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 November 3, 2001
or
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to__________________
Commission File No. 0-22102
CYGNE DESIGNS, INC.
DELAWARE 04-2843286
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1410 BROADWAY, NEW YORK, NEW YORK 10018
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 997-7767
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.01 par value, 12,438,038 shares as of December 14, 2001.
1
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at November 3, 2001 and February 3, 2001 ..... 3
Consolidated Statements of Operations for the
three and nine months ended November 3, 2001 and October 28, 2000 ..... 4
Consolidated Statements of Stockholders' Equity for the
nine months ended November 3, 2001..................................... 5
Consolidated Statements of Cash Flows for the
nine months ended November 3, 2001, and October 28, 2000............... 6
Notes to Consolidated Financial Statements................................ 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 14
ITEM 6. Exhibits and Reports on Form 8-K................................. 14
2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
November February
3, 2001 3, 2001
----------- ----------
(In thousands, except
share and per share amounts)
ASSETS
Current assets:
Cash ............................................. $ 2,299 $ 2,378
Trade accounts receivable, net ................. 4,615 3,633
Inventory ...................................... 4,425 5,225
Other receivables and prepaid expenses ......... 1,015 453
--------- ---------
Total current assets ............................. 12,354 11,689
Fixed assets, net ................................ 2,309 2,255
Goodwill and other intangibles, net .............. 625 --
Other assets (includes restricted cash of $465
and $1,000, at November 3, 2001 and
February 3, 2001, respectively) ................ 517 1,042
--------- ---------
Total assets ..................................... $ 15,805 $ 14,986
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ............................... $ 2,355 $ 2,108
Accrued expenses ............................... 2,423 2,004
Income taxes payable ........................... 5,550 5,542
--------- ---------
Total current liabilities ........................ 10,328 9,654
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 ............................ (115,565) (115,710)
--------- ---------
Total stockholders' equity ....................... 5,477 5,332
--------- ---------
Total liabilities and stockholders' equity ....... $ 15,805 $ 14,986
========= =========
See accompanying notes
3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
------------------------ -----------------
November October November October
3, 2001 28, 2000 3, 2001 28, 2000
--------- -------- -------- --------
(In thousands, except per share amounts)
Net sales .......................................... $ 11,810 $ 8,350 $ 31,270 $ 20,238
Cost of goods sold ................................. 10,587 7,448 27,424 17,766
-------- -------- -------- --------
Gross profit ....................................... 1,223 902 3,846 2,472
Selling, general, and administrative expenses ...... 1,040 823 3,428 2,347
Amortization of goodwill and other intangibles ..... 47 -- 75 --
-------- -------- -------- --------
Income from operations ............................. 136 79 343 125
Interest income .................................... -- 58 33 161
Interest expense ................................... (118) (14) (207) (46)
-------- -------- -------- --------
Income before income taxes ......................... 18 123 169 240
Provision for income taxes ......................... 5 5 24 15
-------- -------- -------- --------
Net income ......................................... $ 13 $ 118 $ 145 $ 225
======== ======== ======== ========
Net income per share - basic and dilutive .......... $ 0.00 $ 0.01 $ 0.01 $ 0.02
======== ======== ======== ========
Weighted average number of common shares outstanding 12,438 12,438 12,438 12,438
======== ======== ======== ========
See accompanying notes
4
Cygne Designs, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
Common Stock
------------------
Number
of Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ --------- ---------- ------------ --------
(In thousands)
Balance at February 3, 2001.... 12,438 $ 124 $ 120,918 $(115,710) $ 5,332
Net income for the nine
months ended
November 3, 2001 ............ -- -- -- 145 145
------- -------- --------- --------- ---------
Balance at November 3, 2001 ... 12,438 $ 124 $ 120,918 $(115,565) $ 5,477
======= ======== ========= ========= =========
See accompanying notes
5
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
---------------------
November October
3, 2001 28, 2000
-------- --------
(In thousands)
Operating activities
Net income ......................................... $ 145 $ 225
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation ..................................... 292 258
Amortization of goodwill and other intangibles ... 75 --
Changes in operating assets and liabilities:
Trade accounts receivable ........................ (982) (98)
Inventory ........................................ 800 200
Other receivables and prepaid expenses ........... (562) (24)
Other assets ..................................... 525 8
Accounts payable ................................. 247 (12)
Accrued expenses ................................. 199 (1,097)
Income taxes payable ............................. 8 (1)
------- -------
Net cash provided by (used in) operating activities 747 (517)
Investing activities
Purchase of fixed assets, net ...................... (346) (52)
Purchase of goodwill and other intangibles ......... (480) --
------- -------
Net cash used in investing activities .............. (826) (52)
------- -------
Net decrease in cash ............................... (79) (569)
Cash at beginning of period ........................ 2,378 7,020
------- -------
Cash at end of period .............................. $ 2,299 $ 6,451
======= =======
Supplemental disclosures
Income taxes paid .................................. $ 16 $ 6
======= =======
Interest paid ...................................... $ 207 $ 46
======= =======
See accompanying notes
6
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
November 3, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Cygne Designs,
Inc. ("Cygne") and its subsidiaries (collectively the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended November 3, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ended
February 2, 2002. 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, 2001. The balance sheet at February 3, 2001 has been
derived from the audited financial statements at that date. The Company's fiscal
year ends on the Saturday nearest to January 31.
