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 October 30, 1999
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 Identification No.)
incorporation or organization)
680 Fifth Avenue, New York, New York 10019
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 489-3900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 December 13, 1999.
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at October 30, 1999 and
January 30, 1999 .......................................................... 1
Condensed Consolidated Statements of Operations for the three and
nine months ended October 30, 1999 and October 31, 1998 ................. 2
Condensed Consolidated Statement of Stockholders' Equity for the
nine months ended October 30, 1999 ...................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 30, 1999 and October 31, 1998 ................. 4
Notes to Condensed Consolidated Financial Statements ...................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................... 12
PART II OTHER INFORMATION
Item 4. Other Information ................................................. 21
Item 6. Exhibits and Reports on Form 8-K .................................. 22
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
October 30, January 30,
1999 1999
--------- ---------
ASSETS (In thousands, except share
and per share amounts)
Current assets:
Cash (includes restricted cash of $1,653 and $669,
respectively) $ 3,988 $ 3,686
Trade accounts receivable, net 4,703 8,242
Inventory 1,694 2,705
Assets held for sale 4,071 4,700
Other receivables and prepaid expenses 1,272 996
--------- ---------
Total current assets 15,728 20,329
Fixed assets, net 2,544 2,720
Other assets 550 550
--------- ---------
Total assets $ 18,822 $ 23,599
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,786 $ 2,754
Accounts payable 1,923 4,579
Accrued expenses 3,150 4,140
Income taxes payable 5,979 6,080
--------- ---------
Total current liabilities 13,838 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 (115,928) (114,872)
Foreign currency translation adjustment (130) (124)
--------- ---------
Total stockholders' equity 4,984 6,046
--------- ---------
Total liabilities and stockholders' equity $ 18,822 $ 23,599
========= =========
See accompanying notes.
1
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -----------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Net sales $ 22,799 $ 13,158 $ 49,526 $ 27,912
Cost of goods sold 21,579 13,470 45,612 28,063
-------- -------- -------- --------
Gross profit (loss) 1,220 (312) 3,914 (151)
Selling, general and administrative
expenses 1,086 1,108 3,110 3,480
Provision for impairment of
Knit business assets 530 -- 1,416 --
Amortization of intangibles -- 91 -- 273
-------- -------- -------- --------
(Loss) from operations (396) (1,511) (612) (3,904)
Interest income (33) (174) (82) (378)
Interest expense 104 40 479 195
-------- -------- -------- --------
(Loss) before income taxes (467) (1,377) (1,009) (3,721)
Provision for income taxes 3 107 47 218
-------- -------- -------- --------
Net (loss) $ (470) $ (1,484) $ (1,056) $ (3,939)
======== ======== ======== ========
Net (loss) per share--basic $ (0.04) $ (0.12) $ (0.08) $ (0.32)
======== ======== ======== ========
Weighted average number of
common shares outstanding 12,438 12,438 12,438 12,438
======== ======== ======== ========
Net (loss) per share assuming dilution $ (0.04) $ (0.12) $ (0.08) $ (0.32)
======== ======== ======== ========
Weighted average number of common shares
and dilutive securities 12,438 12,438 12,438 12,438
======== ======== ======== ========
See accompanying notes.
2
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 30, 1999 12,438 $ 124 $ 120,918 $ (124) $(114,872) $ 6,046
Foreign currency translation adjustment -- -- -- (6) -- (6)
Net (loss) for the nine months ended
October 30, 1999 -- -- -- -- (1,056) (1,056)
---------
Comprehensive (loss) for the nine
months ended October 30, 1999 -- -- -- -- -- (1,062)
------ --------- --------- --------- --------- ---------
Balance at October 30, 1999 12,438 $ 124 $ 120,918 $ (130) $(115,928) $ 4,984
====== ========= ========= ========= ========= =========
See accompanying notes.
3
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
October 30, October 31,
1999 1998
----------- -----------
(In thousands, except share and
per share amounts)
OPERATING ACTIVITIES
Net (loss) $ (1,056) $ (3,939)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Provision for impairment of Knit business
assets 1,416 --
Depreciation and amortization 364 380
Amortization of intangibles -- 273
Changes in operating assets and liabilities:
Trade accounts receivable 3,559 (18)
Inventory 2,887 (3,031)
Other receivables and prepaid expenses (174) 877
Accounts payable (5,258) (1,811)
Accrued expenses (1,285) (1,565)
Income taxes payable (101) (10)
-------- --------
Net cash provided by (used in) operating
activities 352 (8,844)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets, net (76) (227)
Other assets -- (190)
-------- --------
Net cash (used in) investing activities (76) (417)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) of short-term
borrowings, net 32 1,701
-------- --------
Net cash provided by financing activities 32 1,701
-------- --------
Effect of exchange rate changes on cash (6) --
-------- --------
Net increase (decrease) in cash 302 (7,560)
Cash at beginning of period 3,686 10,926
-------- --------
Cash at end of period $ 3,988 $ 3,366
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 431 $ 228
Interest paid 499 201
See accompanying notes.
