UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1996
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-22102
CYGNE DESIGNS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 04-2843286
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1372 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(212) 354-6474
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, $.01 Par Value, 12,438,038 shares as of June 7, 1996
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at May 4, 1996 (unaudited)
and February 3, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended May 4, 1996 and April 29, 1995 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended May 4, 1996 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
three months ended May 4, 1996 and April 29, 1995 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II OTHER INFORMATION
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
2
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
MAY FEBRUARY
4, 1996 3, 1996
--------------------------
(Unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash $ 8,473 $ 5,487
Trade accounts receivable 40,511 35,117
Inventory 13,441 29,999
Other receivables and prepaid expenses 9,372 8,150
Assets held for sale - 15,200
Deferred income taxes 4,066 4,066
-------------------------
Total current assets 75,863 98,019
Fixed assets, net 13,211 13,533
Other assets 761 803
Deferred income taxes 2,000 2,000
Goodwill, net 2,699 2,790
-------------------------
Total assets $ 94,534 $ 117,145
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 29,178 $ 37,453
Accounts payable 18,846 32,928
Trade credit facilities outstanding 9,110 8,945
Accrued expenses 13,136 14,083
Income taxes payable 5,878 5,677
Current portion of long-term debt 2,003 2,047
-------------------------
Total current liabilities 78,151 101,133
Long-term debt 1,409 1,562
Deferred rent credits 1,463 1,386
-------------------------
Total liabilities 81,023 104,081
Minority interests in subsidiaries 4,466 4,018
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 (May 4, 1996) and
(February 3, 1996) shares
issued and outstanding 124 124
Paid-in capital 120,918 120,918
Accumulated deficit (111,968) (111,999)
Foreign currency translation adjustment (29) 3
-------------------------
Total stockholders' equity 9,045 9,046
-------------------------
Total liabilities and stockholders' equity $ 94,534 $ 117,145
=========================
See accompanying notes.
3
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
MAY APRIL
4, 1996 29, 1995
-------------------------
(In thousands, except per
share amounts)
Net sales $ 83,756 $ 128,367
Cost of goods sold 73,044 117,239
------------------------
Gross profit 10,712 11,128
Selling, general and administrative expenses 9,159 18,178
Gain from sale of subsidiary, net - (4,742)
Bad debt expense - 1,030
Amortization of intangibles 91 956
------------------------
Income (loss) from operations 1,462 (4,294)
Other income 388 -
Interest expense 935 2,111
------------------------
Income (loss) before provision for income taxes
and minority interests 915 (6,405)
Provision (benefit) for income taxes 436 (2,122)
------------------------
Income (loss) before minority interests 479 (4,283)
Income attributable to minority interests 448 397
------------------------
Net income (loss) $ 31 $ (4,680)
========================
Net income (loss) per share $ 0.00 $ 0.36
========================
Weighted average number of common and common
equivalent shares outstanding 12,438 12,886
========================
See accompanying notes.
4
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Common Stock Foreign
--------------------------- Currency
Number Paid-in Translation Accumulated
of Shares Amount Capital Adjustment Deficit Total
------------- ------------- -------------- ------------- -------------- -------------
(In thousands)
Balance at February 3, 1996 12,438 $124 $ 120,918 $ 3 $ (111,999) $ 9,046
Foreign currency translation adjustment -- -- -- (32) -- (32)
Net income for the three months ended
May 4, 1996 -- -- -- -- 31 31
------------- ------------- -------------- ------------- -------------- -------------
Balance at May 4, 1996 12,438 $124 $ 120,918 $ (29) $ (111,968) $ 9,045
============= ============= ============== ============= ============== =============
See accompanying notes.
5
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
MAY APRIL
4, 1996 29, 1995
--------------------------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 31 $(4,680)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 489 1,017
Gain from sale of subsidiary, net - (4,742)
Bad debt expense - 1,030
Rent expense not currently payable 77 270
Amortization of intangibles 91 893
Deferred income taxes 3 35
Income attributable to minority interests 448 397
Changes in operating assets and liabilities:
Trade accounts receivable (5,392) 11,352
Inventory 16,559 12,253
Other receivables and prepaid expenses 1,457 2,697
Accounts payable (14,038) (4,221)
Accrued expenses (967) (5,161)
Income taxes payable 201 (2,126)
-------------------------
Net cash (used in) provided by operating activities (1,041) 9,014
-------------------------
INVESTING ACTIVITIES
Purchase of fixed assets (161) (3,081)
Other assets 36 201
Sale of business 12,500 -
Sale of subsidiary - (464)
Purchase of businesses - (3,107)
-------------------------
Net cash provided by (used in) investing activities 12,375 (6,451)
-------------------------
FINANCING ACTIVITIES
Short-term borrowings, net (8,275) (3,935)
Credit facility outstanding, net 165 2,429
Repayments of long-term debt, net (206) (58)
Net proceeds from issuance of common stock - 20
-------------------------
Net cash provided by (used in) financing activities (8,316) (1,544)
Effect of exchange rate changes on cash (32) (69)
-------------------------
Net increase in cash 2,986 950
Cash at beginning of period 5,487 14,202
-------------------------
Cash at end of period $ 8,473 $15,152
=========================
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 232 $ 517
Interest paid 672 2,055
Exchange of Company common stock for acquisitions - 675
Retirement of Company common stock from sale of subsidiary - 7,500
See accompanying notes.
