and the beneficial owner has not checked one of the boxes on the proxy card.
Only holders of record of our Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the Annual Meeting.
Stockholders are entitled to cast one vote for each share of Common Stock held
as of the Record Date on all matters properly submitted for the vote of
stockholders at the Annual Meeting.
VOTE REQUIRED
In order to comply with the provisions of applicable law, approval of
6,219,020 shares of Common Stock, representing a majority of the shares of our
Common Stock outstanding on the Record Date, is required for the approval and
adoption of (1) the Amended and Restated Acquisition Agreement, dated as of
August 1, 1999 (the "Acquisition Agreement"), by and among M.T.G.I. - Textile
Manufacturers Group (Israel) Ltd., an Israeli corporation ("MTGI"), MBS (Cygne)
Company, a Delaware corporation, A.C. Services, Inc., a Delaware corporation,
and Jordache Limited, a Delaware corporation ("Jordache"), pursuant to which we
propose to sell (the "Sale") to Jordache for cash substantially all of the
assets (the "Assets") of our women's private label knit clothing manufacturing
business (the "Knit Business") and (2) the amendment of our Certificate of
Incorporation to reduce the number of shares of Common Stock and Preferred Stock
we are authorized to issue. Abstentions and broker non-votes will be counted as
votes against the approval and adoption of the Acquisition Agreement and the
amendment of our Certificate of Incorporation.
The two nominees for election to our Board of Directors receiving the
highest number of affirmative votes of the shares present in person or
represented by proxy and entitled to vote for them shall be elected as
directors. Abstentions and broker non-votes will not be counted as votes for any
nominee for director.
VOTING OF PROXIES
All shares entitled to vote and represented by properly executed
proxies received prior to the Annual Meeting, and not revoked, will be voted at
the Annual Meeting in accordance with the instructions indicated on those
proxies. Unless contrary instructions are given, the persons named on the proxy
card intend to vote the shares of Common Stock so represented FOR (1) approval
and adoption of the Acquisition Agreement, (2) election of the proposed nominees
and (3) approval and adoption of the amendment of our Certificate of
Incorporation. If any other matters are properly presented for consideration at
the Annual Meeting, including, among other things, consideration of a motion to
adjourn the Annual Meeting to another time or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the enclosed proxy and acting thereunder will have discretion
17
<PAGE>
to vote on those matters in accordance with their best judgment. We do not
currently anticipate that any other matters will be raised at the Annual
Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. A proxy may be revoked (1) by
filing with the Secretary of Cygne, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation or a duly executed proxy, in
either case later dated than the prior proxy relating to the same shares or (2)
by attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not of itself revoke a proxy). Any written notice of
revocation or subsequent proxy must be received by the Secretary of Cygne prior
to the taking of the vote at the Annual Meeting. Such written notice of
revocation or subsequent proxy should be hand delivered to the Secretary of
Cygne or should be sent to Cygne Designs, Inc., 680 Fifth Avenue, New York, New
York 10019, Attention: Roy E. Green, Secretary, so as to be delivered prior to
the taking of the vote at the Annual Meeting.
SOLICITATION OF PROXIES
Execution and return of the enclosed Proxy Card are being solicited by
and on behalf of the Board of Directors of Cygne for the purposes set forth in
the notice of meeting. We will bear the costs incidental to the solicitation and
obtaining of proxies, including the cost of reimbursing banks and brokers for
forwarding proxy materials to their principals. Proxies may be solicited,
without extra compensation, by our officers and employees by mail, telephone,
telefax, personal interviews and other methods of communication. Although we
have no present plans to hire paid solicitors to assist us in obtaining proxies,
we may do so if we determine it will be helpful in obtaining stockholder
approval of the matters to be voted upon at the Annual Meeting. We will pay all
the fees and expenses of any firm engaged by us.
STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED. IN ORDER TO AVOID UNNECESSARY EXPENSE, WE ASK
YOUR COOPERATION IN MAILING YOUR PROXY PROMPTLY, NO MATTER HOW LARGE OR HOW
SMALL YOUR HOLDINGS MAY BE.
18
<PAGE>
PROPOSAL NO. 1 -- THE SALE
BACKGROUND OF THE SALE
In January 1999, Mr. Jonathan Kafri, President of the our Knit
Business, approached Jordache as a potential customer for Cygne's knit products.
On January 28, 1999, Mr. Kafri and Mr. Roy Green, our Senior Vice
President-Chief Financial Officer, met at Jordache's offices in New York City
with Mr. Joe Nakash, President of Jordache, and Mr. Ralph Nakash, Secretary and
Treasurer of Jordache, to discuss Jordache becoming a customer of the Knit
Business. During this meeting, Jordache noted that it was opening a denim/woven
clothing manufacturing facility in Jordan. Mr. Kafri determined that this
facility was next to the primary sewing contractor for the Knit Business. In the
course of the discussions Jordache indicated that it might be interested in
acquiring the Knit Business.
During the first week of February, we became aware that Jordache was
negotiating with the landlord of our leased New York City office space, which we
were seeking to dispose of. On February 2, 1999, Messrs. Green and Manuel met at
Jordache's offices in New York City with Mr. Ralph Nakash to discuss the
possibility of Jordache assuming the lease of our New York City office space.
During our discussions Mr. Nakash indicated that Jordache was interested in
acquiring the Knit Business.
During the week of February 8, 1999, Mr. Joe Nakash and Mr. Kafri
visited our facilities in Israel, Italy and Jordan for due diligence purposes.
Messrs. Nakash and Kafri then visited Jordache's manufacturing facilities in
Hong Kong and the Philippines so that Mr. Kafri could see how Jordache operated.
During this period, executives of Jordache and Cygne continued to discuss
possible terms and conditions for the possible sale of the Knit Business.
On February 17, 1999, Messrs. Manuel and Green met at Cygne's offices in
New York City with Messrs. Joe and Ralph Nakash. At the meeting we reached an
agreement-in-principle with Jordache on the terms and conditions of the Sale of
the Knit Business. On February 25, 1999, our counsel delivered an initial draft
of the proposed acquisition agreement to counsel for Jordache, and the
respective counsel for Cygne and Jordache held several discussions over the next
week regarding the draft agreement.
On March 5, 1999, Mr. Manuel and counsel for Cygne met with Mr. Joe
Nakash and counsel for Jordache to negotiate open issues. Following the meeting,
counsel for Cygne circulated a revised draft of the proposed acquisition
agreement to counsel for Jordache, and the respective counsel for Cygne and
Jordache held several discussions.
On March 15, 1999, a special meeting of Cygne's Board of Directors was
held to discuss the possible sale of the Knit Business. Cygne management
reviewed with the Board the status of negotiations, the business prospects of
the Knit Business and the rationale for a possible sale of the Knit Business.
The Board focused primarily on the net assets employed by the Knit Business and
on the effect of a possible sale on Cygne's continuing operations. Counsel for
Cygne reviewed with the directors the terms of the proposed acquisition
agreement. After detailed discussions, including pricing, the Cygne Board
approved the Sale and instructed management to continue with negotiations and
provided guidance with respect to acceptable terms regarding the proposed sale.
Following the Cygne Board meeting, management of Cygne and Jordache had
continuing discussions to finalize the acquisition agreement. On March 24, 1999,
Mr. Manuel, Mr. Nakash and counsel for Cygne and Jordache met to resolve all
open issues relating to the Sale of the Knit Business. The original acquisition
agreement was signed on March 25, 1999 and announced publicly on March 26, 1999
subsequent to the closing of the financial markets.
19
<PAGE>
Due to complications, it took us longer than expected to resolve our
Approved Enterprise status in Israel. As a result, it became clear that we would
be unable to complete the Sale by the original anticipated July 31, 1999 closing
date. As a result, we requested that Jordache amend the acquisition agreement to
extend the date after which either party could terminate the agreement. Jordache
indicated that it was only willing to extend the date if it received the benefit
of the earnings of the Knit Business beginning August 1, 1999, which it had
anticipated receiving under the original acquisition agreement. Jordache also
requested the right to manage the Knit Business beginning August 1, 1999. At the
same time, the Knit Business was facing liquidity pressures, so we requested
that Jordache provide us financing in respect of our unfilled purchase orders
for WalMart Stores, for which MTGI was manufacturing the clothing. During the
last week of July and the first 10 days of August, we negotiated the revised
terms of the Sale and the terms of the management agreement and the financing
for the WalMart purchase orders.
On August 9, 1999, a special meeting of Cygne's Board of Directors was
held to discuss the proposed amendments to the terms of the Sale of the Knit
Business. After detailed discussion, the Cygne Board approved the revised terms
of the Sale, instructed management to continue with negotiations and provided
guidance with respect to acceptable terms regarding the proposed sale. We signed
the Acquisition Agreement, a management agreement and a letter agreement
relating to the WalMart purchase orders on August 11, 1999, all effective as of
August 1, 1999.
REASONS FOR THE SALE; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has determined that the terms of the Sale are
fair to, and in the best interests of, the stockholders of Cygne, and has
unanimously approved the Acquisition Agreement. Accordingly, the Board of
Directors unanimously recommends that the stockholders vote to approve and adopt
the Acquisition Agreement. In reaching its conclusion, the Board of Directors
considered a number of factors, including:
o the limited growth opportunities for the Knit Business;
o the historical financial performance of the Knit Business, which
has been erratic;
o the cash requirements of the Knit Business, which uses a
substantial portion of our cash resources and thus limits our
ability to use the cash elsewhere, particularly in our growing
woven business;
o the purchase price for the Knit Business, which will allow us to
recover all the cash we currently have invested in the business;
and
o the possibility that Jonathan Kafri, who runs the Knit Business
and on whom the Knit Business is dependent, might leave, in which
event our ability to sell the Knit Business as an ongoing
operation would be adversely affected.
Among the specific factors considered in evaluating Jordache's offer,
the Board of Directors of Cygne noted:
o Jordache will pay cash for the Assets so that there is no risk
involved to Cygne or the stockholders with the form of
consideration.
o A larger organization such as Jordache, with access to more
resources and with a higher profile within the apparel industry,
is likely to be better positioned to expand the Knit Business. In
light of our size and financial resources and the risks
associated with continuing to manufacture and merchandise women's
private label knit clothing,
20
<PAGE>
the price that Jordache was willing to pay for the Knit Business
was greater than the value of the Knit Business if retained by
us.
o Based on our efforts in seeking a potential acquirer and the
Board's knowledge of the marketplace, it was highly unlikely that
a sale could be structured with another purchaser that would
offer greater value to the stockholders.
o The terms and conditions of the Sale were favorable to us and our
stockholders.
The foregoing discussion of the factors considered by Board of
Directors is not intended to be complete, although it does include all material
factors considered by the Board of Directors. In view of the variety of factors
considered in connection with its evaluation of the Sale, the Board of Directors
did not find it practicable to and did not attempt to rank or assign relative
weights to the foregoing factors. In addition, individual members of the Board
of Directors may have given different weights to different factors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ADOPTION OF THE ACQUISITION AGREEMENT.
USE OF PROCEEDS
We plan to use a portion of the proceeds to fund transaction expenses
and taxes related to the Sale. We estimate that the expenses and taxes incurred
by us in connection with the Sale (including accounting, legal and printing fees
and the severance payments to employees of the Knit Business, including an
$800,000 severance payment to Mr. Kafri), will aggregate approximately $2.1
million. We will use the remaining proceeds from the Sale, together with
retained cash and collections on accounts receivable of the Knit Business, to
repay bank borrowings related to the Knit Business (which aggregated
approximately $7.5 million at July 31, 1999), and a portion of the other
liabilities of the Knit Business (which aggregated approximately $3.2 million at
July 31, 1999). Had we closed the Sale on July 31, 1999, the last day of our
latest full fiscal quarter, we would have received proceeds of $11.8 million,
consisting of $10.8 million for the Assets, commissions of $600,000 and a
non-compete payment of $400,000. At July 31, 1999, the cash and accounts
receivable of the Knit Business aggregated approximately $4.7 million. The
purchase price mechanism, which reduces the purchase price by the adjusted
income before tax of the Knit Business from August 1, 1999 to the closing date,
has the effect of treating the knit business as if it were sold effective July
31, 1999.
NO PAYMENT, DIVIDEND OR DISTRIBUTION TO HOLDERS OF COMMON STOCK
The stockholders of Cygne will not receive any payments, whether as a
dividend or distribution in liquidation, as a result of the Sale. Any
determination to pay dividends in the future will be at the discretion of our
Board of Directors and will be dependent upon our results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant by the Board of Directors. The Board of Directors does
not intend to declare dividends in the foreseeable future, but instead intends
to retain earnings, if any, for use in our business operations.
21
<PAGE>
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
The Delaware General Corporation Law governs stockholders' rights in
connection with the Sale. Under the applicable provisions of Delaware law,
Cygne's stockholders have no right in connection with the Sale to dissent and
seek appraisal of their shares of Common Stock.
THE ACQUISITION AGREEMENT
The following is a brief summary of certain provisions of the
Acquisition Agreement, is not complete and is qualified in its entirety by
reference to the copy of the Acquisition Agreement included as APPENDIX A to
this Proxy Statement. All stockholders are urged to read carefully the
Acquisition Agreement in its entirety.
ASSETS TO BE SOLD AND LIABILITIES TO BE ASSUMED
The Assets to be transferred to Jordache consist of substantially all
of the assets used by us in the manufacture of women's knit clothing, including
machinery, equipment, raw materials, leases, rental agreements, supplies used in
the business, furniture, computer hardware and software and certain operating
data and records of M.T.G.I. - Textile Manufacturers Group (Israel) Ltd.
("MTGI") and network equipment, as well as all of the outstanding stock (the
"Stock ") of Wear & Co. Srl ("Wear"). MTGI is our wholly-owned Israeli
subsidiary and Wear is our wholly-owned Italian subsidiary.
The Sale does not include cash, accounts receivable and certain other
assets of MTGI's business, which aggregated approximately $4.7 million on July
31, 1999.
The liabilities to be assigned to, and assumed by, Jordache are all
obligations of MTGI under the contracts and registrations included within the
assets sold to Jordache that arise and are to be performed after the closing of
the Sale.
PURCHASE PRICE
In consideration of the sale to Jordache of the Assets, Jordache has
agreed to pay us cash consideration equal to (a) the adjusted net book value of
the inventory, fixed assets, advances to vendors and an investment in a dye
house facility owned by MTGI less an amount equal to the difference between (1)
the sum of (A) $80,000 and (B) MTGI's income before taxes for the period from
August 1, 1999 to the Closing Date and (2) the operating expenses of Wear and
Wear & Co. International, Inc., the U.S. marketing company for MTGI and (b)
$100,000 for the outstanding stock of Wear and to assume the liabilities
described above. At the Closing, Jordache will deliver to us an amount equal to
our estimate of the purchase price, except that in estimating the adjusted net
book value of the Assets work-in-progress inventory will be valued (only for
purposes of the estimate) at 75% of the selling price of the garments in
progress, and $100,000 for the outstanding stock of Wear. Of the amount to be
delivered to us at closing, an amount equal to our estimate of 10% of the value
of the inventory (the "Purchase Price Escrow Amount") will be placed in an
escrow account pending preparation and agreement on the adjusted net book value
of the Assets, MTGI's income before taxes and the operating expenses of Wear and
Wear & Co. International. Pursuant to the Acquisition Agreement, we will, as
soon as practicable but no more than 30 days after the Closing Date, prepare and
deliver to Jordache a statement computing the adjusted net book value on the
Closing Date of the Assets being sold, MTGI's income before taxes for the period
from August 1, 1999 to the Closing Date and the operating expenses of Wear and
Wear & Co. International for the same period. The adjusted net tangible book
value of the Assets will be determined in accordance with generally accepted
accounting principles, except that
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(i) inventory will be valued in accordance with the formula set forth
in the Acquisition Agreement;
(ii) our interest in DyeCo Textile Holdings Ltd., a dye house
facility, will be valued at our cost; and
(iii) leasehold improvements will be valued at one-third of net book
value.
Jordache will have 30 days to review our calculation of the adjusted net book
value, income before tax and operating expenses. If they do not agree with our
calculation, we will try to resolve the differences. If we cannot do so within
15 days, our respective accounting firms will choose a firm of independent
accountants to resolve the remaining differences. If the final determination of
the purchase price is:
o higher than the amount paid to us at Closing, Jordache is
required to immediately pay the difference to us; or
o less than the amount paid to us at Closing, then we must
immediately pay the difference to Jordache, first through
reduction of the Purchase Price Escrow Amount and then by payment
of cash.
If we had closed the sale on July 31, 1999, the last day of our latest full
fiscal quarter, we would have received approximately $10.8 million for the
Assets pursuant to the formula set forth above, of which approximately
$1,000,000 would have been placed in escrow. The purchase price mechanism, which
reduces the purchase price by the adjusted income before tax of the Knit
Business from August 1, 1999 to the closing date, has the effect of treating the
knit business as if it were sold effective July 31, 1999.
Under the original acquisition agreement executed on March 25, 1999,
Jordache had agreed to pay us cash consideration equal to (a) the adjusted net
book value of the inventory, fixed assets, advances to vendors and an investment
in a dye house facility owned by MTGI and (b) $100,000 for the outstanding stock
of Wear and to assume the liabilities described above. We had agreed to escrow
$750,000 of the purchase price to secure our indemnification obligations under
the original acquisition agreement, which obligations had a maximum limit of
$750,000.
THE CLOSING
Cygne and Jordache are working toward closing the Sale as quickly as
possible, with the goal of completing the Sale as soon as practicable after the
Annual Meeting is held.
REPRESENTATIONS AND WARRANTIES
The Acquisition Agreement also contains various representations and
warranties of MTGI and the stockholders of Wear including, among others,
representations and warranties related to corporate organization and similar
corporate matters; authorization and enforceability of the Acquisition
Agreement; no conflicts and requisite consents; government approvals and
filings; title to the Assets and the Stock; contracts, obligations and
commitments; absence of legal proceedings; compliance with applicable laws;
ownership, title to and condition of the tangible Assets; contracts;
registrations, permits, approvals and similar consents; and employees and labor
matters.
The Acquisition Agreement also contains various representations and
warranties of Jordache including, among others, representations and warranties
related to corporate organization and similar
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corporate matters; authorization and enforceability of the Acquisition
Agreement; no conflicts and requisite consents; government approvals and
filings; and absence of legal proceedings.
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
AND LIMITATION ON LIABILITY
Under the Acquisition Agreement, MTGI and/or the stockholders of Wear
are required to indemnify Jordache from and against any losses and expenses
suffered or incurred by Jordache and arising out of any misrepresentation,
breach of warranty, nonfulfillment of or failure to perform any covenant or
agreement on the part of MTGI and the stockholders of Wear contained in the
Acquisition Agreement, or arising out of any liability of MTGI and Wear which is
not assumed by Jordache or any tax liability arising out of MTGI's business.
Jordache is required to indemnify MTGI and/or the stockholders of Wear
from and against any losses and expenses suffered or incurred by MTGI and/or
Wear and arising out of any misrepresentation, breach of warranty,
nonfulfillment of or failure to perform and covenant or agreement on the part of
Jordache contained in the Acquisition Agreement, or arising out of any liability
of MTGI which is assumed by Jordache.
No claim for indemnification can be made by a party against the other
party unless and until the losses suffered by the party exceed $25,000 in the
aggregate, in which event, the party suffering the losses may make a claim for
indemnification of the losses suffered in excess of $25,000. The amount of
losses suffered by either party for which it may make a claim for
indemnification is limited to a maximum of $500,000 in the aggregate ($100,000
in the case of the stockholders of Wear). The representations and warranties of
the parties in the Acquisition Agreement survive until December 31, 1999 unless
a claim in respect of a representation or warranty is made prior to that date.
Indemnification under the Acquisition Agreement is Jordache's sole and exclusive
remedy for any losses suffered arising out of any misrepresentation, breach of
warranty, nonfulfillment of or failure to perform any covenant or agreement on
the part of MTGI and/or Wear contained in the Acquisition Agreement.
We have agreed to guarantee MTGI's and Wear's indemnification
obligations under the Acquisition Agreement.
ADDITIONAL AGREEMENTS
The Acquisition Agreement provides that MTGI, Wear and Jordache must
comply with certain covenants. Among such covenants, MTGI and Wear must, prior
to the closing of the Sale: (a) provide Jordache and its representatives with
full access to, and all information and data concerning, the Knit Business; (b)
maintain, preserve and protect the Knit Business; (c) operate the Knit Business
in the ordinary course consistent with past practice; and (d) refrain generally
from acting or failing to act in a manner that would cause its representations
and warranties to be breached.
In addition, each of MTGI, Wear's stockholders and Jordache have
agreed, prior to the closing of the Sale: (a) to make all filings and
submissions required to be made in order to consummate the Sale; (b) to use its
reasonable efforts to obtain all authorizations, approvals, consents and waivers
from third parties and any governmental or regulatory authority required of
MTGI, Wear and Jordache to consummate the Sale; (c) to use its reasonable
efforts to take all other action necessary to consummate the Sale; and (d) to
cooperate with each other in obtaining all necessary authorizations, approvals,
consents and waivers.
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Following the closing of the Sale, (a) Jordache and MTGI have agreed to
discharge all liabilities assumed and retained, respectively, (b) MTGI and
Wear's stockholders have agreed to do what is necessary to protect Jordache's
interests in the Assets being transferred in the Sale, (c) the parties will
share data to the extent documents or records are needed by a party to comply
with its obligations under applicable law and regulations, (d) Jordache will
assist MTGI in collecting all accounts receivable arising from MTGI's business
prior to the Closing Date, and (e) MTGI will not source knit products in Israel,
Jordan or the Palestinian territory for the six month period following the
Closing Date.
CONDITIONS TO THE SALE
The obligations of MTGI, the stockholders of Wear and Jordache to
effect the Sale are subject to the fulfillment or waiver of the following
conditions: (a) each of the representations and warranties made by each other
party in the Acquisition Agreement shall be accurate in all material respects as
of the closing date of the Sale; (b) each agreement, covenant and obligation
required to be performed or complied with prior to the Closing by each other
party shall have been performed or complied with in all material respects and
each party shall have received a certificate stating that the other party has
fulfilled the conditions described in clauses (a) and (b) above; (c) Cygne's
stockholders shall have approved the Acquisition Agreement as required by
applicable law; (d) each other party shall have obtained all of the consents and
approvals necessary to effect the Sale; (e) there shall not be in effect on the
closing date of the Sale any order or law restraining, enjoining or otherwise
prohibiting or making illegal the Sale; (f) all proceedings to be taken and
documents to be delivered by MTGI and Wear's stockholders in connection with the
transactions contemplated in the Acquisition Agreement shall have been taken or
delivered; (g) Cygne and Jordache shall have entered into the non-compete
agreement described below; (h) Jonathan Kafri, the President of the Knit
Business, shall have delivered to MTGI and Cygne an agreement releasing Cygne
and its affiliates from all obligations they have to Jonathan Kafri; and (i)
Jordache shall have arranged that all letters of credit issued on behalf of MTGI
and Wear's stockholders for the Knit Business be released as of the Closing.
TERMINATION
The Acquisition Agreement may be terminated (a) by mutual written
consent of Jordache, MTGI and Wear's stockholders, (b) by any party if the Sale
is not consummated by October 15, 1999, or such later date as the parties may
agree, provided that the terminating party was not at fault for the delay, (c)
by any party if Cygne's stockholders do not approve the Sale at the Annual
Meeting, or (d) by either MTGI and Wear's stockholders or Jordache if the other
party materially defaults or breaches any of its covenants, agreements or
representations and warranties and the default or breach cannot be cured and has
not been waived. We and Jordache have extended the October 15, 1999 date to
October 30, 1999.
FEES AND EXPENSES
The Acquisition Agreement provides that each party will pay all of the
fees and expenses incurred by it in connection with the Sale, whether or not the
Sale is consummated.
NON-COMPETITION AGREEMENT
As a condition to Jordache's obligation to purchase the Assets, we have
agreed to enter into a Non-Competition Agreement pursuant to which we have
agreed not to source knit products in Israel, Jordan or the Palestinian
territory for the six month period following the Closing Date. Jordache will pay
us $400,000 at the Closing for our non-compete agreement.
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COMMISSION AGREEMENT
In connection with the Sale, Jordache has agreed to pay us at closing a
commission of 6% on all orders for garments included in the Assets, up to a
maximum of $600,000. If the transaction had closed on July 31, 1999, the last
day of our latest full fiscal quarter, we would have received commissions of
$600,000 under this agreement.
SEVERANCE ARRANGEMENT WITH JONATHAN KAFRI
Jonathan Kafri runs our Knit Business. In connection with the Sale, we
have agreed to pay him $800,000 in severance payments, and he has agreed to
release us from any claims he may have against us arising out his employment
with us.
MANAGEMENT AGREEMENT
Effective August 1, 1999, we entered into a management agreement with a
company affiliated with Jordache. Under this agreement, Jordache's affiliate
will manage MTGI's business pending the closing of Jordache's acquisition of the
Knit Business. Under the agreement, the manager is obligated to manage the
business in the ordinary course and consistent with past practice, and is not
permitted, without the consent of MTGI and our Chief Executive Officer, to
change the nature of MTGI's business or incur any obligation or liability other
than those incurred in the ordinary course of business and consistent with past
practice that do not exceed $25,000 in the aggregate. Because Jordache will be
entitled to the profits of MTGI's business as of August 1, 1999, through a
reduction in the purchase price for the Assets paid to us, the manager will
receive no compensation for managing MTGI's business.
PURCHASE ORDER FINANCING ARRANGEMENT
Jordache has also agreed to the following arrangements with respect to
WalMart Stores purchase orders of Sportswear International (USA), Inc., one of
our subsidiaries for which MTGI manufactures clothing:
-- With respect to finished goods at July 31, 1999 that have been
shipped by MTGI to Sportswear but not shipped to WalMart,
Jordache paid us $4,019,903 on August 11, 1999, which represented
97% of the invoice price (after giving effect to WalMart's
standard terms). $3,642,141.20 of the amount paid to us was paid
on our behalf directly to MTGI's lender in respect of financing
provided to manufacture the finished goods. The account
receivable from WalMart has been assigned to Jordache; however,
if WalMart has not paid such receivable by November 30, 1999,
Sportswear must repurchase the unpaid amount of the receivable.
MTGI has guaranteed Sportswear's obligation to repurchase the
receivable.
-- With respect to all finished goods manufactured for WalMart after
August 1, 1999, MTGI will sell such goods to Jordache for the
MTGI invoice price plus certain specified amounts, with Jordache
being entitled to offset amounts owed to it for fabric provided
to MTGI in connection with the manufacture of the inventory. At
the time Sportswear is ready to ship the inventory to WalMart,
Jordache will transfer title to the inventory to Sportswear in
exchange for the assignment to Jordache of the account receivable
from WalMart.
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ACCOUNTING TREATMENT OF THE SALE
For accounting purposes, the Sale will be presented as a sale of assets
transaction. Upon the consummation of the Sale, the excess, if any, of the book
value of the assets sold over the purchase price received by us will be
recognized as a loss on our books. In 1998 we established a provision of $2.6
million for the impairment of the Knit Business assets as a result of the
proposed sale of the business to Jordache. This provision includes the write-off
of the unamortized goodwill of the business ($1.7 million), the loss on assets
to be sold ($0.3 million) and estimated transaction costs ($0.6 million). In the
first half of 1999 we established an additional provision of $0.9 million for
the impairment of the Knit Business assets, representing an additional loss on
the Assets to be sold ($0.4 million) and additional transaction costs, including
taxes ($0.5 million).
INTERESTS OF CERTAIN PERSONS IN THE SALE
All of our executive officers and directors own shares of our Common
Stock and/or options to purchase shares of our Common Stock and, to that extent,
their interest in the Sale is the same as that of other stockholders of Cygne.
The consummation of the Sale will constitute a "change in control of
the Company " for purposes of employment agreements with our executive officers
and our stock option plans. As a result, if we fail to renew the employment
agreement of any executive officer for a period of two years following the
closing of the Sale, such executive will be entitled to certain specified
severance payments. In addition, all outstanding options will become immediately
exercisable upon consummation of the Sale. See "Executive Compensation -
Employment Agreements."
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ADDITIONAL INFORMATION ABOUT CYGNE
UNLESS OTHERWISE NOTED, ALL REFERENCES TO A YEAR REFER TO OUR FISCAL
YEAR COMMENCING IN THAT CALENDAR YEAR AND ENDING ON THE SATURDAY NEAREST JANUARY
31 OF THE FOLLOWING YEAR. UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS
"we," "our," "Company" OR "Cygne" INCLUDES THE OPERATIONS OF CYGNE DESIGNS, INC.
AND ITS SUBSIDIARIES AS THEN IN EXISTENCE.