2. ACQUISITION
On May 13, 2001, the Company acquired from Best Knits, L.L.C ("Best Knits" or
"Seller") the rights and obligations under all the customer purchase orders held
by the Seller at the closing date and the trade name and domain name " Best
Knits". Best Knits, located in Irbid, Jordan, is a manufacturer of private label
women's knit tops for sale to retailers located in the United States. To produce
these orders under the terms of the Agreement, the Company (i ) assumed all
outstanding vendor purchase orders issued by the Seller directly related to the
acquired customer purchase orders, (ii) purchased from the Seller all raw
materials on hand directly related to acquired customer purchase orders, (iii)
entered into a lease in Irbid, Jordan for the eighteen month period starting May
2001 with the Seller, which includes 66,000 square feet of manufacturing and
office space, approximately 550 sewing machines, cutting and pressing equipment
and office furniture and equipment, (iv) hired substantially all of the
approximately 650 employees employed by the Seller and (v) paid the Seller
$500,000 for the trade name and customer relationships, of which $200,000 was
paid in cash at the closing and the remaining $300,000 through the issuance of a
non-interest bearing note payable in fifteen monthly installments of $20,000
commencing August 1, 2001. The Company has recorded $700,000 in goodwill
related to this transaction including $200,000 recorded during the third
quarter of 2001. The Company is still evaluating the allocation of goodwill and
other intangible assets. The resulting goodwill and other intangible assets are
being amortized over their estimated useful life of three years.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
November February
3, 2001 3, 2001
------- -------
(In thousands)
Raw materials and Work-in-Process .............. $3,988 $4,263
Finished goods ................................. 437 962
------ ------
$4,425 $5,225
====== ======
7
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)-Continued
4. CREDIT FACILITIES
From February 1, 1997 until May 11, 2001, the Company did not have a credit
facility and the Company obtained letters of credit from a domestic bank secured
by a cash deposit from the Company. Since May 11, 2001, the Company has obtained
letters of credit through use of a cash deposit to secure the letters of credit
and through its credit facilities. The Company had restricted cash at a bank of
$465,000 at November 2001 and $1,000,000 at February 3, 2001, respectively,
recorded in other assets, to secure letters of credit from a domestic bank. The
total outstanding letters of credit at November 3, 2001 were $1,618,000.
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC. ("GMACCC"). The Agreement provides
for a Revolving Facility of $8,000,000 ("Facility"), including a letter of
credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings
under this Facility bear a rate of interest of the lesser of (i) LIBOR plus 3%
or (ii) prime plus 0.5% and are secured by substantially all of the Company's
assets. In addition, the Facility is subject to various financial covenants
including requirements for tangible net worth and fixed charge coverage ratios,
among others. The facility terminates on May 10, 2004, but can be terminated
earlier by GMACCC upon default under the Agreement. At November 3, 2001 the
Company had no borrowings or letters of credit outstanding and could have
borrowed or had issued letters of credit in the aggregate amount of
approximately $494,000, under this facility.
In August 2001, Prosperity Textiles Ltd. ( "Prosperity") a wholly owned
subsidiary of the Company which is located in Jordan, entered into an informal
credit facility arrangement with the Egyptian Arab Land Bank. Formal
documentation of this credit facility arrangement is currently being completed.
This arrangement can be terminated by either party without any notice.
The aggregate credit facility is $2,800,000 and can be used for both short-term
borrowings and the issuance of documentary letters of credit. The security for
this facility is (i) 50% of the sales value of customers' letters of credit for
garments to be shipped by Prosperity, and (ii) 80% of its trade receivables. At
November 3, 2001, the Company had no borrowings and letters of credit of
$1,153,000 outstanding under this facility. The Company could have increased its
borrowings or had additional letters of credit issued in the aggregate amount of
approximately $1,647,000.
