================================================================================
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 31, 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
incorporation or organization) Identification No.)
1372 BROADWAY, NEW YORK, NEW YORK 10018
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 354-6474
----------------------------------------------------
(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 11, 1998.
================================================================================
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
----------
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at October 31, 1998
and January 31, 1998........................................ 3
Condensed Consolidated Statements of Operations
for the three and nine months ended October 31, 1998
and November 1, 1997........................................ 4
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended October 31, 1998.................. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 31, 1998 and November 1, 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 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
October 31, January 31,
1998 1998
--------- ---------
(In thousands,
except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash (includes restricted cash of $1,699 and
$1,098, respectively) ....................................... $ 3,366 $ 10,926
Trade accounts receivable, net ................................ 6,030 6,012
Inventory ..................................................... 7,043 4,012
Other receivables and prepaid expenses ........................ 1,102 1,979
--------- ---------
Total current assets ............................................ 17,541 22,929
Fixed assets, net ............................................... 3,819 3,972
Other assets .................................................... 977 787
Goodwill, net ................................................... 1,789 2,062
--------- ---------
Total assets .................................................... $ 24,126 $ 29,750
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ......................................... $ 3,020 $ 1,319
Accounts payable .............................................. 1,537 3,348
Accrued expenses .............................................. 5,071 6,636
Income taxes payable .......................................... 6,058 6,068
--------- ---------
Total current liabilities ....................................... 15,686 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 ........................................... (112,486) (108,547)
Foreign currency translation adjustment ....................... (116) (116)
--------- ---------
Total stockholders' equity ...................................... 8,440 12,379
--------- ---------
Total liabilities and stockholders' equity ...................... $ 24,126 $ 29,750
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales ................................... $ 13,158 $ 15,729 $ 27,912 $ 34,369
Cost of goods sold .......................... 13,470 14,026 28,063 33,229
-------- -------- -------- --------
Gross (loss) profit ......................... (312) 1,703 (151) 1,140
Selling, general and administrative
expenses .................................. 1,108 2,296 3,480 8,985
Provision for lease termination
expenses .................................. -- 3,566 -- 3,566
Amortization of intangibles ................. 91 91 273 273
-------- -------- -------- --------
(Loss) from operations ...................... (1,511) (4,250) (3,904) (11,684)
Interest (income) expense, net .............. (134) (12) (183) (161)
-------- -------- -------- --------
(Loss) before income taxes .................. (1,377) (4,238) (3,721) (11,523)
Provision for income taxes .................. 107 51 218 153
-------- -------- -------- --------
Net (loss) .................................. $ (1,484) $ (4,289) $ (3,939) $(11,676)
======== ======== ======== ========
Net (loss) per share -- basic ............... $ (0.12) $ (0.34) $ (0.32) $ (0.94)
======== ======== ======== ========
Weighted average number of common
shares outstanding ........................ 12,438 12,438 12,438 12,438
======== ======== ======== ========
Net (loss) per share assuming dilution ...... $ (0.12) $ (0.34) $ (0.32) $ (0.94)
======== ======== ======== ========
Weighted average number of common
shares and dilutive securities ............ 12,438 12,438 12,438 12,438
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<CAPTION>
Common Stock Foreign
-------------------- Currency
Number Paid-in Translation (Accumulated
of Shares Amount Capital Adjustment Deficit) Total
--------- ------ -------- ---------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1998 .......... 12,438 $124 $120,918 $(116) $(108,547) $12,379
Net (loss) for the nine months
ended October 31, 1998 ............. -- -- -- -- (3,939) (3,939)
------ ---- -------- ----- --------- -------
Balance at October 31, 1998 .......... 12,438 $124 $120,918 $(116) $(112,486) $ 8,440
====== ==== ======== ===== ========= =======
</TABLE>
See accompanying notes.
5
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
------------------------
October 31, November 1,
1998 1997
---------- -----------
(In thousands)
OPERATING ACTIVITIES
Net (loss) ........................................... $ (3,939) $(11,676)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities
Depreciation and amortization .................... 380 819
Provision for lease termination expenses ......... -- 1,857
Write-off of fixed assets ........................ -- 1,709
Rent expense not currently payable ............... -- 57
Amortization of intangibles ...................... 273 273
Changes in operating assets and liabilities:
Trade accounts receivable ..................... (18) (3,718)
Inventory ..................................... (3,031) 893
Other receivables and prepaid expenses ........ 877 1,779
Accounts payable .............................. (1,811) (558)
Accrued expenses .............................. (1,565) (2,187)
Income taxes payable .......................... (10) 41
-------- --------
Net cash (used in) operating activities .............. (8,844) (10,711)
INVESTING ACTIVITIES
Purchase of fixed assets ............................. (227) (674)
Other assets ......................................... (190) (500)
-------- --------
Net cash (used in) investing activities .............. (417) (1,174)
FINANCING ACTIVITIES
Short-term borrowings, net ........................... 1,701 246
Repayments of long-term debt, net .................... -- (842)
-------- --------
Net cash provided by (used in) financing
activities ......................................... 1,701 (596)
Effect of exchange rate changes on cash .............. -- (115)
-------- --------
Net (decrease) in cash ............................... (7,560) (12,596)
Cash at beginning of period .......................... 10,926 22,246
-------- --------
Cash at end of period ................................ $ 3,366 $ 9,650
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid .................................... $228 $112
Interest paid ........................................ 201 188
See accompanying notes.