BUSINESS
GENERAL
We are a private label manufacturer of women's apparel, serving
principally The Limited, Inc. Our products include woven and knit career and
casual women's apparel, although we have agreed, subject to stockholder
approval, to sell substantially all our assets relating to the Knit Business. As
a private label manufacturer, we produce apparel upon orders from our customers
for sale under the customers' own labels, rather than producing our own
inventory of apparel for sale under the Cygne name.
The manufacture of private label apparel is characterized by high
volume sales to a small number of customers at competitive prices. Although
private label gross margins are lower than in the brand name apparel industry,
collection and markdown costs are typically commensurably lower, and inventory
turns are generally higher. Inventory risks are also reduced because the
purchasing of fabric and other supplies begins only after purchasing commitments
have been obtained from customers. We believe that retailers, including our
customers, are increasingly sourcing private label products themselves rather
than utilizing outside vendors like us.
We historically have been dependent on one or two key customers. A
significant portion of our sales currently are, and are expected to continue to
be, to various divisions of The Limited, Inc. In 1998, sales to divisions of The
Limited, Inc. were $25.5 million, or 59% of our total sales, of which sales of
$9.4 million, or 37% of our sales to divisions of The Limited, Inc., were knit
products. Sales to The Limited, Inc. decreased in each of the last several
years. There can be no assurance that The Limited, Inc. will continue to
purchase merchandise from us in the future, or that we will be able to attract
new customers. We believe that The Limited, Inc., like other retailers, is
increasing its sourcing capabilities and reducing its reliance on outside
vendors, including us, for these services.
SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
Cygne, which was formed in 1984 and went public in July 1993, expanded
rapidly in 1994 with the acquisition of Fenn, Wright & Manson, Incorporated
("FWM"), a designer, merchandiser, manufacturer and wholesaler of women's and
men's apparel primarily serving prominent specialty retail store chains and
department stores in the United States and the United Kingdom, and the
acquisition of GJM International's intimate apparel and sleepwear operations
(the "GJM Business "). During this period, our joint venture sourcing
arrangement ("CAT") with Ann Taylor Stores Corporation ( together with its
affiliates "Ann Taylor ") also expanded rapidly. However, retailers' diminishing
reliance upon outside design, merchandising and sourcing services and liquidity
pressures in 1995 began to adversely affect our operating results. In response
to these factors, we began to restructure our operations by selling the United
Kingdom subsidiary of FWM and discontinuing the remaining operations of FWM.
In February 1996, we sold substantially all of the assets relating to
our GJM Business to Warnaco Inc. for $12.5 million in cash and Warnaco assumed
certain liabilities of the business. We have
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agreed to indemnify Warnaco for any claims for taxes arising out of our
operation of the GJM Business prior to the sale of the GJM Business to Warnaco.
We incurred a loss from the disposition of the GJM Business of approximately $31
million in 1995.
In September 1996, we sold to Ann Taylor (i) our interest in CAT and
(ii) the assets of our division that were used in sourcing merchandise for Ann
Taylor (the "Ann Taylor Disposition "). We received 2,348,145 shares of Ann
Taylor common stock and approximately $8.9 million in cash. Ann Taylor also
assumed certain liabilities of the acquired operations. As a result of the
transaction, we realized a pre-tax gain of $29.6 million. Between October 1996
and January 1997, we sold all of the 2,348,145 shares of Ann Taylor common stock
resulting in aggregate net proceeds of approximately $44.3 million and a pre-tax
gain of approximately $6.1 million.
Net sales to Ann Taylor during 1996 amounted to 67% of our net sales.
Since the closing of the Ann Taylor Disposition, we have not had, and do not
anticipate that we will have, sales to Ann Taylor. If the Ann Taylor Disposition
had been consummated on February 4, 1996 (the first day of our 1996 fiscal
year), we would have had pro forma net sales of $84.8 million for 1996 and our
pro forma loss from operations would have been $15.5 million. Pro forma net loss
(excluding the gain on the Ann Taylor Disposition and on the subsequent sale of
the Ann Taylor common stock) for 1996 would have been $17.7 million and pro
forma net loss per share for 1996 would have been $1.42.
The Limited, Inc. (consisting primarily of The Limited Stores and
Lerner) accounted for approximately 25%, 65%, and 59% of our net sales for 1996,
1997, and 1998, respectively, and approximately 55% and 53% of our net sales for
the first half of 1998 and 1999, respectively.
We used the cash proceeds received from the GJM Disposition and the Ann
Taylor Disposition, together with a substantial portion of the cash proceeds
from the sale of the shares of Ann Taylor common stock, to pay off the
outstanding indebtedness under our bank and trade credit facilities, which
facilities have been terminated. We have been using the balance of the proceeds
for working capital purposes.
During 1996 we incurred a reorganization expense of $4.8 million as a
result of the downsizing of Cygne and the redeployment of assets necessary to
meet changes in continuing customer needs. The major components of this expense
were costs in connection with early termination of leases for excess space
outside of New York, disposition of related fixed assets, and severance costs
related to the resignation of Mr. Benson, our President, as an officer and
employee. All of such costs were paid prior to the start of our 1998 fiscal
year.
During 1997 we provided for lease termination expense of $4.0 million
as a result of our decision to relocate from our existing New York office space
to substantially smaller New York office space. On March 1, 1999, we moved our
offices to smaller New York office space. The actual expenses in connection with
this lease termination approximated $3.1 million. Therefore, the balance of $0.9
million of this provision was reversed in 1998. Approximately $1.0 million of
the provision had not been paid as of January 30, 1999.
During 1997 we discontinued our (i) design studio, which had been
engaged primarily in the design and development of private label apparel
collections for certain Japanese retailers, and (ii) our license agreements
entered into during the summer of 1996 with the Kenzo Group ("Kenzo") for the
manufacture and distribution in the United States, Canada and Mexico of the
Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines.
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In December 1997, Mr. Manuel acquired 734,319 shares of our Common
Stock from a limited partnership controlled by The Limited, Inc. Upon the
closing of the transaction, The Limited, Inc. did not own any shares of Cygne
Common Stock.
As discussed earlier under "Proposal No. 1--The Sale, " we have agreed,
subject to stockholder approval, to sell our Knit Business to Jordache. In 1998
our Knit Business had revenues of $25.9 million and gross profit of $1.1
million, while the remainder of our business had revenues of $17.1 million and
gross loss of $0.8 million. In the first half of 1999, which ended July 31,
1999, our Knit Business had revenues of $14.0 million and gross profit of $0.8
million, while the remainder of our business had revenues of $12.7 million and
gross profit of $1.9 million.
We are continuing to review our business operations and expect to
continue to incur additional costs in the future associated with the further
restructuring or downsizing of our operations.
See also "--Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements of Cygne.
PRODUCTS
We currently participate in two principal segments of the apparel
market: woven career and casual women's sportswear and knit career and casual
women's sportswear. During 1998 and the first half of 1999 our products included
tops, jackets, skirts and pants.
SOURCING, MANUFACTURING AND SALES
We source and manufacture garments for our customers which have been
designed and developed by the customer. In the past we also developed and
designed products for our customers.
Private label manufacturing usually operates on a tighter schedule than
brand name manufacturing because goods are not manufactured until purchase
orders are received and customers strive for quick response time in order to
react to market changes and test results. Delivery cycles vary according to the
type of products manufactured, but frequently occur within a period of six weeks
from fabric delivery to garment delivery. Meeting customer delivery requirements
is both essential and difficult given the global nature of the manufacturing
process.
During 1998 substantially all of our products were manufactured outside
the United States, either by non-affiliated contract manufacturers or at our
sewing facilities. Only 23% of our net sales resulted from products which were
manufactured by us in our own sewing facilities and approximately 77% resulted
from products which were manufactured by non-affiliated contract manufacturers.
We intend to continue to utilize foreign contract manufacturers for a
significant percentage of our manufacturing requirements. Our contract
manufacturers are located in several countries in the Far East, the Middle East
and Central America. In addition, we own and operate a manufacturing facility in
Guatemala and lease and operate a manufacturing facility in Israel. We are
selling the assets of our Israeli manufacturing facility as part of our sale of
the Knit Business. During 1998 products representing approximately 8% of our net
sales were produced in the Far East, approximately 60% in the Middle East,
approximately 29% in Central America and approximately 3% in the U.S. We review
our product sourcing on an ongoing basis and may alter this allocation to meet
changing conditions and demands. In connection with our sale of the Knit
Business, Cygne Designs, Inc. and MTGI have agreed not to source
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products in Israel, Jordan, and the Palestinian territories for a period of six
months following the closing of the Sale.
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays and interruptions, political instability,
foreign currency fluctuations, economic disruptions, expropriation,
nationalization, the imposition of tariffs and import and export controls,
changes in governmental policies (including U.S. policy toward these countries)
and other factors which could have an adverse effect on our business. In
addition, we may be subject to risks associated with the availability of and
time required for the transportation of products from foreign countries. The
occurrence of certain of these factors may delay or prevent the delivery of
goods ordered by customers, and such delay or inability to meet delivery
requirements would have a severe adverse impact on our results of operations and
could have an adverse effect on our relationships with our customers.
Furthermore, the occurrence of certain of these factors in countries in which we
own or lease and operate manufacturing facilities could result in the impairment
or loss of our investment in such countries. The loss of any one or more of our
foreign manufacturers could have an adverse effect on our business until
alternative supply arrangements were secured.
We from time to time experience difficulties in obtaining timely
delivery of products of acceptable quality which has resulted, in many cases, in
rejections or chargebacks by customers. During 1996 and 1997 we experienced
substantial rejections or cancellations by customers with respect to certain of
our products. During 1998, we continued to experience some rejections but to a
far lesser extent than in 1996 and 1997. We believe that in some cases these
difficulties resulted from not having sufficient access to and control over the
manufacturing process for such products as well as shortened manufacturing times
attributable to delays in obtaining required raw materials due to the liquidity
pressures we faced. There can be no assurance that we will not continue to
experience such difficulties in the future. See "--Management's Discussion and
Analysis of Financial Condition and Results of Operations--General."
During 1993, we began operating our own sewing factories, located
outside the United States. Operating manufacturing facilities rather than
contracting with independent manufacturers requires us to maintain a higher
level of working capital. In addition, reduced sales have an even greater
adverse impact on our results in light of the fixed costs needed to own and
operate our own factories. All of our manufacturing operations are located
outside the U.S. and, accordingly, we are subject to many of the same risks as
relying on foreign contract manufacturers. We currently operate manufacturing
facilities in Guatemala and Israel, although we will cease manufacturing in
Israel following the closing of the sale of our Knit Business. See
"--Properties." In connection with the GJM Disposition, we sold or closed our
manufacturing facilities in The People's Republic of China, the Philippines and
Sri Lanka. Our Hong Kong sourcing office was significantly downsized in 1996 and
its operations were closed in April 1997.
RAW MATERIALS
We supply the raw materials to our domestic manufacturers and usually
supply the raw materials to foreign manufacturers. Otherwise, the raw materials
are purchased directly by the manufacturer in accordance with our
specifications. Raw materials, which are in most instances made and/or colored
specifically to our order, consist principally of fabric and trim and are
readily available from numerous domestic and foreign sources.
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Our foreign raw materials and finished goods purchases are frequently
made on a letter of credit basis, while our domestic purchases are made on an
open order basis. We do not have formal long-term arrangements with any of our
suppliers. We have experienced little difficulty in satisfying our raw material
requirements and consider our sources of supply adequate.
QUALITY ASSURANCE
Our quality assurance program is designed to ensure that our products
meet the quality standards of our customers. We employ inspectors in our
overseas offices and require our overseas agents to employ similarly qualified
quality control personnel. Foreign manufactured fabric is usually inspected both
prior to shipment by our overseas offices or agents as well as upon arrival at
their manufacturing destination.
COMPETITION
The private label apparel industry is highly fragmented, and we face
intense competition, including competition from our own customers (including
their affiliates) who have, or may establish, their own internal product
development and sourcing capabilities. Most of our competitors are larger in
size and have greater resources than we do. We compete primarily on the basis of
price, quality and short lead time high volume manufacturing.
We believe that many of our own customers (including their affiliates),
who possess, to varying degrees, the know-how and internal resources to develop
and source directly a portion of their requirements, constitute our major
competition. For example, The Limited, Inc., through its sourcing subsidiary,
Mast Industries, Inc., procures directly a substantial portion of its product
requirements. In addition, apparel divisions of The Limited, Inc. have formed
product development groups as well as added direct sourcing departments.
We believe that our business will depend upon our ability to provide
apparel products which are of good quality and meet our customers' pricing and
delivery requirements, as well as our ability to maintain relationships with key
customers. There can be no assurance that we will be successful in this regard.
IMPORT RESTRICTIONS
We source substantially all our products from a number of foreign
countries in the Far East, the Middle East and Central America. Our ability to
meet our customers' pricing requirements will depend, in large part, on our
ability to manufacture our products in countries where manufacturing costs are
low. However, because of quota limits, our manufacturing flexibility is reduced,
increasing the risk that we will need to manufacture more of our products in
countries where manufacturing costs are higher.
TEXTILE AGREEMENTS
Prior to January 1, 1995, apparel imports from most countries were
subject to bilateral textile agreements under the Multifiber Arrangement ("MFA")
of the General Agreement on Tariffs and Trade ("GATT") which allowed the
imposition of visa and quota restrictions on certain apparel and textile
articles, including a significant portion of those currently sold by us. Under
the Uruguay Round Agreements Act, the United States agreed to phase out these
bilateral quotas in three stages over a ten
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<PAGE>
year period. The agreement became effective on January 1, 1995 for the 124
member countries of the World Trade Organization ("WTO"). Those textile quotas
in effect on December 31, 1994 will remain in effect until they are "phased-out"
during the ten-year period. However, these quotas are subject to a growth
formula which uses as a basis the growth rate set forth in the bilateral textile
agreements in effect as of December 31, 1994 and provides for additional growth
of 16%, 25% and 27% of the base growth rate in the respective phase-out periods.
We believe that the quotas affecting most of the products imported by us are not
likely to be phased out until the end of the third and final stage, I.E., on
January 1, 2005. Once "phased-out," quotas cannot be imposed except in
accordance with GATT rules. These rules generally forbid bilateral quota
agreements and other discriminatory, country-specific restraints. However, some
form of global quota is still possible after completion of the ten year
phase-out period. Under limited circumstances, a new quota (called a
"transitional safeguard") may be imposed during the ten-year phase out period if
there is demonstrable evidence of serious damage, or actual threat of serious
damage, to a domestic industry producing like or competitive products due to a
sharp and substantial increase in imports of a particular product. The United
States may also counteract illegal transshipping practices by imposing new
quotas, issuing chargebacks against existing quotas or imposing embargoes. Such
action can be taken against both the actual country of origin and countries
through which such merchandise was transshipped. While it is not possible to
forecast the likelihood of such occurrences, the imposition of new quotas and/or
chargebacks could impact our ability to source imported merchandise.
Textile and apparel imports from non-members of the WTO, such as The
People's Republic of China, will continue to be subject to bilateral textile
agreements negotiated under the MFA. Under these agreements, the United States
may impose quota restraints on importations of specific categories of
merchandise not presently subject to such quota restraints. The bilateral
textile agreement with The People's Republic of China expires on December 31,
2000. The People's Republic of China is seeking membership in the WTO. Should
its application be approved, imports from The People's Republic of China may
become subject to the quota phase-outs discussed above or modifications thereof.
DUTY RATES
The products we import are subject to "Most Favored Nation (MFN)" or
column 1 rates of duty which range from zero to 38% AD VALOREM. As a result of
the Uruguay Round Agreements Act, many of these rates will be reduced over five
to fifteen years resulting on average in a 12% reduction from current rates of
duty.
On December 8, 1993, Congress adopted the North American Free Trade
Agreement ("NAFTA") under which originating apparel and other products from
Mexico and Canada are immediately exempt from quota restrictions and subject to
duty rates which are being reduced to zero over the next ten years. Similar
tariff rate preferences and quota exemptions are being phased in for certain
non-originating apparel products cut and sewn in Mexico and Canada. Negotiations
have begun to expand NAFTA to possibly include certain Central and South
American countries. Additionally, "NAFTA Parity" legislation may be introduced
to confer similar quota and duty benefits on countries subject to the Caribbean
Basin Economic Recovery Act (CBERA) including Guatemala.
Imports from The People's Republic of China receive MFN duty rates
under a waiver of the Jackson-Vanik Amendment to the Trade Act of 1974. Under
this statute, certain countries and non-market economies are prohibited from
receiving MFN rates of duties and other trade benefits unless an annual waiver
is issued by the President. The People's Republic of China has received a
Jackson-Vanik
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<PAGE>
Waiver annually since 1979. In May 1999 President Clinton renewed the waiver.
Congress can pass legislation disapproving the one-year extension of MFN to
China, but did not do so in 1999. If MFN for China is discontinued, goods from
China will be subject to "column 2" rates of duty, which range up to 90% AD
VALOREM. However, current duty rates will remain in effect at least until June
2000. The loss of MFN status for the People's Republic of China could adversely
affect our ability to supply products to our customers.
ADDITIONAL RESTRICTIONS
In the ordinary course of our business we are from time to time subject
to claims by the U.S. Customs Service for additional duties and other charges.
Similarly, from time to time we are entitled to refunds from the U.S. Customs
Service due to the overpayment of duties.
The U.S. and other countries in which our products are manufactured or
sold may, from time to time, impose new quotas, duties, tariffs or other
restrictions, including trade sanctions or revocation of "most favored nation"
status, or adversely adjust presently prevailing quotas or duty rates, which
could adversely affect our operations and our ability to import products at
current or increased levels. We cannot predict the likelihood or frequency of
any such events occurring.
We monitor duty, tariff and quota-related developments and continually
seek to minimize our potential exposure to quota-related risks through, among
other measures, geographical diversification of our manufacturing sources, the
maintenance of overseas offices, allocation of production to merchandise
categories where more quota is available and shifts of production among
countries and manufacturers. We also from time to time purchase quantities of
temporary quota in certain countries.
Our ability to import our products is subject to the cost and
availability of transportation to the U.S., the demand for production capacity
abroad by other manufacturers, economic or political instability resulting in
the disruption of trade from exporting countries, any significant fluctuation in
the value of the dollar against foreign currencies and restrictions on the
transfer of funds. Our operations have not been materially affected by any of
the foregoing factors to date, although there can be no assurance that these
factors will not adversely affect us in the future.
BACKLOG
At July 31, 1999 we had unfilled confirmed customer orders of $16.7
million for the Knit division and $8.3 million for the Woven division, compared
with unfilled customer orders of $12.8 million for the Knit division and $9.8
million for the Woven division at January 30, 1999 and $15.8 million for the
Knit division and $5.9 million for the Woven division at August 1, 1998 . The
amount of unfilled orders at a particular time is affected by a number of
factors, including the scheduling of manufacture and shipping of the product
which, in some instances, depends on the customer's demands. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. Our
experience has been that the cancellations, rejections or returns of orders do
not materially reduce the amount of sales we realize from our backlog.
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<PAGE>
EMPLOYEES
At August 31, 1999, we had approximately 610 full-time employees,
including approximately 535 employees at our facilities in Guatemala and 58
employees at our facilities in Israel and Italy. We consider our relations with
our employees to be satisfactory.
PROPERTIES
On March 1, 1999, we moved our executive and general offices from 1372
Broadway, New York to 680 Fifth Avenue, New York. Our office now consists of
6,000 square feet pursuant to a lease which expires at December 31, 1999 with an
annual rental expense of approximately $156,000.
In addition, on March 1, 1999, we paid $175,000 to the landlord of the
1372 Broadway premises to be released from any contingent rent liability on the
vacated executive and general offices described above as well as the contingent
rent liability on the 60,000 square feet of space previously subleased to Ann
Taylor in 1996 at this location.
During 1997, we had provided for lease termination expense of $4.0
million for the expenses connected with the move of our executive and general
offices described above as well as an amount to be paid to the landlord for the
release of our contingent rent liabilities. At January 30, 1999, we determined
that the expenses contemplated by this provision would approximate $3.1 million
and, as a result, the balance of $0.9 million of this provision is shown as a
recoupment of the 1997 provision in our 1998 financial statements.
We also lease an office and manufacturing facility in Israel, although
this lease will be transferred to Jordache in the Sale, and we own a sewing
facility in Guatemala. We believe that our existing facilities are well
maintained and in good operating condition.
LEGAL PROCEEDINGS
We are involved in various legal proceedings that are incidental to the
conduct of our business, none of which we believe could reasonably be expected
to have a material adverse effect on our financial condition or results of
operations.
TAX AUDITS
The U.S. Internal Revenue Service (the "IRS ") is conducting an audit
of the U.S. Federal income tax returns filed by GJM (US) Inc. for its taxable
years ending December 31, 1990 through October 7, 1994 (the date we acquired GJM
(US) Inc.). To date, the IRS has informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16 million (including some
penalties but not interest). Depending on the amount of the deficiency, the
amount of interest could be significant. The outcome of the audit of GJM (US)
Inc. cannot be predicted at this time. Although we are disputing the proposed
adjustment and believe that we have established appropriate accounting reserves
with respect to this matter, an adverse decision in this matter could have a
material adverse impact on us and our financial condition, results of operations
and cash flows.
In February 1999, the U.S. Customs Service commenced an audit of our
import operations for 1995, 1996 and 1997. The audit was completed in June 1999,
and we were assessed additional duties of approximately $29,000.
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<PAGE>
We are subject to other ongoing tax audits in several jurisdictions in
the United States and Israel. Although there can be no assurances, we believe
any adjustments that may arise as a result of these other audits will not have a
material adverse effect on our financial position, results of operations and
cash flows.
EXECUTIVE OFFICERS
Our executive officers are as follows:
Name Age Position With Cygne
- ---- --- -------------------
Bernard M. Manuel ..... 52 Director, Chairman of the Board and Chief
Executive Officer
Roy E. Green .......... 66 Senior Vice President--Chief Financial Officer,
reasurer and Secretary
BERNARD M. MANUEL has served as our Chief Executive Officer and a
director, as well as in several additional executive positions, since he joined
Cygne in October 1988. He currently serves as the Chairman of the Board, Chief
Executive Officer and a director. Mr. Manuel has been a director of Designs,
Inc., a retailer selling exclusively apparel and accessories manufactured or
licensed by Levi Strauss & Co., Inc., since 1990, and is a director of several
private companies in the U.S. and Europe. From 1983 until he joined Cygne, Mr.
Manuel was involved, through Amvent, Inc., a company he founded, in the transfer
of technology between Europe and the U.S. and related venture capital and merger
and acquisition activities, as well as in the apparel industry. Mr. Manuel
earned a Bachelor's of Science in Mathematics and several graduate degrees in
Mathematics and in Economics from the University of Paris, an M.S. in Political
Science from the "Institut d'Etudes Politiques" in Paris and an M.B.A. with high
honors (Baker Scholar) from the Harvard Business School, where he was awarded
both the Loeb Rhodes Fellowship for excellence in finance and the Melvin T.
Copeland prize for top performance in marketing.
ROY E. GREEN has served as our Chief Financial Officer, as well as in
various additional executive capacities, since October 1987. He currently serves
as our Senior Vice President--Chief Financial Officer, Treasurer and Secretary.
From 1974 until he joined Cygne, Mr. Green was employed by Cluett Peabody & Co.,
first as the Chief Financial Officer of its Arrow Co. division until 1979, then
as Vice President and Controller until 1985, and finally as Chief Financial
Officer. He has also worked as a certified public accountant for J. K. Lasser &
Co. and Hurdman & Cranstown. Mr. Green received a Bachelor's degree in Business
Administration from Rutgers University. Mr. Green is a certified public
accountant.
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RISK FACTORS
OUR BUSINESS IS DEPENDENT ON SALES TO THE LIMITED, INC.
During 1997 and 1998, The Limited, Inc. (consisting primarily of The
Limited Stores and Lerner) accounted for 65% and 59%, respectively, of our net
sales. During 1998, The Limited, Inc. accounted for 36% and 94% of sales of our
Knit Business and woven business, respectively. During the first half of 1999,
The Limited, Inc. accounted for 12% and 98% of sales of our Knit Business and
woven business, respectively. As a result of the Sale of the Knit Business, our
remaining business will be even more dependent on The Limited, Inc. than it
currently is. Although we have a long established relationship with The Limited,
Inc., our key customer, we do not have long-term contracts with any of our
customers, including The Limited, Inc. Since the consummation of the Ann Taylor
Disposition, we have not had, and do not anticipate that we will have, sales to
Ann Taylor. Sales to Ann Taylor constituted approximately 56% of our net sales
in 1996. Our future success will be dependent upon our ability to attract new
customers and to maintain our relationship with The Limited, Inc. There can be
no assurance that The Limited, Inc. will continue to purchase merchandise from
us at the same rate or at all in the future, or that we will be able to attract
new customers. In addition, as a result of our dependence on The Limited, Inc.,
The Limited, Inc. has the ability to exert significant control over our 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 with
respect to our business with The Limited, Inc. In addition, the apparel
divisions of The Limited, Inc. have formed direct sourcing departments. In 1995,
our sales to certain divisions of The Limited, Inc. decreased significantly and,
in 1996, 1997 and 1998 sales to certain divisions of The Limited, Inc. with
which we continue to do business decreased. In December 1997 a limited
partnership controlled by The Limited, Inc. sold its 734,319 shares of Cygne
stock to Mr. Manuel, our Chairman and Chief Executive Officer. Upon the closing
of the transaction, The Limited, Inc. did not own any shares of Cygne stock.
WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS LOCATED OUTSIDE THE
UNITED STATES
During 1998 substantially all of our products were manufactured outside
the United States, either by non-affiliated contract manufacturers or at our
sewing facilities. Only 23% of our net sales resulted from products which were
manufactured by us in our own sewing facilities and approximately 77% resulted
from products which were manufactured by non-affiliated contract manufacturers.
We intend to continue to utilize foreign contract manufacturers for a
significant percentage of our manufacturing requirements. Our contract
manufacturers are located in several countries in the Far East, the Middle East
and Central America. In addition, we own and operate a manufacturing facility in
Guatemala and lease and operate a manufacturing facility in Israel. We are
selling the assets of our Israeli manufacturing facility in the Sale. During
1998 products representing approximately 8% of our net sales were produced in
the Far East, approximately 60% in the Middle East, approximately 29% in Central
America and approximately 3% in the U.S. We review our product sourcing on an
ongoing basis and may alter this allocation to meet changing conditions and
demands. In connection with the Sale, Cygne Designs, Inc. and MTGI have agreed
not to source products in Israel, Jordan and the Palestinian territories for a
period of six months following the closing of the Sale of the Knit Business.
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays and interruptions, political instability,
foreign currency fluctuations, economic disruptions, expropriation,
nationalization, the imposition of tariffs and import and export controls,
changes in
37
<PAGE>
governmental policies (including U.S. policy toward these countries) and other
factors which could have an adverse effect on our business. Further, revocation
of "most favored nation" status for, or the imposition of trade sanctions
against, The People's Republic of China, where products representing
approximately 6% of our 1998 net sales and 15% of our woven product sales were
manufactured, could have a material adverse effect on our business. In addition,
we may be subject to risks associated with the availability of and time required
for the transportation of products from foreign countries. The occurrence of
certain of these factors may delay or prevent the delivery of goods ordered by
customers, and such delay or inability to meet delivery requirements would have
a severe adverse impact on our results of operations and could have an adverse
effect on our relationships with our customers. Furthermore, the occurrence of
certain of these factors in Guatemala and Israel, where we own or lease and
operate manufacturing facilities, could result in the impairment or loss of our
investment in such countries.
OUR BUSINESS IS SUBJECT TO IMPORT QUOTAS AND OTHER RESTRICTIONS
We import fabrics and finished products under the constraints imposed
by bilateral textile agreements between the U.S. and substantially all of the
countries from which we import goods. These agreements impose fixed quotas on
the quantity of certain types of goods, including a significant portion of those
currently sold by us, that may be imported into the U.S. from these countries.
Our ability to meet our customers' pricing requirements will depend, in large
part, on our ability to manufacture our products in countries where
manufacturing costs are low. However, because of quota limits, our manufacturing
flexibility is reduced, increasing the risk that we will need to manufacture
more of our products in countries where manufacturing costs are higher. The U.S.
and other countries in which our products are manufactured or sold may, from
time to time, impose new quotas, duties, tariffs or other restrictions. These
include trade sanctions and revocation of "most-favored-nation" trade status, or
adversely adjust presently prevailing quotas or duty rates, which could
adversely affect our operations and our ability to import products at current or
increased levels. See "--Business--Import Restrictions."
