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 August 1, 1998
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.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-2843286
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1372 Broadway, New York, New York 10018
- --------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(212) 354-6474
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value, 12,438,038 shares as of September 11, 1998.
CYGNE DESIGNS, INC. AND SUBSIDIARIES
----------
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION PAGE
NO.
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at August 1, 1998
and January 31, 1998..........................................................................3
Condensed Consolidated Statements of Operations for the three and six months
ended August 1, 1998 and August 2, 1997.......................................................4
Condensed Consolidated Statement of Stockholders' Equity for the six
months ended August 1, 1998...................................................................5
Condensed Consolidated Statements of Cash Flows for the six months
ended August 1, 1998 and August 2, 1997.......................................................6
Notes to Condensed Consolidated Financial Statements............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................................11
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................16
Item 5. Other Information...............................................................................16
Item 6. Exhibits and Reports on Form 8-K................................................................16
2
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August January
1, 1998 31, 1998
------- --------
(In thousands,
except share amounts)
ASSETS
Current assets:
Cash (includes restricted cash of $938 and $1,098,
respectively) .................................................................. $ 3,449 $10,926
Trade accounts receivable, net ................................................... 5,621 6,012
Inventory ........................................................................ 8,303 4,012
Other receivables and prepaid expenses ........................................... 1,657 1,979
------- -------
Total current assets ............................................................... 19,030 22,929
Fixed assets, net .................................................................. 3,925 3,972
Other assets ....................................................................... 787 787
Goodwill, net ...................................................................... 1,880 2,062
------- -------
Total assets ....................................................................... $25,622 $29,750
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ............................................................ $2,093 $1,319
Accounts payable ................................................................. 2,431 3,348
Accrued expenses ................................................................. 5,123 6,636
Income taxes payable ............................................................. 6,051 6,068
------- -------
Total current liabilities .......................................................... 15,698 17,371
Stockholders' equity:
Preferred stock, $0.01 par value; 4,000,000 shares
authorized: none issued and outstanding
Common stock, $0.01 par value; 75,000,000 shares
authorized: 12,438,038 shares issued and outstanding ............................ 124 124
Paid-in capital .................................................................. 120,918 120,918
Accumulated deficit .............................................................. (111,002) (108,547)
Foreign currency translation adjustment .......................................... (116) (116)
------- --------
Total stockholders' equity ......................................................... 9,924 12,379
------- -------
Total liabilities and stockholders' equity ......................................... $25,622 $29,750
======= =======
See accompanying notes.
3
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
----------------------- -----------------------
August August August August
1, 1998 2, 1997 1, 1998 2, 1997
------- ------- ------- -------
(In thousands, except per share amounts)
Net sales ................................................. $ 8,509 $11,003 $14,754 $18,640
Cost of goods sold ........................................ 8,110 10,907 14,593 19,203
------- ------- ------- -------
Gross profit (loss) ....................................... 399 96 161 (563)
Selling, general and administrative
expenses ................................................ 1,356 2,813 2,372 6,689
Amortization of intangibles ............................... 91 91 182 182
------- ------- ------- -------
(Loss) from operations .................................... (1,048) (2,808) (2,393) (7,434)
Interest expense (income), net ............................ 1 (54) (49) (149)
------- ------- ------- -------
(Loss) before income taxes ................................ (1,049) (2,754) (2,344) (7,285)
Provision for income taxes ................................ 78 51 111 102
------- ------- ------- -------
Net (loss) ................................................ $(1,127) $(2,805) $(2,455) $(7,387)
======= ======= ======= =======
Net (loss) per share - basic .............................. $(0.09) $(0.23) $(0.20) $(0.59)
======= ======= ======= =======
Weighted average number of common
shares outstanding ...................................... 12,438 12,438 12,438 12,438
======= ======= ======= =======
Net (loss) per share assuming dilution .................... $(0.09) $(0.23) $(0.20) $(0.59)
======= ======= ======= =======
Weighted average number of common
shares and dilutive securities ........................... 12,438 12,438 12,438 12,438
======= ======= ======= =======
See accompanying notes.