6
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 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 nine months
ended October 31, 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 nine months ended October 31, 1998 and
November 1, 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 established 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 nine
months ended October 31, 1998 was $1,484,000 and $3,939,000, respectively. The
comprehensive loss for the three and nine months ended November 1, 1997 was
$4,378,000 and $11,792,000, respectively.
Effective February 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments
7
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1998 (Unaudited)
of an Enterprise and Related Information", which supersedes SFAS Statement No.
14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131
established standards for the way 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 established 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.
October 31, January 31,
1998 1998
---------- ----------
(In thousands)
Raw materials and Work-in-Process...... $5,633 $3,593
Finished goods ........................ 1,410 419
------ ------
$7,043 $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 October 31, 1998
and January 31, 1998 the Company had restricted cash at a bank of $1,699,000 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 (as modified from time
to time and currently in effect): borrowings against trade accounts receivable
not to exceed $3,250,000; letters of credit not to exceed $3,250,000; 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 1.5% 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 October 31, 1998, outstanding loans under this facility
were $2,876,000 and letters of credit aggregating $1,399,000 had been issued.
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. The
principal payments under this loan are due in twenty-four monthly installments
of $6,250 starting in October 1998 and the loan bears interest of
8
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1998 (Unaudited)
7.2% payable monthly. At October 31, 1998 the outstanding balance was
$144,000.
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 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 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 NINE MONTHS ENDED
OCTOBER 31, 1998
Net sales .......................... $7,669 $24,055 $(3,812) $27,912
Operating (loss) ................... (2,698) (1,206) (3,904)
Identifiable assets ................ 11,747 12,379 24,126
FOR THE THREE MONTHS ENDED
OCTOBER 31, 1998
Net sales .......................... $4,858 $10,851 $(2,551) $13,158
Operating (loss) ................... (753) (758) (1,511)
9
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1998 (Unaudited)
TOTAL TOTAL INTERSEGMENT
U.S. FOREIGN ELIMINATIONS TOTAL
----- ------- ------------ -----
(In thousands)
FOR THE NINE MONTHS ENDED
NOVEMBER 1, 1997
Net sales .......................... $13,830 $21,779 $(1,240) $34,369
Operating (loss) income ............ (11,815) 131 (11,684)
Identifiable assets ................ 15,802 18,015 33,817
FOR THE THREE MONTHS ENDED
NOVEMBER 1, 1997
Net sales .......................... $ 5,860 $ 9,962 $ (93) $15,729
Operating (loss) income ............ (5,436) 1,186 (4,250)
- ----------
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.
Foreign net sales and identifiable assets principally represent the Company's
Asian operations. Foreign operating loss for the three and nine months
ended October 31, 1998 represents operating income from the Company's Asian
operations, offset by operating losses at the Company's Central American
operations of $1,700,000 and $2,900,000, respectively.
Foreign operating income for the three and nine months ended November 1, 1997
represents operating income from the Company's Asian operations, partially
offset by operating losses at the Company's Central American operations of
$116,000 and $417,000, respectively.
During the three months and nine months ended October 31, 1998 The Limited, Inc.
(consisting of The Limited Stores and Lerner) accounted for 59% and 58%,
respectively, of the Company's net sales. During the three months and nine
months ended November 1, 1997, The Limited, Inc. accounted for 67% and 65%,
respectively, of the Company's net sales.