OUR BUSINESS IS SUBJECT TO ECONOMIC CYCLICALITY AND APPAREL RETAILING
The apparel industry is historically subject to substantial cyclical
variation, with purchases of apparel and related goods tending to decline during
recessionary periods when disposable income is low. A recessionary period could
have a material adverse effect on our business. In addition, various retailers,
including some of our customers, experienced financial difficulties during
recent years which have increased the risk of extending credit to such
retailers. See "--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent to a significant degree on the efforts of Bernard M.
Manuel, our Chairman of the Board and Chief Executive Officer, and Roy E. Green,
our Chief Financial Officer. Messrs. Manuel and Green each have an employment
agreement with us which includes restrictions on competition by them in certain
circumstances after termination of employment, subject to certain conditions.
See "Executive Compensation--Employment Agreements." The loss of the services of
Messrs. Manuel or Green could have an adverse effect on our business. Our
continued success is also dependent upon our ability to attract and retain
qualified employees to support our future growth, if any.
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<PAGE>
WE PARTICIPATE IN A HIGHLY COMPETITIVE INDUSTRY
The private label industry is highly fragmented, and we face intense
competition, including competition from our own customers (including their
affiliates) who have, or may establish, their own internal product development
and sourcing capabilities. Many of our own customers and their affiliates,
including The Limited, Inc., our primary customer, are among our major
competitors. Substantially all of our competitors are much larger in size and
have greater resources than us, and there can be no assurance that we will be
successful in competing with them in the future. We believe that our ability to
compete effectively will depend upon our ability to provide, within our
customers' time requirements, products which are of good quality and
attractively priced, as well as our ability to maintain relationships with key
customers. We cannot assure you that we will be able to compete successfully
against new competitors or that competitive pressures faced by us would not
adversely affect our business or operating results. See "--Business--
Competition."
MR. MANUEL HAS SIGNIFICANT CONTROL OVER CYGNE
Mr. Manuel beneficially owns approximately 40.0% of the outstanding
Common Stock, and has a significant influence over, and may in fact control, the
outcome of all matters submitted to a vote of our stockholders, including the
election of directors. Mr. Manuel has agreed to vote his shares in favor of the
Sale. See "Beneficial Ownership of Common Stock."
SELECTED FINANCIAL INFORMATION
The following tables summarize certain selected financial information
which should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto included at the back of this proxy statement. The
selected financial information for fiscal year 1994, 1995, 1996, 1997 and 1998
was derived from our consolidated financial statements, which were audited by
independent auditors. The information presented as of August 1, 1998 and July
31, 1999 and for the first half of 1998 and 1999 are unaudited and include, in
our opinion, all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly our financial position and results of operations for
these periods. Our results for the six months ended July 31, 1999 are not
necessarily indicative of the results we may achieve for the full fiscal year.
The acquisition of FWM in April 1994 and GJM in October 1994, the sale of FWM's
United Kingdom subsidiary and certain brand name rights in April 1995, the
discontinuance of the remaining operations of FWM in 1995, the GJM Disposition
in February 1996 and the Ann Taylor Disposition in September 1996, materially
affect the comparability of the financial data reflected below.
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<PAGE>
<TABLE>
<CAPTION>
Year(1) First Half(2)
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales ................................ $ 516,105 $ 540,063 $ 254,313 $ 43,379 $ 43,013 $ 14,754 $ 26,727
Cost of goods sold ....................... 433,700 510,761 226,456 43,063 42,753 14,593 24,033
--------- --------- --------- --------- --------- --------- ---------
Gross profit ............................. 82,405 29,302 27,857 316 260 161 2,694
Selling, general and administrative
expenses ............................... 54,261 72,182 27,251 10,331 4,381 2,372 2,024
Provision for impairment of Knit
business assets ........................ -- -- -- -- 2,564 -- 886
Provision (recoupment) for lease
termination expenses ................... -- -- -- 3,964 (902) -- --
Gain from sale of Ann Taylor
Woven Division and CAT ................. -- -- (29,588) -- -- -- --
Gain from sale of subsidiary, net ........ -- (4,742) -- -- -- -- --
Loss from sale of GJM business, net ...... -- 31,239 -- -- -- -- --
Reorganization expense ................... -- -- 4,813 -- -- -- --
Write-off of goodwill .................... -- 48,949 -- -- -- -- --
Amortization of intangibles .............. 2,505 3,425 364 364 364 182 --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ............ 25,639 (121,751) 25,017 (14,343) (6,147) (2,393) (216)
Other income(3) .......................... -- -- (6,864) -- -- -- --
Settlement of shareholder class action
and related legal expenses ............ -- -- 2,627 -- -- -- --
Interest income .......................... -- -- (80) (461) (428) (204) (49)
Interest expense ......................... 7,620 8,813 3,340 378 337 155 375
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interests ..................... 18,019 (130,564) 25,994 (14,260) (6,056) (2,344) (542)
Provision (benefit) for income taxes ..... 5,568 (6,216) 7,117 204 269 111 44
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interests .. 12,451 (124,348) 18,877 (14,464) (6,325) (2,455) (586)
Income attributable to minority interests. 1,642 1,710 961 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ........................ $ 10,809 $(126,058) $ 17,916 $ (14,464) $ (6,325) $ (2,455) $ (586)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share -- basic ..... $ 0.95 $ (10.04) $ 1.44 $ (1.16) $ (0.51) $ (0.20) $ (0.05)
========= ========= ========= ========= ========= ========= =========
Number of shares used in computation of
net income (loss) per share -- basic ... 11,352 12,550 12,438 12,438 12,438 12,438 12,438
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share -- diluted ... $ 0.93 $ (10.04) $ 1.44 $ (1.16) $ (0.51) $ (0.20) $ (0.05)
========= ========= ========= ========= ========= ========= =========
Number of shares used in computation of
net income (loss) per share - diluted .. 11,658 12,550 12,439 12,438 12,438 12,438 12,438
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA (AS OF END OF PERIOD)
Cash ..................................... $ 14,202 $ 5,487 $ 22,246 $ 10,926 $ 3,686 $ 3,449 $ 3,950
Accounts receivable ...................... 64,921 35,117 7,239 6,012 8,242 5,621 5,505
Assets held for sale ..................... -- 15,200 -- -- 4,700 -- 10,752
Inventory ................................ 57,570 29,999 5,109 4,012 2,705 8,303 1,733
Goodwill ................................. 76,659 2,790 2,426 2,062 -- 1,880 --
Total assets ............................. 253,528 117,145 47,142 29,750 23,599 25,622 26,857
Long-term debt ........................... 1,460 1,562 -- -- -- -- --
Stockholders' equity ..................... 141,692 9,046 26,959 12,379 6,046 9,924 5,460
- ----------------
(1) References to a year are to our fiscal year commencing in that calendar year and ending on the Saturday nearest January 31 of
the following year. We have never declared or paid cash dividends on our Common Stock. The fiscal year ended February 3, 1996
consisted of 53 weeks. All other years presented consisted of 52 weeks.
(2) References to the first half of 1998 and 1999 are to the six month periods ended August 1, 1998 and July 31, 1999,
respectively.
(3) Principally from the gain on the sale of shares of Ann Taylor common stock.
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNLESS OTHERWISE NOTED, ALL REFERENCES TO A YEAR ARE TO OUR FISCAL YEAR
COMMENCING IN THAT CALENDAR YEAR AND ENDING ON THE SATURDAY NEAREST JANUARY 31
OF THE FOLLOWING YEAR.
GENERAL
On April 6, 1994, we acquired FWM for a purchase price of $44.0
million, consisting of 2,000,000 unregistered shares of our common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, we sold FWM's U.K. subsidiary to FWM
N.V. for 600,000 shares of our common stock. During 1995, we took various
actions to reverse a decline in FWM's business. However, we determined that such
actions were not having the desired results and eliminated all of the operations
of FWM. In connection with the elimination of the FWM operations, we wrote-off
the remaining $44.5 million of goodwill in fiscal 1995.
On October 7, 1994, we acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of our common stock, $10,000
in cash and the assumption of approximately $1.9 million of debt owed by GJM
International to The Limited, Inc., as well as non-compete payments aggregating
$3.2 million. Additional costs related to this acquisition approximated $1.7
million. The excess of the purchase price over the fair value of the net assets
acquired of approximately $27.7 million was recorded as goodwill and was being
amortized over a twenty-five year period.
In February 1996, we sold the GJM Business to Warnaco. In the
transaction, Warnaco paid us $12.5 million in cash and assumed certain
liabilities of the GJM Business. We are 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. We used all the proceeds of the sale to
repay outstanding senior bank indebtedness.
In February 1995, we acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sourced products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of our common stock and $3.1 million in cash.
Additional costs related to this acquisition approximated $730,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $4.5 million was recorded as goodwill and was being amortized over
a twenty-five year period. In January 1996, we determined to close TSA. As a
result, we recorded a loss of approximately $6.4 million in fiscal 1995,
primarily resulting from the write-off of goodwill associated with the
acquisition. We terminated these operations during the third quarter of 1996.
The acquisitions of FWM, GJM and TSA were accounted for under the
purchase method and, accordingly, the operating results of FWM, GJM and TSA were
included in our consolidated operating results since their respective dates of
acquisition.
In June 1992, Cygne 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
41
<PAGE>
of the Ann Taylor Disposition, a 40% interest in the net income of CAT, which
interest was reflected in Cygne's consolidated statements of income as "income
attributable to minority interests."
We completed the Ann Taylor Disposition on September 20, 1996. In the
transaction we sold to Ann Taylor our 60% interest in CAT and the assets of our
Ann Taylor Woven Division (the "Division") that were used in sourcing
merchandise for Ann Taylor. On the closing of the transaction, we received
2,348,145 shares of Ann Taylor common stock, having a value of $36 million
(based on the average closing price of the Ann Taylor common stock during the
ten trading days prior to closing), and approximately $8.9 million (after
post-closing adjustments) in cash in respect of inventory (less related payables
and advances and certain other assumed liabilities), net fixed assets and
accounts receivable of the Ann Taylor Woven Division. Ann Taylor also assumed
certain liabilities of the acquired sourcing operations. As a result of the
transaction, we realized a pre-tax gain of $29.6 million. Between October 1996
and January 1997, we 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. We realized a pre-tax
gain of approximately $6.1 million as a result of the sale of the shares of Ann
Taylor common stock, which is reflected in "Other income" in our Consolidated
Statements of Operations.
In connection with the closing of the Ann Taylor Disposition, Cygne
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, our Chairman of the Board and Chief Executive Officer,
and Mr. Irving Benson, our 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 Cygne were terminated for any reason. Mr. Benson's
consulting agreement was assigned to him in connection with his resignation as
an officer and employee on November 29, 1996. Mr. Benson, who founded Cygne's
predecessor in 1975 and continued to serve on the Board of Directors, entered
into a consulting agreement with Cygne in November 1996 pursuant to which he
provided services to us with respect to design, development and merchandising
matters and special projects. The consulting agreement with Mr. Benson was
terminated in September 1997 and Mr. Benson resigned as a director on September
4, 1997. During 1997 the consulting agreement with Ann Taylor for the services
of Mr. Manuel was bought out in consideration of the payment by Ann Taylor to us
of approximately $477,000.
During 1996, Ann Taylor accounted for 66.7% of our net sales, and The
Limited, Inc. (consisting primarily of The Limited Stores and Lerner) accounted
for 24.6%, 64.8% and 59.2% of our net sales for 1996, 1997 and 1998,
respectively. During the first half of 1998 and 1999, The Limited, Inc.
accounted for 55% and 53%, respectively, of our net sales. We have had no sales
to Ann Taylor since the Ann Taylor Disposition.
If the Ann Taylor Disposition had been consummated on February 4, 1996
(the first day of fiscal 1996), we would have had pro forma net sales for 1996
of $84.8 million. Pro forma gross profit for 1996 would have been $6.2 million.
Pro forma loss from operations for 1996 would have been $15.5 million. Pro forma
net loss (excluding the gain on the Ann Taylor Disposition and on the subsequent
sale of the Ann Taylor common stock) for 1996 would have been $17.7 million. The
pro forma net loss per share for 1996 would have been $1.42.
In June 1997 we terminated by mutual agreement the license agreements
entered into during the summer of 1996 with the Kenzo Group for our manufacture
and distribution in the United States, Canada
42
<PAGE>
and Mexico of the Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines. In
connection with the termination the Kenzo Group returned the $400,000 in
pre-paid minimum royalty payments made on the signing of the license agreements
and agreed to pay us for certain raw materials related to the manufacture of
Kenzo products.
We have agreed, subject to stockholder approval, to sell our Knit
Business to Jordache, as more fully described under "Proposal No. 1--The Sale".
The purchase price to be paid in the Sale will be a dollar amount in cash equal
to the adjusted net book value (as defined) of the inventory, fixed assets,
advances to vendors, and investment in a dyehouse facility, plus $20,000 less
the adjusted income before tax of the Knit Business. If we had closed the sale
on July 31, 1999, the last day of our latest full fiscal quarter, we would have
received approximately $10.8 million for the Assets, as well as commissions of
$600,000 and a non-compete payment of $400,000. Jordache will also assume all
customer and vendor purchase orders and all lease obligations of the Knit
Business. We will retain all cash and accounts receivable and certain other
assets of the Knit Business, which totaled approximately $4.7 million at July
31, 1999. The purchase price mechanism, which reduces the purchase price by the
adjusted income before tax of the knit business from August 1, 1999 to the
closing date, has the effect of treating the knit business as if it were sold
effective July 31, 1999. During 1996, 1997 and 1998 the Knit Business accounted
for 16%, 67%, and 60%, respectively, of our net sales. The Knit Business
accounted for approximately 77% and 52% of our net sales in the first half of
1998 and 1999, respectively. If the Sale of the Knit Business had been
consummated on January 31, 1999, we would have had pro forma net sales of $12.8
million for the six months ended July 31, 1999 and pro forma income from
operations of $317,000. Pro forma net income for the six months ended July 31,
1999 would have been $270,000 or $0.02 on a per share basis.
Although we have a long established relationship with The Limited,
Inc., our key customer, we do not have long-term contracts with any of our
customers, including The Limited, Inc. During 1996, 1997 and 1998, The Limited,
Inc. accounted for 82%, 69% and 94%, respectively of the our Woven division net
sales. The Limited, Inc. accounted for 66% and 98% of our Woven division net
sales in the first half of 1998 and 1999, respectively. Since the consummation
of the Ann Taylor Disposition, we have not had and do not anticipate that we
will have sales to Ann Taylor. We have been dependent on our key customers and
with the loss of Ann Taylor as a customer and the sale of the Knit Business, our
future success will be even more dependent upon our ability to attract new
customers and to maintain our relationship with The Limited, Inc. There can be
no assurance that The Limited, Inc. will continue to purchase merchandise from
us at the same rate or at all in the future, or that we will be able to attract
new customers. In addition, as a result of our dependence on The Limited, Inc.,
particularly after the Ann Taylor Disposition, The Limited, Inc. has the ability
to exert significant control over our 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 with respect to our business
with The Limited, Inc. In addition, the apparel divisions of The Limited, Inc.
have formed direct sourcing departments. In 1995, our sales to certain divisions
of The Limited, Inc. decreased significantly and, in 1996, 1997 and 1998 our
sales to certain divisions of The Limited, Inc. with which we continue to do
business decreased. In December 1997 a limited partnership controlled by The
Limited, Inc. sold its 734,319 shares of Cygne stock to Mr. Manuel, our Chairman
and Chief Executive Officer. Upon the closing of the transaction, The Limited,
Inc. did not own any shares of Cygne stock.
We are continuing to review our business operations and expect to incur
additional costs in the future associated with the further restructuring or
downsizing of its operations.
43
<PAGE>
The apparel industry is highly competitive and historically has been
subject to substantial cyclical variation, with purchases of apparel and related
goods tending to decline during recessionary periods when disposable income is
low. This could have a material adverse effect on our business. Retailers,
including our customers, are increasingly sourcing private label products
themselves rather than utilizing outside vendors like us.
RESULTS OF OPERATIONS
The following table is derived from our consolidated statements of operations
and expresses for the periods indicated certain income data as a percentage of
net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------------------------------------
First Half Year
------------------ ------------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit .................................... 11.6 1.1 0.6 0.7 11.0
Selling, general and administrative expenses .... 8.4 16.1 10.2 23.8 10.7
Provision for impairment of Knit
business assets ............................. 6.7 -- 6.0 -- --
(Recoupment) provision for lease
termination expense .......................... -- -- (2.1) 9.1 --
Gain from sale of Ann Taylor
Woven Division and CAT ........................ -- -- -- -- (11.5)
Reorganization expense .......................... -- -- -- -- 1.9
Amortization of intangibles ..................... -- 1.2 0.8 0.8 0.1
----- ----- ----- ----- -----
(Loss) income from operations ................... (3.5) (16.2) (14.3) (33.0) 9.8
Other income .................................... -- -- -- -- (2.7)
Settlement of shareholder class action
and related legal expenses ................... -- -- -- -- 1
Interest expense (income), net .................. 1.3 (0.3) (0.2) (0.2) 1.3
Provision for income taxes ...................... 0.3 0.7 0.6 0.5 2.8
----- ----- ----- ----- -----
Income (loss) before minority interests ........ (5.1) (16.6) (14.7) (33.3) 7.4
Income attributable to minority interests ....... -- -- -- -- 0.4
----- ----- ----- ----- -----
Net (loss) income ............................... (5.1)% (16.6%) (14.7%) (33.3%) 7.0%
===== ===== ===== ===== =====
</TABLE>
THE FIRST HALF OF 1999 COMPARED TO THE FIRST HALF OF 1998
NET SALES
Our net sales for the first six months of 1999 were $26.7 million, an
increase of $11.9 million or 81% from $14.8 million for the comparable period in
1998. The increase in net sales for the six months of 1999 compared to the
comparable period in 1998 was primarily attributable to an increase in sales to
The Limited, Inc. of $5.9 million, sales to new customers of $2.4 million, and
an increase of sales to existing customers other than The Limited, Inc.
44
<PAGE>
During the first half of 1999 and 1998, the Knit business accounted for
52% and 77%, respectively, of our net sales.
Woven division sales for the first six months of 1999 were $12.8
million, an increase of $9.3 million or 269% from $3.5 million for the
comparable period in 1998. The increase in Woven division sales to The Limited,
Inc. for the first six months of 1999 compared to the comparable period in 1998
of $10.1 million was offset by a decrease in sales to customers other than The
Limited, Inc. The Limited, Inc. accounted for 98% of the Woven division sales
for the six months ended July 31, 1999 and 66% of the Woven division sales for
the six months ended August 1, 1998.
Knit division sales for the first six months of 1999 were $14.0
million, an increase of $2.7 million or 24% from $11.3 million for the
comparable period in 1998. The decrease in Knit division sales to The Limited,
Inc. for the first six months of 1999 compared to the comparable period in 1998
of $4.2 million was more than offset by an increase in sales to other customers
of $2.4 million and an increase in sales to existing customers other than The
Limited, Inc. The Limited, Inc. accounted for 12% of the Knit division sales for
the six months ended July 31, 1999 and 52% of Knit division sales for the six
months ended August 1, 1998.
GROSS PROFIT
Our gross profit for the six months ended July 31, 1999 was $2.7
million, an increase of $2.6 million from the gross profit of $0.2 million for
the comparable period in 1998.
The Woven division had a gross profit for the six months ended July 31,
1999 of $1.9 million compared to a gross loss of $0.8 million in the comparable
period in 1998. The gross margin for the six months ended July 31, 1999 was
14.9%. The gross profit increase for the six months ended July 31, 1999 compared
to the comparable prior period was primarily due to our Central American
operation earning a profit in 1999 compared to a significant loss in the prior
comparable periods.
The Knit division had a gross profit for the six months ended July 31,
1999 of $0.8 million, a $0.1 million or 16% decrease from the gross profit of
$0.9 million in the comparable period in 1998. The gross margin for the six
months ended July 31, 1999 was 6% compared to 8% for the comparable prior period
in 1998. The decrease in the gross profit and gross margin for the six months
ended July 31, 1999 compared to the comparable prior period was primarily due to
start-up costs associated with a new customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended
July 31, 1999 were $2.0 million, a decrease of $0.4 million or 15% from $2.4
million in the comparable prior period in 1998. The decrease in expense for the
six months ended July 31, 1999 compared to the comparable period in 1998 was
attributed to a reduction of expenses of $0.7 million in Corporate overhead,
offset by an increase in the Woven division of $0.3 million.
The Woven division expenses for the six months ended July 31, 1999 were
$1.0 million, an increase of $0.3 million, or 44% from $0.7 million in the
comparable prior period in 1998. The increase for the six months ended July 31,
1999 compared to the comparable period in 1998 was attributable to increased
staff to support the Woven division sales increase from the prior comparable
period.
45
<PAGE>
The Knit division expenses for the six months ended July 31, 1999 and
August 1, 1998 remained constant at $0.4 million.
The Corporate expenses for the six months ended July 31, 1999 were $0.6
million, a decrease of $0.7 million or 54% from $1.3 million in the comparable
prior period in 1998. The decrease for the six months ended July 31, 1999 was
primarily attributable to the termination of employment of most of the corporate
staff in 1998.
INTEREST
Net interest expense for the six months ended July 31, 1999 was
$326,000 as compared to net interest income of $49,000 for the comparable period
in 1998. The increase in interest expense for the six months of 1999 compared to
the prior comparable period was primarily attributable to increased borrowings
used to fund the Knit division's operations.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In August 1999, we amended and restated its agreement to sell the Knit
business. In connection with the restatement, we established a provision of
$886,000 for the impairment of the Knit business assets. This provision
represents an additional loss on assets to be sold of $362,000 and additional
transaction costs (including taxes) of $524,000.
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended July 31, 1999
represents provision for minimum state income taxes. As of July 31, 1999, based
upon tax returns filed and to be filed for the fiscal year ended January 30,
1999, we expect to report a net operating loss carryforward for U.S. Federal
income tax purposes of approximately $112,000,000. If unused, these loss
carryforwards will expire in our taxable years ending 2011 through 2014. Under
Section 382 of the U.S. Internal Revenue Code, if there is a more than 50%
ownership change (as defined therein) with respect to our stock, our loss
carryforwards for U.S. Federal and New York State and City tax purposes would be
virtually eliminated.
As of July 31, 1999, based upon tax returns filed and to be filed for
the fiscal year ended January 30, 1999, we expect to report net operating loss
carryforwards for New York State and City tax purposes (on a separate company
basis) of approximately $72,000,000 and $71,000,000, respectively. If unused,
these loss carryforwards will expire in our taxable years ending in 2011 through
2014.
1998 COMPARED TO 1997
NET SALES
Our net sales for 1998 were $43.0 million, a decrease of $0.4 million
or 0.8% from $43.4 million in 1997. The decrease in net sales for 1998 compared
to 1997 was primarily attributable to decreases in sales to divisions of The
Limited, Inc. of $2.6 million, which was offset by sales to new customers.
46
<PAGE>
Woven division sales for 1998 were $17.1 million, an increase of $2.8
million or 19.8% from $14.3 million in 1997. The increase in sales to The
Limited, Inc. of $6.2 million was offset by a decrease in sales to other
customers.
Knit division sales for 1998 were $25.9 million, a decrease of $3.0
million or 10.4% from $28.9 million in 1997. The decrease in sales to The
Limited, Inc. of $8.8 million was offset by an increase in sales to other
customers.
Kenzo, a discontinued division, had $0.2 million in sales in 1997.
GROSS PROFIT
Our gross profit was $0.3 million in both 1998 and 1997.
The woven division had gross loss of $0.8 million, a $1.6 million
decrease from the 1997 gross profit of $0.8 million. The increase in the 1998
loss over 1997 was mainly attributable to the loss of $2.8 million at our
Central American operation. The loss at the Central American operation was
caused by under-absorption of manufacturing overhead during the first nine
months of 1998 and severance costs for work force reduction.
The knit division had a gross profit of $1.1 million, an increase of
$0.4 million from the $0.7 million in 1997. The gross margin for 1998 was 4.1%
compared to 2.3% in 1997
The discontinued division in 1997 had a gross loss of $1.2 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1998 were $4.4
million, a decrease of $5.9 million or 57.6% from the $10.3 million in 1997.
The knit division SG&A expenses decreased $0.4 million from 1997 as a
result of expense reduction programs initiated during 1998.
The $2.6 million decrease in corporate SG&A expenses from 1997 resulted
from less severance expense in 1998 than 1997, when a significant portion of the
downsizing of Cygne occurred.
The Kenzo division in 1997 had SG&A expenses of $2.9 million.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In March 1999 we agreed to sell the Knit Business. In connection with
the Sale, during 1998 we established a provision of $2.6 million for the
impairment in the Knit Business assets. This provision includes the unamortized
goodwill of the Knit Business ($1.7 million), loss on assets to be sold ($0.3
million) and estimated transaction expenses ($0.6 million). The provision
excludes the Knit division's 1999 results of operations.
47
<PAGE>
(RECOUPMENT) PROVISION FOR LEASE TERMINATION EXPENSES
In 1997, we provided for lease termination expenses of $3,964,000 as a
result of its decision to relocate from our existing New York office and to seek
substantially smaller new York office space. On March 1, 1999, we completed our
relocation from our existing New York office and the landlord released us from
any contingent rent liability on our New York space and on our leases assumed by
Ann Taylor in 1996. The actual expenses in connection with this lease
termination approximated $3,063,000. Therefore, the balance of $902,000 of this
provision has been reversed in 1998.
INTEREST
Net interest income for 1998 was $91,000 compared to net interest
income of $83,000 in 1997. Interest income for 1998 of $428,000 includes
$155,000 in interest income from a federal tax refund. Excluding the interest
received on the tax refund, the decrease in interest income for 1998 compared to
1997 was primarily attributable to a reduction in our cash balance which was
used to fund our losses.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1998 primarily represents a provision
for minimum state income taxes and taxes payable to foreign countries for income
earned in the foreign countries. At January 30, 1999, we had net operating loss
carryforwards of approximately $108 million, which may be used to offset future
United States taxable income.
1997 COMPARED TO 1996
NET SALES
Our net sales for 1997 were $43.4 million, a decrease of $210.9 million
or 82.9% from $254.3 million in 1996.
Woven division sales for 1997 were $14.3 million, a decrease of $27.8
million or 66.0% from $42.1 million in 1996. Sales to The Limited, Inc. in 1997
decreased by $24.8 million from 1996 levels.
Knit division sales for 1997 were $28.9 million, a decrease of $12.2
million or 29.7% from $41.1 million in 1996. The decrease in sales was mostly
attributable to the discontinuation of the sweater product line.
The discontinued business sales decrease of $170.9 million was mostly
attributable to the decrease in sales to Ann Taylor as a result of the Ann
Taylor Disposition in 1996.
GROSS PROFIT
Our gross profit for 1997 was $316,000, a decrease of $27.5 million or
98.9% from $27.9 million in 1996. The decrease in gross profit for 1997 compared
to 1996 was primarily attributable to operations sold in the Ann Taylor
Disposition, which had gross profit of $21.7 million, lower sales and lower
gross margins on the remaining sales in 1997 compared to 1996, and a $500,000
markdown on fabric purchased for the Kenzo Jeans and Kenzo Studio brand name
products which were discontinued in 1997.
48
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1997 were $10.3
million, a decrease of $16.9 million or 62.1% from the $27.3 million in 1996.
The decrease for 1997 compared to 1996 was primarily attributable to a decrease
in expenses of $10.8 million as a result of the Ann Taylor Disposition, and a
decrease in all other expenses of $10.1 million as a result of downsizing Cygne,
offset in part by expenses of $2.9 million, related to the Kenzo Jeans and Kenzo
Studio brand name products and their discontinuance (including severance costs)
and other severance costs of $1.1 million.
PROVISION FOR LEASE TERMINATION EXPENSE
During 1997 we provided for lease termination expense of $4.0 million
as a result of our decision to relocate from our existing New York office space
and to seek substantially smaller New York office space.
REORGANIZATION EXPENSE
The reorganization expense of $4.8 million during 1996 was the result
of the downsizing of Cygne and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were:
costs in connection with early termination of leases outside New York for excess
space, disposition of related fixed assets, and severance costs related to
Cygne's then President's resignation as an officer and employee. All such costs
were paid prior to January 31, 1998.
INTEREST
Net interest income for 1997 was $83,000 compared to net interest
expense of $3.3 million in 1996. The decrease in interest expense for 1997
compared to 1996 was primarily attributable to our repayment of debt with the
proceeds from the Ann Taylor Disposition and the sale of the Ann Taylor common
stock received in connection therewith.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1997 primarily represents provision
for minimum state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, we historically financed our 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, we have not had a domestic credit facility.
Since the expiration of our prior bank domestic credit facility, we have
obtained letters of credit issued from domestic banks secured by a cash deposit.