4
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock Foreign
------------------------ Currency
Number Paid-in Translation (Accumulated
of Shares Amount Capital Adjustment Deficit) Total
--------- ------ ------- ----------- ------------ -------
(In thousands)
Balance at January 31,
1998 ......................... 12,438 $124 $120,918 $(116) $ (108,547) $12,379
Net (loss) for the six
months ended August 1,
1998 ......................... -- -- -- -- (2,455) (2,455)
------ ---- -------- ----- ---------- -------
Balance at August 1, 1998 ..... 12,438 $124 $120,918 $(116) $ (111,002) $ 9,924
====== ==== ======== ===== ========== =======
See accompanying notes.
5
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
--------------------
August August
1, 1998 2, 1997
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net (loss) .............................................. $ (2,455) $ (7,387)
Adjustments to reconcile net (loss) to net cash (used in)
provided by operating activities
Depreciation and amortization ...................... 249 535
Rent expense not currently payable ................. -- 38
Amortization of intangibles ........................ 182 182
Changes in operating assets and liabilities:
Trade accounts receivable ....................... 391 (549)
Inventory ....................................... (4,291) (2,159)
Other receivables and prepaid expenses .......... 322 776
Accounts payable ................................ (917) (741)
Accrued expenses ................................ (1,513) (1,311)
Income taxes payable ............................ (17) 24
-------- --------
Net cash (used in) operating activities ................. (8,049) (10,592)
INVESTING ACTIVITIES
Purchase of fixed assets ................................ (202) (385)
Other assets ............................................ -- (521)
-------- --------
Net cash (used in) investing activities ................. (202) (906)
FINANCING ACTIVITIES
Short-term borrowings, net .............................. 774 860
Repayments of long-term debt, net ....................... -- (842)
-------- --------
Net cash provided by financing activities ............... 774 18
Effect of exchange rate changes on cash ................. -- (26)
-------- --------
Net (decrease) in cash .................................. (7,477) (11,506)
Cash at beginning of period ............................. 10,926 22,246
-------- --------
Cash at end of period ................................... $ 3,449 $ 10,740
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ....................................... $ 128 $ 78
Interest paid ........................................... 161 169
See accompanying notes.
6
CYGNE DESIGNS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 1, 1998 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended August 1, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ended January 30, 1999. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 1998. The
balance sheet at January 31, 1998 has been derived from the audited financial
statements at that date.
The Company's fiscal year ends on the Saturday nearest to January 31.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". SFAS No. 128 replaced the calculation of primary and
fully diluted income per share with basic and diluted income per share. All
(loss) per share amounts for all periods have been presented and, where
appropriate, restated to conform to SFAS No. 128 requirements. In computing
dilutive loss per share for the three and six months ended August 1, 1998 and
August 2, 1997, 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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This new standard requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that a
company (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Effective February 1, 1998
the Company adopted SFAS No. 130. The comprehensive loss for the three and six
months ended August 1, 1998 was $1,127,000 and $2,455,000, respectively. The
comprehensive loss for the three and six months ended August 2, 1997 was
$2,809,000 and $7,413,000, respectively.
Effective February 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which supersedes SFAS
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS No. 131 establishes standards for the way
7
CYGNE DESIGNS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 1, 1998 (Unaudited)
that public business enterprises report information about operating statements
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position, but did affect the
disclosure of segment information. See note 6.
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
August January
1, 1998 31, 1998
------- --------
(In thousands)
Raw materials and Work-in-Process............ $6,765 $3,593
Finished goods .............................. 1,538 419
------ ------
$8,303 $4,012
====== ======
3. CREDIT FACILITIES
Since January 31, 1997 the Company has obtained letters of credit from
domestic banks secured by a cash deposit from the Company. At August 1, 1998 and
January 31, 1998 the Company had restricted cash at a bank of $938,000 and
$1,098,000, respectively, to secure letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; and bank guarantee for
Israeli custom duties not to exceed $500,000. Borrowings under this facility
generally bear interest at 1.5% over the prime rate, except that borrowings
against trade accounts receivable bear interest at 1.25% over the LIBOR rate.