6
June 15, 19961:39 AM
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
May 4, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Cygne
Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended May 4, 1996 are not
necessarily indicative of the results that may be expected for the fiscal year
ended February 1, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended February 3, 1996. The balance sheet at February 3, 1996
has been derived from the audited financial statements at that date.
The Company's fiscal year ends on the Saturday nearest to January 31.
Earnings per share are based on the weighted average number of shares of common
stock outstanding. For the three months ended May 4, 1996 and April 29, 1995,
common stock equivalents are excluded as the effect of their inclusion would be
antidilutive.
2. PURCHASES AND SALES OF COMPANIES
CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," which began
operations in June 1992, was originally owned by the stockholders of Cygne (80%)
and AnnTaylor, Inc. (20%). Effective April 30, 1993, CAT became a 60% owned
subsidiary of Cygne with AnnTaylor, Inc. owning the remaining 40% interest.
7
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
2. PURCHASES AND SALES OF COMPANIES (CONTINUED)
On May 2, 1993, the Company purchased 66% of the capital stock of JMB
Internacionale S.A. ("JMB"), a company formed to supervise manufacturing of
products in Guatemala, from an affiliate of a Director of the Company. At May 2,
1993, JMB owned 50% of Modas Cisne, S.A., a manufacturing company located in
Guatemala. On October 29, 1993, JMB purchased the remaining 50% of the
outstanding stock of Modas Cisne, S.A. for future contingent payments based on
future earnings of this subsidiary. On October 18, 1995, the Company purchased
the remaining 34% of the capital stock of JMB.
During 1993, in two transactions, the Company acquired T. Wear Company S.r.l.
and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for an
aggregate of $500,000 and 150,000 shares of the Company's common stock. These
companies design, merchandise, manufacture and sell women's apparel to customers
principally in the United States. The fair market value of the assets acquired
approximated their book value and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
over a ten year period.
In April 1994, the Company acquired Fenn, Wright and Manson, Incorporated
("FWM"), a designer, merchandiser and manufacturer principally of private label
women's and men's apparel primarily serving prominent specialty retail store
chains and department stores in the U.S. and the United Kingdom (the "FWM
Acquisition"). The purchase price for FWM was $44,000,000, consisting of
2,000,000 unregistered shares of the Company's common stock and $10,000 in cash.
Additional costs related to this acquisition approximated $1,400,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $47,848,000 was recorded as goodwill, and was being amortized over
a twenty-five year period.
On April 7, 1995, the Company sold the United Kingdom subsidiary of FWM and
certain brand name rights to Fenn Wright and Manson (Antilles) N.V. (a group led
by Colin Fenn) in exchange for 600,000 shares of Cygne common stock previously
issued. In connection with this transaction, Mr. Fenn resigned his positions as
Director and Vice Chairman of the Company, and as President of FWM. In the
quarter ended April 29, 1995, Cygne recorded a gain of $4,742,000 on the sale,
which is net of certain restructuring expenses of $2,800,000 (consisting
primarily of severance to former FWM employees and costs associated with closing
certain of FWM's facilities) pertaining to the related integration of FWM's
operations with the Company's operations.
8
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
2. PURCHASES AND SALES OF COMPANIES (CONTINUED)
During 1995, management also took various actions to reverse a decline in FWM's
remaining business. However, management determined that such actions were not
having the desired results and eliminated all of the operations of FWM. The
unamortized goodwill recorded in connection with the acquisition of FWM
($44,530,000) exceeded the undiscounted anticipated future operating cash flows
over the remaining goodwill amortization of period. Therefore, the FWM goodwill
was written off.
In October 1994, Cygne acquired the business operations of G.J.M. International
Limited ("GJM"), a Hong Kong-based designer, merchandiser and manufacturer of
women's intimate apparel, from G.J.M. International Limited, a company
wholly-owned by Mr. W. Glynn Manson (the "GJM Acquisition"). The purchase price
for GJM was $15,200,000, consisting of 650,000 unregistered shares of the
Company's common stock, $10,000 in cash and the assumption of approximately
$1,900,000 of indebtedness owned by GJM International to The Limited, Inc.
Additional costs related to this acquisition approximated $1,700,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $27,659,000 was recorded as goodwill and was being amortized over
a twenty-five year period.
In connection with the GJM Acquisition the Company also paid $3,200,000 to two
key executives of GJM for non-compete agreements of fifteen years and four
years, respectively, and issued options vesting over four years to certain key
personnel of GJM to purchase an aggregate of 165,000 shares of the Company's
common stock at a purchase price of $20.50 per share, which option purchase
price as to 125,000 of such shares was subsequently reduced to $2.00 per share
along with the reduction of the option purchase price for other employees.