At July 31, 1999 we had restricted cash at banks of $1.2 million as collateral
for letters of credit.
49
<PAGE>
In June 1997 an Israeli bank made available to one of our Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $5,500,000; letters of credit not to exceed $3,000,000; overdraft
facility not to exceed $500,000; and bank guarantee for Israeli custom duties
not to exceed $500,000. Borrowings under this facility generally bear interest
at 1.0% over the prime rate, except that borrowings against trade accounts
receivable bear interest at 1.0% over the LIBOR rate. Borrowings under this
facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing,
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. There can be no assurance that the bank will continue to make this
facility available. Termination by the bank of this facility could have a
material adverse effect on our financial condition and results of operations. At
July 31, 1999, outstanding loans under this facility were $7,407,000 and letters
of credit aggregating $984,000 had been issued. This facility, which supports
the operations of the Knit Business, will terminate upon the closing of the
Sale.
In September 1998 the Israeli bank made an additional $150,000 loan to
the same Israeli subsidiary which is also secured by a lien on its assets.
Principal payments under this loan are due in monthly installments of $6,250
through October 2000 and the loan bears interest of 7.2% payable monthly. At
July 31, 1999 the outstanding balance was $94,000. This facility, which supports
the operations of the Knit Business, will terminate upon the closing of the
Sale.
Net cash used by operating activities for the first half of 1999 was
$4.4 million compared to net cash used by operating activities of $8.0 million
in the comparable prior period of 1998. The decrease in net cash used in
operating activities was primarily the result of the $1.9 million decrease in
net loss, $1.1 million decrease in working capital requirements and the $0.9
million non-cash provision for impairment of Knit Business Assets.
Net cash used in operating activities was $8.4 million in 1998 compared
to $9.0 million in 1997. Cash used in operating activities for 1998 was due to
the cash loss from operations of $2.9 million, increase in accounts receivable
and inventory and a reduction of liabilities.
Prior to the Ann Taylor Disposition in September 1996 we experienced
significant liquidity pressures primarily as a result of the negative cash flow
caused by our operating losses. Although the proceeds from the Ann Taylor
Disposition alleviated the liquidity pressures then faced by Cygne, we continue
to have losses from operations.
Our financial performance for the next 12 months will depend upon a
variety of factors, including the amount of sales to The Limited, Inc. and the
completion of the Sale. If we incur significant operating losses during the next
12 months, we will face severe liquidity pressures which would adversely affect
our financial condition and results of operations. We are continuing to review
our business operations and could incur additional costs in the future
associated with the restructuring or downsizing of our operations.
We negotiate substantially all our purchase orders with our foreign
manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in foreign
currencies, our cost for any purchase order is not subject to change after the
time the order is placed. However, the weakening of the U.S. dollar against
local currencies could lead certain manufacturers to increase their U.S. dollar
prices for products. We believe we would be able to compensate for any such
price increase.
50
<PAGE>
Our interest income and interest expense are not materially sensitive
to changes in the general level of interest rates. In this regard, changes in
interest rates will not materially affect the interest earned on our cash as
well as interest paid on our debt.
INFLATION
We do not believe that the relatively moderate rates of inflation which
have been experienced in the U.S., where we compete, have had a significant
effect on our net sales or profitability.
FOREIGN CURRENCY EXCHANGE
We negotiate substantially all our purchase orders with our foreign
manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in foreign
currencies, our cost for any purchase order is not subject to change after the
time the order is placed. However, the weakening of the U.S. dollar against
local currencies could lead certain manufacturers to increase their U.S. dollar
prices for products. We believe we would be able to compensate for any such
price increase.
51
<PAGE>
QUARTERLY OPERATING RESULTS
The following table sets forth selected unaudited quarterly financial
data for our most recent ten quarters. The quarterly financial data reflects, in
our opinion, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results of operations for such periods.
Results of any one or more quarters are not necessarily indicative of annual
results or continuing trends.
<TABLE>
<CAPTION>
(In thousands except per share amounts)
1999 1998 1997
------------------ -------------------------------------- ---------------------------------------
Qtr. 1 Qtr. 2(1) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4(2) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
------- --------- ------ ------ ------ --------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................. $13,561 $13,166 $6,245 $8,509 $13,158 $15,101 $7,637 $11,003 $15,729 $9,010
Gross profit (loss) ........ 1,163 1,531 (238) 399 (312) 411 (659) 96 1,703 (824)
Operating profit (loss) .... 243 (459) (1,345) (1,048) (1,511) (2,243) (4,626) (2,808) (4,250) (2,659)
Net income (loss) .......... 79 (665) (1,328) (1,127) (1,484) (2,386) (4,582) (2,805) (4,289) (2,788)
Net income (loss) per
share -- basic and
diluted .................. 0.01 ($0.05) (0.11) (0.09) (0.12) (0.19) (0.37) (0.23) (0.34) (0.22)
Weighted average number
of common shares
outstanding .............. 12,438 12,438 12,438 12,438 12,438 12,438 12,438 12,438 12,438 12,438
- -----------------
(1) Includes provision for impairment of Knit Business assets of $886,000.
(2) Includes provision for impairment of Knit Business assets of $2,564,000 and recoupment of lease termination
expense provisions of $902,000.
</TABLE>
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We have determined that we needed to replace portions of our software
so that our computer systems will function properly with respect to dates in the
Year 2000 and thereafter. We continue to have communications with our
significant suppliers and large customers to determine the extent to which our
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. We have upgraded, replaced and tested our computer
systems and equipment so as to be able to operate without disruption due to Year
2000 issues. We presently believe that as a result of our modifications already
made to existing software and conversion to new software, the Year 2000 will not
pose significant operations problems for our computer systems. We cannot provide
assurance, however, that the systems of other companies on which our systems
rely will be timely converted and would not have a material adverse effect on
our systems.
The cost of the Year 2000 systems evaluation and remediation was funded
through operating cash flows and we expensed these costs. The total cost to
obtain Year 2000 compliance was approximately $20,000.
52
<PAGE>
PROPOSAL NO. 2 -- ELECTION OF DIRECTORS
GENERAL
Unless otherwise directed, the persons appointed in the accompanying
form of proxy intend to vote at the Annual Meeting for the election of the two
nominees named below as directors of Cygne to serve until the next Annual
Meeting or until their successors are duly elected and qualified. If any nominee
is unable to be a candidate when the election takes place, the shares
represented by valid proxies will be voted in favor of the remaining nominees.
The Board of Directors does not currently anticipate that any nominee will be
unable to be a candidate for election.
The Board of Directors currently has two members, both of whom are
nominees for re-election.
INFORMATION REGARDING NOMINEES FOR ELECTION AS DIRECTORS
The Board of Directors currently has two members. The following
information with respect to the principal occupation or employment, other
affiliations, and business experience of each nominee during the last five years
has been furnished to Cygne by such nominee. Except as indicated, each of the
nominees has had the same principal occupation for the last five years.
The nominees, their ages, the year in which each first became a
director and their principal occupations or employment during the past five
years are:
Year First
Became Principal Occupation
Nominee Age Director During the Past Five Years
------- --- ---------- --------------------------
James G. Groninger .. 55 1993 President of The BaySouth Company
since January 1995; Managing
Director of PaineWebber Incorporated
from April 1988 through December 1994.
Bernard M. Manuel ... 52 1988 Chief Executive Officer of Cygne since
October 1988 and Chairman of the Board
since December 1989.
Mr. Groninger is a director of Designs, Inc. and NPS Pharmaceuticals.
Mr. Manuel is a director of Designs, Inc.
In September 1993 we established an Audit Committee and a Compensation
Committee. Mr. Groninger is the sole member of the Compensation Committee and
the Audit Committee. The Audit Committee is charged with reviewing our annual
audit and meeting with our independent accountants to review our internal
controls and financial management practices. The Compensation Committee reviews
compensation practices, recommends compensation for our executives and key
employees and functions as the Committee under our 1993 Stock Option Plan. Each
of the Compensation Committee and the Audit Committee met once during the year
ended January 30, 1999.
During the fiscal year ended January 30, 1999, the Board of Directors
held five meetings. Each director attended at least 75% of the meetings of the
Board of Directors held when he was a director and of all committees of the
Board of Directors on which he served.
53
<PAGE>
THE BOARD OF DIRECTORS DEEMS "PROPOSAL NO. 2 - ELECTION OF DIRECTORS"
TO BE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A
VOTE "FOR" APPROVAL THEREOF.
PROPOSAL NO. 3 -- DECREASE OF AUTHORIZED COMMON STOCK
AND PREFERRED STOCK
The Board of Directors has unanimously adopted and submits to
stockholders for their approval an amendment to Article IV of the Certificate of
Incorporation to reduce the authorized number of shares of Common Stock, $.01
par value, from 75 million to 25 million shares and to reduce the authorized
number of shares of Preferred Stock, $.01 par value, from 4 million to 1 million
shares. The text of the proposed amendment is set forth in Appendix B to this
proxy statement and the following discussion is qualified by reference to
Appendix B. The Board of Directors recommends a vote FOR approval of this
amendment.
Our authorized stock consists of 75,000,000 shares of Common Stock,
$.01 par value, and 4,000,000 shares of Preferred Stock, $.01 par value. As of
the Record Date, 12,438,038 shares of Common Stock were issued and outstanding,
and no shares of Preferred Stock were issued or outstanding. As of the Record
Date, approximately 1,700,000 shares were reserved for issuance under our stock
option plans, under which options to purchase a total of approximately 597,000
shares of Common Stock were outstanding. Accordingly, approximately 10,861,962
shares of Common Stock and all 4,000,000 shares of Preferred Stock remained
available and unreserved as of the Record Date.
The proposed decrease in the authorized number of shares of Common
Stock and Preferred Stock is to decrease our tax liability under certain
franchise tax statutes. The reduction in franchise tax will save us
approximately $25,000 per year.
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Annual Meeting will be necessary
for the approval of this amendment.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 3 TO BE IN THE BEST INTEREST
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF
PROPOSAL NO. 3
54
<PAGE>
EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid or to be paid
by Cygne or its subsidiaries as well as certain other compensation paid or
accrued, during the fiscal years indicated, in all capacities in which they
served, to (i) our Chief Executive Officer, (ii) our only other executive
officer at January 30, 1999, and (iii) those persons who would have been
included in this table because they were among the most highly compensated
executive officers during 1998 except they were not serving as executive
officers at January 30, 1999.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
All Other
Year Salary Compensation(1)
---- ------ ---------------
Bernard M. Manuel ......................... 1998 $403,000 $1,001(2)
Chairman of the Board 1997 448,620 1,224(2)
and Chief Executive Officer 1996 433,983 142
Roy E. Green .............................. 1998 245,000 3,685(3)
Senior Vice President--Chief Financial 1997 245,000 3,181(3)
Officer, Treasurer and Secretary 1996 234,612 1,337
Gary C. Smith ............................. 1998 271,655(5) 3,964(6)
Former Senior Vice President-- 1997 271,656 2,863(6)
Manufacturing (4) 1996 271,656 331
Paul D. Baiocchi .......................... 1998 205,000(8) 3,302(9)
Former Vice President, General Counsel 1997 205,000 2,385(9)
and Secretary (7) 1996 195,000 342
- ----------------------
(1) Consists of certain insurance premiums on term life insurance paid by Cygne
for the benefit of the named individuals, except as otherwise indicated.
(2) Includes $822 and $999 for 1998 and 1997, respectively, representing
Cygne's matching contribution pursuant to its 401(k) defined contribution
plan.
(3) Includes $2,425 representing Cygne's matching contribution pursuant to its
401(k) defined contribution plan.
(4) Mr. Smith resigned as an officer and employee on June 30, 1998. See
"Certain Transactions."
55
<PAGE>
(5) Includes $158,465 of severance paid in 1998 to Mr. Smith under the terms of
his employment agreement. Does not include $113,190 of severance to be paid
in 1999 to Mr. Smith under the terms of his employment agreement. See
"Certain Transactions."
(6) Includes $3,723 and $2,689 for 1998 and 1997, respectively, representing
Cygne's matching contribution pursuant to its 401(k) defined contribution
plan.
(7) Mr. Baiocchi resigned as an officer and employee on December 15, 1998. See
"Certain Transactions."
(8) Includes $25,625 of severance paid in 1998 to Mr. Baiocchi under the terms
of his employment agreement. Does not include $85,417 of severance to be
paid in 1999 to Mr. Baiocchi under the terms of his employment agreement.
See "Certain Transactions."
(9) Includes $2,904 and $2,097 for 1998 and 1997, respectively, representing
Cygne's matching contribution pursuant to its 401(k) defined contribution
plan.
During the fiscal year ended January 30, 1999 no options were granted
to the persons named in the Summary Compensation Table.
The following table sets forth information with respect to (i) stock
options exercised in the fiscal year ended January 30, 1999 by the persons named
in the Summary Compensation Table and (ii) unexercised stock options held by
such individuals on January 30, 1999.
<TABLE>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Unexercised Value of Unexercised,
Options Held at In-the-Money Options at
Shares Fiscal Year End (#) Fiscal Year End (1)
Acquired on Value ----------------------------- ---------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard M. Manuel ......... -- -- 55,000 -- $ 0 $ 0
Roy E. Green .............. -- -- 80,000 -- $ 0 $ 0
Gary Smith ................ -- -- -- -- $ 0 $ 0
Paul D. Baiocchi .......... -- -- -- -- $ 0 $ 0
- ---------------
(1) Based on the closing stock price of our Common Stock on January 29, 1999 of $0.10.
</TABLE>
EMPLOYMENT AGREEMENTS
We currently have employment agreements with Bernard M. Manuel, our
Chairman and Chief Executive Officer, and Roy Green, our Senior Vice
President--Chief Financial Officer. These employment agreements, which currently
expire April 30, 2000, provide for automatic renewal for successive one year
terms unless either party notifies the other to the contrary at least 90 days
prior to its expiration. The employment agreements require each employee to
devote substantially all of his time and attention to our business as necessary
to fulfill his duties. Pursuant to the employment agreements Messrs. Manuel and
Green are currently entitled to an annual salary at a rate of $494,000 and
$245,000, respectively, subject to annual cost of living increases. The
employment agreements also provide for the payment of bonuses in such amounts as
may be determined by the Board. Under the employment
56
<PAGE>
agreements, the employee may terminate his employment upon 30 days' notice. The
employment agreements provide that in the event the employee's employment is
terminated by us at any time for any reason other than justifiable cause,
disability or death, or we fail to renew the agreement at any time within two
years following a "Change of Control of the Company," we must pay the employee
his base salary and permit participation in benefit programs for the greater of
(i) the remaining term of the agreement or (ii) two years in the case of Mr.
Manuel and one year in the case of Mr. Green. In the event we elect not to renew
the agreement (other than within two years following a "Change in Control of the
Company"), we will, (a) in the case of Mr. Manuel, pay him a severance payment
equal to the lesser of (i) two months' salary plus one-sixth of his most
recently declared bonus for each year he has been employed by us or (ii) one
year's annual salary, and (b) in the case of Mr. Green, pay him a severance
payment equal to the lesser of (i) one month's salary plus one-twelfth of his
most recently declared bonus for each year he has been employed by us or (ii)
six months' salary. Each agreement contains confidentiality provisions, whereby
each executive agrees not to disclose any confidential information regarding us,
as well as non-competition covenants. The non-competition covenants survive the
termination of an employee's employment for the greater of (i) the remaining
term of the agreement or (ii) two years in the case of Mr. Manuel and one year
in the case of Mr. Green.
For purposes of the employment agreements, a "Change in Control of the
Company" shall be deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of Cygne in which Cygne is not the continuing or
surviving corporation or pursuant to which shares of our Common Stock would be
converted into cash, securities or other property, other than a merger of Cygne
in which the holders of our Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of our assets, or (ii) our stockholders shall approve any
plan or proposal for liquidation or dissolution of Cygne or (iii) any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), shall
become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of 40% or more of our outstanding Common Stock other than pursuant to a
plan or arrangement entered into by such person and us, or (iv) during any
period of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by our stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at the
beginning of the period.
The employment agreements also provide that if, in connection with a
change of ownership or control of Cygne or a change in ownership of a
substantial portion of our assets (all within the meaning of Section 280G(b)(2)
of the Internal Revenue Code of 1986, as amended (the "Code")), an excise tax is
payable by the employee under Section 4999 of the Code, then we will pay to the
employee additional compensation which will be sufficient to enable the employee
to pay such excise tax as well as the income tax and excise tax on such
additional compensation, such that, after the payment of income and excise
taxes, the employee is in the same economic position in which he would have been
if the provisions of Section 4999 of the Code had not been applicable.
We terminated our employment agreement with Gary C. Smith, our former
Senior Vice President--Manufacturing, on June 30, 1998, and our employment
agreement with Paul D. Baiocchi, formerly our Vice President and General
Counsel, on December 15, 1998. See "Certain Transactions."
57
<PAGE>
COMPENSATION OF DIRECTORS
Each non-employee director receives $3,500 for each Board of Directors
meeting attended, and $1,500 for each meeting of any committee of the Board of
Directors attended. In addition, directors who are not employees are compensated
through stock options.
We adopted a Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), pursuant to which options to acquire a maximum aggregate of
100,000 shares of Common Stock may be granted to non-employee directors. Options
granted under the Directors' Plan do not qualify as incentive stock options
within the meaning of Section 422 of the Code. The Directors' Plan provides for
the automatic grant to each of our non-employee directors of (1) an option to
purchase 10,000 shares of Common Stock on the date of such director's initial
election or appointment to the Board to Directors, and (2) an option to purchase
2,000 shares of Common Stock on each annual anniversary of such election or
appointment, provided that such individual is on such anniversary date a
non-employee director. The options have an exercise price of 100% of the fair
market value of our Common Stock on the date of grant, have a ten-year term and
become exercisable in four equal annual installments commencing on the first
anniversary of the grant thereof, subject to acceleration in the event of a
change of control (as defined in the Directors' Plan). The options may be
exercised by payment in cash, check or shares of Common Stock. On April 15, 1993
Mr. Groninger was elected as a director of Cygne and was granted an option to
purchase 10,000 shares of Common Stock at a purchase price of $4.00 per share,
the fair market value of the Common Stock on the date of grant. On each of April
15, 1994, April 15, 1995, April 15, 1996, April 15, 1997, April 15, 1998 and
April 15, 1999, the anniversary dates of his initial election to the Board of
Directors, Mr. Groninger was granted options to purchase 2,000 shares of Common
Stock at a purchase price of $23.50, $11.75, $1.75, $0.687, $0.281 and $0.156
per share, respectively, the fair market values of our Common Stock on the dates
of grant.
On September 20, 1996, we engaged in the Ann Taylor Disposition. As a
result of the Ann Taylor Disposition, a change in control under the Directors'
Plan was deemed to have occurred and all options granted under the Directors'
Plan prior to September 20, 1996 became vested. If the Sale of the Knit Business
is consummated, all options granted under the Director's Plan after September
20, 1996 and prior to the closing date of the Sale will become fully vested on
the date the Sale closes.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933, as
amended (the "Securities Act"), or under the Exchange Act, except to the extent
that we specifically incorporate this information by reference, and shall not
otherwise be deemed filed under such Acts.
The Compensation Committee is comprised of one director. As the sole
member of the Compensation Committee, it is my responsibility to determine the
most effective total executive compensation strategy based on Cygne's business
and consistent with stockholders' interests. My specific duties entail reviewing
Cygne's compensation practices, recommending compensation for executives and key
employees and administering Cygne's Employee Stock Option Plan.
58
<PAGE>
Cygne is a private label merchandiser and manufacturer of women's knit
and woven clothing. The central goal of the Compensation Committee is to ensure
that Cygne's remuneration policy is such that Cygne is able to attract, retain
and reward capable employees who can contribute both short- and longer-term to
the success of Cygne. Equity participation and a strong alignment to
stockholders' interest are key elements of Cygne's compensation philosophy.
Cygne's executive compensation program consists of three parts: base salary,
annual bonus and stock options.
Changes made in 1993 to the Code impose certain limitations on the
deductibility of executive compensation paid by public companies for taxable
years beginning in or after 1994. In general, under these limitations, Cygne
will not be able to deduct annual compensation paid to certain executive
officers in excess of $1,000,000 except to the extent that such compensation
qualifies as "performance-based compensation" (or meets other exceptions not
here relevant). Non-deductibility would result in additional tax cost to Cygne.
It is possible that at least some of the cash and equity based compensation paid
or payable to Cygne's executive officers will not qualify for the
"performance-based compensation" exclusion under these deduction limitation
provisions of the Code. Nevertheless, the Compensation Committee anticipates
that in making compensation decisions it will give consideration to the net cost
to Cygne (including for this purpose, the potential limitation on deductibility
of executive compensation).
Base salary represents the fixed component of the executive
compensation program. Determinations of base salary levels are established on an
annual review of marketplace competitiveness with similar companies, and on
internal relationships. Periodic increases in base salary relate to individual
contributions to Cygne's overall performance, relative marketplace
competitiveness levels, length of service and the industry's annual competitive
pay practice movement.
No bonuses were awarded to executive officers for the year ended
January 30, 1999.
The Compensation Committee, which administers Cygne's stock option
plan, believes that one important goal of the executive compensation program
should be to provide executives, key employees and consultants who have
significant responsibility for the management, growth and future success of
Cygne with an opportunity to increase their ownership and potentially gain
financially from Cygne's stock price increases. This approach ensures that the
best interests of the stockholders, executives and employees will be closely
aligned. Therefore, executive officers and other key employees of Cygne are
granted stock options from time to time, giving them a right to purchase shares
of our Common Stock at a specified price in the future. The grant of options is
based primarily on an employee's potential contribution to Cygne's growth and
financial results. In determining the size of option grants, the Compensation
Committee considers the number of options owned by such officer, the number of
options previously granted and currently outstanding, and the aggregate size of
the current option grants. Options generally are granted at the prevailing
market value of our Common Stock and will only have value if Cygne's stock price
increases. Generally, options become exercisable in equal amounts over four
years and the individual must be employed by Cygne for such options to become
exercisable. No options were granted to executive officers of Cygne during the
fiscal year ended January 30, 1999.
59
<PAGE>
1998 COMPENSATION TO CHIEF EXECUTIVE OFFICER
The base salary for Mr. Manuel during 1998 was $540,834, which was
unchanged since June 1994 except for contractually provided cost of living
adjustments. The Compensation Committee determined during 1998 that, in light of
Cygne's financial condition, it was not appropriate to increase Mr. Manuel's
salary. In addition, in June 1995, Mr. Manuel accepted a reduction in salary
which has to date remained in effect. During the fiscal year ended January 30,
1999, Mr. Manuel was not granted any stock options.
Respectfully submitted,
JAMES G. GRONINGER
60
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires our
executive officers and directors, and persons who own more than ten percent of a
registered class of our equity securities ("10% Stockholders"), to file reports
of ownership on a Form 3 and changes in ownership on a Form 4 or a Form 5 with
the SEC. Such executive officers, directors and 10% Stockholders are also
required by SEC rules to furnish us with copies of all Section 16(a) forms that
they file.
Based solely on our review of the copies of the forms received by us,
or written representations from our executive officers and directors that no
Forms 5 were required for such persons, we believe that, during fiscal 1998, our
executive officers, directors and 10% Stockholders complied with all applicable
Section 16(a) filing requirements.
CERTAIN TRANSACTIONS
Effective June 30, 1998, we terminated the employment of Gary C. Smith,
Senior Vice President --Manufacturing. As a result of the termination of his
employment, Mr. Smith received a severance payment of $271,655, payable in
twelve equal monthly payments starting in July 1998.
Effective December 15, 1998, we terminated the employment of Paul D.
Baiocchi, Vice President, General Counsel and Secretary. As a result of the
termination of his employment, Mr. Baiocchi received a severance payment of
$113,670, payable in twelve equal monthly payments starting in December 1998.
61
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of August 31, 1999
(except as otherwise noted in the footnotes) regarding the beneficial ownership
(as defined by the SEC) of our Common Stock by (i) each person known by us to
own beneficially more than five percent of our outstanding Common Stock; (ii)
each director and nominee for election as a director of Cygne; (iii) each
executive officer named in the Summary Compensation Table (see "Executive
Compensation"); and (iv) all of our directors and executive officers as a group.
Except as otherwise specified, the named beneficial owner has the sole voting
and investment power over the shares listed.
Amount and Nature of Percentage of
Beneficial Ownership Cygne
Name and Address of Cygne Common Stock (1) Common Stock
- ---------------- ------------------------- ------------
James G. Groninger (2)................. 22,500 *
Bernard M. Manuel (3).................. 5,001,975 40.0%
Roy E. Green (4)....................... 80,000 *
Gary C. Smith.......................... -- *
Paul D. Baiocchi....................... -- *
Directors and executive officers
as a group (3 persons)(5)............ 5,104,475 40.5%
- ------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
which generally attribute beneficial ownership of securities to persons who
possess sole or shared voting power and/or investment power with respect to
those securities.
(2) Includes 17,500 shares issuable pursuant to options which are exercisable
within 60 days of August 31, 1999. Does not include 5,000 shares which are
the subject of options which are not exercisable within 60 days of August
31, 1999.
(3) Includes 55,000 shares issuable pursuant to options. Mr. Manuel's address
is c/o Cygne, 680 Fifth Avenue, New York, New York 10019.
(4) Consists of shares issuable pursuant to options.
(5) Includes 152,500 shares issuable pursuant to options which are exercisable
within 60 days of August 31, 1999. See Notes 2, 3 and 4.
62
<PAGE>
PERFORMANCE GRAPH
The Stock Price Performance Graph below shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act or under the
Exchange Act, except to the extent we specifically incorporates this information
by reference, and shall not otherwise be deemed filed under such Acts.
Set forth below is a line graph which compares the cumulative total
shareholder return on our Common Stock against the cumulative total return of
the S&P 500 Index and the S&P Textile-Apparel Index for the period from January
28, 1994 (the first day of our 1994 fiscal year) to January 29, 1999 (the last
business day of our fiscal year).
GRAPHICAL REPRESENTATION FOR THE CHART
1/29/94 1/30/95 1/30/96 1/30/97 1/30/98 1/29/99
------- ------- ------- ------- ------- -------
CYGNE DESIGNS, INC. ...... $100.00 $ 73.44 $ 6.25 $ 5.66 $ 1.76 $ .59
S&P TEXTILES APPAREL ..... $100.00 $100.31 $113.42 $164.34 $160.13 $146.48
S&P 500 INDEX ............ $100.00 $100.53 $139.40 $176.13 $223.52 $296.14
ASSUMES $100 INVESTED ON JAN. 28, 1994
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JAN. 29, 1999
63
<PAGE>
INDEPENDENT AUDITORS
Representatives of Ernst Young LLP, our independent public accountants,
are expected to be present at the Annual Meeting, where they will be available
to respond to appropriate questions and have the opportunity to make a statement
if they so desire.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, we file reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
contain additional information about us. You can inspect and copy these
materials at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the SEC: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. For further information concerning the SEC's public reference rooms, you
may call the SEC at 1-800-SEC-0330. Some of this information may also be
accessed on the World Wide Web through the SEC's Internet address at
http://www.sec.gov.
IF YOU ARE A STOCKHOLDER AND WOULD LIKE TO RECEIVE A COPY OF OUR ANNUAL
REPORT ON FORM 10- K FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 (SEC FILE NUMBER
0-22102) FILED WITH THE SEC ON APRIL 30, 1999, YOU SHOULD CALL OR WRITE TO CYGNE
DESIGNS, INC., 680 FIFTH AVENUE, NEW YORK, NEW YORK 10019, ATTENTION: ROY E.
GREEN, TELEPHONE NO. (212) 489-3900. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS YOU REQUEST, YOU SHOULD MAKE YOUR REQUEST BY OCTOBER 8, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
SEPTEMBER 28, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
STOCKHOLDER PROPOSALS
Stockholder proxies obtained by the Board of Directors in connection
with the annual meeting of stockholders in the year 2000 will confer on the
proxyholders discretionary authority to vote on any matters presented at the
meeting which were not included in the proxy statement, unless notice of the
matter to be presented at the meeting is provided to our Corporate Secretary no
later than April 19, 2000.
In accordance with regulations issued by the SEC, stockholder proposals
intended for presentation at the fiscal 2000 Annual Meeting of Stockholders must
be received by our corporate Secretary no later than February 8, 2000 if such
proposals are to be considered for inclusion in our Proxy Statement.
64
<PAGE>
OTHER MATTERS
We do not know of any matters that are to be presented for action at
the Annual Meeting other than those set forth above. If any other matters
properly come before the Annual Meeting, the persons named in the enclosed form
of proxy will vote the shares represented by proxies in accordance with their
best judgment on such matters.
Proxies will be solicited by mail and may also be solicited in person
or by telephone by some of our regular employees.