4
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 30, 1999
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 nine months ended October 30,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ended January 29, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended January 30, 1999. The balance sheet at
January 30, 1999 has been derived from the audited financial statements at that
date.
The Company's fiscal year ends on the Saturday nearest to January 31.
DISPOSITION OF COMPANIES
On November 15, 1999, with an effective date of October 31, 1999, Cygne Designs,
Inc. (the "Company") 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 Manufacturing Group
(Israel) Ltd. ("MTGI"), MBS (Cygne) Company, A.C. Services, Inc. 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.
5
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
the Company consideration consisting of an interest-bearing note and 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 October 31, 1999 (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 has paid Cygne a commission of
$600,000 on unfilled orders for products included in the assets and $400,000 for
a non-compete payment in the transaction. At the closing the Company received a
note from Jordache in the amount of $2,777,062 bearing interest of 6% per annum
due November 30, 1999 and cash of $500,000. On November 30, 1999, Jordache paid
$1,388,531 of the principal balance of the note and the Company agreed that the
remaining balance and all the accrued interest will be due on or before December
21, 1999. The Company has used the cash proceeds from the sale to fund a portion
of the transaction expenses and taxes related to the sale, and together with
MTGI retained cash and collections of MTGI accounts receivable, repaid banks
borrowings and 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 the 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 on the 1999 condensed consolidated statements of operations a
provision for impairment of Knit business assets in the amount of $1,416,000,
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 October 31,1999.
6
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
October 30, January 30,
1999 (1) 1999 (1)
----------- -----------
(In thousands)
Raw materials and work-in-process $1,580 $2,310
Finished goods 114 395
------ ------
$1,694 $2,705
====== ======
(1) Excludes $1,550,000 and $3,426,000 of inventory of the Knit business being
sold at October 30, 1999 and January 30, 1999, respectively.
3. CREDIT FACILITIES
The Company obtains letters of credit from a domestic bank secured by a cash
deposit from the Company. At October 30, 1999 and January 30, 1999, the Company
had restricted cash at a bank of $1,653,000 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 loans under this facility were
repaid and terminated. On October 30, 1999 the balance outstanding under these
arrangements was approximately $2.8 million.
4. LITIGATION
The Company is involved in various legal proceedings that are incidental to the
conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition
or results of operations. See Note 5 for information regarding income tax
audits.
7
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
5. INCOME TAX
The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc. for its taxable years ending
December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was acquired
by the Company). To date, the IRS has informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16 million (including some
penalties but not interest). Depending on the amount of the deficiency, the
amount of the interest could be significant. The outcome of the audit of GJM
(US) Inc. cannot be predicted at this time. Although the Company is disputing
the proposed adjustment and believes that it has established appropriate
accounting reserves with respect to this matter, an adverse decision in this
matter could have a material adverse impact on the Company and its financial
condition, results of operations, and cash flow.
The Company is subject to other ongoing tax audits in several jurisdictions in
the United States and Israel. Although there can be no assurances, the Company
believes any adjustments that may arise as a result of these other audits will
not have a material adverse effect on the Company's financial position.
As of October 30, 1999, based upon tax returns filed for the fiscal year ended
January 30, 1999, the Company reported a net operating loss carryforward for
U.S. Federal income tax purposes of approximately $112,000,000. If unused, these
loss carryforwards will expire in the Company's taxable years ending 2011
through 2014. Under Section 382 of the U.S. Internal Revenue Code, if there is a
more than 50% ownership change (as defined therein) with respect to the
Company's stock, the Company's loss carryforwards for U.S. Federal and New York
State and City tax purposes would be virtually eliminated.
As of October 30, 1999, based upon tax returns filed for the fiscal year ended
January 30, 1999, the Company reported net operating loss carryforwards for New
York State and City tax purposes (on a separate company basis) of approximately
$72,000,000 and $71,000,000, respectively. If unused, these loss carryforwards
will expire in the Company's taxable years ending in 2011 through 2014.
