ITEM 1. BUSINESS
UNLESS OTHERWISE NOTED, ALL REFERENCES TO A YEAR REFER TO THE FISCAL YEAR OF THE COMPANY COMMENCING IN THAT CALENDAR YEAR AND ENDING ON THE SATURDAY NEAREST JANUARY 31 OF THE FOLLOWING YEAR. UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "COMPANY" OR "CYGNE" INCLUDES THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES AS THEN IN EXISTENCE. 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 BELOW.
GENERAL
Cygne Designs, Inc. (the "Company" or "Cygne") is a private label manufacturer of women's apparel, serving principally The Limited, Inc. The Company's products include women's woven career and casual apparel. As a private label manufacturer, the Company produces apparel upon orders from its customers for sale under the customers' own labels, rather than producing its own inventory of apparel for sale under the Cygne name. Effective October 31, 1999, the Company sold substantially all of the assets used in its Israel based private label Knit clothing manufacturing business ("Knit business"). Since the sale of the Knit business, the Company has contacted potential customers concerning the sale of Knit products under the customers' own labels. In addition, the Company has arrangements in place to produce Knit products in Guatemala and China. While the Company has no confirmed orders at this time, the Company expects that such orders will be forthcoming.
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. The Company believes that retailers, including customers of the Company, are increasingly sourcing private label products themselves rather than utilizing outside vendors like the Company.
The Company historically has been dependent on one or two key customers. A significant portion of the Company's sales currently are, and are expected to continue to be, to various divisions of The Limited, Inc. In 1999, sales to divisions of The Limited, Inc. were $25.0 million or 45% of total Company sales. If the sale of the Knit business had been consummated on January 31, 1999, sales to The Limited, Inc. would have been $22.9 million or 98% of the Company's proforma sales for 1999. There can be no assurance that The Limited, Inc. will continue to purchase merchandise from the Company in the future, or that the Company will be able to attract new customers. The Company believes that The Limited, Inc., like other retailers, is increasing its sourcing capabilities and reducing its reliance on outside vendors, including the Company, for these services.
The principal executive offices of the Company are located at 1410 Broadway, New York, New York 10018 and its telephone number is (212) 997-7767.
SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
On November 15, 1999, with an effective date of October 31, 1999, Cygne consummated the sale of its Knit business to Jordache Limited ("Jordache") pursuant to the Amended and Restated Acquisition Agreement dated as of August 1, 1999, by and among M.T.G.I.-Textiles Manufacturers Group (Israel) Ltd. ("MTGI"), MBS (Cygne) Company, A.C. Services Inc., all subsidiaries of Cygne, and Jordache Limited.
The assets transferred to Jordache consisted of substantially all of the assets used by the Knit business 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 the records of MTGI and network equipment, as well as all of the outstanding stock of Wear & Co. S.r.l. ("Wear"). MTGI was the Company's wholly-owned Israeli subsidiary and Wear was the Company's wholly-owned Italian subsidiary. The sale did not include cash, accounts receivable, and certain other assets of the MTGI business. The liabilities assigned to, and assumed by, Jordache are all obligations of MTGI under the contracts and registration included within the assets sold to Jordache.
In consideration of the sale to Jordache of the assets, Jordache paid to the Company cash 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 effective closing date of the sale of the business to Jordache which was October 31, 1999, 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 assumed liabilities described above, with all of the items subject to post closing adjustments. In addition, Jordache paid Cygne a commission of $600,000 on unfilled orders for products included in the assets and $400,000 for a non-compete agreement for a total of $4,694,000 before transaction costs. The Company has used the proceeds from the sale, and together with MTGI retained cash and collections of MTGI accounts receivable, to pay transaction costs, repay bank borrowings related to MTGI, and to pay other MTGI liabilities.
Effective August 1, 1999, in connection with the amended and restated acquisition agreement, Cygne entered into an agreement pursuant to which an affiliate of Jordache managed the Company's Knit business from August 1, 1999 to October 31, 1999, the effective closing date of the sale of the Knit business to Jordache. In addition Jordache also provided financing to the
Company in connection with certain knit product purchase orders being manufactured by MTGI during this period.
In connection with the Company's agreement to sell its Knit business, the Company recorded in 1999 a provision for impairment of Knit business assets in the amount of $1,625,000, consisting of a loss on assets to be sold, transaction costs (including loss of certain foreign tax incentives) and reduction of the purchase price by the adjusted income (as defined) of the Knit business from August 1, 1999 through the effective closing date of the sale of the business to Jordache which was October 31, 1999.
The Knit business had revenues of $25.9 million and $32.0 million and gross profit of $1.1 million and $1.5 million in 1998 and 1999 (through October 31, 1999), respectively. The Company recorded an impairment of Knit business assets of $2.6 million and $1.6 million in 1998 and 1999, respectively. During 1997, 1998, and 1999, the Knit business accounted for 67%, 60%, and 58%, respectively, of Cygne's net sales.
The Limited, Inc. (consisting primarily of The Limited Stores and Lerner) accounted for approximately 65%, 59%, and 45% of Cygne's net sales for 1997, 1998, and 1999, respectively. If the sale of the Knit business had been consummated on January 31, 1999, sales to The Limited, Inc. for fiscal 1999 would have accounted for 98% of the Company's proforma sales.
Mr. Manuel 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 stockholders.
The Company is continuing to review its business operations and expects to continue to incur additional costs in the future associated with the further restructuring or downsizing of its operations.
See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of Notes to Consolidated Financial Statements of the Company.
PRODUCTS
The Company currently participates in the women's woven and knit career and casual sportswear segments of the apparel market. During 1999 the Company's products in woven and knit career and casual sportswear included jackets, skirts and pants.
SOURCING, MANUFACTURING AND SALES
Cygne currently sources and manufactures garments for its customers which have been designed and developed by the customer.
Private label manufacturing usually operates on a tighter schedule than brand name manufacturing because goods are not manufactured until purchase orders are received and the Company's 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 1999 all of the Company's products were manufactured outside the United States, either by non-affiliated contract manufacturers or at the Company's sewing facility. The Company's contract manufacturers are located in several countries in the Far East, Middle East, and Central America. In addition, the Company owns and operates a manufacturing facility in Guatemala. During 1999 products representing approximately 2% of the Company's net sales were produced in the Far East, approximately 58% in the Middle East, and approximately 40% in Central America. If the sale of the Knit business had been consummated on January 31, 1999, approximately 47% of the Company's net sales resulted from products which were manufactured by Cygne in its sewing facility and approximately 53% resulted from products which were manufactured by non-affiliated contract manufacturers principally in Central America. Cygne intends to continue to utilize foreign contract manufacturers for a significant percentage of its manufacturing requirements. The Company reviews its product sourcing on an ongoing basis and may alter this allocation to meet changing conditions and demands. In connection with the sale of the Knit business, Cygne has agreed not to source products in Israel, Jordan, and the Palestinian territories prior to May 15, 2000.