By Order of the Board of Directors
ROY E. GREEN
Secretary
New York, New York
September 28, 1999
65
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Report of Independent Auditors ........................................ F-2
Consolidated Balance Sheets as of January 30, 1999 and
January 31, 1998 .................................................... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended January 30, 1999 .......................... F-4
Consolidated Statements of Stockholders' Equity for Each of
the Three Years in the Period Ended January 30, 1999 ................ F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended January 30, 1999 .......................... F-6
Notes to Consolidated Financial Statements ............................ F-8
Consolidated Balance Sheets at July 31, 1999 (unaudited) and
January 30, 1999 ..................................................... F-23
Consolidated Statements of Operations for the Six Months
Ended July 31, 1999 and August 1, 1998 (unaudited) ................... F-24
Consolidated Statements of Stockholders' Equity for the
Six Months Ended July 31, 1999 (unaudited) ........................... F-25
Consolidated Statements of Cash Flows for the
Six Months Ended July 31, 1999 and August 1, 1998 .................... F-26
Notes to Consolidated Financial Statements (unaudited) ................ F-27
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Cygne Designs, Inc.
We have audited the accompanying consolidated balance sheets of Cygne Designs,
Inc. and Subsidiaries as of January 30, 1999 and January 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 30, 1999. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cygne
Designs, Inc. and Subsidiaries at January 30, 1999 and January 31, 1998 and the
consolidated results of their operations, changes in their stockholders' equity
and their cash flows for each of the three years in the period ended January 30,
1999, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
New York, New York
March 26, 1999
F-2
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January January
30, 1999 31, 1998
--------- ----------
(In thousands, except share
and per share amounts)
<S> <C> <C>
Assets
Current assets:
Cash (includes restricted cash of $669 and $1,098,
respectively ..................................... $ 3,686 $ 10,926
Trade accounts receivable, net ....................... 8,242 6,012
Inventory ............................................ 2,705 4,012
Assets held for sale ................................. 4,700 --
Other receivables and prepaid expenses ............... 996 1,979
--------- ---------
Total current assets ............................... 20,329 22,929
Fixed assets, net ........................................ 2,720 3,972
Other assets ............................................. 550 787
Goodwill, net ............................................ -- 2,062
--------- ---------
Total assets ....................................... $ 23,599 $ 29,750
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings .................................. $ 2,754 $ 1,319
Accounts payable ....................................... 4,579 3,348
Accrued expenses ....................................... 4,140 6,636
Income taxes payable ................................... 6,080 6,068
--------- ---------
Total current liabilities .......................... 17,553 17,371
Stockholders' equity:
Preferred Stock, $0.01 par value; 4,000,000
shares authorized: none issued and outstanding ...... -- --
Common Stock, $0.01 par value; 75,000,000 shares
authorized: 12,438,038 shares issued and
outstanding .......................................... 124 124
Paid-in capital ........................................ 120,918 120,918
Accumulated deficit .................................... (114,872) (108,547)
Foreign currency translation adjustment ................ (124) (116)
--------- ---------
Total stockholders' equity ......................... 6,046 12,379
--------- ---------
Total liabilities and stockholders' equity ......... $ 23,599 $ 29,750
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
January January February
30, 1999 31, 1998 1, 1997
----------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales ......................................... $ 43,013 $ 43,379 $ 254,313
Cost of goods sold ................................ 42,753 43,063 226,456
--------- --------- ---------
Gross profit ...................................... 260 316 27,857
Selling, general and administrative expenses ...... 4,381 10,331 27,251
Provision for impairment of Knit business
assets .......................................... 2,564 -- --
(Recoupment) provision for lease
termination expenses ............................ (902) 3,964 --
Gain from sale of Ann Taylor Woven
Division and CAT ................................ -- -- (29,588)
Reorganization expense ............................ -- -- 4,813
Amortization of intangibles ....................... 364 364 364
--------- --------- ---------
(Loss) income from operations ..................... (6,147) (14,343) 25,017
Other income, principally from the gain on
sale of Ann Taylor common stock ................ -- -- (6,864)
Settlement of shareholder class
action and related legal expenses .............. -- -- 2,627
Interest income ................................... (428) (461) (80)
Interest expense .................................. 337 378 3,340
--------- --------- ---------
(Loss) income before income taxes and
minority interests ............................. (6,056) (14,260) 25,994
Provision for income taxes ........................ 269 204 7,117
--------- --------- ---------
(Loss) income before minority interests ........... (6,325) (14,464) 18,877
Income attributable to minority interests ......... -- -- 961
--------- --------- ---------
Net (loss) income ................................. $ (6,325) $ (14,464) $ 17,916
========= ========= =========
Net (loss) income per share - basic ............... $ (0.51) $ (1.16) $ 1.44
========= ========= =========
Weighted average number of common shares
outstanding .................................... 12,438 12,438 12,438
========= ========= =========
Net (loss) income per share assuming dilution ..... $ (0.51) $ (1.16) $ 1.44
========= ========= =========
Weighted average number of common shares
and dilutive securities ........................ 12,438 12,438 12,439
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Foreign
-------------------- Currency
Number of Paid-in Translation (Accumulated
Shares Amount Capital Adjustment Deficit) Total
--------- ------- ------- ------------ ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 ..................... 12,438 $124 $120,918 $ 3 $(111,999) $ 9,046
Foreign currency translation adjustment ....... -- -- -- (3) -- (3)
Net income for year ended February 1, 1997 .... -- -- -- -- 17,916 17,916
------ ---- -------- ----- --------- --------
Comprehensive income for year ended
January 30, 1997 ............................ -- -- -- -- -- 17,913
--------
Balance at February 1, 1997 ..................... 12,438 124 120,918 -- (94,083) 26,959
Foreign currency translation adjustment (116) (116)
Net loss for year ended January 31, 1998 (14,464) (14,464)
--------
Comprehensive loss for year ended
January 30, 1998 ............................ -- -- -- -- -- (14,580)
--------
Balance at January 31, 1998 ..................... 12,438 124 120,918 (116) (108,547) 12,379
Net loss for year ended January 30, 1999 (6,325) (6,325)
Foreign currency translation adjustment ....... -- -- -- (8) -- (8)
--------
Comprehensive loss for year ended
January 30, 1999 ............................ -- -- -- -- -- (6,333)
------ ---- -------- ----- --------- --------
Balance at January 30, 1999 ..................... 12,438 $124 $120,918 $(124) $(114,872) $ 6,046
====== ==== ======== ===== ========= ========
</TABLE>
See accompanying notes
F-5
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------
January January February
30, 1999 31, 1998 1, 1997
--------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income ............................................... $ (6,325) $(14,464) $ 17,916
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Provision for impairment of Knit business assets ............ 2,564 -- --
Net gain from sale of Ann Taylor Woven Division and CAT ..... -- -- (29,588)
Gain from sale of Ann Taylor Common Stock ................... -- -- (6,134)
Depreciation and amortization ............................... 833 1,330 2,079
Write-off of fixed assets ................................... -- 1,857 1,359
(Recoupment) provision for lease termination expense ........ -- 2,107 --
Rent expense not currently payable .......................... -- 57 190
Deferred income taxes ....................................... -- -- 6,154
Income attributable to minority interests ................... -- -- 961
Changes in operating assets and liabilities:
Trade accounts receivable ................................. (2,300) 1,227 6,605
Inventory ................................................. (2,120) 1,097 17,462
Other receivables and prepaid expenses .................... 621 1,816 4,194
Accounts payable .......................................... 835 (1,034) (16,301)
Accrued expenses .......................................... (2,496) (3,121) (5,486)
Income taxes payable ...................................... 12 84 2,145
-------- -------- --------
Net cash (used in) provided by operating activities ............. (8,376) (9,044) 1,556
INVESTING ACTIVITIES
Purchase of fixed assets ........................................ (279) (754) (1,186)
Sale of fixed assets ............................................ -- -- 2,089
Other assets .................................................... (12) (501) 164
Proceeds from sale of Ann Taylor Woven Division
and CAT ....................................................... -- -- 3,162
Proceeds from sale of Ann Taylor Common Stock ................... -- -- 44,291
Sale of subsidiary, net ......................................... -- -- 12,500
-------- -------- --------
Net cash (used in) provided by investing activities ............. (291) (1,255) 61,020
FINANCING ACTIVITIES
Short-term borrowings, net ...................................... 1,435 (63) (34,455)
Credit facility outstanding, net ................................ -- -- (8,945)
(Decrease) in long-term debt, net ............................... -- (842) (2,117)
-------- -------- --------
Net cash provided by (used in) financing activities ............. 1,435 (905) (45,517)
Effect of exchange rate changes on cash ......................... (8) (116) (300)
-------- -------- --------
Net (decrease) increase in cash ................................. (7,240) (11,320) 16,759
Cash at beginning of period ..................................... 10,926 22,246 5,487
-------- -------- --------
Cash at end of period ........................................... $ 3,686 $ 10,926 $ 22,246
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ............................................... 264 120 307
======== ======== ========
Interest paid ................................................... 336 310 3,678
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the "Company")
are engaged in private label manufacturing of woven and knit career and casual
women's apparel.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to January 31. A year
refers to the fiscal year of the Company commencing in that calendar year and
ending on the Saturday nearest January 31 of the following year.
ORGANIZATION AND PRINCIPLES OF COMBINATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Cygne and its
subsidiaries. All material intercompany balances and transactions were
eliminated in consolidation and combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
F-7
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the term of the related lease.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales returns and allowances. Such reserves amounted to
$102,000 and $109,000 at January 30, 1999 and January 31, 1998, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the applicable
foreign currency of the country in which it operates for which the functional
currency is the U.S. Dollar. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains and
losses from the changes in exchange rates from year to year have been reported
separately as a component of stockholders' equity.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term debt approximates fair value.
NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with Financial
Accounting Standards Board SFAS No. 128, "Earnings per Share". In computing
dilutive loss per share for the years ended January 30, 1999 and January 31,
1998, no effect has been given to outstanding options since the exercise of any
of these items would have an antidilutive effect on net loss per share.
F-8
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1998 the Company adopted the Financial Accounting Standards Board SFAS No.
130, "Reporting Comprehensive Income", which established standards for reporting
and display of comprehensive income and its components. The adoption had no
effect on the Company's net income.
Effective February 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which supersedes SFAS
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise".
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See note 6.
GOODWILL
Goodwill includes the excess of cost over fair value of net assets acquired. The
Company assesses the recoverability of its intangible assets by determining
whether amortization over the remaining lives can be recovered through
undiscounted future operating cash flows of the acquired operation and other
considerations. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
In 1998, management, as a result of the Knit disposition, determined that the
remaining goodwill (relating to the Knits business) was impaired. The write-off
of the goodwill is included in the 1998 Statement of Operations under the
caption "Provision for impairment of Knit business assets."
2. PURCHASES AND DISPOSITIONS OF COMPANIES
In September 1996 the Company sold to Ann Taylor (i) its interest in a sourcing
joint venture arrangement with Ann Taylor, and (ii) the assets of its Ann Taylor
Woven Division that were used in sourcing merchandise for Ann Taylor. On the
closing of the transaction, Cygne received 2,348,145 shares of Ann Taylor common
stock, and approximately $8,900,000 in cash. Ann Taylor also assumed certain
liabilities. As a result of the transaction, the Company realized a pre-tax gain
of $29,600,000. Between October 1996 and January 1997, the Company sold all of
the 2,348,145 shares of Ann Taylor common stock, resulting in aggregate net
proceeds of approximately $44,300,000 and a pre-tax gain of $6,100,000.
In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the
F-9
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's then President and a director, to facilitate the integration of CAT
and the Division into Ann Taylor's operations. Mr. Benson's consulting agreement
was assigned to him in connection with his resignation as an officer and
employee of the Company on November 29, 1996. During 1997 the consulting
agreement for the services of Mr. Manuel was bought out in consideration of the
payment by Ann Taylor to the Company of approximately $477,000.
The businesses sold to Ann Taylor accounted for approximately 67% of the
Company's net sales for the year ended February 1, 1997. If the sale of the
businesses had been consummated on February 4, 1996, the Company would have had
pro forma net sales of $84,756,000 for the year ended February 1, 1997. Pro
forma gross profit for that year would have been $6,189,000. Pro forma loss from
operations for that year would have been $15,503,000. Pro forma net loss for
that year (excluding the gain on the Ann Taylor Disposition and on the
subsequent sale of the Ann Taylor common stock) would have been $17,660,000. The
pro forma net loss per share for that year would have been $1.42.
3. REORGANIZATION EXPENSE
The reorganization expense in 1996 of $4,813,000 was the result of the
downsizing of the Company and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were
costs in connection with early termination of leases for excess space outside of
New York, disposition of related fixed assets, and severance costs related to
the Company's then President's resignation as an officer and employee of the
Company. All of such costs were paid prior to January 31, 1998.
4. PROVISION FOR LEASE TERMINATION EXPENSES
In 1997, the Company provided for lease termination expenses of $3,964,000 as a
result of the Company's decision to relocate from its existing New York Office
and to seek substantially smaller New York office space. On March 1, 1999, the
Company completed its relocation from its existing New York office and the
Landlord released the Company from any contingent rent liability on its New York
space and on its leases assumed by Ann Taylor in 1996. The actual expenses in
connection with this lease termination approximated $3,063,000. Therefore, the
balance of $902,000 of this provision has been reversed in 1998. Approximately
$950,000 of the provision had not been paid as of January 30, 1999.
F-10
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORY
Inventory consists of the following:
January January
30, 1999(1) 31, 1998
----------- ---------
($ In thousands)
Raw materials and Work-in-Process .... $2,310 $3,593
Finished goods ....................... 395 419
------ ------
$2,705 $4,012
====== ======
(1) Excludes $3,426,000 of inventory of the Knit business being sold.
6. FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization
and are summarized below together with estimated useful lives used in computing
depreciation and amortization:
January January Estimated
30, 1999(1) 31, 1998 Useful Lives
----------- -------- ------------
($ in thousands)
Land and building .................... $ 902 $ 902 20-30 years
Equipment, furniture, and fixtures ... 1,999 3,042 3-10 years
Leasehold improvements ............... 924 1,088 Term of lease
Vehicles ............................. 78 194 3-5 years
------ ------
3,903 5,226
Less accumulated depreciation
and amortization ................... 1,183 1,254
------ ------
$2,720 $3,972
====== ======
(1) Excludes $842,000 of net fixed assets of the Knit business being sold
F-11
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At January 30, 1999 and January 31, 1998 the Company
had restricted cash at a bank of $669,000 and $1,098,000, respectively, to
secure letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $3,200,000; letters of credit not to exceed $3,200,000; overdraft
facility not to exceed $500,000; and bank guarantee for Israeli custom duties
not to exceed $500,000. Borrowings under this facility generally bear interest
at 1.5% over the prime rate, except that borrowings against trade accounts
receivable bear interest at 1.25% over the LIBOR rate. Borrowings under this
facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. At January 30, 1999, outstanding loans under this facility were
$2,629,000 and letters of credit aggregating $1,480,000 had been issued. This
facility will terminate upon the closing of the sale of the Knit business.
In September 1998 the Israeli bank made an additional $150,000 loan to the
Company's Israeli subsidiary which is also secured by a lien on its assets.
Principal payments under this loan are due in monthly installments of $6,250
through October 2000 and the loan bears interest of 7.2% payable monthly. At
January 30, 1999 the outstanding balance was $125,000. This facility will
terminate upon the closing of the sale of the Knit business
The loans to the Israeli subsidiary will be repaid from the proceeds from the
Knit Disposition and this credit facility will terminate.
8. STOCK OPTIONS
Pursuant to an employee Stock Option Plan, as amended, the Company may grant to
eligible individuals incentive stock options as defined in the Internal Revenue
Code ("IRC") and non-qualified stock options. An aggregate of 1,700,000 shares
of common stock have been reserved for issuance under the Plan. The exercise
price for incentive options may not be less than 100% (110% for holders of 10%
or more of the Company's outstanding shares) of the fair market value of the
shares on the date of grant, and at least par value of the common stock with
respect to the non-qualified stock options, have a ten-year term (five years for
holders of 10% or more of the Company's outstanding shares in the case of
incentive stock options) and vest at the discretion
F-12
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Board of Directors.
Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April 15,
1993, the Company will automatically grant to eligible non-employee directors
options to purchase 10,000 shares of Common Stock upon the directors' initial
appointment to the Board of Directors and options to purchase 2,000 shares of
Common Stock on each individual director's anniversary date from initial
appointment. Options granted under the Directors' Plan do not qualify as
incentive stock options under the IRC. The options have an exercise price of
100% of fair market value on the date of grant, have a ten-year term and vest,
pro-rata, over four years.
The 1996 sale of business to Ann Taylor constituted a "change in control of the
Company" for purposes of the Company's stock option plans. As a result, all then
outstanding stock options became immediately exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Had compensation cost been determined based upon the fair value at the grant
date for awards consistent with the methodology prescribed by SFAS No. 123, for
each of the years ended January 30, 1999, and January 31, 1998 the Company's net
loss and net loss per share would have increased by $1,000 or $0.00 per share.
For the year ended February 1, 1997, the Company's net income would have
decreased by $322,000 or $0.03 per share.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1998, 1997
and 1996: risk-free interest rate of 5%; volatility factor of the expected
market price of the Company's common stock of 1.527 for January 30, 1999, 0.076
for January 31, 1998 and 0.082 for February 1, 1997; expected life of 6 years;
and a dividend yield of zero.
As any options granted in the future will also be subject to the fair value pro
forma calculations, the pro forma adjustments for fiscal years 1998, 1997 and
1996 may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1998, 1997 and 1996 is $0.28, $0.34 and
$0.77, respectively. Exercise prices for options issued between February 4, 1996
through January 30, 1999 ranged from $0.12 to $10. The weighted-average
remaining contractual life of those options is 3.1 years.
F-13
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. STOCK OPTIONS (CONTINUED)
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
Employee Stock Non-employee
Option Plan Directors Plan
------------------------- ------------------------
Weighted Weighted
Average Average
Number Exercise Exercise Number Exercise Exercise
of Shares Price Range Price of Shares Price Range Price
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Options outstanding at February 3, 1996 ... 1,192,500 $2.00-$22.75 33,500 $3.25-$23.50
Options granted in 1996 ................... 40,000 $1.00 $1.00 4,000 $1.13-$1.75 $1.44
Options canceled in 1996 .................. (512,000) $2.00-$18.00 $5.50 (5,500) $4.00-$22.50 $7.64
--------- ------
Options outstanding at February 1, 1997 ... 720,500 $1.00-$22.75 32,000 $1.13-$23.50
Options granted in 1997 ................... -- 4,000 $0.28-$0.69 $0.49
Options canceled in 1997 .................. (215,250) $2.00-$22.75 $4.07 --
--------- ------
Options outstanding at January 31, 1998 ... 505,250 $1.00-$13.38 36,000 $0.28-$23.50
Options granted in 1998 ................... 20,000 $0.31 $0.31 4,000 $0.12-$0.28 $0.20
Options canceled in 1998 .................. (93,250) $2.00 --
------
Options outstanding at January 30, 1999 ... 432,000 $0.31-$13.88 40,000 $0.12-$23.50
========= ======
At January 30, 1999 options exercisable ... 412,000 33,000
========= ======
<CAPTION>
Other Stock Option
Arrangements Weighted
------------------------- Average Total
Number Exercise Exercise Number
of Shares Price Range Price of Shares
---------- ------------ --------- ----------
<S> <C> <C> <C>
Options outstanding at February 3, 1996 ... 230,250 $2.00-$22.50 1,456,250
Options granted in 1996 ................... -- 44,000
Options canceled in 1996 .................. (105,250) $2.00 $2.00 (622,750)
-------- ---------
Options outstanding at February 1, 1997 ... 125,000 $2.00-$22.50 877,500
Options granted in 1997 ................... -- 4,000
Options canceled in 1997 .................. -- (215,250)
-------- ---------
Options outstanding at January 31, 1998 ... 125,000 $2.00-$22.50 666,250
Options granted in 1998 ................... -- 24,000
Options canceled in 1998 .................. -- (93,250)
-------- ---------
Options outstanding at January 30, 1999 ... 125,000 $2.00-$22.50 597,000
======== =========
At January 30, 1999 options exercisable ... 125,000 570,000
======== =========
</TABLE>
F-14
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONCENTRATIONS OF RISK
For years 1998, 1997 and 1996, sales to The Limited, Inc. accounted for 59%,
65%, and 25%, respectively, of the Company's net sales. At January 30, 1999 and
January 31, 1998, The Limited, Inc. accounted for 56% and 65%, respectively, of
trade accounts receivable.
For 1996 AnnTaylor accounted for 67% of the Company's net sales.
10. LEASES, COMMITMENTS AND LITIGATION
LEASES
At January 30, 1999, the Company leased manufacturing and office facilities
under operating lease agreements which expire through 2010. On March 1, 1999,
one of the Company's office facility leases was cancelled and the Landlord
released the Company from its contingent liability on leases assumed by Ann
Taylor.
On March 25, 1999, the Company agreed to sell its Knit business, subject to
stockholder approval. The Knit business has an operating lease for manufacturing
and office space requiring annual payments of $193,000 through the year 2000.
The purchaser of the Knit business will assume this lease.
Total rent expense under the operating leases for the years ended January 30,
1999, January 31, 1998 and February 1, 1997 amounted to approximately $968,000,
$1,036,000 and $2,220,000, respectively.
As of January 30, 1999, after giving effect to the lease cancellation and the
sale of the Knits business, the Company's lease commitment was $138,000 through
the period ending December 1999.
F-15
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS
The Company has employment agreements with certain officers and key employees
through 2000. Future minimum aggregate annual payments under these agreements
amount to approximately $1,051,000 in 1999 and $220,000 in 2000. Certain of the
officers and employees may receive additional compensation based upon the
income, as defined, of the Company or one or more of its subsidiaries.
LEGAL PROCEEDINGS
In 1998 the Company settled a shareholder class action lawsuit. As part of the
settlement, the Company contributed approximately $2,100,000 to the settlement.
The Company also incurred legal fees of approximately $500,000 in connection
with this lawsuit.
The Company is involved in various legal proceedings that are incidental to the
conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition
or results of operations or cash flows. See Note 11 for information regarding
tax audits.
In February 1999, the U.S. Customs Service commenced an audit of the Company's
import operations. It is not possible at this time to predict the outcome of
this audit.
F-16
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
Income taxes are provided using the liability method. Under this method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment. Significant components of the
Company's deferred tax assets are as follows:
Year Ended
------------------------
January January
30, 1999 31, 1998
--------- ---------
($ In thousands)
Deferred tax assets:
Capitalization of expenses ..................... $ -- $ 51
Other reserves ................................. -- 924
Net operating loss carryforwards ............... 42,000 33,800
-------- ---------
Subtotal .......................................... 42,000 34,775
Valuation allowance ............................ (42,000) (34,775)
-------- ---------
Total deferred tax assets ......................... $ -- $ --
======== ========
For financial reporting purposes, income before income taxes includes the
following components:
Year Ended
--------------------------------------
January January February
30, 1999 31, 1998 1, 1997
-------- -------- --------
($ In thousands)
Pretax income (loss):
United States ..................... $(3,555) $(13,901) $16,928
Foreign ........................... (2,501) (359) 9,066
------- -------- -------
$(6,056) $(14,260) $25,994
======= ======== =======
F-17
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the provision for income taxes are as follows:
Year Ended
--------------------------------------
January January February
30, 1999 31, 1998 1, 1997
-------- -------- --------
($ In thousands)
Current:
Federal .......................... $ -- $ -- $ 682
Foreign .......................... 182 -- 224
State and local .................. 87 204 343
---- ---- ------
Total current ........................ 269 204 1,249
---- ---- ------
Deferred:
Federal .......................... -- -- 4,367
Foreign .......................... -- -- 311
State and local .................. -- -- 1,190
---- ---- ------
Total deferred ....................... -- -- 5,868
---- ---- ------
Tax provision ........................ $269 $204 $7,117
==== ==== ======
F-18
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax at the U.S. federal statutory
tax rates to income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------
January January February
30, 1999 31, 1998 1, 1997
----------------------- ------------------- -------------------
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates ........ $(2,059) (34.0%) $(4,848) (34.0)% $8,838 34.0%
Benefit of operating loss
carryforward ..................... -- -- -- -- 2,922 (10.5)
Loss, no benefit provided .......... 2,059 34.0 4,848 34.0 -- --
Foreign and state income taxes,
net of federal tax benefit ....... 269 4.4 204 1.4 1,142 4.4
Lower effective income tax
rates of foreign jurisdictions ... -- -- -- -- (235) (0.9)
Amortization of intangibles ........ -- -- -- -- 124 0.5
Other .............................. 0 -- 0 -- 170 0.7
------- ----- ------- ----- ------ ----
$ 269 4.4% $ 204 1.4% $7,117 28.2%
======= ===== ======= ===== ====== ====
</TABLE>
As of January 30, 1999, based upon tax returns filed and to be filed the Company
expects to report a net operating loss carryforward for U.S. Federal income tax
purposes of approximately $108,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2014. Under Section
382 of the U.S. Internal Revenue Code, if there is a more than 50% ownership
change (as defined therein) with respect to the Company's stock, the Company's
loss carryforwards for U.S. Federal and New York State and City tax purposes
would be virtually eliminated.
As of January 30, 1999, based upon tax returns filed and to be filed the Company
expects to report net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $70,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
TAX AUDITS
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc. for its taxable years ending
December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was acquired
by the Company). To date, the IRS has informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16 million (including some
penalties but not interest). Depending on the amount of the deficiency, the
amount of interest could be significant. The outcome of the GJM (US) Inc. audit
cannot be
F-19
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
predicted at this time.
Although the Company is disputing the proposed adjustment and believes that it
has established appropriate accounting reserves with respect to this matter, an
adverse decision in this matter could have a material adverse impact on the
Company and its financial condition, results of operations or cash loss.
The Company is subject to other ongoing tax audits in several jurisdictions.
Although there can be no assurances, the Company believes any adjustments that
may arise as a result of these other audits will not have a material adverse
effect on the Company's financial position.
12. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments of
the apparel market: woven career and casual women's sportswear and knit career
and casual women's sportswear. The Company sources and manufacturers garments
which have been designed and developed by the customer.
Net sales to unaffiliated customers and identifiable assets were as follows:
<TABLE>
<CAPTION>
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended January 30, 1999
Net sales ............................... $25,891 $17,122 -- -- $43,013
Gross profit (loss) ..................... 1,053 (793) -- -- 260
Selling, general and administrative ..... 841 1,493 2,047 -- 4,381
Amortization of intangibles ............. 364 -- -- -- 364
Provision for impairment of
Knit business assets ................... 2,564 -- -- -- 2,564
(Recoupment) provision for
lease termination ...................... -- -- (902) -- (902)
------- -------
(Loss) from operations .................. $(2,716) $(2,286) $(1,145) -- (6,147)
======= ======= =======
Interest income ......................... (428)
Interest expense ........................ 337
-------
(Loss) income before taxes .............. (6,056)
Provision for income taxes .............. 269
Net (loss) .............................. $(6,325)
=======
Identifiable assets ..................... $10,326 $ 9,705 $ 3,568 -- $23,599
======= ======= ======= =======
</TABLE>
F-20
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Knit Woven Other
Division Division Corporate Divisions Total
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1998
Net sales .............................. $ 28,886 $14,290 -- $ 203 $ 43,379
Gross profit (loss) .................... 656 814 -- (1,154) 316
Selling, general and
administrative ........................ 1,292 1,462 4,665 2,912 10,331
Amortization of intangibles ............ 364 -- -- -- 364
Provision for lease termination ........ -- -- 3,964 -- 3,964
-------- --------
(Loss) from operations ................. $(1,000) $ (648) $ (8,629) $ (4,066) (14,343)
======= ======= ======== ========
Interest income ........................ (461)
Interest expense ....................... 378
--------
(Loss) before income tax ............... (14,260)
Provision for income taxes ............. 204
--------
Net (loss) ............................. $(14,464)
========
Identifiable assets .................... $ 10,873 $ 7,249 $ 11,628 -- $ 29,750
======== ======= ======== ========
YEAR ENDED FEBRUARY 1, 1997
Net sales .............................. $ 41,138 $42,085 -- $171,090 $254,313
Gross profit ........................... 2,099 4,688 -- 21,070 27,857
Selling, general and
administrative ........................ 2,023 3,361 9,801 12,066 27,251
Amortization of intangibles ............ 364 -- -- -- 364
Gain from sale of Ann Taylor
woven division and CAT ............... -- -- -- 29,588 29,588
Reorganization expense ................. -- -- 4,813 -- 4,813
-------- --------
(Loss) income from operations .......... $ (288) $ 1,327 $(14,614) $ 38,592 25,017
======== ======= ======== ========
Other income, principally from
the gain on sale of Ann Taylor
common stock ......................... (6,864)
Settlement of shareholder class
action and related legal expenses .... 2,627
Interest income ........................ (80)
Interest expense ....................... 3,340
--------
Income before income taxes and
minority interest .................... 25,994
Provision for income taxes ............. 7,117
--------
Income before minority interest ........ 18,877
Income attributable to minority
interest ............................. 961
--------
Net income ............................. $ 17,916
========
Identifiable assets .................... $13,364 $ 8,815 $ 24,963 -- $ 47,142
======= ======= ======== ========
</TABLE>
F-21
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS
The Company does not provide any post employment or post retirement benefits to
its current or former employees. The Company implemented a new 401(k) plan for
domestic employees on February 2, 1997. The Company will match 33% of the
employee's contributions up to 3% of the employee's voluntary contribution.