8
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
6. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments of
the apparel market: woven career and casual women's sportswear and knit career
and casual women's sportswear. The Company sources and manufactures garments
which have been designed and developed by the customer. The Company sold its
Knit business on November 15, 1999, as of October 31, 1999. (see Note 1)
Net sales to unaffiliated customers and identifiable assets were as follows:
KNIT WOVEN
DIVISION DIVISION CORPORATE TOTAL
-------- -------- --------- --------
FOR THE NINE MONTHS ENDED
OCTOBER 30, 1999
Net sales $ 32,007 $ 17,519 $ -- $ 49,526
Gross profit 1,480 2,434 -- 3,914
Selling, general and administrative 685 1,498 927 3,110
Provision for impairment of Knit
business assets 1,416 -- -- 1,416
-------- -------- -------- --------
(Loss) income from operations $ (621) $ 936 $ (927) (612)
======== ======== ========
Interest income (82)
Interest expense 479
--------
(Loss) before income taxes (1,009)
Provision for income taxes 47
--------
Net (loss) $ (1,056)
========
Identifiable assets $ 8,666 $ 5,898 $ 4,258 $ 18,822
======== ======== ======== ========
FOR THE THREE MONTHS ENDED
OCTOBER 30, 1999
Net sales $ 18,037 $ 4,762 $ -- $ 22,799
Gross profit 687 533 -- 1,220
Selling, general and administrative 245 530 311 1,086
Provision for impairment of Knit
business assets 530 -- -- 530
-------- -------- -------- --------
(Loss) income from operations $ (88) $ 3 $ (311) (396)
======== ======== ========
Interest income (33)
Interest expense 104
--------
(Loss) before income taxes (467)
Provision for income taxes 3
--------
Net (loss) $ (470)
========
9
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
6. SEGMENT INFORMATION (CONTINUED)
KNIT WOVEN
DIVISION DIVISION CORPORATE TOTAL
-------- -------- --------- --------
FOR THE NINE MONTHS ENDED
OCTOBER 31, 1998
Net sales $ 19,342 $ 8,570 $ -- $ 27,912
Gross profit (loss) 1,806 (1,957) -- (151)
Selling, general and administrative 587 983 1,910 3,480
Amortization of intangibles 273 -- -- 273
--------- --------- --------- --------
Income (loss) from operations 946 (2,940) (1,910) (3,904)
Interest income (378)
Interest expense 195
--------
(Loss) before income taxes (3,721)
Provision for income taxes 218
--------
Net (loss) $ (3,939)
--------- --------- --------- ========
Identifiable assets $ 13,634 $ 6,610 $ 3,880 $ 24,124
========= ========= ========= ========
FOR THE THREE MONTHS ENDED
OCTOBER 31, 1998
Net sales $ 8,048 $ 5,110 $ -- $ 13,158
Gross profit (loss) 858 (1,170) -- (312)
Selling, general and administrative 180 312 616 1,108
Amortization of intangibles 91 -- -- 91
--------- --------- --------- --------
Income (loss) from operations 587 (1,482) (616) (1,511)
Interest income (174)
Interest expense 40
--------
(Loss) before income taxes (1,377)
Provision for income taxes 107
--------
Net (loss) $ (1,484)
========
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 30, 1999. The Company assumes no obligation to update or
revise any such forward-looking statements.
GENERAL
On November 15, 1999, with an effective date of October 31, 1999, Cygne Designs,
Inc. (the "Company") consummated the sale of its Knit business to Jordache
Limited ("Jordache") pursuant to, an Amended and Restated Acquisition Agreement
dated as of August 1, 1999, by and among M.T.G.I.--Textiles Manufacturing Group
(Israel) Ltd. ("MTGI"), MBS (Cygne) Company, A.C. Services, Inc. and Jordache
Limited.
The assets transferred to Jordache consist 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 is 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.
11
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
the Company consideration consisting of an interest bearing note and 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 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. All items in (A) and (B) above are
subject to post closing adjustments. In addition, Jordache has paid Cygne a
commission of $600,000 on unfilled orders for products included in the assets
and $400,000 for a noncompete payment in the transaction. The Company received a
note from Jordache in the amount of $2,777,062 bearing interest of 6% per annum
due November 30, 1999 and cash of $500,000. On November 30, 1999 Jordache paid
$1,388,531 of the principal of the note and the Company agreed that the
remaining balance and all accrued interest will be paid on or before December
21, 1999. The Company has used the cash proceeds from the sale to fund a portion
of the transaction expenses and taxes related to the sale, and together with
MTGI retained cash and collections of MTGI accounts receivable, repaid bank
borrowings related to MTGI and 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, 999 to October 31,
1999. In addition Jordache provided financing to Cygne 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 on the 1999 condensed consolidated statements of operations a
provision for impairment of Knit business assets in the amount of $1,416,000,
consisting of a loss on assets to be sold, transaction costs (including taxes)
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.