10
<PAGE>
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 nine months ended October 31, 1998 The Limited,
Inc. (consisting of The Limited Stores and Lerner) accounted for 59% and 58%,
respectively, of Cygne's net sales. During the three months and nine months
ended November 1, 1997, The Limited, Inc. accounted for 67% and 65%,
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
<PAGE>
During the third quarter and first nine months ended October 31,1998, the
Company had gross loss of $312,000 and $151,000, respectively, and loss from
operations of $1.5 million and $3.9 million, respectively. In connection with
the Company's continuing review of its business operations, the Company has
during 1998 significantly reduced its selling, general and administrative
expenses. During the third quarter of 1998 the Company took additional steps to
improve its future operating results, particularly with respect to its Central
American operations, including the reduction of its workforce at its factory in
Guatemala from 1,009 to 555 employees. Although no assurances can be given, the
Company believes that the actions it has taken will improve its gross margins
and cash flow from operations and lead to the elimination of its operating
losses. Further, although no assurances can be given, the Company believes that
cash on hand, the credit facilities available to one of the Company's operating
subsidiaries in Israel and expected internally generated funds will be
sufficient to meet its operating needs and anticipated capital expenditures for
the next twelve months.
However, the Company's actual financial performance during the fourth
quarter of 1998 and the next twelve months will depend upon a variety of
factors, including, among other things, the amount of sales to The Limited,
Inc., the continuing availability of the Israeli credit facilities and a
successful conclusion to the ongoing effort to negotiate a satisfactory sublease
or termination of the lease for the Company's New York headquarters, as to which
no assurances can be given. If as a result of any of the foregoing factors or
otherwise the Company is unable to eliminate its operating losses, the Company
will face severe liquidity pressures in the next twelve months which would
adversely affect the Company's financial condition and results of operations.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the restructuring or downsizing
of its operations.
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 Year 2000 will not pose significant operations problems for
its computer systems. The Company, using both internal and external resources,
has begun to upgrade, replace and test its computer systems and equipment so as
to be able to operate without disruption due to Year 2000 issues. The Company
expects to complete its remediation efforts by mid 1999. 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.
The cost of the Year 2000 systems evaluation and remediation is being
funded through operating cash flows and the Company is expensing these costs.
While the total cost to obtain Year 2000 compliance is not known at this time,
the Company currently expects the cost to be less than $20,000, of which less
than half had been expended through October 31, 1998. The actual cost, however,
could exceed this estimate. These costs are not expected to have a material
effect on the Company's financial position, results of operations or cash flows.
12
<PAGE>
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 31, 1998
and November 1, 1997 and expresses for the periods certain data as a percentage
of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -------------------------
October 31, October 31, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross (loss) profit ................. (2.4) 10.8 (0.5) 3.3
Selling, general and
administrative expenses ........... 8.4 14.6 12.5 26.1
Provision for lease termination
expense ........................... 22.7 10.4
Amortization of intangibles ......... 0.7 0.5 1.0 0.8
----- ----- ----- -----
(Loss) from operations .............. (11.5) (27.0) (14.0) (34.0)
Interest (income) expense, net ...... (1.0) (0.1) (0.7) (0.5)
----- ----- ----- -----
(Loss) before income taxes .......... (10.5) (26.9) (13.3) (33.5)
Provision for income taxes .......... 0.8 0.4 0.8 0.5
----- ----- ----- -----
Net (loss) .......................... (11.3) (27.3) (14.1) (34.0)
===== ===== ===== =====
</TABLE>
NET SALES
Net sales for the third quarter of 1998 were $13.1 million, a decrease of
$2.6 million or 16.3% from $15.7 million for the comparable period in 1997. Net
sales for the first nine months of 1998 were $27.9 million, a decrease of $6.5
million or 18.8% from $34.4 million in the comparable period in 1997. The
decreases in net sales for the third quarter and the first nine months of 1998
compared to the comparable periods in 1997 were primarily attributable to
decreases in sales to divisions of The Limited, Inc. of $2.7 million and $6.4
million, respectively.
GROSS PROFIT (LOSS)
Gross loss for the third quarter of 1998 was $312,000, as compared to a
gross profit of $1.7 million in the comparable period in 1997 for a decrease of
$2.0 million. The gross loss for the first nine months of 1998 was $151,000 as
compared to a gross profit of $1.1 million in the comparable period in 1997 for
a decrease of $1.3 million. The decrease in gross profit for the third quarter
of 1998 was primarily attributable to a loss of $1.7 million (which includes
$376,000 of work force reduction costs) at the Company's Central American
operations for the third quarter 1998 compared to a gross loss of $116,000 in
the third quarter of 1997. The decrease in gross profit for the first nine
months of 1998 was primarily attributable to a gross loss at the Company's
Central American operations of $2.9 million compared to a gross loss of $417,000
in the comparable period in 1997.