14. RELATED PARTY TRANSACTIONS
During 1997, a company controlled by a shareholder paid the Company $292,000 for
design fees and commissions.
15. SUBSEQUENT EVENT
On March 25, 1999, the Company entered into an agreement, subject to stockholder
approval, pursuant to which it will sell substantially all of the assets of
Cygne's Knit business. The purchase price consideration in the transaction
consists of a dollar amount in cash equal to the adjusted net book value of
inventory, fixed assets, advances to vendors, and investment in a dye house
facility plus $100,000. The purchaser will also assume all customer and vendor
purchase orders and all lease obligations.
F-22
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
July January
31, 1999 30, 1999
--------- ---------
(In thousands, except share
and per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash (includes restricted cash of $1,200 and $669,
respectively) ............................................... $ 3,950 $ 3,686
Trade accounts receivable, net ............................... 5,505 8,242
Inventory .................................................... 1,733 2,705
Assets held for sale ......................................... 10,752 4,700
Other receivables and prepaid expenses ....................... 1,763 996
--------- ---------
Total current assets .................................... 23,703 20,329
Fixed assets, net .............................................. 2,604 2,720
Other assets ................................................... 550 550
--------- ---------
Total assets ............................................ $ 26,857 $ 23,599
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ........................................ $ 7,501 $ 2,754
Accounts payable ............................................. 4,174 4,579
Accrued expenses ............................................. 3,650 4,140
Income taxes payable ......................................... 6,072 6,080
--------- ---------
Total current liabilities ............................... 21,397 17,553
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 .......................................... (115,458) (114,872)
Foreign currency translation adjustment ...................... (124) (124)
--------- ---------
Total stockholders' equity .............................. 5,460 6,046
--------- ---------
Total liabilities and stockholders' equity .............. $ 26,857 $ 23,599
========= =========
</TABLE>
See accompanying notes.
F-23
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
July August
31, 1999 1, 1998
-------- -------
(In thousands, except
per share amounts)
<S> <C> <C>
Net sales ............................................. $ 26,727 $ 14,754
Cost of goods sold .................................... 24,033 14,593
-------- --------
Gross profit .......................................... 2,694 161
Selling, general and administrative expenses .......... 2,024 2,372
Provision for impairment of Knit business assets ...... 886 --
Amortization of intangibles ........................... -- 182
-------- --------
(Loss) from operations ................................ (216) (2,393)
Interest income ....................................... (49) (204)
Interest expense ...................................... 375 155
-------- --------
(Loss) before income taxes ............................ (542) (2,344)
Provision for income taxes ............................ 44 111
-------- --------
Net (loss) ............................................ $ (586) $ (2,455)
======== ========
Net (loss) per share - basic .......................... $ (0.05) $ (0.20)
======== ========
Weighted average number of common shares
outstanding ......................................... 12,438 12,438
======== ========
Net (loss) per share assuming dilution ................ $ (0.05) $ (0.20)
======== ========
Weighted average number of common
shares and dilutive securities ...................... 12,438 12,438
======== ========
</TABLE>
See accompanying notes.
F-24
<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 January 30, 1999 ...... 12,438 $ 124 $ 120,918 $ (124) $(114,872) $ 6,046
Foreign currency
translation adjustment ......... -- -- -- -- -- --
Net (loss) for the six
months ended July 31, 1999 ..... -- -- -- -- (586) (586)
------ --------- --------- --------- --------- ---------
Comprehensive (loss)
for the six months
ended July 31, 1999 ............ -- -- -- -- -- (586)
------ --------- --------- --------- --------- ---------
Balance at July 31, 1999 ......... 12,438 $ 124 $ 120,918 $ (124) $(115,458) $ 5,460
====== ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-25
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
--------------------
July August
31, 1999 1, 1998
-------- -------
(In thousands)
OPERATING ACTIVITIES
Net (loss) ............................................. $ (586) $ (2,455)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities
Provision for impairment of Knit business assets .. 886 --
Depreciation and amortization ..................... 250 249
Amortization of intangibles ....................... -- 182
Changes in operating assets and liabilities:
Trade accounts receivable ....................... 2,747 391
Inventory ....................................... (5,641) (4,291)
Other receivables and prepaid expenses .......... (712) 322
Accounts payable ................................ (836) (917)
Accrued expenses ................................ (491) (1,513)
Income taxes payable ............................ (8) (17)
-------- --------
Net cash (used in) operating activities ................ (4,391) (8,049)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets, net .......................... (92) (202)
-------- --------
Net cash (used in) investing activities ................ (92) (202)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) of short-term borrowings, net .. 4,747 774
-------- --------
Net cash provided by financing activities .............. 4,747 774
-------- --------
Net increase (decrease) in cash ........................ 264 (7,477)
Cash at beginning of period ............................ 3,686 10,926
-------- --------
Cash at end of period .................................. $ 3,950 $ 3,449
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ...................................... $ 178 $ 128
Interest paid .......................................... 375 161
See accompanying notes.
F-26
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended July 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ended January 29, 2000. 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 January 30, 1999. The
balance sheet at January 30, 1999 has been derived from the audited financial
statements at that date.
The Company's fiscal year ends on the Saturday nearest to January 31.
DISPOSITION OF COMPANIES
On March 25, 1999, the Company entered into an agreement, subject to
stockholder approval, to sell its Knit business to Jordache Limited (the "Knit
Disposition"). This agreement was amended and restated effective August 1, 1999.
The Knit Disposition consists of (i) certain assets of M.T.G.I. - Textile
Manufacturers Group (Israel), Ltd. ("MTGI"), the Company's wholly-owned
subsidiary located in Israel, and (ii) the stock of Wear & Co. S.r.l. ("Wear"),
the Company's wholly-owned subsidiary located in Italy (collectively the "Knit
Disposition"). The purchase price in the transaction consists of a dollar amount
in cash equal to $100,000 plus the adjusted net book value (as defined in the
Purchase Agreement) of the inventory, fixed assets, and certain other assets of
MTGI, less an amount equal to the difference between (i) the sum of (A) $80,000
and (B) MTGI's income before tax for the period commencing August 1, 1999 and
ending on the closing date, and (ii) the operating expenses of certain
affiliates serving MTGI. Jordache will also assume all customer and vendor
purchase orders and all lease obligations. In addition, Jordache has agreed to
pay Cygne commissions of 6% on orders for products included in the assets, up to
a maximum of $600,000, and a non-compete payment of $400,000. In connection with
the transaction Cygne will pay severance of $800,000 to the person who runs the
Knit business.
In connection with the amended and restated acquisition agreement, Cygne
entered into an agreement pursuant to which an affiliate of Jordache will manage
the Company's Knit business pending the consummation of the Knit Disposition.
Jordache also agreed to provide financing to the Company in connection with
certain knit product purchase orders being manufactured by MTGI.
In connection with the amended and restated acquisition agreement, the
Company recorded on the Statement of Operations a provision for impairment of
Knit business assets in the amount of $886,000, representing an additional loss
on assets to be sold of $362,000 and additional transaction costs (including
taxes) of $524,000.
F-27
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 (UNAUDITED)
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
July January
31, 1999(1) 30, 1999(1)
----------- -----------
(In thousands)
Raw materials and Work-in-Process ..... $1,573 $ 2,310
Finished goods ........................ 160 395
------ -------
$1,733 $ 2,705
====== =======
(1) Excludes $10,039,000 and $3,426,000 of inventory of the Knit business being
sold at July 31, 1999 and January 30, 1999, respectively.
3. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At July 31, 1999 and January 30, 1999 the Company had
restricted cash at a bank of $1,200,000 and $669,000, respectively, to secure
letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $5,500,000; letters of credit not to exceed $3,000,000; overdraft
facility not to exceed $500,000; and bank guarantee for Israeli custom duties
not to exceed $500,000. Borrowings under this facility generally bear interest
at 1.0% over the prime rate, except that borrowings against trade accounts
receivable bear interest at 1.0% over the LIBOR rate. Borrowings under this
facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. At July 31, 1999, outstanding loans under this facility were
$7,407,000 and letters of credit aggregating $984,000 had been issued. This
facility, which supports the operations of the Knit business, will terminate
upon the closing of the sale.
In September 1998 the Israeli bank made an additional $150,000 loan to the
Company's Israeli subsidiary which is also secured by a lien on its assets.
Principal payments under this loan are due in monthly installments of $6,250
through October 2000 and the loan bears interest of 7.2% payable monthly. At
July 31, 1999 the outstanding balance was $94,250. This facility will terminate
upon the closing of the sale.
The loans to the Israeli subsidiary will be repaid from the proceeds from
the Knit Disposition and this credit facility will terminate.
F-28
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 (UNAUDITED)
4. 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 5 for information regarding income
tax audits.
In February 1999, the U.S. Customs Service commenced an audit of the
Company's import operations for 1995, 1996 and 1997. The audit was completed in
June 1999 with an assessment of approximately $29,000.
5. INCOME TAX
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the
U.S. Federal income tax returns filed by GJM (US) Inc. for its taxable years
ending December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was
acquired by the Company). To date, the IRS has informally proposed a Federal
income tax deficiency against GJM (US) Inc. of approximately $16 million
(including some penalties but not interest). Depending on the amount of the
deficiency, the amount of the interest could be significant. The outcome of the
audit of GJM (US) Inc. cannot be predicted at this time. Although the Company is
disputing the proposed adjustment and believes that it has established
appropriate accounting reserves with respect to this matter, an adverse decision
in this matter could have a material adverse impact on the Company and its
financial condition, results of operations, and cash flow.
The Company is subject to other ongoing tax audits in several jurisdictions
in the United States and Israel. Although there can be no assurances, the
Company believes any adjustments that may arise as a result of these other
audits will not have a material adverse effect on the Company's financial
position.
As of July 31, 1999, based upon tax returns filed and to be filed for the
fiscal year ended January 30, 1999, the Company expects to report a net
operating loss carryforward for U.S. Federal income tax purposes of
approximately $112,000,000. If unused, these loss carryforwards will expire in
the Company's taxable years ending 2011 through 2014. Under Section 382 of the
U.S. Internal Revenue Code, if there is a more than 50% ownership change (as
defined therein) with respect to the Company's stock, the Company's loss
carryforwards for U.S. Federal and New York State and City tax purposes would be
virtually eliminated.
As of July 31, 1999, based upon tax returns filed and to be filed for the
fiscal year ended January 30, 1999, the Company expects to report net operating
loss carryforwards for New York State and City tax purposes (on a separate
company basis) of approximately $72,000,000 and $71,000,000, respectively. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
F-29
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 (UNAUDITED)
6. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments
of the apparel market: woven career and casual women's sportswear and knit
career and casual women's sportswear. The Company sources and manufactures
garments which have been designed and developed by the customer. The Company has
agreed to sell its Knit business. See Note 1.
Net sales to unaffiliated customers and identifiable assets were as
follows:
<TABLE>
<CAPTION>
Knit Woven
Division Division Corporate Total
--------- --------- --------- --------
<S> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JULY 31, 1999
Net sales ............................................... $ 13,970 $ 12,757 -- $ 26,727
Gross profit ............................................ 793 1,901 -- 2,694
Selling, general and administrative ..................... 440 968 $ 616 2,024
Provision for impairment of Knit business assets ........ 886 -- -- 886
-------- -------- -------- --------
(Loss) income from operations .......................... $ (533) $ 933 $ (616) (216)
======== ======== ======== ========
Interest income ......................................... (49)
Interest expense ........................................ 375
--------
Loss before taxes ....................................... (542)
Provision for income taxes .............................. 44
--------
Net (loss) .............................................. $ (586)
========
Identifiable assets ..................................... $15,812 $7,051 $ 3,994 $ 26,857
======== ======== ======== ========
FOR THE THREE MONTHS ENDED JULY 31, 1999
Net sales ............................................... $5,798 $7,368 -- $ 13,166
Gross profit ............................................ 444 1,087 -- 1,531
Selling, general and administrative ..................... 239 548 $ 317 1,104
Provision for impairment of Knit business assets ... 886 -- -- 886
-------- -------- -------- --------
(Loss) income from operations ........................... $(681) $539 $ (317) (459)
======== ======== ========
Interest income ......................................... (29)
Interest expense ........................................ 193
--------
(Loss) before income tax ................................ (623)
Provision for income taxes .............................. 42
......................................................... --------
Net (loss) .............................................. $ (665)
========
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Knit Woven
Division Division Corporate Total
-------- -------- --------- --------
FOR THE SIX MONTHS ENDED AUGUST 1, 1998
<S> <C> <C> <C> <C>
Net sales ...................................... $ 11,294 $ 3,460 -- $ 14,754
Gross profit (loss) ............................ 948 (787) -- 161
Selling, general and administrative ............ 407 671 $ 1,294 2,372
Amortization of intangibles .................... 182 -- -- 182
-------- -------- -------- --------
Income (loss) from operations .................. $ 359 $ (1,458) $ (1,294) (2,393)
======== ======== ========
Interest income ................................ (204)
Interest expense ............................... 155
--------
(Loss) before income tax ....................... (2,344)
Provision for income taxes ..................... 111
--------
Net (loss) ..................................... ($ 2,455)
========
Identifiable assets ............................ $ 13,616 $ 7,706 $ 4,300 $ 25,622
======== ======== ======== ========
FOR THE THREE MONTHS ENDED AUGUST 1, 1998
Net sales ...................................... $ 7,272 $ 1,237 -- $ 8,509
Gross profit (loss) ............................ 826 (427) -- 399
Selling, general and administrative ............ 204 338 $ 814 1,356
Amortization of intangibles .................... 91 -- -- 91
-------- -------- -------- --------
Income (loss) from operations .................. $ 531 $ (765) $ (814) (1,048)
======== ======== ========
Interest income ................................ (98)
Interest expense ............................... 99
--------
(Loss) before income tax ....................... (1,049)
Provision for income taxes ..................... 78
--------
Net (loss) ..................................... ($ 1,127)
========
</TABLE>
F-31
<PAGE>
================================================================================
APPEXDIX A
AMENDED AND RESTATED
ACQUISITION AGREEMENT
by and among
M.T.G.I. - TEXTILE MANUFACTURERS GROUP (ISRAEL) LTD.,
MBS (CYGNE) COMPANY,
A.C. SERVICES, INC.
and
JORDACHE LIMITED
Dated as of August 1, 1999
==============================================================================
<PAGE>
AMENDED AND RESTATED ACQUISITION AGREEMENT, dated as of August 1, 1999,
by and among M.T.G.I. - Textile Manufacturers Group (Israel) Ltd., an Israeli
corporation ("SELLER"), MBS (Cygne) Company, a Delaware corporation ("MBS"),
A.C. Services, Inc., a Delaware corporation ("ACS" and, together with MBS, the
"STOCK SELLERS"), and Jordache Limited, a Delaware corporation ("PURCHASER").
W I T N E S S E T H:
WHEREAS, Seller and Wear & Co. S.r.l., an Italian corporation
wholly-owned by the Stock Sellers ("WEAR"), are engaged in the business of
manufacturing women's knit clothing (the "BUSINESS");
WHEREAS, Purchaser, Seller and the Stock Sellers were party to an
Acquisition Agreement, dated as of March 25, 1999 (the "ORIGINAL AGREEMENT"),
pursuant to which (i) Purchaser agreed to purchase, and Seller agreed to sell,
the Assets (as defined below) and (ii) Purchaser agreed to purchase, and the
Stock Sellers agreed to sell, all the outstanding stock of Wear (the "WEAR
STOCK"); and
WHEREAS, Purchaser, Seller and the Stock Sellers desire to amend and
restate the terms and conditions of the purchase and sale of the Assets and the
Wear Stock.
NOW, THEREFORE, in reliance upon the covenants and agreements set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
I. DEFINITIONS
The following terms shall have the following respective meanings for
all purposes of this Agreement:
"Agreement" means this Amended and Restated Acquisition
Agreement, as it may be from time to time amended.
"Assets" has the meaning set forth in Section 2.2.
"Assumed Contracts" shall mean the contracts, agreements and
arrangements listed on SCHEDULES 2.2(c) and 2.2(d) hereto and all
purchase orders.
"Assumed Liabilities" has the meaning set forth in Section 2.4.
"Business" has the meaning set forth in the preamble.
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<PAGE>
"Closing" means the completion of the acquisition of the Assets
and the Wear Stock pursuant to this Agreement.
"Closing Date" means the date the Closing takes place.
"Continued Employees" has the meaning set forth in Section 2.9.
"Discount" has the meaning set forth in Section 2.7(a).
"Escrow Agent" has the meaning set forth in Section 2.7(c).
"Escrowed Amount" has the meaning set forth in Section 2.7(c).
"Estimated Amount" has the meaning set forth in Section 2.7(b).
"Excluded Assets" has the meaning set forth in Section 2.3.
"Excluded Liabilities" means all liabilities and obligations of
Seller (other than the Assumed Liabilities) of any kind or nature
whatsoever, whether accrued, absolute, fixed, contingent, known or
unknown, arising out of the conduct of the Business by Seller prior to
the Closing Date.
"Governmental Entity" means any court, administrative agency or
commission or other governmental authority or instrumentality.
"Indemnified Party" has the meaning set forth in Section 10.3.
"Indemnifying Party" has the meaning set forth in Section 10.3.
"Initial Payment Amount" has the meaning set forth in Section
2.7(b).
"Inventory" has the meaning set forth in Section 2.2(b).
"Liens" has the meaning set forth in Section 2.1.
"Management Agreement" means that certain Management Agreement,
dated as of the date hereof, between T.S. Wear Me & Co., an affiliate
of Purchaser and Seller, pursuant to which Purchaser is managing the
Business on behalf of Seller.
"Original Agreement" has the meaning set forth in the preamble.
"Person" means an individual, partnership, corporation, joint
venture, unincorporated organization, cooperative or a governmental
entity or agency thereof.
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<PAGE>
"Seller's IBT" has the meaning set forth in Section 2.7(a).
"Stock Purchase Price" has the meaning set forth in Section 2.7.
"Wear Operating Expenses" has the meaning set forth in Section
2.7(a).
"Wear Stock" has the meaning set forth in the preamble.
II. PURCHASE AND SALE OF STOCK AND ASSETS
Section 2.1 THE WEAR STOCK. Upon the terms and subject to the
conditions of this Agreement, at the Closing, the Stock Sellers shall sell and
transfer to the Purchaser and Purchaser shall purchase and acquire good and
valid title to the Wear Stock, free and clear of any mortgage, pledge, security
interest, encumbrance, claim, lien, option, charge or agreement (collectively,
"LIENS").
Section 2.2 PURCHASE AND SALE OF ASSETS. At the Closing, upon the terms
and subject to the conditions contained herein, Seller shall sell, transfer,
convey and assign to Purchaser, effective as of the Closing, and Purchaser shall
purchase and accept from Seller, all of the assets of Seller related to the
Business, free and clear of all Liens, except the Excluded Assets (collectively,
the "ASSETS"), as follows:
(a) all machinery, equipment, fixtures, leasehold improvements,
computers, computer hardware and software, tools, supplies, furniture
and other tangible personal property and assets of Seller related to
the Business, including without limitation those described in SCHEDULE
2.2(a);
(b) all Seller's inventories of raw materials, work in progress,
finished products and supplies used in the conduct of the Business
("INVENTORY");
(c) subject to the second sentence of Section 3.5, all the
interest of and the rights and benefits accruing to Seller as lessee
under all leases or rental agreements covering real property,
machinery, equipment, computers, computer hardware and software,
tools, supplies, furniture and fixtures, automobiles and other
tangible personal property and assets used in the Business, all of
which agreements are listed in SCHEDULE 2.2(c);
(d) subject to the second sentence of Section 3.5, all of the
rights and benefits accruing to Seller under all customer and vendor
purchase orders, contracts, agreements and arrangements, written or
oral, entered into in connection with the conduct of the Business, all
of which currently effective written contracts, agreements and
arrangements (other than customer and vendor purchase orders) are
listed in SCHEDULE 2.2(d),
-3-
<PAGE>
provided that Purchaser is only acquiring oral customer and vendor
purchase orders outstanding on the Closing Date;
(e) all currently existing operating data and records of Seller
relating to the Business, including without limitation lists of all
currently existing clients and all client records, production reports
and records, standard operating procedures, equipment logs, operating
guides and manuals, part lists and specifications, vendor lists,
copies of personnel records of the Continued Employees, correspondence
and other similar documents and records relating to the foregoing;
(f) all advance payments to, and credits from, suppliers and all
deposits;
(g) Seller's 22.5% interest in DyeCo Textile Holdings Ltd., which
owns approximately 66% of the Zion Dyeing and Finishing Technologies
Limited Partnership; and
(h) all goodwill of the Business.
Section 2.3 EXCLUDED ASSETS. Anything to the contrary in Section 2.2
notwithstanding, the Assets shall exclude and Purchaser shall not purchase (a)
any cash or equivalents in transit, in hand or in bank accounts and (b) all of
Seller's accounts and notes receivable arising from the conduct of the Business
(collectively, the "EXCLUDED ASSETS").
Section 2.4 ASSUMPTION OF LIABILITIES. At the Closing, upon the terms
and subject to the conditions contained herein, and simultaneous with the
transfer, conveyance and assignment to Purchaser of the Assets, Purchaser shall
assume, effective as of the Closing, and discharge in accordance with their
terms, only the obligations and liabilities of Seller under the Assumed
Contracts to the extent that they shall remain uncompleted and outstanding at
the Closing Date, including without limitation all amounts owed to outside
contractors for cutting and sewing corresponding to work-in-progress Inventory
not yet billed and paid, which amounts are therefore not included in the
calculation of the value of Inventory in accordance with Section 2.7(g)
(collectively, the "ASSUMED LIABILITIES").
Section 2.5 EXCLUDED LIABILITIES. Purchaser and Seller agree that
Purchaser shall not assume, pay, discharge, become liable for or perform when
due, and Seller shall not cause Purchaser so to assume, pay, discharge, become
liable for or perform, any liabilities (contingent or otherwise), debts,
contracts, commitments and other obligations of Seller of any nature whatsoever
arising out of the conduct of the Business prior to the Closing Date other than
the Assumed Liabilities, including without limitation all severance obligations
to all employees of Seller whose employment is terminated by Seller in
connection with the Closing hereunder.
Section 2.6 CLOSING. The Closing shall take place at the offices of
Cygne Designs, Inc., 680 Fifth Avenue, New York, New York, at the opening of
business, as soon as practicable after all
-4-
<PAGE>
conditions to the respective obligations of the parties have been satisfied or
waived, or at such other date, time and place as the parties may agree. Each
party hereto agrees to use its reasonable efforts to satisfy promptly the
conditions to the obligations of the respective parties hereto in order to
expedite the Closing.
Section 2.7 PURCHASE PRICE. (a) The purchase price for the Assets shall
be the net tangible book value of the Assets at the Closing Date, determined as
set forth below, less an amount (the "DISCOUNT") equal to the difference between
(i) the sum of (a) $80,000 and (b) the income before tax of Seller for the
period commencing August 1, 1999 and ending on the Closing Date ("SELLER'S
IBT"), and (ii) the sum of the operating expenses of Wear and Wear & Co
International, Inc. for the period commencing August 1, 1999 and ending on the
Closing Date ("WEAR OPERATING EXPENSES") (the "ASSET PURCHASE PRICE"). The
purchase price for the Wear Stock shall be $100,000 (the "STOCK PURCHASE
PRICE").
(b) At least five (5) business days prior to the Closing Date, Seller
shall prepare and deliver to Purchaser (i) a good faith estimate, prepared in
U.S. Dollars in accordance with Israeli generally accepted accounting principles
("GAAP"), applied in a manner consistent with the past practice, except as
otherwise expressly provided below, and accompanied by a certificate of the
chief financial officer of Seller to that effect, of (A) the aggregate amount of
the net tangible book value of the Assets determined in accordance with clause
(g) below, except that work-in-progress Inventory shall be valued at 75% of the
selling price of the garment in progress rather than as specified in Section
2.7(g)(ii) (the "ESTIMATED AMOUNT") as of the Closing Date, and (B) the
Discount, and (ii) a schedule of all open purchase orders of Seller relating to
the Business.
(c) At Closing, Purchaser shall (i) place in escrow with Republic Bank
(the "ESCROW AGENT"), pursuant to a mutually agreeable escrow agreement, an
amount equal to ten percent (10%) of the Inventory as shown on the estimate
delivered to Seller pursuant to Section 2.7(b) (the "ESCROWED AMOUNT") and (ii)
deliver to Seller an amount (the "INITIAL PAYMENT AMOUNT") equal to the
difference between (A) the Estimated Amount less the Discount and (B) the
Escrowed Amount in accordance with Section 2.8.
(d) As promptly as practicable, but in no event more than thirty (30)
days, following the Closing Date, Seller shall prepare or cause to be prepared
and shall deliver to Purchaser a reasonably detailed statement setting forth (i)
the net tangible book value of the Assets at the Closing Date, determined in
accordance with clause (g) below, (ii) the Seller's IBT and (iii) the Wear
Operating Expenses (the "SELLER STATEMENT"), together with all work papers
prepared in connection with the preparation of the Seller Statement. Unless
within thirty (30) days after its receipt of the Seller Statement Purchaser
shall deliver to Seller a reasonably detailed statement describing its
objections to the Seller Statement (a "STATEMENT OF OBJECTION"), the amount of
the net tangible book value of the Assets, (ii) the Seller's IBT and (iii) the
Wear Operating Expenses determined in accordance with this clause (d) shall be
final and binding on the parties hereto and the Seller Statement shall be the
final statement hereunder (the "CLOSING DATE STATEMENT").
-5-
<PAGE>
(e) If Purchaser shall deliver to Seller a timely Statement of
Objection, Purchaser and Seller and their respective independent accountants
shall negotiate in good faith and use reasonable best efforts to resolve any
disputes. If a resolution is reached, such resolution shall be final and binding
on the parties and Purchaser and Seller shall set forth the net tangible book
value of the Assets, the Seller's IBT and the Wear Operating Expenses on a
mutually acceptable statement and such statement shall be the Closing Date
Statement. If a final resolution is not reached within fifteen (15) days after
Purchaser has submitted its Statement of Objection, any remaining disputes shall
be resolved by a third firm of independent accountants (the "REVIEWING
ACCOUNTANTS") selected jointly by the parties' independent accounting firms. The
Reviewing Accountants shall be instructed to resolve any matters in dispute as
promptly as practicable, but in no event more than thirty (30) days, and set
forth their resolution in a statement setting forth the net tangible book value
of the Assets (the "ACCOUNTANT STATEMENT"). In such event, the determination of
the Reviewing Accountants shall be final and binding on the parties hereto and
the Accountant Statement shall be the Closing Date Statement.
(f) Seller and Purchaser each shall pay one-half of the fees and
expenses of the Reviewing Accountants. Seller and the Purchaser shall cooperate
with each other and the Reviewing Accountants in connection with the matters
contemplated by this Section 2.7, including Seller's preparation of and
Purchaser's review of the Closing Date Statement, including by furnishing such
information and access to books, records (including accountants' work papers),
personnel and properties as may be reasonably requested.
(g) The Closing Date Statement shall be prepared in U.S. Dollars in
accordance with GAAP applied in a manner consistent with past practice, except
that (i) Seller's interest in DyeCo Textile Holdings Ltd. shall be valued at the
amount of Seller's investment rather than book value and (ii) the leasehold
improvements shall be valued at 33.33% of the net book value of the leasehold
improvements. Accordingly, the Inventory shall be valued as follows:
(i) Raw materials and accessories shall be valued at cost,
including without limitation, FOB or CIF purchase price, as the case
may be, plus (A) 5% of such purchase price representing the estimated
cost of freight, brokerage, insurance and storage charges, provided,
however, that Purchaser may elect to pay only actual cost of freight,
brokerage, insurance and storage charges for all raw materials and
accessories, in which event Purchaser shall compute the actual cost in
connection with its review of the Seller Statement pursuant to Section
2.7(d) hereof, which computation Seller shall have the right to review
and dispute in accordance with Section 2.7(e) hereof, and any such
dispute shall be resolved in accordance with Section 2.7(e), and (B)
any fabric commission for fabric from Korea, inspection costs owed to
SGS, dyeing and finishing charges, to the extent actually incurred;
provided however, that the portion of such raw materials and
accessories for which no corresponding customer liability exists
(either in the form of finished garment purchase order or other
customer commitment) shall be valued at the lower of cost or market.