Borrowings under this facility are subject to certain borrowing base
limitations, are due on the earlier of demand or the maturity date specified by
the bank for each borrowing and are secured by a lien on substantially all of
the assets of the Israeli subsidiary. There can be no assurance that the bank
will continue to make this facility available. At August 1, 1998, outstanding
loans under this facility were $2,093,000 and letters of credit aggregating
$2,108,000 had been issued.
4. LITIGATION
The Company is involved in various legal proceedings that are incidental to
the conduct of its business, none of which the Company believes could reasonably
be expected to have a material adverse effect on the Company's financial
condition or results of operations. See Note 5 for information
8
CYGNE DESIGNS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
August 1, 1998 (Unaudited)
regarding tax audits.
5. INCOME TAX AUDITS
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the
U.S. Federal income tax returns filed by GJM (US) Inc. for its taxable years
ending December 31, 1990 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). 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.
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.
6. GEOGRAPHIC SEGMENT INFORMATION
The Company operates primarily in one industry segment which includes the
development, manufacturing and sale of women's apparel.
Net sales to unaffiliated customers and identifiable assets classified by
geographic area, which were determined by where sales originated and where
identifiable assets were held, were as follows:
TOTAL TOTAL INTERSEGMENT
U.S. FOREIGN ELIMINATIONS TOTAL
--------- -------- ------------ --------
(In thousands)
FOR THE SIX MONTHS ENDED AUGUST 1, 1998
Net sales ............................... $ 2,811 $ 13,204 $ (1,261) $ 14,754
Operating (loss) ........................ (1,945) (448) (2,393)
Identifiable assets ..................... 11,741 13,881 25,622
FOR THE THREE MONTHS ENDED AUGUST 1, 1998
Net sales ............................... $ 1,236 $ 8,362 $ (1,089) $ 8,509
Operating (loss) income ................. (1,237) 189 (1,048)
9
CYGNE DESIGNS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
August 1, 1998 (Unaudited)
TOTAL TOTAL INTERSEGMENT
U.S. FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
FOR THE SIX MONTHS ENDED AUGUST 2, 1997
Net sales .............................................. $ 7,970 $ 11,817 $ (1,147) $ 18,640
Operating (loss) ....................................... (6,379) (1,055) (7,434)
Identifiable assets .................................... 18,375 20,192 38,567
FOR THE THREE MONTHS ENDED AUGUST 2, 1997
Net sales .............................................. $ 3,596 $ 7,961 $ (554) $ 11,003
Operating (loss) ....................................... (2,486) (322) (2,808)
Net sales in the U.S. are primarily from imported goods.
The intangible assets recognized in connection with acquisitions are included in
identifiable assets in the U.S.
Total foreign amounts principally represent the Company's Asian operations,
except the operating losses in the first six months of 1998 relate primarily
to the Company's Central American operations. The Company's foreign operating
income for the three months ended August 1, 1998 represents operating income
from the Company's Asian operations, partially offset by operating losses at
the Company's Central American operations.
During the three months and six months ended August 1, 1998 The Limited, Inc.
(consisting of The Limited Stores and Lerner) accounted for 46% and 57%,
respectively, of the Company's net sales. During the three months and six
months ended August 2, 1997, The Limited, Inc. accounted for 71% and 64%,
respectively, of the Company's net sales.
10
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 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 its Annual Report on Form
10-K for the year ended January 31, 1998. The Company assumes no obligation to
update or revise any such forward-looking statements.
General
During the three months and six months ended August 1, 1998 The Limited,
Inc. (consisting of The Limited Stores and Lerner) accounted for 46% and 57%,
respectively, of Cygne's net sales. During the three months and six months ended
August 2, 1997, The Limited, Inc. accounted for 71% and 64%, 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
any of its customers, including 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. In
addition, the apparel divisions of The Limited, Inc. have formed direct sourcing
departments. The Company expects sales to The Limited, Inc. to decrease in 1998
from 1997 sales levels.
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.
In June 1997 the Company announced that 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 had been terminated by mutual agreement.
In connection with the termination the Kenzo Group returned the $400,000 in
prepaid minimum royalty payments made on the signing of the license agreements
and paid Cygne for certain raw materials related to the manufacture of Kenzo
products.