In February 1996, the Company sold substantially all of the assets of its GJM
intimate apparel and sleepwear business to Warnaco Inc. In the transaction,
Warnaco paid Cygne $12,500,000 in cash and assumed certain liabilities of the
GJM business. Warnaco is also holding an additional $1,500,000 in a treasury
security to secure its obligations to make post-closing payments based upon a
formula that provides, to the extent that net assets (as defined in the purchase
agreement) acquired by Warnaco exceed $8,100,000, Warnaco will pay Cygne the
$1,500,000 held in a treasury security and the amount by which the net assets
exceeds $8,100,000. To the extent such net assets are less than $8,100,000,
Cygne will pay Warnaco the difference first by applying up to $1,500,000
9
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
2. PURCHASES AND SALES OF COMPANIES (CONTINUED)
being held in a treasury security by Warnaco against the amount the net assets
fall below $8,100,000 and thereafter will pay Warnaco any further difference
below $6,600,000 in net assets. Warnaco has informed the Company that it
believes the net assets acquired aggregated only $1,589,000 and that the Company
owes Warnaco $6,511,000, of which $1,500,000 would be satisfied through the
treasury security. The Company disagrees with Warnaco's calculations and is in
the process of reviewing them with Warnaco. The Company cannot predict the
outcome of this dispute. At the time the dispute is resolved, and depending on
the determination of the value of net assets acquired by Warnaco, the Company
may recognize an increase or a decrease in the loss of approximately $31,200,000
on the sale. The Company used all the proceeds from the sale to repay
outstanding senior bank indebtedness. GJM accounted for approximately 12.0% of
the Company's net sales of $128,367,000 for the quarter ended April 29, 1995.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan corporation
that sources products in Brazil for export, primarily to the U.S. The purchase
price for TSA was approximately $3,800,000, consisting of 53,038 unregistered
shares of the Company's common stock and $3,100,000 in cash (the "TSA
Acquisition"). 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 $4,500,000 was recorded as goodwill and was amortized
over a twenty-five year period. Cygne also issued options to purchase an
aggregate of 55,000 shares of the Company's common stock to the two former
shareholders of TSA in connection with their entering into consulting agreements
with TSA. In January 1996, the Company decided to cease operations of TSA by the
end of the second quarter of 1996 and wrote-off the remaining goodwill.
The FWM Acquisition, the GJM Acquisition and the TSA Acquisition were accounted
for under the purchase method and, accordingly, the operating results of FWM,
GJM and TSA have been included in the consolidated operating results since their
respective dates of acquisition.
On June 7, 1996 Cygne signed a definitive agreement with AnnTaylor Stores
Corporation regarding the previously announced sale to AnnTaylor of Cygne's 60%
interest in CAT, Cygne's sourcing joint venture arrangement with AnnTaylor, and
the assets of Cygne's AnnTaylor Woven Division that are used in sourcing
merchandise for AnnTaylor (the "AnnTaylor Disposition").
10
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
2. PURCHASES AND SALES OF COMPANIES (CONTINUED)
The aggregate consideration to be paid to Cygne in the transaction consists of
unregistered shares of AnnTaylor common stock having a market value of $36
million (based upon the market price of the common stock for the ten trading
days prior to closing, but in no event greater than 2.5 million shares), and a
cash payment in an amount equal to the tangible net book value of the fixed
assets of Cygne's AnnTaylor Woven Division (but not to exceed $2,646,000) plus
the tangible net book value of the inventory of Cygne's AnnTaylor Woven
Division, less the amount of certain liabilities of the Division to be assumed
by AnnTaylor.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company lenders, and the continuation of CAT's $40 million credit
facility. It is currently anticipated that the transaction will close in August
1996, following approval by Cygne's stockholders. There can be no assurance,
however, that the conditions to the closing will be satisfied, that the
transaction will be consummated or, if consummated, that it will be consummated
within the currently anticipated time frame. In order to facilitate the
integration of CAT and Cygne's AnnTaylor Woven Division into AnnTaylor's
operations, Cygne has agreed to make available for a three year period the
services of Mr. Bernard Manuel, the Company's Chief Executive Officer, and Mr.
Irving Benson, the Company's President. Cygne will make available up to 30% of
Messrs. Benson's and Manuel's time and will receive an aggregate fee of $450,000
per year. AnnTaylor has agreed to register the shares issued to Cygne for
resale, although Cygne will be subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time.
CAT and the AnnTaylor Woven Division accounted for approximately 72% of the
Company's net sales of $83,756,000 for the quarter ended May 4, 1996.