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 the Company's business. In addition, the Company 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 the Company's results of operations and could have an adverse effect on the Company's relationships with its customers.
Furthermore, the occurrence of certain of these factors in the country in which Cygne owns a manufacturing facility could result in the impairment or loss of the Company's investment in this country. The loss of any one or more of its foreign contract manufacturers could have an adverse effect on the Company's business until alternative supply arrangements were secured.
The Company from time to time experiences 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 the Company experienced substantial rejections or cancellations by customers with respect to certain of its products. During 1998 and 1999, the Company continued to experience some rejections but to a far lesser extent than in years 1996 and 1997. The Company believes 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 faced by the Company. There can be no assurance that the Company will not continue to experience such difficulties in the future. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--General."
Cygne operates its own sewing factory in Guatemala. Operating a manufacturing facility rather than contracting with independent manufacturers requires the Company to maintain a higher level of working capital. In addition, reduced sales have an even greater adverse impact on the Company's results in light of the fixed costs needed to own and operate its own factory. Because the Company's manufacturing operation is located outside the U.S., the Company is subject to many of the same risks as relying on foreign contract manufacturers. See "Item 2.
ITEM 2. PROPERTIES
On March 1, 1999, the Company moved its executive and general offices from 1372 Broadway, New York to substantially smaller space at 680 Fifth Avenue, New York. During April 2000, the Company moved its executive and general offices to 1410 Broadway, New York. The Company's office now consists of 6,000 square feet pursuant to a lease which expires on April 30, 2001 with an annual rental expense of approximately $252,000.
In addition, on March 1, 1999, the Company 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 at this location.
During 1997, the Company had provided for lease termination expense of $4.0 million for the expenses connected with the move of its executive and general offices described above as well as an amount to be paid to landlord for release of its contingent rent liabilities. At January 30, 1999, the Company determined that the expenses contemplated by this provision would approximate $3.1 million. Therefore, $0.9 million of this provision is shown as a recoupment in 1998, and the remaining unused balance of $0.2 million of the original provision was reversed in 1999.
The Company owns a sewing facility in Guatemala that it believes is well maintained and in good operating condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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.
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., a wholly-owned subsidiary, 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 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 would have a material adverse impact on the Company and its financial condition, results of operations, or cash flows.
On October 31, 1999, the date of sale of the Company's Knit business, the Company's wholly-owned Israeli subsidiary, M.T.G.I.--Textile Manufacturers Group (Israel) Ltd. ("MTGI"), had its Israeli tax free status terminated retroactive to January 1, 1994. The Israeli Tax Authority ("Authority") is in the process of assessing the tax due by MTGI on account of the termination of MTGI's tax free status for the years ending December 31, 1994 through December 31, 1997. To date, the Authority has not issued a report detailing the MTGI tax assessment for this period. Although the Company 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 flows.
The Company is subject to other ongoing tax audits in several jurisdictions in the United States. 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, results of operations, or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on The Nasdaq National Market under the symbol "CYDS" until May 29, 1998. On that date, the Company's Common Stock was delisted from The Nasdaq National Market because the Company did not meet certain continued listing requirements of the Nasdaq National Market, including the maintenance of a minimum bid price of at least $1 per share. Cygne Common Stock is now quoted on the OTC Bulletin Board. There are no assurances that the OTC Bulletin Board will continue to give quotes on the Cygne Company Stock. The following table sets forth for the periods indicated the high and low reported sale prices per share for the Cygne Common Stock as reported by the OTC Bulletin Board.
High Low ---- ----- FISCAL YEAR ENDED JANUARY 30, 1999
First Quarter ........................................ $0.38 $0.22 Second Quarter ....................................... $0.25 $0.13 Third Quarter ........................................ $0.16 $0.06 Fourth Quarter ....................................... $0.17 $0.08
FISCAL YEAR ENDED JANUARY 29, 2000
First Quarter ........................................ $0.22 $0.08 Second Quarter ....................................... $0.23 $0.16 Third Quarter ........................................ $0.22 $0.13 Fourth Quarter ....................................... $0.38 $0.17
The number of stockholders of record of Common Stock on April 14, 2000 was approximately 96. The closing sale price of the Company's Common Stock on April 14, 2000 was $0.23 per share.
Cygne has never declared or paid a cash dividend on its Common Stock. The Company anticipates that all future earnings will be retained by the Company for the development of its business. Accordingly, Cygne does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions.
ITEM 7.
ITEM 7. 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.
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K CONCERNING THE COMPANY'S BUSINESS OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED RESULTS OF OPERATIONS, REVENUES, EXPENSES OR OTHER FINANCIAL ITEMS; PRIVATE LABEL AND BRAND NAME PRODUCTS, AND PLANS AND OBJECTIVES RELATED THERETO; AND STATEMENTS CONCERNING ASSUMPTIONS MADE OR EXPECTATIONS AS TO ANY FUTURE EVENTS, CONDITIONS, PERFORMANCE OR OTHER MATTERS, ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS. SUCH RISKS, UNCERTAINTIES AND FACTORS INCLUDE, BUT ARE NOT LIMITED TO, A DECLINE IN DEMAND FOR MERCHANDISE OFFERED BY THE COMPANY OR CHANGES AND DELAYS IN CUSTOMER DELIVERY PLANS AND SCHEDULES, SIGNIFICANT REGULATORY CHANGES, INCLUDING INCREASES IN THE RATE OF IMPORT DUTIES OR ADVERSE CHANGES IN EXPORT QUOTAS, DEPENDENCE ON A KEY CUSTOMER, RISK OF OPERATIONS AND SUPPLIERS IN FOREIGN COUNTRIES, COMPETITION, GENERAL ECONOMIC CONDITIONS, AS WELL AS OTHER RISKS DETAILED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
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 $44.5 million of goodwill in fiscal 1995.
On October 7, 1994, Cygne 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.