-6-
<PAGE>
(ii) Work-in-progress, which includes finished garments to be
shipped to customers and finished goods in transit but not yet billed
to customers, shall include (A) raw materials and accessories as
determined above; (B) cutting costs valued at the greater of (1) $.10
per unit or (2) the cost paid to or billed by outside contractors; (C)
sewing costs paid to or billed by outside contractors; and (D) a
manufacturing overhead charge of 3% of the selling price of the
finished garments.
(iii) Finished garments, excluding finished garments included in
work-in-progress above, shall be valued at the lower of cost or
market.
(h) If the Asset Purchase Price as finally determined based on the
Closing Date Statement exceeds the Initial Payment Amount, Purchaser shall
immediately pay to Seller in cash out of the Escrowed Amount the amount of such
excess. Purchaser shall retain the remainder, if any, of the Escrowed Amount.
Purchaser shall distribute interest earned on the Escrowed Amount to Seller, or
shall retain such interest, in proportion to the amount of the Escrowed Amount
distributed or retained, as the case may be, by each. If the Asset Purchase
Price as finally determined based on the Closing Date Statement exceeds the
Initial Payment Amount plus the Escrowed Amount, then, in addition to
distribution of the Escrowed Amount pursuant to preceding sentence, Purchaser
shall pay the difference to Seller in immediately available funds.
(i) If the Asset Purchase Price as finally determined based on the
Closing Date Statement is less than the Initial Payment Amount, Seller shall
immediately pay the difference to Purchaser in immediately available funds. In
such event, Purchaser shall retain the Escrowed Amount and all interest earned
thereon.
Section 2.8 DELIVERY OF PURCHASE PRICE AND TRANSFER OF ASSETS. (a) At
the Closing, Purchaser shall deliver the Initial Payment Amount and the Stock
Purchase Price by wire transfer of immediately available federal funds to an
account specified by Seller and the Stock Sellers, respectively, at least two
business days prior to the Closing Date, and shall deliver the Escrowed Amount
by wire transfer of immediately available federal funds to an account specified
by the Escrow Agent. Purchaser shall pay all costs of such escrow. The escrow
agreement shall provide that the Escrowed Amount shall be released in accordance
with Section 2.7(h) or (i), as the case may be.
(b) At the Closing, Seller shall deliver to Purchaser such bills of
sale, endorsements, assignments and other instruments of sale, conveyance,
transfer and assignment, reasonably satisfactory in form and substance to
Purchaser and its counsel, as may be reasonably requested by Purchaser, in order
to convey to Purchaser good and marketable title to the Assets, free and clear
of all Liens except as permitted by this Agreement. Purchaser shall pay all
sales, transfer and value added taxes or similar charges payable by reason of
the sale hereunder.
-7-
<PAGE>
(c) At the Closing, Seller shall deliver to Purchaser all written
consents which are required under any Assumed Contract being assigned to
Purchaser hereunder; provided, however, that as to any Assumed Contract the
assignment of which by its terms requires prior consent of the parties thereto,
if such consent is not obtained prior to or on the Closing Date, Seller shall
cooperate with Purchaser to establish arrangements which will provide for the
transfer of the economic benefit of such Assumed Contracts to Purchaser as of
the Closing Date under terms and conditions reasonably acceptable to all the
parties hereto.
(d) At the Closing, the Stock Sellers and Purchaser will enter into a
customary sale contract in front of a notary public in Florence, Italy for the
purpose of causing the sale of the Wear Stock. As soon as technically possible
after the Closing, the Stock Sellers will cause the ownership of Wear Stock, as
reflected in the shareholders' registry, to be recorded in the Purchaser's name
on the shareholders' registry.
(e) Prior to the Closing, all intercompany accounts between Wear and
Cygne Designs, Inc. or any affiliates shall be settled in cash.
(f) At the Closing, Purchaser shall deliver any bank guarantees
required by the Assumed Contracts, as specified in SCHEDULE 2.8(F), in order to
allow Seller to have its bank guarantees released.
Section 2.9 EMPLOYEES. (a) Purchaser shall not have any obligation to
assume or honor any employment agreement between Seller and any current or
former employee of Seller. As of the Closing Date, Seller shall terminate the
employment of, and Purchaser shall offer employment to, employees of Seller who
are actively employed immediately prior to the Closing Date, whose primary
employment is with the Business and who have been identified to Seller in
writing by Purchaser as employees to whom Purchaser shall offer employment
("AFFECTED EMPLOYEES"). Wear employees who are employed by Wear immediately
prior to the Closing Date shall remain employees of Wear following the Closing
Date ("WEAR EMPLOYEES"). All Affected Employees who accept employment with
Purchaser and Wear Employees who continue employment by Wear immediately
following the Closing Date, shall be referred to, collectively, as "CONTINUED
EMPLOYEES". Purchaser acknowledges that Seller intends to give to each of its
employees notice of termination of employment, effective immediately prior to
the Closing Date, at least thirty (30) days prior to the Closing Date, except
that Seller gave the individuals listed on SCHEDULE 2.9 hereto notice of
termination as of the date of the Original Agreement. Purchaser acknowledges and
agrees that there can be no assurance that such employees will be available to
Purchaser, and Purchaser shall have no recourse against Seller if such employees
are not available to Purchaser following the Closing.
(b) Purchaser shall pay or cause to be paid when due to the Continued
Employees the amount of all wages, salary, bonuses, commissions, incentive
payments and other compensation (including, without limitation, any vacation and
sick pay) or any other benefit, perquisite, cost,
-8-
<PAGE>
expense, liability or obligation attributable to services provided on and after
the Closing Date. Seller shall pay or cause to be paid all amounts due to
employees of Seller engaged in the Business, including Affected Employees, for
wages, salary, bonuses, commissions, incentive payments and other compensation
(including, without limitation, any vacation and sick pay) or any other benefit,
perquisite, cost, expense, liability or obligation attributable to services
provided prior to the Closing Date.
(c) Nothing in this Section 2.9 is intended, or shall be construed, to
confer upon any person, other than the parties hereto and their successors and
permitted assigns, any rights or remedies by reason of this Section 2.9.
III. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligation of Purchaser under this Agreement to consummate the
purchase of the Assets and the Wear Stock at the Closing shall be subject to the
satisfaction, at or prior to the Closing, of all of the following conditions, to
the reasonable satisfaction of Purchaser (any of which may be waived in writing
in whole or in part by Purchaser):
Section 3.1 REPRESENTATIONS AND WARRANTIES ACCURATE. All
representations and warranties of Seller and the Stock Sellers contained in this
Agreement shall be true in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties
were made on and as of the Closing Date.
Section 3.2 PERFORMANCE BY SELLER AND THE STOCK SELLERS. Seller and the
Stock Sellers shall have performed and complied in all material respects with
all agreements, covenants and conditions required by this Agreement to be
performed and complied with by Seller and the Stock Sellers prior to or on the
Closing Date.
Section 3.3 CERTIFICATE. Purchaser shall have received a certificate,
dated the Closing Date, signed by an authorized officer of each of Seller and
the Stock Sellers, to the effect that the conditions set forth in Sections 3.1
and 3.2 have been satisfied.
Section 3.4 LEGAL PROHIBITION. On the Closing Date, no injunction or
order shall be in effect prohibiting consummation of the transactions
contemplated hereby or which would make the consummation of such transactions
unlawful and no action or proceeding shall have been instituted and remain
pending before a court, governmental body or regulatory authority, nor shall any
action or proceeding be threatened, to restrain or prohibit the transactions
contemplated by this Agreement.
Section 3.5 CONSENTS, APPROVALS, PERMITS, LICENSES, ETC. All
authorizations, consents, waivers, approvals, orders, registrations,
qualifications, designations, declarations, filings or other action required
with or from any Governmental Entity or third party (including without
limitation
-9-
<PAGE>
all parties to each of the Assumed Contracts) in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated thereby shall have been duly obtained and shall be
reasonably satisfactory to Purchaser and its counsel, and copies thereof shall
be delivered to the Purchaser prior to the Closing. With respect to any Assumed
Contract, the assignment of which by its terms requires prior consent of the
parties thereto, if such consent is not obtained prior to the Closing Date,
Seller shall cooperate with Purchaser to establish arrangements which will
provide for the transfer of the economic benefits of such Assumed Contracts to
Purchaser as of the Closing Date under terms and conditions reasonably
acceptable to all the parties hereto.
Section 3.6 CLOSING MATTERS. All proceedings to be taken by the Seller
and the Stock Sellers in connection with the consummation of the transactions
contemplated hereby and all certificates, instruments and other documents
required to effect the transactions contemplated hereby shall be reasonably
satisfactory in form and substance to Purchaser and its counsel.
Section 3.7 NON-COMPETITION AGREEMENT. Cygne Designs, Inc. and
Purchaser shall have entered into a Non-Competition Agreement, substantially in
the form of EXHIBIT 3.7 hereto.
Section 3.8 GUARANTY. Cygne Designs, Inc. shall have delivered to
Purchaser a guaranty, substantially in the form of EXHIBIT 3.8 hereto.
IV. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND STOCK SELLERS
The obligation of Seller and the Stock Sellers under this Agreement to
consummate the sale of the Assets and the Wear Stock, respectively, at the
Closing shall be subject to the satisfaction, at or prior to the Closing, of all
of the following conditions, to the reasonable satisfaction of Seller and the
Stock Sellers:
Section 4.1 REPRESENTATIONS AND WARRANTIES ACCURATE. All
representations and warranties of Purchaser contained in this Agreement shall be
true in all material respects on and as of the Closing Date, with the same force
and effect as though such representations and warranties were made on and as of
the Closing Date.
Section 4.2 PERFORMANCE BY PURCHASER. Purchaser shall have performed
and complied in all material respects with all agreements, covenants and
conditions required by this Agreement to be performed and complied with by
Purchaser prior to or on the Closing Date.
Section 4.3 CERTIFICATE. Each of Seller and the Stock Sellers shall
have received a certificate, dated the Closing Date, signed by an authorized
officer of Purchaser, to the effect that the conditions set forth in Sections
4.1 and 4.2 have been satisfied.
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Section 4.4 LEGAL PROHIBITION. On the Closing Date, no injunction or
order shall be in effect prohibiting consummation of the transactions
contemplated hereby or which would make the consummation of such transactions
unlawful and no action or proceeding shall have been instituted and remain
pending before a court, governmental body or regulatory authority to restrain or
prohibit the transactions contemplated by this Agreement.
Section 4.5 CLOSING MATTERS. All proceedings to be taken by Purchaser
in connection with the consummation of the transactions contemplated hereby and
all certificates, instruments and other documents required to effect the
transactions contemplated hereby shall be reasonably satisfactory in form and
substance to Seller and the Stock Sellers and their counsel.
Section 4.6 KAFRI AGREEMENT. Jonathan Kafri shall have delivered to
Seller and Cygne Designs, Inc. an agreement releasing Cygne Designs, Inc. and
its Affiliates from all obligations they may have to Jonathan Kafri.
Section 4.7 STOCKHOLDER APPROVAL. The stockholders of Cygne Designs,
Inc. shall have approved the transactions contemplated hereby.
Section 4.8 RELEASE OF LETTERS OF CREDIT. Purchaser shall have made
arrangements reasonably satisfactory to Seller and the Stock Sellers such that
all letters of credit posted on behalf of Seller or the Stock Sellers in respect
of the Business will be released as of the Closing and Seller and the Stock
Sellers, nor any affiliate thereof, will have no further liability in respect
thereof.
Section 4.9 NON-COMPETITION AGREEMENT. Cygne Designs, Inc. and
Purchaser shall have entered into a Non-Competition Agreement, substantially in
the form of EXHIBIT 3.7 hereto.
V. REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller represents, warrants and agrees as of the Closing Date that:
Section 5.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Israel, with corporate power and authority necessary to enter into and
perform this Agreement and the transactions contemplated hereby.
Section 5.2 DUE AUTHORIZATION. Seller has all requisite corporate power
and authority to execute and deliver this Agreement and to perform fully its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery by Seller of this Agreement and the other documents
contemplated hereby, the performance by Seller of its obligations hereunder and
thereunder, and the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of Seller,
other than
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approval by the stockholders of Cygne Designs, Inc. This Agreement has been duly
executed and delivered by Seller, and is a legal, valid and binding obligation
of Seller, enforceable against it in accordance with its terms (except as the
enforceability thereof may be limited by any applicable bankruptcy, insolvency
or other laws affecting creditors' rights generally or by general principles of
equity, regardless of whether such enforceability is considered in equity or at
law).
Section 5.3 NO CONFLICT. Except as set forth in SCHEDULE 5.3, neither
the execution and delivery of this Agreement or any of the other documents
contemplated hereby by Seller nor the consummation of the transactions
contemplated hereby or thereby will (a) conflict with, result in a breach or
violation of or constitute (or with notice or lapse of time or both constitute)
a default under, (i) the Articles or Memorandum of Association of Seller or (ii)
any statute, regulation, order, judgment or decree or any instrument, contract
or other agreement to which Seller is a party or by which Seller (or any of the
Assets) or the Business is subject or bound; (b) result in the creation of, or
give any party the right to create, any Lien upon the Assets; (c) terminate or
modify, or give any third party the right to terminate or modify, the provisions
or terms of any Assumed Contract; or (d) require Seller to obtain any
authorization, consent, approval or waiver from, or to make any filing with, any
Governmental Entity or to obtain the approval or consent of any other Person.
Section 5.4 TITLE TO AND CONDITION OF ASSETS. Seller has, and, except
for the assets sold by Seller in the ordinary course of the Business between the
date hereof and the Closing Date, upon payment therefor Purchaser will have,
good and marketable title to, or valid and subsisting leasehold interests in or
valid licenses to use, all of the Assets, free and clear, except for such
licensed or leased property and assets, of any Liens, except (i) those accepted
by Purchaser which are set forth on SCHEDULE 5.4 hereto, (ii) liens which will
be removed at Closing and (iii) the lien of current taxes not yet due and
payable or of taxes the validity of which is being contested in good faith by
appropriate proceedings, so long as such contest does not involve any real
danger of the sale, foreclosure or loss of any Assets. All tangible personal
property included in the Assets is being acquired by Purchaser "as is" and
Seller makes no representation as to its condition.
Section 5.5 CONTRACTS, OBLIGATIONS AND COMMITMENTS. In connection with
the operation of the Business, except as set forth on SCHEDULE 5.5 hereto,
Seller has no existing contract, obligation or commitment (written or, to
Seller's knowledge, oral) of any nature other than the Assumed Contracts. Except
as set forth on SCHEDULE 5.5, each Assumed Contract is a valid and binding
obligation of Seller and, to Seller's knowledge, the other parties thereto,
enforceable in accordance with its terms (except as the enforceability thereof
may be limited by any applicable bankruptcy, insolvency or other laws affecting
creditors' rights generally or by general principles of equity, regardless of
whether such enforceability is considered in equity or at law), and is in full
force and effect (except for any Assumed Contracts which by their terms expire
after the date hereof or are terminated after the date hereof in accordance with
the terms thereof), and neither Seller nor, to Seller's knowledge, any other
party thereto has breached any material provision of, nor is in default in any
material respect under the terms of (and, to Seller's knowledge, no condition
exists which,
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with the passage of time, the giving of notice, or both, would result in a
default under the terms of), any of the Assumed Contracts.
Section 5.6 LITIGATION. There is no action, suit, proceeding or, to
Seller's knowledge, investigation, at law or in equity or otherwise in, before
or by any court or governmental board, commission, agency, department or office,
or private arbitration tribunal pending or, to Seller's knowledge, threatened by
or against Seller that relates to the Business or the Assets.
Section 5.7 COMPLIANCE WITH LAW. The Business is being conducted in
compliance in all material respects with all applicable laws, rules, regulations
and court or administrative orders and processes.
Section 5.8 LICENSES; REGISTRATIONS; PERMITS; ETC. Seller possesses all
governmental registrations, certificates of need, consents, qualifications,
accreditations, licenses, permits, authorizations and approvals necessary to own
and operate the Business, except those the failure of which to have do not
materially adversely affect Seller's ability to conduct the Business, which
approvals are set forth on SCHEDULE 5.8 hereto, and true, complete and correct
copies of which approvals have previously been delivered to Purchaser. All such
approvals are in full force and effect as of the date hereof and Seller is in
compliance therewith in all material respects.
Section 5.9 PERSONNEL. SCHEDULE 5.9 comprises a complete and correct
list of the names, titles, length of employment or service and current annual
salary rates and all other compensation and fringe benefits of each of the
employees engaged in the Business. Except as set forth on SCHEDULE 5.9, none of
such personnel is a party or subject to any oral or written employment, bonus,
pension, profit-sharing, deferred compensation, percentage compensation,
employee benefit (including without limitation, medical disability, life
insurance and other welfare benefit plans), incentive, pension or retirement
plans, fringe benefit or termination or severance agreements, plans or
commitments other than those mandated by applicable law.
VI. REPRESENTATIONS AND WARRANTIES OF THE STOCK SELLERS
Section 6.1 ORGANIZATION AND QUALIFICATION. Each Stock Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with corporate power and authority necessary to enter
into and perform this Agreement and the transactions contemplated hereby.
Section 6.2 DUE AUTHORIZATION. Each Stock Seller has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform fully its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery by each Stock Seller of this
Agreement and the other documents contemplated hereby, the performance by each
Stock Seller of its obligations hereunder and thereunder, and the transactions
contemplated hereby
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and thereby have been duly and validly authorized by all necessary corporate
action on the part of each Stock Seller, other than approval by the stockholders
of Cygne Designs, Inc.. This Agreement has been duly executed and delivered by
each Stock Seller, and is a legal, valid and binding obligation of each Stock
Seller, enforceable against it in accordance with its terms (except as the
enforceability thereof may be limited by any applicable bankruptcy, insolvency
or other laws affecting creditors' rights generally or by general principles of
equity, regardless of whether such enforceability is considered in equity or at
law).
Section 6.3 NO CONFLICT. Except as set forth in SCHEDULE 6.3, neither
the execution and delivery of this Agreement or any of the other documents
contemplated hereby by the Stock Sellers nor the consummation of the
transactions contemplated hereby or thereby will (a) conflict with, result in a
breach or violation of or constitute (or with notice or lapse of time or both
constitute) a default under, (i) the organizational documents of the Stock
Sellers or (ii) any statute, regulation, order, judgment or decree or any
instrument, contract or other agreement to which either Stock Seller is a party
or by which either Stock Seller is subject or bound; (b) result in the creation
of, or give any party the right to create, any Lien upon the Wear Stock; or (c)
require either Stock Seller to obtain any authorization, consent, approval or
waiver from, or to make any filing with, any Governmental Entity or to obtain
the approval or consent of any other Person, other than the stockholders of
Cygne Designs, Inc.
Section 6.4 ORGANIZATION OF WEAR. Wear is duly organized, validly
existing and in good standing under the laws of Italy. Wear has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. The Stock Sellers own of record
and beneficially all the outstanding Wear Stock. Other than pursuant to this
Agreement, there are no contracts, options, warrants, calls, rights,
subscriptions, convertible securities or other rights or agreements,
arrangements or commitments of any kind with respect to any security of Wear.
Section 6.5 LITIGATION. There is no action, suit, proceeding or, to the
Stock Sellers' knowledge, investigation, at law or in equity or otherwise in,
before or by any court or governmental board, commission, agency, department or
office, or private arbitration tribunal pending or, to the Stock Sellers'
knowledge, threatened by or against Wear.
Section 6.6 COMPLIANCE WITH LAW. Wear is in compliance in all material
respects with all applicable laws, rules, regulations and court or
administrative orders and processes.
Section 6.7 LICENSES; REGISTRATIONS; PERMITS; ETC. Wear possesses all
governmental registrations, certificates of need, consents, qualifications,
accreditations, licenses, permits, authorizations and approvals necessary to own
and operate its business, except those approvals the failure of which to have do
not materially adversely affect Wear's ability to conduct the Business, which
approvals are set forth on SCHEDULE 6.7 hereto, and true, complete and correct
copies of which
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approvals have previously been delivered to Purchaser. All such approvals are in
full force and effect as of the date hereof and Wear is in compliance therewith
in all material respects.
Section 6.8 PERSONNEL. SCHEDULE 6.8 comprises a complete and correct
list of the names, titles, length of employment or service and current annual
salary rates and all other compensation and fringe benefits of each of the
employees of Wear. Except as set forth on SCHEDULE 6.8, none of such personnel
is a party or subject to any oral or written employment, bonus, pension,
profit-sharing, deferred compensation, percentage compensation, employee benefit
(including without limitation, medical disability, life insurance and other
welfare benefit plans), incentive, pension or retirement plans, fringe benefit
or termination or severance agreements, plans or commitments.
VII. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller and the Stock
Sellers as follows:
Section 7.1 ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of Delaware.
Section 7.2 DUE AUTHORIZATION; NO CONFLICT. (a) Purchaser has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform fully its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Purchaser, the performance by Purchaser of its obligations hereunder, and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Purchaser. This
Agreement has been duly executed and delivered by Purchaser, and is a legal,
valid and binding obligation of Purchaser enforceable against it in accordance
with its terms (except as the enforceability thereof may be limited by any
applicable bankruptcy, insolvency or other laws affecting creditors' rights
generally or by general principles of equity, regardless of whether such
enforceability is considered in equity or at law).
(b) Neither the execution and delivery of this Agreement by
Purchaser nor the consummation by Purchaser of the transactions contemplated
hereby will (i) conflict with, result in a breach or violation of or constitute
(or with notice or lapse of time or both constitute) a default under, (A) the
organizational documents of Purchaser, or (B) any statute, regulation, order,
judgment or decree or any instrument, contract or other agreement to which
Purchaser is a party or by which it (or any of its properties or assets) is
subject or bound; or (ii) require Purchaser to obtain any authorization,
consent, approval or waiver from, or to make any filing with, any Governmental
Entity, or to obtain the approval or consent of any other Person, except as set
forth in SCHEDULE 7.2 hereto.
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VIII. COVENANTS
Section 8.1 CONDUCT AND PRESERVATION OF ASSETS. Except as contemplated
by this Agreement, during the period from the date of this Agreement to the
Closing Date:
(a) Seller shall (i) maintain, preserve and protect the Assets,
(ii) comply in all material respects with all laws, ordinances, rules,
regulations and orders applicable to the Business or the Assets, (iii)
operate the Business in the ordinary course and consistent with past
practice and (iv) not take any action or omit to take any action which
act or omission would result in the inaccuracy of any of its
representations and warranties set forth herein if such
representations or warranties were to be made immediately after the
occurrence of such act or omission; and
(b) The Stock Sellers shall (i) cause Wear to maintain, preserve
and protect its business, operate its business in the ordinary course
and consistent with past practice and comply in all material respects
with all laws, ordinances, rules, regulations and orders applicable to
it, and (ii) not take any action or omit to take any action which act
or omission would result in the inaccuracy of any of its
representations and warranties set forth herein if such
representations or warranties were to be made immediately after the
occurrence of such act or omission.
Section 8.2 ACCESS TO INFORMATION. Between the date of this Agreement
and the Closing Date, Seller and the Stock Sellers will (i) permit Purchaser's
authorized representatives and financing parties reasonable access to all of the
books, records, reports and other related materials, offices and other
facilities and properties of Seller related to the Assets and the Business and
of Wear; (ii) permit Purchaser to make such inspections thereof as Purchaser may
reasonably request; and (iii) furnish Purchaser with such financial and
operating data and other information with respect to the business, operations
and properties of the Business and Wear as Purchaser may from time to time
reasonably request.
Section 8.3 FILINGS AND AUTHORIZATIONS. Each of Seller, the Stock
Sellers and Purchaser, as promptly as practicable, (i) will make, or cause to be
made, all filings and submissions required under laws, rules and regulations
applicable to it, or to its subsidiaries and affiliates, as may be required for
it to consummate the transactions contemplated hereby; (ii) will use its
reasonable efforts to obtain, or cause to be obtained, all authorizations,
approvals, consents and waivers from all Persons and governmental or public
authorities or bodies necessary to be obtained by it, or any subsidiaries or
affiliates, in order for it so to consummate such transactions, including
without limitation Israeli government authorities; and (iii) will use its
reasonable efforts to take, or cause to be taken, all other actions necessary,
proper or advisable in order for it to fulfill its obligations hereunder.
Seller, the Stock Sellers and Purchaser will coordinate and cooperate with one
another in exchanging information and supplying such reasonable assistance as
may be reasonably requested by each in connection with the foregoing. Purchaser
shall use its reasonable efforts to assist Seller
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in obtaining all consents required under the Assumed Contracts as a result of
this Agreement and the transactions contemplated hereby.
Section 8.4 PUBLIC ANNOUNCEMENTS. Unless and to the extent required by
law, each party hereto will agree in advance prior to the issuance by either of
any press release or the making of any public statement with respect to this
Agreement and the transactions contemplated hereby and shall not issue any such
press release or make any such public statement without the agreement of the
other party. In the event that either party is required to issue a press release
or make a public statement by law, it will notify the other party of the
contents thereof in advance of the issuance or making thereof. Notwithstanding
the foregoing, Purchaser understands, acknowledges and agrees that Cygne
Designs, Inc. is a publicly-traded company and, as such, may be required to
disclose this transaction and the terms hereof by a filing with the Securities
and Exchange Commission and the issuance of a press release. To the extent
possible, Seller will give Purchaser prior notice of, and an opportunity to
review, any such disclosure.
Section 8.5 HIRING OF EMPLOYEES. Purchaser shall be permitted to
interview all employees of Seller engaged in the Business and discuss with, and
offer employment to, any of such employees. It is understood and agreed,
however, that Purchaser shall not be obligated to offer employment to any of
Seller's employees.
Section 8.6 SCHEDULES. Seller and the Stock Sellers will have the
continuing obligation to promptly supplement or amend the Schedules being
delivered concurrently with the execution of this Agreement and attached hereto
with respect to any matter hereafter arising or discovered which, if existing or
known at the date of this Agreement, would have been required to be set forth or
described in the Schedules.
Section 8.7 BROKERS. Each party shall pay all fees and commissions of
any broker, finder, investment banker or other similar intermediary to which it
is obligated to pay any fee or commission in connection with the transactions
contemplated by this Agreement and shall indemnify and hold harmless the other
party from and against any such fee or commission and any damage, loss, cost,
expense or liability (including reasonable attorneys' fees) resulting therefrom.
IX. CERTAIN ACTIONS AFTER THE CLOSING
Section 9.1 PAYMENT OF LIABILITIES. Following the Closing Date each of
Purchaser and Seller agrees to discharge (whether by payment or performance) in
accordance with their terms the Assumed Liabilities and the Excluded
Liabilities, respectively.
Section 9.2 FURTHER ASSURANCES. Seller and the Stock Sellers from time
to time after the Closing, at Purchaser's request, will execute, acknowledge and
deliver to Purchaser such other instruments of conveyance and transfer and will
take such other actions and execute and deliver such
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other documents, certifications and further assurances as Purchaser may
reasonably require in order to vest more effectively in Purchaser, or to put
Purchaser more fully in possession of, any of the Assets and the Wear Stock,
respectively. Each of the parties hereto will cooperate with the other and
execute and deliver to the other such other instruments and documents and take
such other actions as may be reasonably requested from time to time by the other
party hereto as necessary to carry out, evidence and confirm the intended
purposes of this Agreement.
Section 9.3 SHARING OF DATA. Purchaser shall have the right following
the Closing Date to have reasonable access to those corporate minute books,
stock books, tax returns and other corporate records and files of Seller which
remain with Seller pursuant to the terms of this Agreement to the extent any of
the foregoing relates to the Business or is otherwise needed by Purchaser in
order to comply with its obligations under applicable laws and regulations.
Seller shall have the right following the Closing Date to have reasonable access
to those documents and records included in the Assets to the extent any such
documents or records are needed by Seller in order to comply with its
obligations under applicable laws and regulations.
Section 9.4 COLLECTION ASSISTANCE. Purchaser will, if so requested by
Seller, assist Seller in collecting all accounts receivable arising from
Seller's conduct of the Business prior to the Closing Date; provided that
Purchaser shall not be required to take any actions which Purchaser reasonably
determines would adversely affect its relationship with such customer.