11
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
3. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
Inventory consists of the following:
MAY FEBRUARY
4, 1996 3, 1996
---------------------------
(In thousands)
Raw materials $ 9,451 $ 21,748
Finished goods 1,228 2,972
Finished goods-in-transit 2,762 5,279
---------------------------
$ 13,441 $ 29,999
===========================
4. CREDIT FACILITIES
During the quarter ended October 28, 1995, Cygne and CAT each entered into a
Credit Agreement with the HS Bank which modified the previous credit arrangement
with the HS Bank. The modifications included (i) the consolidation of the Cygne,
FWM and GJM facilities, previously aggregating up to $76,400,000, into one
facility of up to $70,000,000, (ii) an increase in the CAT facility from up to
$28,000,000 to up to $40,000,000, (iii) a requirement under each agreement to
comply with certain financial covenants as well as various other restrictions,
and (iv) an increase in the Cygne facility interest rate. Borrowings under these
facilities, which may be terminated by the HS Bank or the Company at any time as
to future borrowings upon proper notice, are subject to certain borrowing base
limitations and the HS Bank's agreement as to amount, purpose, interest rate,
maturity and collateral. Borrowings under these facilities are due on the
earlier of demand or the maturity date specified by the HS Bank for each
borrowing. Amounts outstanding under the Cygne agreement bear interest at 1.25%
above the prime rate through January 31, 1996 and between 1% and 1.75% above the
prime rate thereafter depending upon the working capital, as defined, of the
Company, exclusive of CAT. Amounts outstanding under the CAT agreement bear
interest at 0.5% above the prime rate. Each agreement provides for additional
interest at 2% per annum on amounts not paid when due. The HS Bank facilities
are cross guaranteed by Cygne and certain of its subsidiaries and are secured by
a first lien on substantially all the assets of the Company including a pledge
of 65% of the capital stock of certain of Cygne's foreign subsidiaries, except
for C.A.T. (Far East) Limited as to which 60% of the capital stock is pledged.
12
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
4. CREDIT FACILITIES (CONTINUED)
The following table sets forth information with respect to the HS Bank
facilities:
MAY 4, 1996
-------------------------------
DIRECT OPEN DIRECT
TOTAL BORROWING LETTERS BORROWINGS
FACILITY (1) LIMIT (2) OF CREDIT OUTSTANDING
----------------------------------------------------------------
(In thousands)
Cygne (3) $ 70,000 $ 50,000 $ 8,501 $ 21,149
CAT (4) 40,000 8,000 22,193 5,600
--------------------------------------------------------------
Total $ 110,000 $ 58,000 $ 30,694 $ 26,749
==============================================================
(1) The total facility, less any direct borrowings outstanding is available
for letters of credit.
(2) Consists principally of revolving loans and borrowings against
import/exports.
(3) The Limited, Inc. had guaranteed $10,000,000 of HS Bank facilities
through May 31, 1996.
(4) Cygne has guaranteed 60% of the indebtedness outstanding under this
facility and AnnTaylor, Inc., which owns 40% of CAT, has provided the HS
Bank with a $4,000,000 standby letter of credit.
On May 15, 1996, the Company received a commitment letter from HS Bank to
provide the Company with a new credit facility to replace the existing facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the AnnTaylor Disposition;
thereafter the facility reduces to $22.5 million and further reduces to $15
million at October 31, 1996; $10 million at November 30, 1996; $5 million at
December 31, 1996; and matures on January 31, 1997. Borrowings under this
facility are subject to borrowing base limitations. The Company is obligated to
pledge substantially all of its assets, including the AnnTaylor stock to be
received at the closing of the AnnTaylor Disposition. The credit facility is
subject to the completion of definitive documentation.
13
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
4. CREDIT FACILITIES (CONTINUED)
Certain foreign subsidiaries have credit facilities aggregating $2,429,000 at
May 4, 1996. Borrowings under these facilities, which are payable on demand, are
secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two-third parties not affiliated with the Company, but
affiliated with each other, whereby these parties made available to the Company
a trade credit facility. The trade credit facility has been suspended. At May 4,
1996, $9,110,000 of this facility was outstanding. The Company has reached an
agreement in principle to restructure the amounts outstanding under this trade
credit facility.
5. DEBT
The Company has existing mortgages, of $999,000 at May 4, 1996 relating to a
foreign office and manufacturing facility with bears interest at LIBOR plus 2%
and is payable quarterly in equal payments of $52,600.
At May 4, 1996, the Company also has a $1,258,000 unsecured note payable to The
Limited, Inc., a major customer of the Company. The principal amount
outstanding, which is currently payable, bears interest at prime plus 2% and was
originally due on December 31, 1995.
At May 4, 1996, the balance outstanding on other debt was $1,155,000 of which
$616,000 is long-term.
6. LITIGATION
On December 11, 1995, a class action complaint was filed against the Company,
certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class of purchasers of the Company's stock during the period
September 28, 1993 through April 28, 1995. The complaint seeks unspecified money
damages and alleges that the Company and the other defendants violated federal
securities laws in connection with various public statements made by the Company
and certain of its officers and directors during the putative class
14
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
6. LITIGATION (CONTINUED)
period. On April 9, 1996, all of the defendants filed motions to dismiss the
complaint. Pursuant to a scheduling order entered by the court, the plaintiff
filed oppositions to the motions to dismiss in May 1996. Defendants are
scheduled to file their reply memoranda on June 18, 1996. The Company believes
that all of the allegations contained in the complaint are without merit and
intends to continue to defend the action vigorously. An adverse decision in this
action could have a material adverse effect on the Company's financial condition
or results of operations.