5. LITIGATION
The Company is involved in various legal proceedings that are incidental to the
conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition
results of operations and cash flow. See Note 6 for information regarding income
tax audits.
6. INCOME TAX
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc. for its taxable years ending
December 31, 1990 through October 7, 1994 (the date of 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 $16,000,000
(including some penalties but not interest).
8
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)-Continued
Depending on the amount of the deficiency, the amount of the interest could be
significant. The outcome of the audit of GJM (US) Inc. cannot be predicted at
this time. Although the Company is disputing the proposed adjustment and
believes that it has established appropriate accounting reserves with respect to
this matter, an adverse decision in this matter could have a material adverse
impact on the Company and its financial condition, results of operations, and
cash flow.
The Company is subject to other ongoing tax audits in several jurisdictions
including Guatemala for the years ended 1998, 1999 and 2000. 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, and cash flow.
As of February 3, 2001, based upon tax returns filed, the Company reported a net
operating loss carryforward for U.S. Federal income tax purposes of
approximately $113,000,000. If unused, these loss carryforwards will expire in
the Company's taxable years ending 2011 through 2019. Under Section 382 of the
U.S. Internal Revenue Code, if there is a more than a 50% ownership change (as
defined therein) with respect to the Company's stock in any three-year period,
the Company's loss carryforwards for U.S. Federal and New York State and City
tax purposes would be virtually eliminated.
As of February 3, 2001, based upon tax returns filed, the Company reported a net
operating loss carryforward for New York State and City tax purposes (on a
separate company basis) of approximately $74,000,000. If unused, these loss
carryforwards will expire in the Company's taxable years ending in 2011 through
2019.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to an annual
impairment test in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. During fiscal
2002, the Company will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets, which is still being evaluated,
as of February 3, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
8. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in one segment of
the apparel market - women's career and casual sportswear.
9
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.
Statements in this report concerning the Company's business outlook or future
economic performance; anticipated results of operations, revenues, expenses, or
other financial items; private label and brand name products and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance, or other matters,
are "forward-looking statements" as that term is defined under the Federal
Securities Laws. Forward-looking statements are subject to risks, uncertainties,
and other factors which would 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 increases in the rate of import duties, adverse changes in export
quotas, dependence on a key customer, risk of operations and suppliers in
foreign countries, competition, adverse decision in its federal tax audit of GJM
(US) Inc., termination of its credit facilities and general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the year ended
February 3, 2001. The Company assumes no obligation to update or revise any such
forward-looking statements.
GENERAL
On May 13, 2001, the Company acquired from Best Knits, L.L.C ("Best Knits" or
"Seller") the rights and obligation of all the customer purchase orders held by
the Seller at the closing date and the trade name and domain name " Best Knits".
Best Knits, located in Irbid, Jordan, is a manufacturer of private label women's
knit tops for sale to retailers located in the United States. To produce these
orders under the terms of the Agreement, the Company (i ) assumed all
outstanding vendor purchase orders issued by the Seller directly related to the
acquired customer purchase orders, (ii) purchased from the Seller all raw
materials on hand directly related to acquired customer purchase orders, (iii)
entered into a lease in Irbid, Jordan for the eighteen month period starting May
2001 with the Seller, which includes 66,000 square feet of manufacturing and
office space, approximately 550 sewing machines, cutting and pressing equipment
and office furniture and equipment, (iv) hired substantially all of the
approximately 650 employees, employed by the Seller and (v) paid the Seller
$500,000 for the trade name and customer relationships of which $200,000 was
paid in cash at the closing and the remaining $300,000 through the issuance of a
non-interest bearing note payable in fifteen monthly installments of $20,000
commencing August 1, 2001. The Company has recorded $700,000 in goodwill
related to this transaction including $200,000 recorded during the third
quarter of 2001. The Company is still evaluating the allocation of goodwill and
other intangible assets.
During the third quarter of 2001 and 2000, The Limited, Inc. accounted for 49%
and 97%, respectively, of Cygne's net sales. During the nine months of 2001 and
2000, the Limited, Inc accounted for 52% and 97%, respectively, of Cygne's net
sales. Although Cygne has a long-established relationship with The Limited,
Inc., its key customer, Cygne does not have long-term contracts with The
Limited, Inc. The Company's 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.