Section 9.5 NON-COMPETITION. Seller agrees that it will not, for a
period of six (6) months from the Closing Date (the "NON-COMPETE PERIOD"),
source knit products in Israel, Jordan or the Palestinian territory. Seller
acknowledges and agrees that a substantial and legally sufficient portion of the
Asset Purchase Price is attributable to the non-competition provisions of this
Section 9.5 and Seller expressly waives any right to assert inadequacy of
consideration as a defense to enforcement of the non-competition provisions of
this Section 9.5 should such enforcement ever become necessary. Seller
acknowledges that a remedy at law for any breach or attempted breach of this
Section 9.5 will be inadequate and further agrees that any breach of this
Section 9.5 will result in irreparable harm to the Business; and Seller
covenants and agrees not to oppose any demand for specific performance and
injunctive and other equitable relief in case of any such breach or attempted
breach. Whenever possible, each provision of this Section 9.5 shall be
interpreted in such manner as to be effective and valid under applicable law but
if any provision of this Section 9.5 shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Section 9.5. If any provision of this
Section 9.5 shall, for any reason, be judged by any court of competent
jurisdiction to be invalid or unenforceable, such judgment shall not affect,
impair or invalidate the remainder of this Section 9.5 but shall be confined in
its operation to the provision of this Section 9.5 directly involved in the
controversy in which such judgment shall have been rendered. In the event that
the provisions of this Section 9.5 should ever be deemed to exceed the time or
geographic limitations permitted by the applicable laws, then such provision
shall be reformed to the maximum time or geographic limitations permitted by
applicable law.
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X. INDEMNIFICATION
Section 10.1 BY SELLER AND THE STOCK SELLERS. (a) Seller hereby agrees
to indemnify and hold harmless Purchaser from any and all claims, damages,
losses, liabilities, costs and expenses (including, without limitation,
settlement costs and any legal, accounting or other expenses for investigating
or defending any actions or threatened actions) reasonably incurred by Purchaser
in connection with each and all of the following:
(i) any misrepresentation, breach of warranty or non-fulfillment
of any agreement or covenant on the part of Seller under this
Agreement or any other agreement executed by Seller in connection
herewith;
(ii) any and all liabilities and obligations of Seller arising
out of the conduct of the Business of prior to the Closing (including
without limitation the termination by Seller of its employees in
accordance with Section 2.9 hereof) other than the Assumed Liabilities
and liabilities and obligations resulting from Purchaser's conduct of
the Business in violation of the Management Agreement; and
(iii) any and all liabilities of Seller for taxes arising from
the conduct of the Business prior to the Closing Date.
(b) Stock Sellers hereby agree to indemnify and hold harmless Purchaser
from any and all claims, damages, losses, liabilities, costs and expenses
(including, without limitation, settlement costs and any legal, accounting or
other expenses for investigating or defending any actions or threatened actions)
reasonably incurred by Purchaser in connection with any misrepresentation,
breach of warranty or non-fulfillment of any agreement or covenant on the part
of the Stock Sellers under this Agreement or any other agreement executed by the
Stock Sellers in connection herewith.
Section 10.2 BY PURCHASER. Purchaser hereby agrees to indemnify and
hold harmless Seller and the Stock Sellers from any and all claims, damages,
losses, liabilities, costs and expenses (including, without limitation,
settlement costs and any legal, accounting or other expenses for investigating
or defending any actions or threatened actions) reasonably incurred by Seller in
connection with each and all of the following:
(a) any misrepresentation, breach of warranty or non-fulfillment
of any agreement or covenant on the part of Purchaser under this
Agreement or any other agreement executed by Purchaser in connection
herewith; and
(b) the Assumed Liabilities.
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Section 10.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise
for indemnification hereunder the party seeking indemnification (the
"INDEMNIFIED PARTY") shall promptly notify the party from whom indemnification
is sought (the "INDEMNIFYING PARTY") of the claim and, when known, the facts
constituting the basis for such claim. In the event any such claim for
indemnification hereunder results from or in connection with any claim or legal
proceedings by a third party, the notice to the Indemnifying Party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom. The Indemnified Party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld or delayed.
Section 10.4 DEFENSE BY INDEMNIFYING PARTY. In connection with any
claim giving rise to indemnity hereunder resulting from or arising out of any
claim or legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Party at its sole cost and expense may, upon written notice to the
Indemnified Party, assume the defense of any such claim or legal proceeding. The
Indemnified Party shall be entitled to participate in (but not control) the
defense of any such action, but the fees and expenses of its counsel shall be at
its own expense unless the employment of such counsel shall have been authorized
by the Indemnifying Party in connection with the defense of such action, suit or
proceeding. If the Indemnifying Party does not assume the defense of any such
claim or litigation resulting therefrom within 30 days after the date such claim
is made, (a) the Indemnified Party may defend against such claim or litigation,
in such manner as it may deem appropriate, (b) the Indemnified Party may settle
such claim in accordance with the last sentence of Section 10.3 hereof, and (c)
the Indemnifying Party shall be entitled to participate in (but not control) the
defense of such action, with its counsel and at its own expense. If the
Indemnifying Party thereafter seeks to question the manner in which the
Indemnified Party defended such third party claim, the Indemnifying Party shall
have the burden to prove by a preponderance of the evidence that the Indemnified
Party did not defend such third party claim in a reasonably prudent manner.
Section 10.5 LIMITATION OF LIABILITY. Indemnification pursuant to this
Article X is the sole and exclusive remedy for claims by Purchaser or Seller and
the Stock Sellers under or in respect of this Agreement. Notwithstanding
anything to the contrary contained herein, an Indemnified Party shall not be
entitled to indemnification and an Indemnified Party shall have no liability to
an Indemnified Party under Section 10.1(a)(i) and 10.1(b) or 10.2(a), as the
case may be, until the aggregate losses for which there is indemnification
pursuant to Section 10.1 or 10.2 equals $25,000, whereupon the Indemnified Party
shall be entitled to receive any such indemnification in excess of $25,000;
provided, however, that an Indemnified Party's maximum cumulative liability
under or in respect of this Agreement shall not exceed $500,000 in the aggregate
($100,000 in the case of the indemnification to or from the Stock Sellers) and
provided further that the maximum cumulative liability of Seller and the Stock
Sellers shall not exceed $500,000. Notwithstanding anything to the contrary
contained herein, to the extent Purchaser, Seller or the Stock Sellers should
obtain at or prior to the Closing actual knowledge of any facts which it
reasonably should have known would constitute a breach or violation by the other
party hereto of any representation, warranty, covenant
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or agreement under this Agreement, the Purchaser, Seller or the Stock Sellers,
as the case may be, shall be deemed to have waived said breach to the extent it
proceeds to close under this Agreement and shall have no right to
indemnification for such breach.
Section 10.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made by the parties herein shall survive the
Closing and any investigation at any time made by or on behalf of the parties
hereto until December 31, 1999, except as to any matters with respect to which a
bona fide written claim shall have been made or an action at law or in equity
shall have commenced before such date, in which event survival shall continue
(but only with respect to and to the extent of, such claim) until the final
resolution of such claim or action, including all applicable periods for appeal.
XI. TERMINATION
Section 11.1 TERMINATION EVENTS. Subject to the provisions of Section
11.2, this Agreement may, by written notice given at or prior to the Closing in
the manner hereinafter provided, be terminated and abandoned:
(a) By either Seller and the Stock Sellers or Purchaser if a
material default or breach shall be made by the other party with
respect to the due and timely performance of any of its covenants and
agreements contained herein, or with respect to the due compliance
with any of the representations and warranties contained in Article V,
VI and VII, as the case may be, and such default cannot be cured and
has not been waived;
(b) By written mutual consent of Seller, the Stock Sellers and
Purchaser;
(c) By either Seller and the Stock Sellers or Purchaser if the
Closing shall not have occurred, other than through failure of such
party to fulfill its obligations hereunder, on or before October 15,
1999 or such later date as may be agreed upon by the parties; or
(d) By Seller and the Stock Sellers if the stockholders of Cygne
Designs, Inc. do not approve the transactions contemplated hereby.
Section 11.2 EFFECT OF TERMINATION. In the event this Agreement is
terminated pursuant to Section 11.2, all further obligations of the parties
hereunder shall terminate, no party shall have any right against the other party
hereto, except as set forth in this Section 11.2, and each party shall bear its
own costs and expenses, except that if this Agreement is so terminated by one
party because one or more of the conditions to such party's obligations
hereunder is not satisfied as a result of the other party's failure to comply
with its obligations under this Agreement (other than a failure by Seller, after
the good faith exercise of reasonable best efforts, to obtain any consent,
approval or other permission required pursuant to Section 3.5 hereof or the
failure by Cygne Designs, Inc. to obtain
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<PAGE>
the approval of its stockholders), it is expressly agreed and understood that
the terminating party's right to pursue all legal remedies for breach of
contract or otherwise, including, without limitation, damages relating thereto,
shall survive such termination unimpaired.
XII. MISCELLANEOUS
Section 12.1 EXPENSES. Each party to this Agreement shall pay its own
costs and expenses (including all legal and accounting fees incurred by it)
relating to this Agreement, the negotiations leading up to this Agreement and
the transactions contemplated by this Agreement.
Section 12.2 AMENDMENT. This Agreement shall not be amended or modified
except by a writing duly executed by Seller, the Stock Sellers and Purchaser
indicating an intention to amend this Agreement.
Section 12.3 ENTIRE AGREEMENT. This Agreement, including the Exhibits
and Schedules hereto and the other instruments, agreements and documents
delivered pursuant to this Agreement or in connection with the Closing, contains
all of the terms, conditions and representations and warranties agreed upon by
the parties relating to the subject matter of this Agreement and supersedes all
prior agreements, negotiations, correspondence, undertakings and communications
of the parties, oral or written, respecting such subject matter, including
without limitation the Original Agreement.
Section 12.4 HEADINGS. The headings contained in this Agreement are
intended solely for convenience and shall not affect the rights of the parties
to this Agreement.
Section 12.5 NOTICES. All notices, requests, demands and other
communications made in connection with this Agreement shall be in writing and
shall be deemed to have been duly given (a) on the date of delivery, if
delivered to the persons identified below, (b) seven calendar days after mailing
if mailed, with proper postage, by certified or registered mail, air mail
postage prepaid, return receipt requested, addressed as follows:
IF TO PURCHASER:
Jordache Limited
1411 Broadway
New York, New York 10018
Attention: President
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<PAGE>
WITH A COPY TO:
Robert Spiegelman, Esq.
1411 Broadway
New York, New York 10018
IF TO THE STOCK SELLERS:
c/o Cygne Designs, Inc.
680 Fifth Avenue
New York, New York 10019
Attention: Bernard Manuel
IF TO SELLER:
M.T.G.I. - Textile Manufacturers Group
(Israel) Ltd.
c/o Cygne Designs, Inc.
680 Fifth Avenue
New York, New York 10019
Attention: Bernard Manuel
WITH COPIES OF ANY NOTICES TO SELLER OR THE STOCK SELLERS TO:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Paul Jacobs, Esq.
Cygne Designs, Inc.
680 Fifth Avenue
New York, New York 10019
Attention: Bernard Manuel
or (c) on the date of receipt if sent by telex or telecopy, and confirmed in
writing in the manner set forth in (b) on or before the next day after the
sending of the telex or telecopy. Such addresses and numbers may be changed,
from time to time, by means of a notice given in the manner provided in this
Section.
Section 12.6 SEVERABILITY. If any provision of this Agreement is held
to be unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of
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<PAGE>
the parties to this Agreement to the extent possible. In any event, all other
provisions of this Agreement shall be deemed valid and enforceable to the full
extent possible.
Section 12.7 WAIVER. Waiver of any term or condition of this Agreement
by any party shall only be effective if in writing and shall not be construed as
a waiver of any subsequent breach or failure of the same term or condition, or a
waiver of any other term or condition of this Agreement.
Section 12.8 COUNTERPARTS. This Agreement may be signed in two or more
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument, and all such counterparts together shall be deemed an
original of this Agreement.
Section 12.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the law of the State of Israel.
Section 12.10 THIRD PARTIES. Except as specifically set forth or
referred to herein, nothing herein expressed or implied is intended or shall be
construed to confer upon or give to any person other than the parties hereto and
their successors or assigns any rights or remedies under or by reason of this
Agreement.
Section 12.11 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, executors, successors and permitted assigns,
but except as contemplated herein, neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, directly or indirectly, by
Purchaser, Seller or the Stock Sellers without the prior written consent of the
other parties hereto; provided, however, that Purchaser may assign any or all of
its rights, interest or obligations hereunder to any one or more direct or
indirect wholly owned subsidiaries of Purchaser, provided, however, that no such
assignment by Purchaser shall limit or affect Purchaser's obligations hereunder.
Section 12.12 ARBITRATION. Any dispute, controversy or claim arising
out of or in connection with or relating to this Agreement, any breach or
alleged breach hereof, or the transaction contemplated hereby, shall be resolved
and settled by arbitration by three arbitrators; provided, however, that in the
event the dispute is pursuant to Section 2.7 of this Agreement, the dispute
shall be resolved in accordance with that section. Within fifteen (15) days
after written demand for arbitration is sent by one party to the other,
Purchaser and Seller and the Stock Sellers shall each select one arbitrator, and
the two arbitrators so selected shall select a third arbitrator. The parties
shall endeavor to complete arbitration within 60 days after delivery of written
notice demanding arbitration. The decision of the arbitrators shall be binding
and conclusive upon the parties. Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction. Any such
arbitration shall be held in New York County, State of New York under the
commercial rules then in effect of the American Arbitration Association. The
expense of arbitration shall be borne equally by the parties to the arbitration
and each party shall bear and pay for the cost
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<PAGE>
of its own experts, witnesses, evidence, counsel and other costs in connection
with the preparation and presentation of its case; provided, however, in the
event either party alleges fraud or that the position of the other party is not
supportable in good faith, and the arbiters find that such fraud or bad faith
exists, the arbiters shall be free to award costs in such arbiters' discretion.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as of the date set forth above.
PURCHASER:
JORDACHE LIMITED
By: /s/ ROBERT SPIEGELMAN
----------------------------------
Name: Robert Spiegelman
Title: Authorized Signatory
SELLER:
M.T.G.I. -- TEXTILE MANUFACTURERS
GROUP (ISRAEL) LTD.
By: /s/ BERNARD MANUEL
----------------------------------
Name: Bernard Manuel
Title: Director
STOCK SELLERS:
MBS (CYGNE) COMPANY
By: /s/ BERNARD MANUEL
----------------------------------
Name: Bernard Manuel
Title: Director
A.C. SERVICES, INC.
By: /s/ BERNARD MANUEL
----------------------------------
Name: Bernard Manuel
Title: Director
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<PAGE>
EXHIBIT 3.7
NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT, dated as of ______ ___, 1999, by and between
Cygne Designs, Inc., a Delaware corporation having its chief executive office at
680 Fifth Avenue, New York, New York ("Cygne"), and Jordache Limited, a Delaware
corporation having its chief executive office at 1411 Broadway, New York, New
York ("Jordache").
W I T N E S S E T H :
WHEREAS, Cygne indirectly owns all the outstanding capital stock of
M.T.G.I. - Textile Manufacturers Group (Israel) Ltd., an Israeli corporation
"(MTGI"); and
WHEREAS, MTGI is engaged in the business of manufacturing women's knit
clothing (the "Business"); and
WHEREAS, on the date hereof Jordache is purchasing substantially all the
assets used by MTGI in the conduct of the Business pursuant to the terms of an
Acquisition Agreement, dated as of March 25, 1999, by and among MTGI, MBS
Company, Inc., a Delaware corporation and a subsidiary of Cygne, A.C. Services,
Inc., a Delaware corporation and a subsidiary of Cygne, and Jordache; and
WHEREAS, in order to protect the goodwill of the Business, Jordache has
agreed to make a payment to Cygne in exchange for Cygne's agreement not to
compete with the Business, the observance and enforcement of which Cygne
acknowledges are essential to Jordache protecting such goodwill;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, and in order to
induce Jordache to consummate the transactions contemplated by the Acquisition
Agreement, the parties hereby agree as follows:
1. DEFINITIONS. All capitalized terms used herein and not otherwise defined
shall have the meaning ascribed to them in the Acquisition Agreement.
2. ACKNOWLEDGMENTS. Cygne acknowledges that (i) the agreements and
covenants contained in Section 3 hereof are essential to protect the assets,
business and goodwill purchased by Jordache and (ii) Jordache would not purchase
the assets used in the Business but for such agreements and covenants.
<PAGE>
3. CYGNE COVENANT AGAINST COMPETITION. In order to induce Jordache to
purchase the assets used in the Business pursuant to the Acquisition Agreement,
Cygne agrees that it will not, for a period of six (6) months from the Closing
Date (the "Non-Compete Period"), source knit products in Israel, Jordan or the
Palestinian territory. Cygne expressly waives any right to assert inadequacy of
consideration as a defense to enforcement of this Agreement should such
enforcement ever become necessary. Cygne acknowledges that a remedy at law for
any breach or attempted breach of this Agreement will be inadequate and further
agrees that any breach of this Agreement will result in irreparable harm to the
Business; and Cygne covenants and agrees not to oppose any demand for specific
performance and injunctive and other equitable relief in case of any such breach
or attempted breach. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement. If any provision of this
Agreement shall, for any reason, be judged by any court of competent
jurisdiction to be invalid or unenforceable, such judgment shall not affect,
impair or invalidate the remainder of this Agreement but shall be confined in
its operation to the provision of this Agreement directly involved in the
controversy in which such judgment shall have been rendered. In the event that
the provisions of this Agreement should ever be deemed to exceed the time or
geographic limitations permitted by the applicable laws, then such provision
shall be reformed to the maximum time or geographic limitations permitted by
applicable law. Notwithstanding anything herein to the contrary, the covenants
and agreement set forth herein are applicable only to Cygne and its successors
and assigns, but are not applicable to its affiliates.
4. COMPENSATION. As full compensation for Cygne entering into this
Agreement, Jordache is paying to Cygne, simultaneously with the delivery hereof,
an aggregate of $400,000 in immediately available funds by wire transfer to an
account specified by Cygne. Cygne acknowledges and agrees that it will be
responsible for, and shall pay, as and when due, any and all United States,
state, local or foreign taxes in respect of the payment made pursuant to this
Section 4 and, in consideration thereof, Jordache and Cygne agree that Jordache
will not withhold any amounts in respect of such payment.
5. ASSIGNMENT. This Agreement shall not be assigned by any party hereto
(except by operation of law).
6. NOTICES. All notices, demands and other communications hereunder must be
in writing and shall be deemed to have duly been given (a) on the date of
delivery, if delivered to the persons identified below, (b) seven calendar days
after mailing if mailed, with proper postage, by certified or registered
first-class mail, postage prepaid, return receipt requested, addressed as set
forth in the preamble, (c) on the date of receipt if sent by telecopy, and
confirmed in writing in the manner set forth in (b) on or before the next day
after the sending of the telecopy or (d) one business day after delivery to a
nationally recognized overnight courier service marked for overnight delivery.
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<PAGE>
IF TO JORDACHE:
Jordache Limited
1411 Broadway
New York, New York 10018
Attention: President
WITH A COPY TO:
Robert Spiegelman, Esq.
1411 Broadway
New York, New York 10018
IF TO CYGNE:
Cygne Designs, Inc.
680 Fifth Avenue
New York, New York 10019
Attention: Bernard Manuel
WITH A COPY TO:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Paul Jacobs, Esq.
Such addresses and numbers may be changed, from time to time, by means of a
notice given in the manner provided in this Section.
7. CONSENT TO JURISDICTION. Each of Cygne and Jordache hereby irrevocably
submits and consents to the jurisdiction of any New York state or federal court
over any action or proceeding arising out of or relating to this Agreement and
hereby irrevocably agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York state or federal court.
Each of Cygne and Jordache irrevocably consents to the service of any and all
process in any such action or proceeding by the hand delivery or mailing of
copies of such process to it at its address specified herein. Nothing in this
Section 7 shall affect the right of Jordache or Cygne to serve legal process in
any other manner permitted by law or affect the right to bring any action or
proceeding against the other or its property in the courts of any other
jurisdiction in which any violation of this Agreement occurs. Each of Cygne and
Jordache intends to and does hereby confer upon such court the power to exercise
personal jurisdiction over it to enforce the covenants contained herein upon the
courts of any jurisdiction within the geographical scope of such covenants.
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<PAGE>
8. MISCELLANEOUS. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of New York without
regard to the conflict of laws provisions thereof. This Agreement may not be
modified or amended or any term or provision hereof waived or discharged except
in writing signed by the party against whom such amendment, modification, waiver
or discharge is sought to be enforced. Any failure or delay on the part of any
party in exercising any power or right hereunder shall not operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power
preclude any other or further exercise thereof or the exercise of any other
right or power hereunder. This Agreement sets forth the entire agreement and
understanding of the parties in respect of the subject matter contained herein,
and supersedes all prior agreements, whether written or oral, between the
parties. The headings in this Agreement are for purposes of reference only and
shall not limit or otherwise affect the meaning hereof. This Agreement may be
executed in several counterparts, each of which shall be deemed an original, but
all or which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.
CYGNE DESIGNS, INC.
By:
---------------------------------
Name:
Title:
JORDACHE LIMITED
By:
----------------------------------
Name:
Title:
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<PAGE>
EXHIBIT 3.8
GUARANTEE
GUARANTEE, made as of the ___ day of _____, 1999, by Cygne Designs, Inc., a
Delaware corporation (the "GUARANTOR").
W I T N E S S E T H :
WHEREAS, pursuant to that certain Amended and Restated Acquisition
Agreement, dated as of August 1, 1999 (the "ACQUISITION AGREEMENT"), by and
among M.T.G.I. - Textile Manufacturers Group (Israel) Ltd., an Israeli
corporation and a subsidiary of Guarantor ("MTGI"), MBS (Cygne) Company, a
Delaware corporation and a subsidiary of Guarantor ("MBS"), A.C. Services, Inc.,
a Delaware corporation and a subsidiary of Guarantor ("ACS" and, together with
MBS, the "STOCK SELLERS" and together with MTGI, the "SELLERS")), and Jordache
Limited, a Delaware corporation ("PURCHASER"), the Purchaser is purchasing the
Assets (as defined in the Acquisition Agreement) from MTGI and the Wear Stock
(as defined in the Acquisition Agreement from the Stock Sellers; and
WHEREAS, as a condition to purchasing the Assets and the Wear Stock, the
Purchaser has required that the Guarantor guarantee the Sellers' obligation to
indemnify the Purchaser set forth in Section 10.1 of the Acquisition Agreement;
and
WHEREAS, Guarantor will derive significant benefit from the sale and
purchase of the Assets and the Wear Stock pursuant to the Acquisition Agreement.
NOW, THEREFORE, Guarantor hereby covenants and agrees as follows:
1. Subject to Section 2 hereof, Guarantor guarantees to Purchaser the
full and timely performance of Sellers' obligation set forth in Section
10.1 of the Acquisition Agreement. This Guarantee is a continuing,
unconditional and absolute guarantee.
2. In the event any person shall make a claim against Purchaser for
which Sellers are liable pursuant to Section 10.1 of the Acquisition
Agreement, Purchaser shall provide written notice of such claim to the
Sellers and Guarantor. In the event the Sellers do not pay such claim
within 15 days of receipt of the notice of claim, then Guarantor shall
immediately make full payment of such claim, and Purchaser shall be
immediately entitled to pursue all remedies against Guarantor for the full
and timely payment of such claim.
3. Guarantor waives any notice or demand whatsoever (written or oral)
of acceptance, non-payment, non-performance, or non-observance by Seller.
4. This Guarantee may not be amended, modified, rescinded, discharged
or terminated orally or in any manner other than by a writing which refers
to this Guarantee and which is executed by the Purchaser and the Guarantor.
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<PAGE>
5. The validity of this Guarantee, all the provisions thereof, and the
obligations of the Guarantor hereunder shall in no way be terminated,
affected or impaired by reason of the assertion by the Purchaser against
the Sellers of any of the rights or remedies available to the Purchaser
pursuant to the Acquisition Agreement.
6. If any provision of this Guarantee shall be invalid or
unenforceable to any extent, the remainder of this Guarantee shall not be
affected thereby, and every provision of this Guarantee shall be valid and
enforceable to the fullest extent permitted by law.
7. Any notices, demands or other communications desired or required to
be given to Guarantor hereunder shall be in writing and shall be sent by
registered or certified mail, return receipt requested, or by a nationally
recognized overnight courier which obtains a written receipt of delivery,
such as Federal Express, and shall be sent to Guarantor at 680 Fifth
Avenue, New York, New York 10019, Attn: Bernard Manuel, or to such other
address as Guarantor may designate by written notice to Purchaser. Notices
given by Guarantor to Purchaser shall be deemed sufficiently given if sent
in the manner provided for the giving of notice to Purchaser pursuant to
the Acquisition Agreement.
8. This Guarantee shall be binding upon Guarantor, its successors and
assigns, and shall inure to the benefit of Purchaser, its successors and
assigns.
IN WITNESS WHEREOF, the undersigned has executed this Guarantee as of the
date first above written.
CYGNE DESIGNS, INC.
Guarantor
By:
---------------------------------
Name:
Title:
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<PAGE>
APPENDIX B
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CYGNE DESIGNS, INC.
--------------------------------
Under Section 241 of the
General Corporation Law
--------------------------------
The undersigned, being the ___________ of Cygne Designs, Inc. (the
"Corporation"), does hereby certify that the following amendment to the
Certificate of Incorporation has been duly adopted in accordance with Section
241 of the General Corporation Law of the State of Delaware and the Corporation
has not received any payment for any of its authorized capital stock:
FIRST: The Certificate of Incorporation of the Corporation is amended by
replacing the present first paragraph of Article IV with a new first paragraph
of Article IV to read as follows:
The total number of shares of all classes of stock which the
Corporation has authority to issue is twenty-six million (26,000,000)
shares, consisting of twenty-five million (25,000,000) shares of Common
Stock, par value $.01 per share (the "Common Stock"), and one million
(1,000,000) shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"), which Preferred Stock shall have such designations
as may be authorized by the board of Directors from time to time.
SECOND: The remaining provisions of the Certificate of Incorporation shall
continue in full force and effect.
IN WITNESS WHEREOF, I do hereby acknowledge, under the penalties of
perjury, that this is my act and deed and the facts herein stated are true, and
accordingly I hereunto set my hand this ____ day of______, 1999.
------------------------------------
Name:
Title:
<PAGE>
- --------------------------------------------------------------------------------
CYGNE DESIGNS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 19, 1999
Bernard Manuel and Roy Green, and each of them, as the true and lawful
attorneys, agents and proxies of the undersigned, with full power of
substitution, are hereby authorized to represent and to vote all shares of
Common Stock of Cygne Designs, Inc. (the "Company") held of record by the
undersigned on September 15, 1999, at the Annual Meeting of Stockholders to be
held at 9:30 A.M. (local time) on October 19, 1999, at the offices of Fulbright
& Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103 and any
adjournment thereof. Any and all proxies heretofore given are hereby revoked.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED FOR PROPOSAL NO.
1, FOR EACH OF THE NOMINEES FOR PROPOSAL NO. 2 AND FOR PROPOSAL NO. 3.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
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[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Proposal to approve and adopt an Amended and [ ] [ ] [ ]
Restated Acquisition Agreement, dated as of
August 1, 1999, by and among M.T.G.I.--Textile
Manufacturers Group (Israel) Ltd., an Israeli
corporation, MBS (Cygne) Company, a Delaware
corporation, A.C. Services, Inc., a Delaware
corporation, and Jordache Limited, a Delaware
corporation, pursuant to which the Company will
sell to Jordache for cash substantially all the
assets used in connection with its women's
private label knit clothing manufacturing business.
2. Election of Directors--Nominees are: James G.
Groninger and Bernard M. Manuel [ ] [ ]
FOR all listed nominees (except do not vote for
the nominee(s) whose name(s) appear(s) below):
______________________________________________
3. Proposal to consider and vote upon a proposal [ ] [ ] [ ]
to approve and adopt an amendment to the
Company's Certificate of Incorporation to
reduce the number of shares of common stock
and preferred stock we are authorized to issue.
Discretionary authority is hereby granted with
respect to such other matters as may properly
come before the meeting.
IMPORTANT: Please sign exactly as name appears above. Each joint owner shall sign. Executors, administrators, trustees, etc. should
give full title as such. If signor is a corporation, please give full corporate name by duly authorized officer. If
a partnership, please sign in partnership name by authorized person.
Signature_____________________ Signature if held jointly_________________________ DATED____________ , 1999
The above-signed acknowledges receipt of the Notice of Annual Meeting of Stockholders and the Proxy Statement furnished therewith.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
</TABLE>
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