During the third quarter of 1999 and 1998, the Knit business accounted for 79%
and 61%, respectively, of Cygne's net sales. During the nine months of 1999 and
1998, the Knit business accounted for 65% and 69%, respectively, of Cygne's net
sales. If the Knit Disposition had been consummated on January 31, 1999, the
Company would have had pro forma net sales of $4.8 million for the three months
ended October 30, 1999 and pro forma loss from operations of $308,000. Pro forma
net loss for the three months ended October 30, 1999, would have been $286,000
or $0.02 on a per share basis. The Company would have had pro forma net sales of
$17.5 million for the nine months of 1999 and pro forma income
12
from operations of $9,000 Pro forma net loss for the nine months of 1999 would
have been $16,000 or $0.00 on a per share basis.
During the third quarter of 1999 and 1998, The Limited, Inc. (consisting of The
Limited Stores and Lerner) accounted for 23% and 59%, respectively, of Cygne's
net sales. During the nine months of 1999 and 1998, The Limited, Inc. accounted
for 39% and 58%, respectively, of Cygne's net sales. During the third quarter of
1999 and 1998, The Limited Inc. accounted for 8% and 31% of net sales of the
Knit business, respectively. During the nine months of 1999 and 1998, The
Limited, Inc. accounted for 11% and 43% of the net sales of the Knit business,
respectively. During the third quarter of 1999 and 1998,The Limited Inc.
accounted for 100% of the Woven business. During the nine months of 1999 and
1998, The Limited Inc. accounted for 98% and 86% of the Woven business
respectively. As a result of the sale of the Knit business, the remaining
business will be more dependent on The Limited, Inc. than it currently is.
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 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.
Retailers, including customers of the Company, are increasingly sourcing private
label products themselves rather than utilizing outside vendors like the
Company. These two factors could have a material adverse effect on the Company's
business.
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.
13
The Company has determined that it needed 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 has upgraded, replaced and
tested its computer systems and equipment so as to be able to operate without
disruption due to Year 2000 issues. The Company presently believes that as a
result of modifications already made to existing software and conversion to new
software, the Year 2000 will not pose significant operations problems for its
computer systems. 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.
14
The cost of the Year 2000 systems evaluation and remediation has been funded
through operating cash flows and the Company has expensed these costs. The total
cost to obtain Year 2000 compliance approximated $20,000.
RESULTS OF OPERATIONS
The following table is derived from the Company's condensed consolidated
statements of operations for the three and nine months ended October 30, 1999
and October 31, 1998 and expresses for the periods certain data as a percentage
of net sales:
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
Net sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Gross profit (loss) 5.4 (2.4) 7. 9 (0.5)
Selling, general and administrative
expenses 4.8 8.4 6.3 12.5
Provision for impairment of Knit
business assets 2.3 -- 2.9 --
Amortization of intangibles -- 0.7 -- 1.0
------ ------ ------ ------
(Loss) from operations (1.7) (11.5) (1.2) (14.0)
Interest expense (income), net 0.3 (1.0) 0.8 (0.7)
------ ------ ------ ------
(Loss) before income taxes (2.0) (10.5) (2.0) (13.3)
Provision for income taxes -- 0.8 0.1 0.8
====== ====== ====== ======
Net (loss) (2.0) (11.3) (2.1) (14.1)
====== ====== ====== ======
THREE AND NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED OCTOBER 31, 1998.
Net Sales
Net sales for the third quarter of 1999 were $22.8 million, an increase of $9.6
million or 73% from $13.2 million in the third quarter of 1998. Net sales for
the nine months of 1999 were $49.5 million, an increase of $21.6 million or 77%
from $27.9 million for the comparable period in 1998. The increase in net sales
for the nine months of 1999 compared to the comparable period in 1998 was
primarily attributable to an increase in sales of the Woven division of $8.9
million and the Knit division of $12.7 million.