11
The Company anticipates that it will have a net loss for fiscal 1998
(ending January 30, 1999). The extent of the net loss will depend, among other
things, on the amount of sales to The Limited, Inc. 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. The
Company believes that the weakness in retail sales of women's apparel adversely
affected its operating results. The effect of these factors has been increased
competition and reduced operating margins for both the retailers and their
suppliers. Retailers, including customers of the Company, are increasingly
developing and sourcing private label products themselves rather than utilizing
outside vendors like the Company.
Impact of the Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has determined that it will be required to replace portions of
its software so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The Company continues to have
communications with its significant suppliers and large customers to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company
presently believes that with modifications to existing software and conversions
to new software, the cost of which is not expected to be material to the
Company's results of operations or financial position, the Year 2000 will not
pose significant operations problems for its computer systems. The Company will
use both internal and external resources to reprogram, or replace, and test the
software for Year 2000 modifications. The Company anticipates completing the
Year 2000 project prior to any anticipated impact on its operating systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material adverse effect on
the operations of the Company. Likewise, there can be no assurance that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have a material adverse effect on the Company's systems.
12
RESULTS OF OPERATIONS
The following table is derived from the Company's Condensed Consolidated
Statements of Operations for the three and six months ended August 1, 1998 and
August 2, 1997 and expresses for the periods certain data as a percentage of net
sales.
Three Months Ended Six Months Ended
------------------ -----------------
August August August August
1, 1998 2, 1997 1, 1998 2, 1997
------- ------- ------- -------
Net sales ............................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit (loss) ................................... 4.7 0.9 1.1 (3.0)
Selling, general and administrative expenses .......... 15.9 25.6 16.1 35.9
Amortization of intangibles ........................... 1.1 0.8 1.2 1.0
----- ----- ----- -----
(Loss) from operations ................................ (12.3) (25.5) (16.2) (39.9)
Interest expense (income), net ........................ 0.0 (0.5) (0.3) (0.8)
----- ----- ----- -----
(Loss) before income taxes ............................ (12.3) (25.0) (15.9) (39.1)
Provision for income taxes ............................ 0.9 0.5 0.8 0.5
----- ----- ----- -----
Net (loss) ............................................ (13.2) (25.5) (16.7) (39.6)
===== ===== ===== =====
Net Sales
Net sales for the second quarter of 1998 decreased by $2.5 million or 22.7%
to $8.5 million from $11.0 million for the comparable period in 1997. Net sales
for the first six months of 1998 were $14.8 million, a decrease of $3.9 million
or 20.8% from $18.6 million in the comparable period in 1997. The decreases in
net sales for the second quarter and the first six months of 1998 were primarily
attributable to decreases in sales to divisions of The Limited, Inc. of $2.6
million and $3.6 million, respectively.
Gross Profit (Loss)
Gross profit for the second quarter of 1998 was $399,000, an increase of
$303,000 or 316% from $96,000 in the comparable period in 1997. Gross profit for
the first six months of 1998 was $161,000, an increase of $724,000 from a gross
loss of $563,000 in the comparable period in 1997. The increased gross profit in
the second quarter of 1998 compared to the comparable period in 1997 was
primarily attributable to higher gross margins, offset by the
lower-than-anticipated sales volume during May and June which resulted in the
under-absorption of manufacturing overhead at the Company's Central American
operation. The increased gross profit for the first six months of 1998 compared
to the comparable period in 1997 was primarily attributable to higher gross
margins offset by the lower-than-anticipated sales volume for the period
February through June which resulted in the under-absorption of manufacturing
overhead at the Company's Central American operation. The gross loss in the
first six months of 1997 was primarily attributable to a $0.5 million markdown
on fabric purchased for Kenzo Jeans and Kenzo Studio brand name products.
13
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 1998
were $1.4 million, a decrease of $1.5 million or 52% from the $2.8 million in
the comparable period in 1997. Selling, general and administrative expenses for
the first six months of 1998 were $2.4 million, a decrease of $4.3 million or
65% from $6.7 million in the comparable period in 1997. The decreases for the
second quarter and the first six months of 1998 were primarily attributable to
termination of the Kenzo Jeans and Kenzo Studio brand name business which had
$1.0 million and $2.9 million in start-up expenses in the second quarter and
first six months of 1997 and a decrease in other expenses of $457,000 in the
second quarter and $1.4 million in the first six months of 1998, respectively,
as a result of the downsizing of the Company.