Richard Kramer, a former employee of the Company, brought an action against the
Company, Bernard Manuel and Irving Benson alleging three causes of action: (1)
fraudulent inducement of Kramer to accept employment as a Group Vice President;
(2) breach of contract by refusing to pay Kramer approximately $168,500 upon his
termination, under a provision which states that if he were terminated without
cause he would receive consideration equal to that sum; and (3) breach of
contract for failure to deliver certain stock options to Kramer. In October
1995, the defendants moved to dismiss the action on the grounds that the
complaint failed to state a cause of action, that Kramer refused to give the
Company a release in return for payment of the $168,500, and that Kramer, who
had been employed for only two months at the time of his termination, was not
entitled to stock options under the employment letter between the parties. The
motion was denied to the extent that it sought dismissal of the fraudulent
inducement claim and the claim for $168,500, but granted insofar as to the claim
for stock options. An agreement in principle was reached with respect to this
matter for an amount that the Company does not deem material during mandatory
nonbinding mediation but a definitive settlement agreement has not yet been
entered into.
The Company is involved in various other legal proceedings that are incidental
to the conduct of its business, non of which the Company believes could
reasonable be expected to have a material adverse effect on the Company's
financial condition or results of operations.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unless otherwise noted, all references to a year are to the fiscal year of the
Company commencing in that calendar year and ending on the Saturday nearest
January 31 of the following year.
On April 7, 1995, Cygne sold the United Kingdom subsidiary of FWM and certain
brand name rights which were acquired in the FWM Acquisition. On February 9,
1996, the Company sold substantially all of the assets relating to its GJM
Business. In June 1996, the Company entered into a definitive agreement to sell
its 60% interest in its joint venture arrangement with AnnTaylor and the assets
of Cygne's AnnTaylor Woven Division.
Upon consummation of the above dispositions, the Company will continue in three
principal segments of the women's apparel market: career sportswear, casual
sportswear and dresses. In addition, upon the consummation of the AnnTaylor
Disposition, the Company anticipates that it will no longer have sales to
AnnTaylor. The Company has been dependent on its key customers (The Limited,
Inc. and AnnTaylor) and, with the loss of AnnTaylor as a customer, its business
is dependent upon maintaining its relationship with The Limited, Inc. and its
ability to attract new customers. However, there can be no assurance that the
Company will be able to do so. This Report contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this report and the Company's other filings with the
Securities and Exchange Commission.
16
General
In June 1992, the Company and certain of its stockholders formed CAT, a joint
venture arrangement with AnnTaylor to source products exclusively for AnnTaylor.
During 1992 and the first quarter of 1993, AnnTaylor owned a 20% interest in
CAT. Effective May 1, 1993, AnnTaylor's interest in CAT increased to 40%. As a
result of such change in ownership, AnnTaylor has a 40% interest in the net
income of CAT, which interest is reflected in Cygne's consolidated statements of
income as "income attributable to minority interests."
On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of the Company's common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, the Company sold FWM's U.K. subsidiary
to FWM N.V. for 600,000 shares of the Company's common stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. In connection with the elimination of
the FWM operations, the Company wrote-off the remaining $44,530,000 of goodwill
in fiscal 1995.
17
On October 7, 1994, Cgyne acquired GJM for a purchase price of $15.2 million,
consisting of 650,000 unregistered shares of common stock, $10,000 in cash and
the assumption of approximately $1.9 million of debt owed by GJM International
to The Limited, Inc., as well as non-compete payments aggregating $3.2 million.
Additional costs related to this acquisition approximated $1.7 million. The
excess of the purchase price over the fair value of the net assets acquired of
approximately $27.7 million was recorded as goodwill and was being amortized
over a twenty-five year period. See Note 2 of Notes to Consolidated Financial
Statements of the Company.
In February 1996, the Company sold the GJM Business to Warnaco Inc. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. Warnaco is also holding an additional $1.5
million in a treasury security to secure its obligations to make post-closing
payments based upon a formula that provides, to the extent that net assets ( as
defined in the purchase agreement) acquired by Warnaco exceed $8.1 million,
Warnaco will pay Cygne the $1.5 million held in a treasury security and the
amount by which the net assets exceed $8.1 million. To the extent such net
assets are less than $8.1 million, Cygne will pay Warnaco the difference first
by applying up to $1.5 million being held in a treasury security by Warnaco
against the amount the net assets fall below $8.1 million and thereafter will
pay Warnaco any further difference below $6.6 million in net assets. Warnaco has
informed the Company that it believes the net assets acquired aggregated only
$1.6 million, and that the Company owes Warnaco $6.5 million, of which $1.5
million would be satisfied through the treasury security. The Company disagrees
with Warnaco's calculations and is in the process of reviewing them with
Warnaco. The Company cannot predict the outcome of this dispute. As a result of
the sale, the Company incurred a loss of approximately $31.2 million. This
amount may be increased or decreased depending on the final value of the net
assets acquired by Warnaco. The Company used all the proceeds of the sale to
repay outstanding senior bank indebtedness. See "--Liquidity and Capital
Resources."