In February 1996, the Company sold the GJM Business to Warnaco. In the transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain liabilities of the GJM Business. The Company is obligated to indemnify Warnaco for any claims for taxes arising out of the operation of the GJM Business prior to the sale of the GJM Business to Warnaco. The Company used all the proceeds of the sale to repay outstanding senior bank indebtedness.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan corporation that sourced products in Brazil for export, primarily to the United States. 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. In January 1996, the Company determined to close TSA. As a result, the Company recorded a loss of approximately $6.4 million in fiscal 1995, primarily resulting from the write-off of goodwill associated with the acquisition. The Company terminated these operations during the third quarter of 1996.
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 the consolidated operating results since their respective dates of acquisition.
In June 1992, the Company and certain of its stockholders formed CAT, a joint venture arrangement with Ann Taylor to source products exclusively for Ann Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20% interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT increased to 40%. As a result of such change in ownership, Ann Taylor had, prior to the consummation of the Ann Taylor Disposition, a 40% interest in the net income of CAT, which interest was reflected in Cygne's consolidated statements of income as "income attributable to minority interests."
On September 20, 1996, the Company sold to Ann Taylor Cygne's 60% interest in CAT and the assets of Cygne's Ann Taylor Woven Division that were used in sourcing merchandise for Ann Taylor (the "Ann Taylor Disposition"). On the closing of the transaction, Cygne received 2,348,145 shares of Ann Taylor common stock, having a value of $36 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, the Company realized a pre-tax gain of $29.6 million. Between October 1996 and January 1997, the Company sold all of the 2,348,145 shares of Ann Taylor common stock received upon the closing of the transaction at various prices resulting in aggregate net proceeds of approximately $44.3 million. The Company realized a pre-tax gain of approximately $6.1 million as a result of the sale of the shares of Ann Taylor common stock, which is reflected in "Other income" in the Company's Consolidated Statements of Operations.
In June 1997 the Company terminated by mutual agreement the license agreements entered into during the summer of 1996 with the Kenzo Group for the manufacture and distribution in the United States, Canada and Mexico of the Kenzo Studio and Kenzo Jeans ready-to-wear apparel lines. In connection with the termination the Kenzo Group returned the $400,000 in pre-paid minimum royalty payments made on the signing of the license agreements and agreed to pay Cygne for certain raw materials related to the manufacture of Kenzo products.
On November 15, 1999, with an effective date of October 31, 1999, Cygne consummated the sale of its Knit business to Jordache Limited ("Jordache") pursuant to the Amended and Restated Acquisition Agreement dated as of August 1, 1999, by and among M.T.G.I.-Textiles Manufacturers Group (Israel) Ltd. ("MTGI"), MBS (Cygne) Company, A.C. Services Inc., all subsidiaries of Cygne, and Jordache Limited.
The assets transferred to Jordache consisted of substantially all of the assets used by the Knit business 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 the records of MTGI and network equipment, as well as all of the outstanding stock of Wear & Co. S.r.l. ("Wear"). MTGI was the Company's wholly-owned Israeli subsidiary and Wear was the Company's wholly-owned Italian subsidiary. The sale did not include cash, accounts receivable, and certain other assets of the MTGI business. The liabilities assigned to, and assumed by, Jordache are all obligations of MTGI under the contracts and registration included within the assets sold to Jordache.
In consideration of the sale to Jordache of the assets, Jordache paid to the Company cash 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 effective closing date of the sale of the business to Jordache which was October 31, 1999, 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
assumed liabilities described above, with all of the items subject to post closing adjustment. In addition, Jordache paid Cygne a commission of $600,000 on unfilled orders for products included in the assets and $400,000 for a non-compete agreement for a total of $4,694,000. The Company has used the proceeds from the sale, and together with MTGI retained cash and collections of MTGI accounts receivable, to pay transaction costs, repay bank borrowings related to MTGI, and to pay other MTGI liabilities.
Effective August 1, 1999, in connection with the amended and restated acquisition agreement, Cygne entered into an agreement pursuant to which an affiliate of Jordache managed the Company's Knit business from August 1, 1999 to October 31, 1999 the effective closing date of the sale of the Knit business to Jordache. In addition Jordache also provided financing to the Company in connection with certain knit product purchase orders being manufactured by MTGI during this period.
In connection with the Company's agreement to sell its Knit business, the Company recorded in 1999 provision for impairment of Knit business assets in the amount of $1,625,000, consisting of a loss on assets to be sold, transaction costs (including taxes) and reduction of the purchase price by the adjusted income (as defined) of the Knit business from August 1, 1999 through the effective closing date of the sale of the business to Jordache which was October 31, 1999.
If the sale of the Knit business had been consummated on January 31, 1999 (the first day of fiscal 1999), the Company would have had proforma net sales for 1999 of $23.4 million. Proforma gross profit for 1999 would have been $3.3 million. Proforma income from operations for 1999 would have been $258,000. The proforma net income would have been $254,000. The proforma net income per share would have been $0.02.
During 1997, 1998, and 1999 the Knit Business accounted for 67%, 60%, and 58%, respectively, of Cygne's net sales.
The Limited, Inc. (consisting primarily of The Limited Stores and Lerner) accounted for 65%, 59%, and 45% of Cygne's net sales for 1997, 1998, and 1999, respectively. If the sale of the Knit business had been consummated on January 31, 1999, sales to The Limited, Inc. for 1999 would have accounted for 98% of the proforma Company sales.
Although Cygne has a long established relationship with The Limited, Inc., its key customer, Cygne does not have long-term contracts with any of its customers, including The Limited, Inc. The Company has been dependent on its key customers and its future success will be dependent upon its ability to attract new customers and to maintain its relationship with The Limited, Inc.
There can be no assurance that The Limited, Inc. will continue to purchase merchandise from the Company at the same rate or at all in the future, or that the Company will be able to attract new customers. In addition, as a result of the Company's dependence on The Limited, Inc. The Limited, Inc. has the ability to exert significant control over the Company's business decisions, including prices. Furthermore, The Limited, Inc. procures directly a substantial portion of its apparel product requirements through its sourcing subsidiary, and such subsidiary will continue to be a major competitor of the Company with respect to the Company's business with The Limited, Inc. In addition, the apparel divisions of The Limited, Inc. have formed direct sourcing departments. In December 1997 a limited partnership controlled by The Limited, Inc. sold its 734,319 shares of Cygne stock to Mr. Manuel, the Company's Chairman and Chief Executive Officer. Upon the closing of the transaction, The Limited, Inc. did not own any shares of Cygne stock.
The Company is continuing to review its business operations and expects to incur additional costs in the future associated with the further restructuring or downsizing of its operations.