Interest
Net interest expense for the second quarter of 1998 was $1,000, compared to
net interest income of $54,000 in the comparable period in 1997. Net interest
income for the first six months of 1998 was $49,000, compared to $149,000 in the
comparable period in 1997. The decrease in net interest income for 1998 as
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 primarily represents provisions for minimum
United States federal income and state taxes and taxes payable to foreign
countries for income earned in the foreign countries . At January 31, 1998 the
Company had net operating loss carryforwards of approximately $90 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.
Since February 1, 1997, the Company has not had a domestic credit facility.
Since that date, Cygne has obtained letters of credit issued from domestic banks
secured by a cash deposit from the Company. At August 1, 1998 the Company had
restricted cash at a bank of $938,000 as collateral for letters of credit.
In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; and bank guarantee for
Israeli custom duties not to exceed $500,000. Borrowings under this facility
generally bear interest at 1.5% over the prime rate, except that borrowings
against trade
14
accounts receivable bear interest at 1.25% over the LIBOR rate. Borrowings under
this facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing,
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. There can be no assurance that the bank will continue to make this
facility available. Termination by the bank of this facility could have a
material adverse effect on the Company's financial condition and results of
operations. At August 1, 1998, outstanding loans under this facility were $2.1
million and letters of credit aggregating $2.1 million had been issued.
Net cash used in operating activities for the first six months of 1998 was
$8.0 million compared to net cash used in operating activities of $10.6 million
in the comparable prior period of 1997. The decrease in net cash used in
operating activities is attributable to the reduction in operating loss of $4.6
million, offset by higher inventories of $2.1 million.
Prior to the sale of the Company's Ann Taylor sourcing business in
September 1996 (the "Ann Taylor Disposition") the Company experienced
significant liquidity pressures primarily as a result of the negative cash flow
caused by the Company's operating losses. Although the proceeds from the Ann
Taylor Disposition alleviated the liquidity pressures then faced by the Company,
the Company continues to have losses from operations. If the Company is unable
to eliminate its operating losses, the Company will face the significant
liquidity pressures previously experienced which would adversely affect the
Company's financial condition and results of operations. The Company is
continuing to review its business operations and expects to continue to incur
additional costs in the future associated with the restructuring or downsizing
of its operations.
15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Stockholders of Cygne Designs, Inc. was held on
July 1, 1998.
c. The following persons, comprising the entire board of directors, were
elected at the Annual Meeting pursuant to the following vote tabulation:
Name Votes For Votes Withheld
---- ---------- --------------
James G. Groninger .............................. 10,339,292 456,724
Stuart B. Katz .................................. 10,339,792 456,224
Bernard M. Manuel ............................... 10,339,792 456,224
Item 5. Other Information
The Company has entered into an arrangement with Mr. Gary Smith pursuant to
which, effective June 30, 1998, he resigned as Senior Vice President -
Manufacturing of the Company but is continuing to provide certain consulting
services with respect to the Company's Guatemalan manufacturing operations. As a
result of the termination of his employment Mr. Smith became entitled to
severance payments equal in the aggregate to one year's salary.
Pursuant to newly adopted rules of the Securities and Exchange Commission,
any stockholder who intends to present a proposal at the Company's 1999 Annual
Meeting of Stockholders without requesting the Company to include such proposal
in the Company's proxy statement should be aware that he must notify the Company
not later than April 20, 1999 of his intention to present the proposal.
Otherwise, the Company may exercise discretionary voting with respect to such
stockholder proposal pursuant to authority conferred on the Company by proxies
to be solicited by the Board of Directors of the Company and delivered to the
Company in connection with the meeting.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule (For SEC use only)
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYGNE DESIGNS, INC.
(Registrant)
September 14, 1998 By: /s/ BERNARD M. MANUEL
------------------------------------
Bernard M. Manuel, Chairman of the
Board and Chief Executive Officer
September 14, 1998 By: /s/ ROY E. GREEN
------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
17