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan corporation
that sources 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 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. Cygne also issued options to purchase an aggregate of 55,000 shares of
common stock to the two former shareholders of TSA in connection with their
entering into consulting agreements with TSA. In January 1996, the Company
determined to close TSA and the Company anticipates that operations will
terminate by the end of the second quarter of 1996.
On June 7, 1996, Cygne entered into a definitive agreement with AnnTaylor Stores
Corporation regarding the previously announced sale to AnnTaylor of Cygne's 60%
interest in CAT, Cygne's sourcing joint venture with AnnTaylor, and the assets
of Cygne's AnnTaylor Woven
18
Division that are used in sourcing merchandise for AnnTaylor (the "AnnTaylor
Disposition").
The aggregate consideration to be paid to Cygne in the transaction consists of
unregistered shares of AnnTaylor common stock having a market value of $36
million (based upon the market price of the common stock for the ten trading
days prior to closing, but in no event greater than 2.5 million shares), and a
cash payment in an amount equal to the tangible net book value of the fixed
assets of Cygne's AnnTaylor Woven Division (but not to exceed $2,646,000) plus
the tangible net book value of the inventory of Cygne's AnnTaylor Woven
Division, less the amount of certain liabilities of the Division to be assumed
by AnnTaylor.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company's lenders, and the continuation of CAT's $40 million
credit facility. It is currently anticipated that the transaction will close in
August 1996, following approval by Cygne's stockholders. There can be no
assurance, however, that the conditions to closing will be satisfied, that the
transaction will be consummated or, if consummated, that it will be consummated
within the currently anticipated time frame. In order to facilitate the
integration of CAT and Cygne's AnnTaylor Woven Division into AnnTaylor's
operations, Cygne has agreed to make available for a three year period the
services of Mr. Bernard Manuel, the Company's Chief Executive Officer, and Mr.
Irving Benson, the Company's President. Cygne will make available up to 30% of
Messrs. Benson's and Manuel's time and will receive an aggregate fee of $450,000
per year. AnnTaylor has agreed to register the shares issued to Cygne for
resale, although Cygne will subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time.
CAT and the AnnTaylor Woven Division accounted for approximately 72% of the
Company's net sales of $83.8 million for the quarter ended May 4, 1996. CAT and
the AnnTaylor Woven Division had combined net sales of $60.5 million and
combined net income of $2.2 million for the quarter ended May 4, 1996.
Although Cygne has long-established relationships with its key customers, Cygne
does not have long-term contracts with any of its customers, including The
Limited, Inc. Upon the consummation of the AnnTaylor Disposition, the Company
anticipates that it will no longer have sales to AnnTaylor. The Company has been
dependent on its key customers and, with the loss of AnnTaylor as a customer,
its future success is dependent upon its ability to attract new customers. There
can be no assurance that The Limited, Inc. will continue to purchase merchandise
from the Company at the same rate in the future, or that the Company will be
able to attract new customers. In addition, as a result of the Company's
dependence on The Limited, Inc., particularly after the AnnTaylor Disposition,
The Limited, Inc. has the ability to exert significant control over the
Company's business decisions, including prices. Furthermore, The Limited, Inc.
procures directly a substantial portion, but not a majority, of its product
requirements through its sourcing subsidiary, and such subsidiary will continue
to be a major competitor of the Company with respect to the Company's business
with The Limited, Inc. In addition, the
19
Limited Stores, which is the Company's largest customer among the divisions of
The Limited, Inc., has formed an internal design and product development group
as well as added a direct souring department.
The apparel industry historically has been subject to substantial cyclical
variation, with purchases of apparel and related goods tending to decline during
necessary periods when disposable income is low. This could have a material
adverse effect on the Company's business. The Company believes that the weakness
of retail sales of women's apparel adversely affected its operating results, and
believes that its operating results will continue to be adversely affected as
long as this weakness continues. In addition, various retailers, including some
of Cygne's customers, have experienced financial difficulties during recent
years which have increased the risk of extending credit to such retailers.
RESULTS OF OPERATIONS
Financial Summary
Certain captions of the Condensed Consolidated Statements of Operations for the
three months ended May 4, 1996 and April 29, 1995 expressed as a percentage of
net sales are as follows:
THREE MONTHS ENDED
MAY APRIL
4, 1996 29, 1995
--------------------------
% OF NET % OF NET
SALES SALES
--------------------------
Net sales 100.0% 100.0%
Gross profit 12.8 8.7
Selling, general and administrative expenses 10.9 14.2
Amortization of intangibles 0.1 0.7
Net gain from sale of subsidiary - (3.7)
Bad debt expense - 0.8
Income (loss) from operations 1.8 (3.3)
Interest expense 1.1 1.6
Net income (loss) 0.0 (3.6)
20
Net Sales
Net sales for the first quarter of 1996 decreased 34.8% to $83.8 million from
$128.4 million for the comparable period in 1995. The $44.6 million decrease in
net sales for the first quarter of 1996 was primarily attributable to the sale
of the GJM business on February 9, 1996 ($15.4 million) and to discontinued
customers and product lines ($38.0 million), partially offset by an increase in
sales to AnnTaylor.