The apparel industry is highly competitive and historically has been subject to substantial cyclical variation, with purchases of apparel and related goods tending to decline during recessionary periods when disposable income is low. This could have a material adverse effect on the Company's business. Retailers, including customers of the Company, are increasingly sourcing private label products themselves rather than utilizing outside vendors like the Company.
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements of operations and expresses for the periods indicated certain income data as a percentage of net sales.
Percentage of Net Sales ------------------------------- Year ------------------------------- 1999 1998 1997 ------ ------ ------ Net sales .................................. 100.0% 100.0% 100.0% ===== ===== ===== Gross profit ............................... 8.6 0.6 0.7 Selling, general and administrative expenses ................................. 7.0 10.2 23.8 Provision for impairment of Knit business assets .......................... 2.9 6.0 -- (Recoupment) provision for lease termination expense ...................... (0.3) (2.1) 9.1 Amortization of intangibles ................ -- 0.8 0.8 ----- ----- ----- Loss from operations ....................... (1.0) (14.3) (33.0) Interest expense (income), net ............. 0.8 (0.2) (0.2) Provision for income taxes ................. 0.1 0.6 0.5 ----- ----- ----- Net (loss) ................................. (1.9%) (14.7%) (33.3%) ===== ===== =====
1999 COMPARED TO 1998
The Company sold its Knit business effective October 31, 1999. Accordingly, the Company's results of operations for 1999 only include the results of the Knit business through October 31, 1999, while the 1998 results of operations include the results of the Knit business for the entire year. As a result, a comparison of 1998 and 1999 results may not be meaningful to the extent effected by the sale of the Knit business.
NET SALES
Net sales for 1999 were $55.4 million, an increase of $12.4 million or 29% from $43.0 million for 1998. The increase in net sales for 1999 compared to 1998 was primarily attributable to an
increase in sales of the Woven division of $6.3 million and the Knit division of $6.1 million.
During 1999 and 1998, the Knit business accounted for 58% and 60%, respectively, of Cygne's net sales.
Woven division sales for 1999 were $23.4 million, an increase of $6.3 million or 37% from $17.1 million for 1998. The increase in Woven division sales to The Limited, Inc. for 1999 compared to the comparable period in 1998 of $6.9 million was partially offset by a decrease in sales to other customers. The Limited, Inc. accounted for 98% of the Woven division sales for 1999 compared to 94% in 1998.
Knit division sales for 1999 were $32.0 million, an increase of $6.1 million or 24% from $25.9 million in 1998. The increase in Knit division sales for 1999 compared to 1998 was primarily attributable to an increase in sales to its new customer, Wal-Mart, partially offset by the sale of the Knit division as of October 31, 1999, which had sales of $6.4 million in the fourth quarter of 1998.
GROSS PROFIT
The gross profit for 1999 was $4.7 million, an increase of $4.4 million from the gross profit of $0.3 million for 1998.
The Woven division had a gross profit for 1999 of $3.3 million compared to a gross loss of $0.8 million in 1998. The gross margin for 1999 was 14%. The gross profit increase for 1999 compared to 1998 was primarily due to its Central American operation earning a profit in 1999 compared to a significant loss in 1998.
The Knit division had a gross profit for 1999 of $1.5 million, an increase of $0.4 million or 36% increase from the gross profit of $1.1 million in 1998. The increase in the gross profit for 1999 was primarily attributable to a gross profit increase on higher sales than the prior comparable period, plus by the sale of the Knit division as of October 31, 1999 which had a gross loss of $0.7 million in the fourth quarter of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for 1999 were $3.9 million, a decrease of $0.5 million or 12% from $4.4 million in 1998. The decrease in expenses for 1999 compared to 1998 was attributed to a reduction of $0.9 million in corporate expenses, offset by an increase in the Woven division expenses of $0.5 million and Knit division expenses of $0.2 million, primarily as a result of the sale of the Knit division effective prior to the commencement of the fourth quarter of 1999.
The Woven division expenses for 1999 were $2.0 million, an increase of $0.2 million, or 33% from $1.5 million in 1998. The increase for 1999 compared to 1998 was attributable to increased staff to support the Woven division sales increase of $6.2 million from 1998.
The Knit division expenses for 1999 were $0.7 million, a decrease of $0.2 million compared to 1998. The decrease was primarily attributable to an increase in travel to service its new customer offset by the sale of the Knit division as of October 31, 1999, which had expenses of $0.3 million in the fourth quarter of 1998.
The corporate expenses for 1999 were $1.2 million, a decrease of $0.9 million, or 45% from $2.0 million in 1998. The decrease for 1999 was primarily attributable to the termination of most of the corporate staff in 1998.
INTEREST
Net interest expense for 1999 was $408,000 as compared to net interest income of $91,000 in 1998. The increase in interest expense for 1999 compared to 1998 was primarily attributable to increased borrowings used to fund the Knit division's operation.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the amended and restated acquisition agreement to sell its Knit business, the Company recorded in 1999 a provision for impairment of Knit business assets in the amount of $1.6 million, which consists of a loss on assets to be sold, transaction costs (including loss of certain foreign tax incentives), and a reduction of the purchase price by the adjusted net income (as defined) of the Knit business from August 1, 1999 through October 31, 1999.
In March 1999, the Company agreed to sell the Knit business. In connection with the sale, during 1998, the Company established a provision of $2.6 million for the impairment of the Knit business assets. The provision included the unamortized goodwill of the Knit business ($1.7 million), loss on assets to be sold and estimated transaction costs.
(RECOUPMENT) FOR LEASE TERMINATION EXPENSE
In 1998, the Company recouped $902,000 of its 1997 provision for lease termination expense. In 1999, the Company recouped the remaining unused balance of $186,000.
PROVISION FOR INCOME TAXES
The provision for income taxes for 1999 represents provision for minimum state income taxes and taxes payable to foreign countries for income earned in foreign countries. As of January 29, 2000, based upon tax returns filed and to be filed for the fiscal year ended January 29, 2000, the Company reported a net operating loss carryforward for U.S. Federal income tax purposes of approximately $114,000,000. If unused, these loss carryforwards will expire in the Company's taxable years ending 2011 through 2015. 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 29, 2000, based upon tax returns filed and to be filed for the fiscal year ended January 29, 2000, the Company reported net operating loss carryforwards for New York State and City tax purposes (on a separate company basis) of approximately $74,800,000. If unused, these loss carryforwards will expire in the Company's taxable years ending in 2011 through 2014.
1998 COMPARED TO 1997
NET SALES
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.
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
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 the Company's 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 the Company occurred.
The Kenzo division in 1997 had SG&A expenses of $2.9 million.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In March 1999 the Company agreed to sell the Knit business. In connection with the sale, during 1998 the Company 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, and estimated transaction costs. The provision excludes the Knit group 1999 results of operations.
(RECOUPMENT) 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 Company determined that the expenses contemplated by this provision would approximate $3,063,000. Therefore, $902,000 of this provision is shown as a recoupment in 1998, and the remaining unused balance of the $186,000 of the original provision was reversed in 1999.
INTEREST
Net interest income for 1998 was $91,000 compared to net interest income of $83,000 in 1997. Net 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 decreases in net interest income for 1998 compared to 1997 was primarily attributable to a reduction in the Company's cash balance which was used to fund the Company's losses.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1998 primarily represents provision for minimum state income taxes and taxes payable to foreign countries for income earned in the foreign countries. At January 30, 1999, the Company had net operating loss carryforwards of approximately $108 million, which may be used to offset future United States taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company had historically financed its operations primarily through financing from lending institutions, financing from customers and third party trade credit facilities, cash from operations and the issuance of debt and equity securities.
The Company received proceeds of approximately $4.7 million before transaction costs, subject to post closing adjustments, from the consummation of the sale of the Knit business. In addition, the retained cash and accounts receivable and certain other assets of the Knit business aggregated approximately $4.5 million at October 30, 1999. The Company has used the cash proceeds from the sale, the collection of MTGI's accounts receivable to pay the transaction costs (including loss of certain foreign tax incentives) related to the sale, repay bank borrowings related to MTGI, and to pay other MTGI liabilities. The excess cash received from the transaction will be used for general working capital purposes.
Since February 1, 1997, the Company has not had a domestic credit facility. Since the expiration of its prior bank domestic credit facility, Cygne has obtained letters of credit issued from domestic banks secured by a cash deposit from the Company. At January 29, 2000 the Company had
restricted cash at banks of $0.7 million as collateral for letters of credit.
The Company had a credit facility with an Israeli bank to finance the Knit operations. On November 4, 1999, the outstanding balance under this facility was repaid and the facility was terminated.
Net cash provided by operating activities was $3.5 million in 1999 compared to net cash used in operating activities of $8.4 million in 1998. The increase in net cash provided by operating activities was primarily the result of $5.3 million decrease in net loss, $7.2 million decrease in working capital requirements, offset by a decrease of $0.6 million non-cash provisions.
The Company's financial performance for 2000 will depend upon a variety of factors, including the amount of sales to The Limited, Inc. If the Company has significant operating losses or adverse decisions in either its federal tax audit of GJM (US) Inc. or the Israeli tax assessment of MTGI, which required the Company to pay significant amounts of tax, the Company will face severe liquidity pressures in 2000 which would adversely affect the Company's financial condition and results of operations. The Company is continuing to review its business operations and could incur additional costs in the future associated with the restructuring or downsizing of its operations.
INFLATION
The Company does not believe that the relatively moderate rates of inflation which have been experienced in the U.S., where it competes, have had a significant effect on its net sales or profitability.
FOREIGN CURRENCY EXCHANGE
The Company negotiates substantially all its purchase orders with its foreign manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in foreign currencies, the Company's 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. The Company believes it would be able to compensate for any such price increase.
IMPACT OF THE YEAR 2000
The Year 2000 problem (the "Year 2000 Problem" or "Year 2000") was to have resulted from competer programs and devices that did not differentiate between the year 1900 and the year 2000 because they were written using two digits rather than four to define the applicable year; accordingly,
computer systems that have time-sensitive calculations potentially would not properly recognize the year 2000. This could have resulted in system failures or miscalculations causing disruptions of the Company's operation, including, without limitation, manufacturing, distribution, and other business activities. The Year 2000 Problem potentially affected substantially all of Cygne's business activities. The Company believes that as a result of its Year 2000 remediation and planning programs, the Year 2000 Problem has not, as of April 20, 2000, had a material adverse effect on the operations or financial results of the Company. As of January 29, 2000, the Company estimates that it had incurred approximately $20,000 in its Year 2000 efforts, including, without limitation, outside consulting fees and computer systems upgrades but excluding internal staff costs, all of which has been expensed. It is possible that Cygne will experience Year 2000 related problems in the future, particularly with its non-business critical systems, which may result in failures of miscalculations resulting in inacuracies in computer output or disruptions of operations. However, Cygne believes that the Year 2000 Problem will not pose significant operational problems for its business critical computer systems and equipment. The financial impact of future remediation actuvities that may becaome necessary, if any, cannot be known precisely at this time, but it is not expected to be material.
QUARTERLY OPERATING RESULTS
The following table sets forth selected unaudited quarterly financial data for the most recent eight quarters. The quarterly financial data reflects, in the opinion of the Company, 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.
- ----------
(1) Includes recoupment of lease termination expense provisions of $186,000.
(2) Includes recoupment of lease termination expense provisions of $902,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The section entitled "Proposal No. 2 -- Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.
Executive Officers
See PART I -- Executive Officers of the Registrant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) See "Index to Consolidated Financial Statements and Financial Statement Schedule" on page.
(3) Exhibits
Certain exhibits presented below contain information that has been granted subject to a request for confidential treatment Such information has been omitted from the exhibit. Exhibit Nos. 10.2, 10.3, 10.4, 10.5, 10.6, 10.8, 10.9, 10.23, 10.28 and 10.30 are management contracts, compensatory plans or arrangements.
Exhibit No. Description ----------- --------------- 2.1 Amended and Restated Acquisition Agreement, dated as of August 1, 1999 by and among M.T.G.I. - Textile Manufacturers Group (Israel), Limited, MBS Company, AC Services Inc. and Jordache Limited. *(10)
3.1 Restated Certificate of Incorporation, as amended by Certificate of Amendment filed August 5, 1994 with the Secretary of State of the State of Delaware.*(1)
3.2 By-laws.*(2)
4 Specimen Stock Certificate.*(2)
10.1 Agreement, dated as of April 30, 1993, among the Company, Bernard Manuel, Irving Benson, CIL, Belton Limited and certain other parties.*(2)
10.2 Amended and Restated Employment Agreement, dated as of January 1, 1995, between the Company and Bernard M. Manuel.*(7)
10.3 Consulting and Severance Agreement dated as of November 27, 1996 between the Company and Irving Benson.*(8)
10.4 Employment Agreement, dated as of May 1, 1993, between the Company and Roy Green.*(2)
10.5 Employment Agreement, dated as of May 1, 1993, between the Company and Gary Smith.*(2)
10.6 Consulting Agreement, dated as of September 20, 1996, between AnnTaylor Stores Corporation, AnnTaylor, Inc., Cygne Designs, Inc. and Mr. Bernard M. Manuel.*(8)
10.7 Consulting Agreement, dated as of September 20, 1996, between AnnTaylor Stores Corporation, AnnTaylor, Inc., Cygne Designs, Inc. and Mr. Irving Benson.*(8)
10.8 Employment Agreement, dated April 4, 1994, between the Company and Paul D. Baiocchi.*(3)
10.9 Employment Agreement, dated as of April 7, 1994, among the Company, Fenn, Wright and Manson, Incorporated, and Trevor J. Wright.*(3)
10.10 Purchase Agreement, dated as of October 7, 1994, by and among Cygne Designs, Inc., G.J.M. Manufacturing Limited, G.J.M. Purchasing Limited, G.J.M. Sales Limited, G.J.M. (Sales), Inc. and G.J.M. International Limited.*(6)
10.11 Registration Rights Agreement, dated as of April 6, 1994, between the Company and Fenn Wright and Manson (Antilles) N.V.*(3)
10.12 Agreement, dated as of March 24, 1995, by and among Cygne Designs, Inc., Fenn Wright and Manson (Antilles) N.V., Fenn, Wright and Manson Incorporated and Colin Fenn.*(7)
10.13 Financing Contract in Value with Personal Mortgage Guarantees, dated January 21, 1994.*(3)
10.14 Agreement, dated as of September 30, 1993, among Jonathan Kafri, Simona Kafri, Cygne Designs F.E. Limited, T. Wear Company S.r.l. and Cygne Designs, Inc.*(4)
10.15 Agreement, dated as of September 30, 1993, among Lancaster Enterprises Limited, Jonathan Kafri, Simona Kafri, Cygne Designs F.E. Limited, M.T.G.I. - Textile Manufacturers Group (Israel) Limited, Cygne TW Inc. and Cygne Designs, Inc.*(4)
10.16 Stock and Asset Purchase Agreement, dated as of June 7, 1996, as amended as of August 27, 1996, by and between Cygne Designs, Inc., Cygne Group (F.E.) Limited, AnnTaylor Stores Corporation and AnnTaylor, Inc.*(9)
10.17 License Agreement, dated as of July 26, 1996, by and between Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO STUDIO license.*(9)
10.18 License Agreement, dated as of July 26, 1996, by and between Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO JEANS license.*(9)
10.19 Form of Indemnification Agreement.*(2)
10.20 Assumption Agreement, dated October 7, 1994, by and between G.J.M. International Limited and Cygne Designs, Inc.*(5)
10.21 Registration Rights Agreement, dated as of October 7, 1994, by and between Cygne Designs, Inc. and G.J.M. International Limited.*(5)
10.22 Amendment No. 1 to the Registration Rights Agreement, dated as of October 6, 1994, amending the registration rights agreement, dated as
of July 29, 1993 between Cygne Designs, Inc. and Limited Direct Associates, L.P.*(5)
10.23 Employment Agreement, dated as of February 3, 1997, between the Company and Jonathan Kafri.
10.24 Agreement of Lease, dated August 7, 1991, between the Company and Nineteen New York Properties Limited Partnership, as amended by the First Amendment of Lease, dated as of January 1, 1993.*(2)
10.25 Second Amendment of Lease, dated May 31, 1993, between Nineteen New York Properties Limited Partnership and the
Company.*(2)
10.26 Third Amendment of Lease, dated as of December 1, 1993, between Nineteen New York Properties Limited Partnership and the Company.*(3)
10.27 Amended and Restated Credit Agreement, dated as of September 20, 1996, by and between Cygne Designs, Inc. and The Hongkong and Shanghai Banking Corporation Limited.*(8)
10.28 1993 Stock Option Plan, as amended, through June 28, 1994.*(1)
10.29 Form of Stock Option Agreement.*(2)
10.30 Stock Option Plan for Non-Employee Directors.*(2)
10.31 Memorandum of Understanding, dated as of June 1, 1993, among the Company, Cygne Knits Limited, T. Wear Company S.r.l. and certain other parties.*(2)
10.32 Management Agreement, dated August 1, 1999, by and between M.T.G.I.-Textile Manufacturers Group (Israel) Ltd., MBS (Cygne) Company, A.C. Services, Inc., and Jordache Limited
10.33 Letter Agreement, dated as of August 1, 1999, between Sportswear International (USA), Inc. And Jordache Limited, as amended *(10)
10.34 Lease between the Company and L.H. Charney Associates, L.P.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only).
- ----------
* Previously filed with the Commission as Exhibits to, and incorporated herein by reference from, the following documents:
(1) Company's Quarterly Report on Form 10-Q for the quarter ended July 30, 1994.
(2) Company's Registration Statement on Form S-1 (Registration No. 33-64358).
(3) Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
(4) Company's Quarterly Report on Form 10-Q for the quarter ended October 30, 1993.
(5) Company's Quarterly Report on Form 10-Q for the quarter ended October 29, 1994.
(6) Company's Current Report on Form 8-K dated October 7, 1994.
(7) Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
(8) Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996.
(9) Company's Quarterly Report on Form 10-Q for the quarter ended August 3, 1996.
(10) Company's Quarterly Report on Form 10Q for the quarter ended July 31, 1999.
Exhibits have been included in copies of this Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibits upon written request to the Company.
(b) Reports on Form 8-K
November 15, 1999 report announcing that Cygne Designs, Inc. had consummated the sale of its Knit business to Jordache Limited.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedule
See "Index to Consolidated Financial Statements and Supplemental Schedule" appearing on. Schedules not included herein are omitted because they are not applicable or the required information appears in the Consolidated Financial Statement or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYGNE DESIGNS, INC. (Registrant)
By: /s/ BERNARD M. MANUEL ---------------------------------- Bernard M. Manuel (Chairman and Chief Executive Officer)
Date: April 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ BERNARD M. MANUEL Chairman of the Board of Directors, April 26, 2000 - ---------------------- Chief Executive Officer and Director Bernard M. Manuel (principal executive officer)
/s/ ROY E. GREEN Senior Vice President, Chief April 26, 2000 - ---------------------- Financial Officer, and Treasurer Roy E. Green (principal financial and accounting officer) and Secretary
/s/ JAMES G. GRONINGER Director April 26, 2000 - ---------------------- James G. Groninger
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page - ----
Consolidated Financial Statements Report of Independent Auditors ........................................ Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999 ................................................. Consolidated Statements of Operations for Each of the Three Years in the Period Ended January 29, 2000 .......................... Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended January 29, 2000 .... Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended January 29, 2000 ................................ Notes to Consolidated Financial Statements ............................ Schedule Schedule II--Valuation and Qualifying Accounts ........................
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 29, 2000 and January 30, 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. 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 29, 2000 and January 30, 1999 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 29, 2000, in conformity with accounting principles generally accepted in the United States. 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 April 7, 2000
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY JANUARY 29, 2000 30, 1999 ---------- ---------- (In thousands, except share and per share amounts)
ASSETS Current assets: Cash (includes restricted cash of $722 and $669, respectively)..................................... $ 7,020 $ 3,686 Trade accounts receivable, net .................... 1,853 8,242 Inventory ......................................... 2,421 2,705 Assets held for sale .............................. -- 4,700 Other receivables and prepaid expenses ............ 402 996 ------- ------- Total current assets ........................ 11,696 20,329 Fixed assets, net ..................................... 2,472 2,720 Other assets .......................................... 600 550 ------- ------- Total assets ................................ $14,768 $23,599 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings .............................. $ -- $ 2,754 Accounts payable ................................... 1,200 4,579 Accrued expenses ................................... 2,448 4,140 Income taxes payable ............................... 5,977 6,080 ------- ------- Total current liabilities ................... 9,625 17,553 Stockholders' equity: Preferred Stock, $0.01 par value; 1,000,000 shares authorized: none issued and outstanding ... -- -- Common Stock, $0.01 par value; 25,000,000 shares authorized: 12,438,038 shares issued and outstanding ....................................... 124 124 Paid-in capital ..................................... 120,918 120,918 Accumulated deficit ................................. (115,899) (114,872) Foreign currency translation adjustment ............. -- (124) ------- ------- Total stockholders' equity .................. 5,143 6,046 ------- ------- Total liabilities and stockholders' equity .. $14,768 $23,599 ======= =======
SEE ACCOMPANYING NOTES.
CYGNE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
January January January 29, 2000 30, 1999 31, 1998 --------- --------- --------- ($ in thousands except per share amounts)
Net sales ................................ $55,398 $43,013 $43,379 Cost of goods sold ....................... 50,657 42,753 43,063 ------- ------- -------- Gross profit ............................. 4,741 260 316 Selling, general and administrative expenses ................................ 3,874 4,381 10,331 Provision for impairment of Knit business assets ......................... 1,625 2,564 -- (Recoupment) provision for lease termination expenses .................... (186) (902) 3,964 Amortization of intangibles .............. -- 364 364 ------- ------- -------- Loss from operations ..................... (572) (6,147) (14,343) Interest income .......................... (122) (428) (461) Interest expense ......................... 530 337 378 ------- ------- -------- Loss before income taxes ................. (980) (6,056) (14,260) Provision for income taxes ............... 47 269 204 ------- ------- -------- Net loss ................................. ($1,027) ($6,325) ($14,464) ======= ======= ======== Net loss per share -- basic .............. $(0.08) $(0.51) $ (1.16) ======= ======= ======== Weighted average number of common shares outstanding ....................... 12,438 12,438 12,438 ======= ======= ======== Net loss per share assuming dilution ..... $(0.08) $(0.51) $ (1.16) ======= ======= ======== Weighted average number of common shares and dilutive securities .......... 12,438 12,438 12,438 ======= ======= ========
SEE ACCOMPANYING NOTES.
SEE ACCOMPANYING NOTES
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE ACCOMPANYING NOTES
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the "Company") are engaged in private label manufacturing of women's woven career and casual apparel.
Since the sale of the Israel-based Knit business, the Company has contacted potential customers concerning the sale of Knit products under the customers' own labels. In addition, the Company has arrangements in place to produce Knit products in Guatemala and China. While the Company has no confirmed orders at this time, the Company expects that such orders will be forthcoming. Therefore, the Company has not recorded the Knit business as a discontinued operation.
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.
CASH EQUIVALENTS
The Company considers all highly-liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. Restricted cash represents cash committments under ceratin letters of credit.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out basis) or market.
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 $212,000 and $102,000 at January 29, 2000 and January 30, 1999, respectively.
FOREIGN CURRENCY TRANSLATION
As of January 29, 2000, the functional currency for the Company's foreign operations is the U.S. Dollar. In prior years, the functional currency for certain of the Company's foreign operations was the applicable foreign currency of the country in which it operated. 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.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term debt approximates fair value.
NET LOSS PER SHARE
The Company computes net 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 29, 2000, 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.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill included the excess of cost over fair value of net assets acquired.
In 1998, management, as a result of the proposed sale of the Knit business, 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. DISPOSITION OF COMPANIES
On November 15, 1999, the Company consummated the sale of its Knit business to Jordache Limited ("Jordache").The assets transfered to Jordache consisted of substantially all of the assets used by the Knit business 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 the records of MTGI and network equipment, as well as all of the outstanding stock of Wear & Co. S.r.l. ("Wear"). MTGI was the Company's wholly-owned Israeli subsidiary and Wear was the Company's wholly-owned Italian subsidiary. The sale did not include cash, accounts receivable and certain other assets of the MTGI business. The liabilities assigned to, and assumed by, Jordache are all obligations of MTGI under the contracts and registration included within the assets sold to Jordache. Jordache provided financing to the Company in connection with certain knit product purchase orders being manufactured by MTGI prior to the closing.
In consideration of the sale to Jordache of the assets, Jordache paid the Company approximately $4.7 million before transaction costs. The Company has used the proceeds from the sale together with MTGI retained cash and collections of MTGI accounts receivable to pay transaction costs, repay MTGI bank borrowings, and to pay other MTGI liabilities.
In connection with the Company's agreement to sell its Knit business, the Company recorded on the 1999 consolidated statements of operations a provision of impairment of Knit business assets in the amount of $1,625,000.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. (RECOUPMENT) 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 it sublet. The actual expenses in connection with this lease termination approximated $2,876,000. Therefore, $902,000 of this provision was reversed in 1998, and the remaining unused balance of $186,000 of the original provision was reversed in 1999.
4. INVENTORY
Inventory consists of the following:
JANUARY January 29, 2000 30, 1999(1) --------- ------------ ($ IN THOUSANDS)
Raw materials and Work-in-Process .......... $2,186 $2,310 Finished goods ............................. 235 395 ------ ------ $2,421 $2,705 ====== ======
(1) Excludes $3,426,000 of inventory of the Knit business classified as assets held for sale.
5. FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization and are summarized below together with estimated useful lives used in computing depreciation and amortization:
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY JANUARY ESTIMATED 29, 2000 30, 1999(1) USEFUL LIVES -------- ----------- ------------ ($ IN THOUSANDS)
Land and building ................ $ 902 $ 902 30 years
Equipment, furniture, and fixtures ........................ 2,069 1,999 2-10 years
Leasehold improvements ........... 924 924 Term of lease Vehicles ......................... 78 78 5 years ------ ------ 3,973 3,903
Less accumulated depreciation and amortization ................ 1,501 1,183 ------ ------ $2,472 $2,720 ====== ======
(1) Excludes $842,000 of net fixed assets of the Knit business classified as assets held for sale.
6. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash deposit from the Company. At January 29, 2000 and January 30, 1999 the Company had restricted cash at a bank of $722,000 and $669,000, respectively, to secure letters of credit.
The Company had a credit facility with an Israeli bank to finance the Knit operations. On November 4, 1999, the outstanding balance under this facility was repaid and the facility terminated.
7. 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 of the Board of Directors.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
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 sale of the Knit business constituted a "change in control of the Company" for purposes of the Company's stock option plans. As a result, all 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 the year ended January 29, 2000 the Company's net loss and net loss per share would have increased by $1,680 or $0.00 per share. For 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.
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 1999, 1998, and 1997: risk-free interest rate of 5%; volatility factor of the expected market price of the Company's common stock of 1.69 for January 29, 2000, 1.527 for January 30, 1999, and 0.76 for January 31, 1998; 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 1999, 1998, and 1997 may not be indicative of future years.
The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1999, 1998 and 1997 is $0.15, $0.28 and $0.34, respectively. Exercise prices for options issued between February 1, 1997 through January 29, 2000 ranged from $0.12 to $23.50. The weighted-average remaining contractual life of those options is 3.1 years.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONCENTRATIONS OF RISK
For years 1999, 1998, and 1997, sales to The Limited, Inc. accounted for 45%, 59%, and 65%, respectively, of the Company's net sales. For years 1999, 1998, and 1997, excluding sales of the Knit division, sales to The Limited Inc. accounted for 98%, 94%, and 68%, respectively, of the Company's net sales. At January 29, 2000 and January 30, 1999, The Limited, Inc. accounted for 82% and 56%, respectively, of trade accounts receivable. At January 29, 2000 and January 30, 1999, excluding the Knit division, The Limited Inc. accounted for 82% and 100%, respectively, of trade accounts receivable.
9. LEASES, COMMITMENTS AND LITIGATION
LEASES
At January 29, 2000, the Company's lease commitment was $75,000 through April 30, 2000. Effective May 1, 2000, the Company entered into a new lease with a lease commitment through April 30, 2001 of $252,000.
Total rent expense under the operating leases for the years ended January 29, 2000, January 30, 1999, and January 31, 1998, amounted to approximately $355,000, $968,000 and $1,036,000, respectively.
COMMITMENTS
The Company has employment agreements with certain officers and key employees through 2001. Future minimum aggregate annual payments under these agreements amount to approximately $827,000 in 2000 and $208,000 in 2001. 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 $500,000 in connection with this lawsuit.
The Company is involved in various legal proceedings that are incidental to the conduct of its business, none of which the Company believes could reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations or cash flows. See Note 10 for information regarding tax audits.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
Income taxes are provided using the liability method. Under this method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. Significant components of the Company's deferred tax assets are as follows:
YEAR ENDED ---------------------------- JANUARY January 29, 2000 30, 1999 ---------- --------- ($ IN THOUSANDS)
Deferred tax assets: Net operating loss carryforwards ...... $44,000 $42,000 ------- ------- Valuation allowance ................... (44,000) (42,000) ======= ======= Total deferred tax assets ................. $0 $0 == ==
For financial reporting purposes, income before income taxes includes the following components:
YEAR ENDED ------------------------------------------ JANUARY JANUARY JANUARY 29, 2000 30, 1999 31, 1998 -------- -------- --------- ($ IN THOUSANDS) Pretax income (loss): United States ............ $2,468 $(3,555) $(13,901) Foreign .................. (3,448) (2,501) (359) ------ ------- -------- $(980) $(6,056) $(14,260) ====== ======= ========
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows:
YEAR ENDED ---------------------------------------- JANUARY JANUARY JANUARY 29, 2000 30, 1999 31, 1998 -------- --------- --------- ($ IN THOUSANDS)
Current:
Federal ............... $ -- $ -- $ --
Foreign ............... 17 182 --
State and local ....... 30 87 204 ------ ------- ------
Total ..................... $ 47 $ 269 $ 204 ====== ======= ======
The reconciliation of income tax at the U.S. federal statutory tax rates to income tax expense is as follows:
As of January 29, 2000, 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 $114,000,000. If unused, these loss carryforwards will expire in the Company's taxable years ending in 2011 through 2015. 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.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of January 29, 2000, 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 $75,000,000. 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., a wholly-owned subsidiary, 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 predicted at this time. Although the Company is disputing the proposed adjustment, and believes that it has established appropriate reserves with respect to this matter, an adverse decision in this matter would have a material adverse impact on the Company and its financial condition, results of operations or cash loss.
On October 31, 1999, the date of sale of the Company's Knit business, the Company's wholly-owned Israeli subsidiary, M.T.G.I.--Textile Manufacturers Group (Israel) Ltd. ("MTGI"), had its Israeli tax free status terminated retroactive to January 1, 1994. The Israeli Tax Authority ("Authority") is in the process of assessing the tax due by MTGI on account of the termination of MTGI's tax free status for years ending December 31, 1994 through December 31, 1997. To date, the Authority has not issued a report detailing the MTGI tax assessment for this period. Although the Company 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 flow.
The Company is subject to other ongoing tax audits in several jurisdictions. Although there can be no assurances, the Company believes any adjustments that may arise as a result of these other audits will not have a material adverse effect on the Company's financial position.
11. 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. The Company sold its Knit business on November 15, 1999, effective as of October 31, 1999 (see Note 2).
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net sales to unaffiliated customers and identifiable assets were as follows:
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEF IT PLANS
The Company does not provide any post employment or post retirement b enefits to its current or former employees. The Company implemented a 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.
13. RELATED PARTY TRANSACTIONS
During 1997, a company controlled by a shareholder paid the Company $292,000 for design fees and commissions.