10
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the further restructuring 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 for the three and nine months ended November 3, 2001 and October 28,
2000 and expresses for the periods certain data as a percentage of net sales:
Three Months Ended Nine Months Ended
------------------ -----------------
November October November October
3, 2001 28, 2000 3, 2001 28, 2000
------- --------- -------- --------
Net sales .......................... 100% 100% 100% 100%
===== ===== ===== =====
Gross profit ....................... 10.3 10.8 12.3 12.2
Selling, general, and administrative
expenses ......................... 8.8 9.9 11.0 11.6
Amortization ....................... 0.3 -- 0.2 --
----- ----- ----- -----
Income from operations ............. 1.2 0.9 1.1 0.6
Interest income (expense), net ..... (1.0) 0.5 (0.5) 0.6
----- ----- ----- -----
Income before income taxes ......... 0.2 1.4 0.6 1.2
Provision for income taxes ......... 0.1 0.0 0.1 0.1
----- ----- ----- -----
Net income ......................... 0.1 1.4 0.5 1.1
===== ===== ===== =====
THREE AND NINE MONTHS ENDED NOVEMBER 3, 2001 COMPARED TO THREE MONTHS AND NINE
MONTHS ENDED OCTOBER 28, 2000
NET SALES
Net sales for the third quarter of 2001 were $11,810,000, an increase of
$3,460,000, or 41%, from $8,350,000 in the third quarter of 2000. Net sales for
the nine months of 2001 were $31,270,000 an increase of $11,032,000, or 55%,
from $20,238,000 in the nine months of 2000.
The increase in sales for the third quarter was primarily attributed to sales to
new customers: Target of $3,133,000, Kmart of $1,856,000, JC Penney of $514,000
and Dillard's, which became a customer in the first quarter of 2001, of $586,000
partially offset by a decrease in sales to The Limited, Inc. of $2,555,000. The
increase in sales for the nine months was primarily attributed to sales to new
customers: Dillard's of $5,632,000, Target of $5,669,000, Kmart of $2,491,000
and JC Penney of $514,000 partially offset by a decrease in sales to The
Limited, Inc. of $3,588,000. The sales to new customers in the nine months are
not necessarily indicative of future sales. The Limited, Inc. accounted for 49%
of the net sales for the third quarter of 2001 compared to 97% in the comparable
period in 2000. The Limited Inc. accounted for 52% of the net sales for the nine
months of 2001 compared to 97% in the comparable period in 2000.
11
GROSS PROFIT
The gross profit for the third quarter of 2001 was $1,223,000, an increase of
$321,000 from the gross profit of $902,000 for the comparable period in 2000.
The gross profit for the nine months of 2001 was $3,846,000 an increase of
$1,374,000 from the gross profit of $2,472,000 in the comparable period in 2000.
The decrease in gross margin for the third quarter (10.3% vs. 10.8%) was
attributable to product mix. The increase in gross margin for the nine months
(12.3% vs. 12.2%) was attributable to the changes in product mix and favorable
settlements of prior years disputes.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the third quarter of 2001 were
$1,040,000, an increase of $217,000 from $823,000 in the comparable period in
2000. Selling, general and administrative expenses for the nine months of 2001
were $3,428,000, an increase of $1,081,000 from $2,347,000 in the comparable
period in 2000.
The increase in selling, general and administrative expense for the third
quarter and nine months compared to the comparable periods in 2000 was primarily
attributable to the establishment of sales and marketing teams to service new
customers.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible which arose in connection with the May 2001
acquisition of the business of Best Knits, L.L.C. being amortized over thirty
six months.
INTEREST
Net interest expense for the nine months of 2001 was $174,000 compared to net
interest income of $115,000 for the comparable period in 2000. The decrease in
interest income for the nine months of 2001 compared to the comparable prior
period was primarily attributable to the use of the cash that was invested in
short term securities in 2000 and is being used in 2001 as working capital to
support the increase in sales. The increase in interest expense for nine months
of 2001 was due to borrowings under the Company's credit facilities.
PROVISION FOR INCOME TAXES
The provision for income taxes of $24,000 for the nine months ended November 3,
2001 represents a provision for minimum state income taxes and foreign taxes.
The provision for income taxes of $15,000 for the nine months ended October 28,
2000 represents a provision for minimum state income taxes. As of February 3,
2001, based upon tax returns filed, the Company reported a net operating loss
carryforward for U.S. Federal income tax purposes of approximately $113,000,000.