Net sales to AnnTaylor for the quarter ended May 4, 1996 amounted to $60.5
million, or 72% of the Company's net sales. Upon consummation of the AnnTaylor
Disposition, the Company anticipates that it will no longer have sales to
AnnTaylor.
Gross Profit
Gross profit for the first quarter of 1996 was $10.7 million, a decrease of
$400,000 or 3.7% from the comparable period in 1995. However, gross margin
(gross profit as a percentage of net sales) increased to 12.8% in the first
quarter of 1996 from 8.7% in the first quarter of 1995. Gross margin in the
first quarter of 1995 was adversely affected by low margins on sales to
discontinued customers. Certain of the Company's products inherently carry lower
gross margins than the woven products. The Company expects that gross profit as
a percentage of net sales will vary from quarter to quarter depending on the mix
of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 1996 were
$9.2 million, representing a decrease of $9.0 million or 49.6% over the first
quarter of 1995. As a percentage of net sales, selling general and
administrative expenses were 10.9% in the first quarter of 1996, compared to
14.2% in the comparable prior year period. The decrease in these expenses and as
a percentage of net sales were primarily attributable to reductions in the
Company's overhead as well as the disposition of the GJM business.
Bad Debt Expenses
Bad debt expense of $1.1 million in the first quarter of 1995 resulted from the
bankruptcy filing of a customer.
Amortization of Intangibles
The amortization of intangibles for the first quarter of 1996 was $91,000, a
decrease of $856,000 over the first quarter 1995. The decrease was primarily
attributable to the write offs subsequent to the first quarter of 1995 of
intangibles recorded in connection with the FWM Acquisition and the sale of the
GJM business.
21
Interest Expense
Interest expense for the first quarter of 1996 was $935,000, a decrease of $1.2
million or 55.7% over the comparable prior year period. The decrease in the
interest expense is primarily attributable to the reduction in anticipation
taken by customers and the sale of the GJM business.
Provision for Income Taxes
The provision for income taxes in the first quarter of 1996 primarily represents
tax on CAT's income. At February 3, 1996, the Company had net operating loss
carryforwards of approximately $84 million, which can be used to offset future
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
During the quarter ended October 28, 1995, Cygne and CAT each entered into a
Credit Agreement with the HS Bank, which modified and, in the case of Cygne, FWM
and GJM, consolidated the previous credit arrangement with the HS Bank. The
modifications included (i) the consolidation of the Cygne, FWM and GJM
facilities, previously aggregating up to $76,400,000, into one facility of up to
$70,000,000, (ii) an increase in the CAT facility from up to $28,000,000 to up
to $40,000,000, (iii) a requirement under each agreement to comply with certain
financial covenants as well as various other restrictions, (iv) an increase in
the Cygne facility interest rate, and (v) the elimination of the requirement to
maintain a certain certificate of deposit as additional security for the prior
separate GJM credit facility. Borrowings under these facilities, which may be
terminated by the HS Bank or the Company at any time as to future borrowings
upon proper notice, are subject to certain borrowing base limitations and the HS
Bank's agreement as to amount, purpose, interest rate, maturity and collateral.
Borrowings under these facilities are due on the earlier of demand or the
maturity date specified by the HS Bank for each borrowing. Amounts outstanding
under the Cygne agreement bear interest at 1.25% above the prime rate through
January 31, 1996 and between 1% and 1.75% above the prime rate thereafter
depending upon the working capital, as defined, of the Company, exclusive of
CAT. Amounts outstanding under the CAT agreement bear interest at 0.5% above the
prime rate. Each agreement provides for additional interest at 2% per annum on
amounts not paid when due. The HS Bank facilities are cross guaranteed by Cygne
and certain of its subsidiaries and are secured by a first lien on substantially
all the assets of the Company including a pledge of 65% of the capital stock of
certain of Cygne's foreign subsidiaries, except for C.A.T. (Far East) Limited as
to which 60% of the capital stock is pledged.
22
The following table sets forth information with respect to the HS Bank
facilities:
MAY 4, 1996
-------------------------------
DIRECT OPEN DIRECT
TOTAL BORROWING LETTERS BORROWINGS
FACILITY (1) LIMIT (2) OF CREDIT OUTSTANDING
----------------------------------------------------------------
(In thousands)
Cygne (3) $ 70,000 $ 50,000 $ 8,501 $ 21,149
CAT (4) 40,000 8,000 22,193 5,600
--------------------------------------------------------------
Total $ 110,000 $ 58,000 $ 30,694 $ 26,749
==============================================================
(1) The total facility, less any direct borrowings outstanding is available
for letters of credit.
(2) Consists principally of revolving loans and borrowings against
import/exports.
(3) The Limited, Inc. had guaranteed $10,000,000 of HS Bank facilities
through May 31, 1996.
(4) Cygne has guaranteed 60% of the indebtedness outstanding under this
facility and AnnTaylor, Inc., which owns 40% of CAT, has provided the HS
Bank with a $4,000,000 standby letter of credit.