During the third quarter of 1999 and 1998, the Knit business accounted for 79%
and 61%, respectively, of Cygne's net sales. During the nine months of 1999 and
1998, the Knit business accounted for 65% and 69%, respectively, of Cygne's net
sales.
15
Woven division sales for the nine months of 1999 were $17.5 million, an increase
of $8.9 million or 104% from $8.6 million for the comparable period in 1998. The
increase in Woven division sales to The Limited, Inc. for the nine months of
1999 compared to the comparable period in 1998 of $9.8 million was offset by a
decrease in sales to other customers other than The Limited, Inc. The Limited,
Inc. accounted for 98% of the Woven division sales for the nine months of 1999
compared to 86% in the comparable period in 1998.
Knit division sales for the nine months of 1999 were $32.0 million, an increase
of $12.7 million or 65% from $19.3 million for the comparable period in 1998.
The increase in Knit division sales for the nine months of 1999 compared
to the comparable period in 1998 was primarily attributable to sales to its new
customer--WalMart.
GROSS PROFIT
The gross profit for the nine months of 1999 was $3.9 million, an increase of
$4.1 million from the gross loss of $0.2 million for the comparable period in
1998.
The Woven division had a gross profit for the nine months of 1999 was $2.4
million compared to a gross loss of $2.0 million in the comparable period in
1998. The gross margin for the nine months of 1999 was 14%. The gross profit
increase for the nine months of 1999 compared to the comparable prior period was
primarily due to its Central American operation earning a profit in 1999
compared to a significant loss in the prior comparable period.
The Knit division had a gross profit for the nine months of 1999 was $1.5
million, a $0.3 million or 17% decrease from the gross profit of $1.8 million in
the comparable period in 1998. The gross margin for the nine months of 1999 was
5% compared to 9% for the comparable prior period in 1998. The decrease in gross
profit and gross margin for the nine months ended October 30, 1999 compared to
the comparable prior period was primarily due to start-up costs associated with
its new customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months of 1999 were
$3.1 million, a decrease of $0.4 million or 11% from $3.5 million in the
comparable prior period in 1998. The decrease in expense for the nine months of
1999 compared to the comparable periods in 1998 was attributed to a reduction of
expenses of $1.0 million, in Corporate expenses, offset by increases in the
Woven division expenses of $0.5 million and Knit division expenses of $0.1
million.
16
The Woven division expenses for the nine months of 1999 were $1.5 million, an
increase of $.5 million, or 52% from $1.0 million in the comparable prior period
in 1998. The increase for the nine months of 1999 compared to the comparable
period in 1998 was attributable to increased staff to support the Woven division
sales increase of $8.9 million from the prior comparable period.
The Knit division expenses for the nine months of 1999 were $0.7 million an
increase of $0.1 million in the comparable prior period in 1998. The increase
was attributable to increased travel to service its new customer.
The Corporate expenses for the nine months of 1999 were $0.9 million, a decrease
of $1.0 million, or 51% from $1.9 million in the comparable prior period in
1998. The decrease for the nine months of 1999 were primarily attributable to
the termination of most of the corporate staff in 1998.
INTEREST
Interest expense for the nine months of 1999 was $399,000 as compared to net
interest income of $183,000 for the comparable period in 1998. The increase in
interest expense for the nine months of 1999 compared to the prior comparable
period was primarily attributable to increased borrowings used to fund the Knit
division's operations.
PROVISION FOR IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the Company's agreement to sell its Knit business, the
Company recorded on the condensed consolidated statements of operations a
provision for impairment of Knit business assets in the amount of $1,416,000
which consists of a loss on assets to be sold, transaction costs (including
taxes) 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.
PROVISION FOR INCOME TAXES
The provision for income taxes for nine months of 1999 represents provision for
minimum state income taxes. As of October 30, 1999, based upon tax returns filed
for the fiscal year ended January 30, 1999, the Company reported a net operating
loss carryforward for U.S. Federal income tax purposes of approximately
$112,000,000. If unused, these loss carryforwards will expire in the Company's
taxable years ending 2011 through 2014. Under Section 382 of the U.S. Internal
Revenue Code, if there is a more than 50% ownership change (as defined therein)
with respect to the Company's stock, the Company's loss carryforwards for U.S.
Federal and New York State and City tax purposes would be virtually eliminated.
As of October 30, 1999, based upon tax returns filed for the fiscal year ended
January 30, 1999, the Company reported net operating loss carryforwards for New
York State and City tax purposes (on a separate company basis) of approximately
$72,000,000 and $71,000,000, respectively. If unused, these loss carryforwards
will expire in the Company's taxable years ending in 2011 through 2014.