If unused, these loss carryforwards will expire in the Company's taxable years
ending 2011 through 2019. Under Section 382 of the U.S. Internal Revenue Code,
if there is more than a 50% ownership change (as defined therein) with respect
to the Company's stock in any three-year period, the Company's loss
carryforwards for U.S. Federal and New York State and City tax purposes would be
virtually eliminated.
As of February 3, 2001, based upon tax returns filed, the Company reported net
operating loss carryforwards for New York State and City tax purposes (on a
separate company basis) of approximately $74,000,000. If unused, these loss
carryforwards will expire in the Company's taxable years ending in 2011 through
2019.
12
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.
From February 1, 1997 until May 11, 2001, the Company did not have a domestic
credit facility, and Cygne obtained letters of credit issued from a domestic
bank secured by a cash deposit from the Company. Since May 11, 2001, the Company
has obtained letters of credit through use of a cash deposit to secure the
letters of credit and through its credit facility. At November 3, 2001, the
Company had restricted cash at a bank of $465,000 as collateral for letters of
credit. The total outstanding letters of credit at November 3, 2001 were
$1,618,000.
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC. ("GMACCC"). The Agreement provides
for a Revolving Facility of $8,000,000 ("Facility"), including a letter of
credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings
under this Facility bear a rate of interest of the lesser of (i) LIBOR plus 3%
or (ii) prime plus 0.5% and are secured by substantially all of the Company's
assets. In addition, the Facility is subject to various financial covenants
including requirements for tangible net worth and fixed charge coverage ratios,
among others. The facility terminates on May 10, 2004, but can be terminated
earlier by GMACCC upon default under the Agreement. At November 3, 2001 the
Company had no borrowings or letters of credit outstanding and could have
borrowed or had issued letters of credit in the aggregate amount of
approximately $494,000, under this facility.
In August 2001, Prosperity Textiles Ltd. ( "Prosperity") a wholly owned
subsidiary of the Company which is located in Jordan entered into an informal
credit facility arrangement with the Egyptian Arab Land Bank. Formal
documentation of this credit facility arrangement is currently being completed.
This arrangement can be terminated by either party without any notice.
The aggregate credit facility is $2,800,000 and can be used for both short-term
borrowings and the issuance of documentary letters of credit. The security for
this facility is (i) 50% of the sales value of customers' letters of credit for
garments to be shipped by Prosperity, and (ii) 80% of its trade receivables. At
November 3, 2001, the Company had no borrowings and letters of credit of
$1,153,000 outstanding under this facility. The Company could have increased its
borrowings or had additional letters of credit issued in the aggregate amount of
approximately $1,647,000.
Net cash provided by operating activities for the nine months of 2001 was
$747,000 compared to cash used in operating activities of $517,000 in 2000. The
increase in net cash provided by operating activities was primarily the result
of a decrease in inventory and other assets and an increase in accounts payable
and accrued expenses partially offset by an increase in accounts receivables.
Net cash used in investing activities for 2001 and 2000 was $826,000 and $52,000
respectively. In 2001, $480,000 of the $826,000 of the cash paid is attributable
to the purchase of the trade name and additional relationships of Best Knits.
The balance of $346,000 was for purchase of fixed assets in 2001. The purchase
of fixed assets in 2000 was $52,000. The increase in fixed asset purchases in
2001 compared to 2000 was primarily related to machinery and equipment to
upgrade the Guatemalan factory and furniture and computers in the New York
office needed to service the new customers.
The Company's financial performance for the next twelve months will depend on a
variety of factors, including the amount of sales to The Limited, Inc., the
continuation of sales to newly acquired customers and the success of its newly
acquired operations. If the Company has significant operating losses, if it's
ability to borrow under its credit facilities is limited or terminated or if it
suffers an adverse decision in its federal tax audit of GJM (US) Inc., which
would require the Company to pay a significant amount of tax, the Company will
face severe liquidity pressures which would adversely affect the Company's
financial condition and results of operations and cash flow. The Company is
continuing to review its business operations and could incur additional costs in
the future associated with the restructuring of its operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The annual meeting of stockholders of Cygne Designs, Inc. was held on
December 4, 2001.
b. The following persons, comprising the entire board of directors, were
elected at the annual meeting pursuant to the following vote tabulation:
Name In Favor Withheld
---- -------- --------
Jim Groninger 11,663,424 140,986
Bernard Manuel 11,663,424 140,986
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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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.
December 14, 2001 By: /s/ BERNARD M. MANUEL
------------------------------------------------
Bernard M. Manuel, Chairman of the Board
and Chief Executive Officer
December 14, 2001 By: /s/ ROY E. GREEN
------------------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer and
Secretary
15