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter of 1998
were $1.1 million, a decrease of $1.2 million or 52% from the $2.3 million in
the comparable period in 1997. Selling, general and administrative expenses for
the first nine months of 1998 were $3.5 million, a decrease of $5.5 million or
61% from $9.0 million in the comparable period in 1997. The decreases for the
third quarter and the first nine months of 1998 compared to the comparable
periods in 1997 were primarily attributable to termination of the Kenzo brand
name business which had $2.9 million in start-up expenses in the first nine
months of 1997 and decreases in other expenses of $1.2 million in the third
quarter and $6.1 million in the first nine months of 1998, respectively, as a
result of the downsizing of the Company.
INTEREST
Net interest income for the third quarter of 1998 was $134,000, compared to
net interest income of $12,000 in the comparable period in 1997. Net interest
income for the first nine months of 1998 was $183,000, compared to $161,000 in
the comparable period in 1997. Net interest income for the third quarter of 1998
includes $155,000 in interest income from a federal tax refund. Excluding the
interest received on the tax refund, the decrease in net interest income for
1998 compared to 1997 was primarily attributable to a reduction in the Company's
cash balance which was used to fund the Company's losses.
PROVISION FOR INCOME TAXES
The provision for income taxes 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 October 31, 1998 the Company had
restricted cash at a bank of $1.7 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 $3.2 million; letters of credit not to exceed $3.2
14
<PAGE>
million; 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 1.5% 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. Termination by the bank of this
facility could have a material adverse effect on the Company's financial
condition and results of operations. At October 31, 1998, outstanding loans
under this facility were $2.9 million and letters of credit aggregating $1.4
million had been issued.
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 twenty-four monthly installments
of $6,250 starting in October 1998 and the loan bears interest of 7.2% payable
monthly. At October 31, 1998 the outstanding balance was $144,000.
Net cash used in operating activities for the first nine months of 1998 was
$8.8 million compared to net cash used in operating activities of $10.7 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 $3.7
million, lower receivables of $2.8 million and approximately $600,000 net
increase in accounts payable and accrued expenses, partially offset by higher
inventories of $3.9 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.
During the third quarter and first nine months ended October 31,1998, the
Company had gross loss of $312,000 and $151,000, respectively, and loss from
operations of $1.5 million and $3.9 million, respectively. In connection with
the Company's continuing review of its business operations, the Company has
during 1998 significantly reduced its selling, general and administrative
expenses. During the third quarter of 1998 the Company took additional steps to
improve its future operating results, particularly with respect to its Central
American operations, including the reduction of its workforce at its factory in
Guatemala from 1,009 to 555 employees. Although no assurances can be given, the
Company believes that the actions it has taken will improve its gross margins
and cash flow from operations and lead to the elimination of its operating
losses. Further, although no assurances can be given, the Company believes that
cash on hand, the credit facilities available to one of the Company's operating
subsidiaries in Israel and expected internally generated funds will be
sufficient to meet its operating needs and anticipated capital expenditures for
the next twelve months.
15
<PAGE>
However, the Company's actual financial performance during the fourth
quarter of 1998 and the next twelve months will depend upon a variety of
factors, including, among other things, the amount of sales to The Limited,
Inc., the continuing availability of the Israeli credit facilities and a
successful conclusion to the ongoing effort to negotiate a satisfactory sublease
or termination of the lease for the Company's New York headquarters, as to which
no assurances can be given. If as a result of any of the foregoing factors or
otherwise the Company is unable to eliminate its operating losses, the Company
will face severe liquidity pressures in the next twelve months which would
adversely affect the Company's financial condition and results of operations.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the restructuring or downsizing
of its operations.
16
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
On December 3, 1998 Mr. Stuart B. Katz resigned as a director of
the Company.
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.
17
<PAGE>
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 14, 1998 By: /s/ BERNARD M. MANUEL
------------------------------------
Bernard M. Manuel, Chairman of the
Board and Chief Executive Officer
December 14, 1998 By: /s/ ROY E. GREEN
------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Condensed Consolidated Balance Sheets and Condensed Consolidated
Statements of Operations and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 3,366
<SECURITIES> 0
<RECEIVABLES> 6,030
<ALLOWANCES> 0
<INVENTORY> 7,043
<CURRENT-ASSETS> 17,541
<PP&E> 5,416
<DEPRECIATION> 1,597
<TOTAL-ASSETS> 24,126
<CURRENT-LIABILITIES> 15,686
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 8,316
<TOTAL-LIABILITY-AND-EQUITY> 24,126
<SALES> 27,912
<TOTAL-REVENUES> 27,912
<CGS> 28,063
<TOTAL-COSTS> 28,063
<OTHER-EXPENSES> 3,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (183)
<INCOME-PRETAX> (3,721)
<INCOME-TAX> 218
<INCOME-CONTINUING> (3,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,939)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