17
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 has received proceeds consisting of an interest bearing note and
cash of $5.1 million subject to post closing adjustments, from the consummation
of the sale of the Knit business, consisting of $4.1 million for the assets,
commission of $600,000 and a non-compete payment of $400,000. In addition, the
retained cash and accounts receivable and certain other assets of the MTGI
aggregated were approximately $4.4 million at October 30, 1999. The Company has
used a portion of the cash proceeds from the sale and the MTGI retained cash and
collection of MTGI accounts receivable to fund a portion of the transaction
expenses and taxes related to the sale, repaid bank borrowings related to MTGI
and a portion of other MTGI liabilities. After all Knit business obligations are
paid, the excess of the proceeds and MTGI cash and collections of MTGI accounts
receivable estimated to be $2.6 million will be used for general working
capital purposes.
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 October 30, 1999, the Company had
restricted cash at a bank of $1.6 million 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 (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $5,500,000; letters of credit not to exceed $3,000,000; overdraft
facility not to exceed $500,000; and bank guarantee for Israeli custom duties
not to exceed $500,000. Borrowings under this facility generally bear interest
at 1.0% over the prime rate, except that borrowings against trade accounts
receivable bear interest at 1.0% over the LIBOR rate. Borrowings under this
facility are subject to certain borrowing base limitations, are due on the
earlier of demand or the maturity date specified by the bank for each borrowing
and are secured by a lien on substantially all of the assets of the Israeli
subsidiary. At October 30, 1999, the outstanding loan under this facility was
$2.8 million and there were no letters of credit. On November 4, 1999, the
outstanding borrowings were repaid and the facility was terminated.
In September 1998, the Israeli bank made an additional $150,000 loan to the
Company's Israeli subsidiary which is also secured by a lien on its assets.
Principal payments under this loan are due in monthly installments of $6,250
through October 2000 and the loan bears interest of 7.2% payable monthly. At
October 30, 1999, the outstanding balance was $75,500. This loan was repaid on
November 4, 1999.
18
Net cash provided by operating activities for the nine months ended October 30,
1999 was $352,000 compared to net cash used in operating activities of $8.8
million in the comparable period in 1998. The decrease in net cash used in
operating activities was primarily the result of the $2.9 million decrease in
net loss, $4.9 million decrease in working capital requirements and $1.4 million
non-cash provision for impairment of Knit business assets.
The Company's financial performance for the next 12 months will depend upon a
variety of factors, including the amount of sales to The Limited, Inc. If the
Company would incur significant operating losses during the next 12 months, the
Company will face severe liquidity pressures which would adversely affect the
Company's financial condition. The Company is continuing to review its business
operations and could continue to incur additional costs in the future associated
with the restructuring or downsizing of its operations.
19
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
October 19, 1999.
b. The Amended and Restated Acquisition Agreement dated as of August 1, 1999
by and among M.T.G.I.--Textile Manufacturers Group (Israel) Ltd., an
Israeli corporation, MBS (Cygne) Company, a Delaware corporation, A.C.
Services, Inc., a Delaware corporation, and Jordache Limited, a Delaware
corporation, was approved and adopted at the Annual Meeting pursuant to
the following vote tabulation.
Votes Broker
Votes For Against Abstentions Non-Votes
--------- ------- ----------- ---------
7,167,731 93,328 4,300 3,785,871
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 10,955,940 95,290
Bernard M. Manuel 10,955,940 95,290
d. The amendment to the Certificate of Incorporation to reduce the number of
shares of Common Stock and Preferred Stock was approved and adopted at the
Annual Meeting pursuant to the following vote tabulation:
Votes Broker
Votes For Against Abstentions Non-Votes
--------- ------- ----------- ---------
7,214,809 45,350 5,200 3,785,871
In accordance with regulations issued by the Securities and Exchange Commission,
stockholder proposals intended for presentation at the fiscal 2000 Annual
Meeting of Stockholders must be received by the Corporate Secretary no later
than February 8, 2000 if such proposals are to be considered for inclusion in
the Company's Proxy Statement.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.37 Lease between the Company and 680 Fifth Avenue Associates, L.P.
27 Financial data schedule (for SEC use only)
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
21
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)
December 13, 1999 By: /s/ Bernard M. Manuel
------------------------------------------------
Bernard M. Manuel, Chairman of the Board
and Chief Executive Officer
December 13, 1999 By: /s/ Roy E. Green
------------------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
22