On May 15, 1996, the Company received a commitment letter from HS Bank to
provide the Company with a new credit facility to replace the existing facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the AnnTaylor Disposition;
thereafter the facility reduces to $22.5 million and further reduces to $15
million at October 31, 1996; $10 million at November 30, 1996; $5 million at
December 31, 1996; and matures on January 31, 1997. Borrowings under this
facility are subject to borrowing base limitations. The Company is obligated to
pledge substantially all of its assets, including the AnnTaylor stock to be
received at the closing of the AnnTaylor Disposition. The credit facility is
subject to the completion of definitive documentation.
Certain foreign subsidiaries have credit facilities aggregating $2.4 million at
May 4, 1996. Borrowings under these facilities, which are payable on demand, are
secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two-third parties not affiliated with the Company, but
affiliated with each other, whereby these parties made available to the Company
a trade credit facility. The trade credit facility has been suspended. At May 4,
1996, $9.1 million of this facility was outstanding. The Company has reached an
agreement in principle to restructure the amounts outstanding under this trade
credit facility.
23
In addition, from time to time customers finance the purchase of raw materials
on behalf of the Company, and the Company anticipates that they will continue to
do so, although there can be no assurance of this.
Net cash used by operating activities for the first quarter of 1996 was $1
million. The cash used resulted primarily from decreases in accounts payable and
an increase in accounts receivable substantially offset by decreases in
inventory. Net additions to fixed assets aggregated approximately $161,000 for
the first quarter of 1996.
As discussed above, the financing of the Company's operations currently depends
primarily upon financing provided by the HS Bank, the Company's customers and to
a lesser extent, third party vendors. As a result of the Company not being in
compliance with financial covenants in its HS Bank credit facility and the
liquidity pressure faced by the Company, third party vendors have been less
willing to extend credit to the Company than in prior years. Although the HS
Bank has waived the default, there can be no assurance that such third party
vendors will continue to extend credit to the Company.
During 1995 and the first quarter of 1996, the Company experienced liquidity
pressures primarily as a result of the negative cash flow caused by the
Company's operating losses. The Company believes that its new credit facility
with the HS Bank and the proceeds from the AnnTaylor Disposition will alleviate
the liquidity pressures faced by the Company during 1995 and the first quarter
of 1996. However, there can be no assurance that the AnnTaylor Disposition will
occur or that the new credit facility will be implemented. If the AnnTaylor
Disposition does not occur or the new credit facility is not implemented the
Company will face the liquidity pressures previously experienced which would
adversely affect the Company's financial condition and results of operations.
TAXES
The Company is subject to 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 audits will not have a material adverse effect on the
Company's financial position.
24
PART II OTHER INFORMATION
Item 5. Other Information
On June 7, 1996, the Company entered into a definitive agreement with Ann Taylor
Stores Corporation regarding the previously announced sale to Ann Taylor of
Cygne's 60% interest in CAT, Cygne's sourcing joint venture arrangement with Ann
Taylor, and the assets of Cygne's Ann Taylor Woven Division that are used in
sourcing merchandise for Ann Taylor. The aggregate consideration to be paid to
Cygne in the transaction consists of unregistered shares of Ann Taylor common
stock having a market value of $36 million (based upon the market price of the
common stock for the ten trading days prior to closing, but in no event greater
than 2.5 million shares), and a cash payment in an amount equal to the tangible
net book value of the fixed assets of Cygne AnnTaylor Woven Division (but not to
exceed $2,646,000) plus the tangible net book value of the inventory of Cygne's
Ann Taylor Woven Division, less the amount of certain liabilities of the
Division to be assumed by Ann Taylor.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company's lenders, and the continuation of CAT's $40 million
credit facility. It is currently anticipated that the transaction will close in
August 1996, following approval by Cygne's stockholders. There can be no
assurance, however, that the conditions to the closing will be satisfied, that
the transaction will be consummated or, if consummated, that it will be
consummated within the currently anticipated time frame. In order to facilitate
the integration of CAT and Cygne's Ann Taylor Woven Division into Ann Taylor's
operations, Cygne has agreed to make available for a three year period the
services of Mr. Bernard Manuel, the Company's Chief Executive Officer, and Mr.
Irving Benson, the Company's President. Cygne will make available up to 30% of
Messrs. Benson's and Manuel's time and will receive an aggregate fee of $450,000
per year. Ann Taylor has agreed to register the shares issued to Cygne for
resale, although Cygne will be subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Stock and Asset Purchase Agreement by and between
Cygne Designs, Inc., Cygne Group (F.E.) Limited,
AnnTaylor Stores Corporation and Ann Taylor, Inc.
27 Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K
Current report on Form 8-K dated February 9, 1996
relating to the consummation of the disposition of the
Company's GJM Business.
Current report on Form 8-K dated April 8, 1996
relating to the agreement in principal with AnnTaylor
relating to the AnnTaylor Disposition.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYGNE DESIGNS, INC.
(Registrant)
June 18, 1996 By /s/BERNARD M. MANUEL
-------------------------------
Bernard M. Manuel, Chairman of the Board
and Chief Executive Officer
June 18, 1996 By /s/ROY E. GREEN
------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer