================================================================================
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 May 1, 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
incorporation or organization) Identification No.)
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 June 11, 1999.
================================================================================
<PAGE>
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 May 1, 1999
and January 30, 1999 .......................................... 3
Condensed Consolidated Statements of Operations
for the three months ended May 1, 1999 and May 2, 1998 ........ 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended May 1, 1999 ........................ 5
Condensed Consolidated Statements of Cash Flows
for the three months ended May 1, 1999 and May 2, 1998 ........ 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 6. Exhibits and Reports on Form 8-K ............................. 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
May January
1, 1999 30, 1999
--------- --------
(In thousands, except
share and per share
amounts)
ASSETS
Current assets:
Cash (includes restricted cash of $1,576
and $669, respectively) $ 4,495 $ 3,686
Trade accounts receivable, net 5,618 8,242
Inventory 3,198 2,705
Assets held for sale 4,961 4,700
Other receivables and prepaid expenses 1,185 996
------- -------
Total current assets 19,457 20,329
Fixed assets, net 2,680 2,720
Other assets 550 550
------- -------
Total assets $22,687 $23,599
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,204 $2,754
Accounts payable 3,524 4,579
Accrued expenses 3,768 4,140
Income taxes payable 6,066 6,080
------- -------
Total current liabilities 16,562 17,553
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 (114,793) (114,872)
Foreign currency translation adjustment (124) (124)
------- -------
Total stockholders' equity 6,125 6,046
------- -------
Total liabilities and stockholders' equity $22,687 $23,599
======= =======
See accompanying notes.
3
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
------------------------
May May
1, 1999 2, 1998
-------- --------
(In thousands,
except per share amounts)
Net sales $ 13,561 $ 6,245
Cost of goods sold 12,398 6,483
-------- --------
Gross profit (loss) 1,163 (238)
Selling, general and administrative
expenses 920 1,016
Amortization of intangibles -- 91
-------- --------
Income (loss) from operations 243 (1,345)
Interest income (20) (111)
Interest expense 182 61
-------- --------
Income (loss) before income taxes 81 (1,295)
Provision for income taxes 2 33
-------- --------
Net income (loss) $ 79 $ (1,328)
======== ========
Net income (loss) per share - basic $0.01 $(0.11)
===== ======
Weighted average number of common
shares outstanding 12,438 12,438
====== ======
Net income (loss) per share assuming
dilution $0.01 $(0.11)
===== ======
Weighted average number of common
shares and dilutive securities 12,438 12,438
====== ======
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1999 12,438 $ 124 $ 120,918 $ (124) $(114,872) $ 6,046
Foreign currency
translation adjustment -- -- -- -- -- --
Net income for the three
months ended May 1, 1999 -- -- -- -- 79 79
------ ------ --------- ------- --------- -------
Comprehensive income for
the three months ended
May 1, 1999 -- -- -- -- -- 79
------ ------ --------- ------- --------- -------
Balance at May 1, 1999 12,438 $ 124 $ 120,918 $ (124) $(114,793) $ 6,125
====== ====== ========= ======= ========= =======
</TABLE>
See accompanying notes.
5
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
May May
1, 1999 2, 1998
------- -------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 79 $(1,328)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 126 123
Amortization of intangibles -- 91
Changes in operating assets and liabilities:
Trade accounts receivable 2,601 3,887
Inventory (99) 468
Other receivables and prepaid expenses (818) (845)
Accounts payable (1,094) (1,292)
Accrued expenses (301) (735)
Income taxes payable (14) (20)
------ -------
Net cash provided by operating activities 480 349
------ -------
INVESTING ACTIVITIES
Purchase of fixed assets (121) (100)
------ -------
Net cash (used in) investing activities (121) (100)
------ -------
FINANCING ACTIVITIES
Borrowings (repayments) of short-term
borrowings, net 450 (96)
------ -------
Net cash provided by (used) in financing
activities 450 (96)
------ -------
Net increase in cash 809 153
Cash at beginning of period 3,686 10,926
------ -------
Cash at end of period $4,495 $11,079
====== =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid $32 $53
Interest paid 182 61
See accompanying notes.
6
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 1, 1999 (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 months ended
May 1, 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 March 25, 1999, the Company entered into an agreement, subject to
stockholder approval, pursuant to which it will sell substantially all of the
assets of Cygne's Knit business. The purchase price consideration in the
transaction consists of a dollar amount in cash equal to the adjusted net book
value of inventory, fixed assets, advances to vendors, and investment in a dye
house facility plus $100,000. The purchaser will also assume all customer and
vendor purchase orders and all lease obligations. In addition, the purchaser has
agreed to pay Cygne commissions of 6% on orders for products included in the
assets, up to a maximum of $600,000, and a non-compete payment of $400,000. In
connection with the transaction Cygne will pay severance of $800,000 to the
person who runs the Knit business.
7
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 1, 1999 (UNAUDITED)
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
May 1, January 30,
1999 (1) 1999 (1)
-------- -----------
(In thousands)
Raw materials and Work-in-Process $2,874 $2,310
Finished goods 324 395
------ ------
$3,198 $2,705
====== ======
----------
(1) Excludes $3,176,000 and $3,426,000 of inventory of the Knit business being
sold at May 1, 1999 and January 30, 1999, respectively.
3. CREDIT FACILITIES
The Company obtains letters of credit from domestic banks secured by a cash
deposit from the Company. At May 1, 1999 and January 30, 1999 the Company has
restricted cash at a bank of $1,576,000 and $669,000, 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 1.0% 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 May 1, 1999, outstanding loans under this facility were
$3,091,000 and letters of credit aggregating $3,795,000 had been issued. This
facility, which supports the operations of the Knit business, will terminate
upon the closing of the sale.
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 May
1, 1999 the outstanding balance was $113,000. This facility, which supports the
operations of the Knit business, will terminate upon the closing of the sale.
The loans to the Israeli subsidiary will be repaid from the proceeds from
the Knit Disposition and this credit facility will terminate.
8
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 1, 1999 (UNAUDITED)
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.
In February 1999, the U.S. Customs Service commenced an audit of the
Company's import operations for 1995, 1996 and 1997. It is not possible at this
time to predict the outcome of the audit.
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, or 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 May 1, 1999, based upon tax returns filed and to be filed the Company
expects to report a net operating loss carryforward for U.S. Federal income tax
purposes of approximately $108,000,000. 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 May 1, 1999, based upon tax returns filed and to be filed the Company
expects to report net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $70,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
6. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in two segments
of the apparel
9
<PAGE>
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 has agreed to sell its
Knit business. See Note 1.
<TABLE>
Net sales to unaffiliated customers and identifiable assets were as
follows:
<CAPTION>
Knit Woven
Division Division Corporate Total
FOR THE THREE MONTHS ENDED MAY 1, 1999 -------- -------- --------- -------
<S> <C> <C> <C> <C>
Net sales $ 8,172 $ 5,389 -- $13,561
Gross profit 349 814 -- 1,163
Selling, general and administrative 201 420 299 920
------- ------- ------- -------
Income (loss) from operations $ 148 $ 394 $ (299) 243
======= ======= =======
Interest income (20)
Interest expense 182
---
Income before taxes 81
Provision for income taxes 2
-------
Net income $ 79
------- ------- ------- =======
Identifiable assets $ 9,733 $ 7,507 $ 5,447 $22,687
======= ======= ======= =======
FOR THE THREE MONTHS ENDED MAY 2, 1998
Net sales $ 4,022 $ 2,223 -- $ 6,245
Gross profit (loss) 122 (360) -- (238)
Selling, general and administrative 204 333 479 1,016
Amortization of intangibles 91 -- -- 91
------- ------- ------- -------
(Loss) from operations $ (173) $ (693) $ (479) (1,345)
Interest income ======= ======= ======= (111)
Interest expense 61
-------
(Loss) before income tax (1,295)
Provision for income taxes 33
-------
Net (loss) $(1,328)
------- ------- ------- =======
Identifiable assets $10,076 $ 4,848 $11,355 $26,279
======= ======= ======= =======
</TABLE>
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 30, 1999. The Company assumes no obligation to
update or revise any such forward-looking statements.
General
- -------
On March 25, 1999, the Company entered into an agreement, subject to
stockholder approval, to sell its Knit business (the "Knit Disposition"), which
consists of (i) certain assets of M.T.G.I. - Textile Manufacturers Group
(Israel), Ltd. ("MTGI"), the Company's wholly-owned subsidiary located in
Israel, and (ii) the stock of Wear & Co. S.r.l. ("Wear"), the Company's
wholly-owned subsidiary located in Italy (collectively the "Knit Disposition").
Cygne would retain all accounts receivable.
The purchase price to be paid in the transaction will be a dollar amount in
cash equal to the adjusted net book value (as defined) of the inventory, fixed
assets, advances to vendors, and investment in a dyehouse facility, plus
$100,000. Based on the book value of such assets at May 1, 1999, the price would
be approximately $5.0 million. The purchaser will also assume all customer and
vendor purchase orders and all lease obligations. In addition, the purchaser has
agreed to pay Cygne commissions of 6% on orders for products included in the
assets, up to a maximum of $600,000, and a non-compete payment of $400,000. In
connection with the transaction Cygne will pay severance of $800,000 to the
person who runs the Knit business.
During the first quarter of 1999 and of 1998, the Knit business accounted
for 60% and 64%, 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 $5.4 million for the first quarter ended May 1, 1999 and pro forma
income from operations of $95,000. Pro forma net income for the first quarter
ended May 1, 1999, would have been $53,000 or break-even on a per share basis.
During the first quarter of 1999 and of 1998 The Limited, Inc. (consisting
primarily of The Limited Stores and Lerner) accounted for 50% and 70%,
respectively, of Cygne's net sales. During the first quarter of 1999, The
Limited Inc. accounted for 17% and 99% of net sales of the Knit business and
Woven business, respectively. As a result of the sale of the Knit
11
<PAGE>
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.
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 already made to existing software and
conversions 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.
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 months ended May 1, 1999 and May 2, 1998
and expresses for the periods certain data as a percentage of net sales.
12
<PAGE>
Three Months Ended
--------------------
May May
1, 1999 2, 1998
------- -------
Net sales 100.0% 100.0%
===== =====
Gross profit (loss) 8.6 (3.8)
Selling, general and administrative
expenses 6.8 16.3
Amortization of intangibles -- 1.5
----- -----
Income (loss) from operations 1.8 (21.6)
Interest expense (income), net 1.2 (0.8)
----- -----
Income (loss) before income taxes 0.6 (20.8)
Provision for income taxes 0.0 0.5
----- -----
Net income (loss) 0.6 (21.3)
===== =====
THE FIRST QUARTER OF 1999 COMPARED TO THE FIRST QUARTER OF 1998
Net Sales
Net sales for the first quarter of 1999 were $13.6 million, an increase of
$7.4 million or 117% from $6.2 million in the first quarter of 1998. The
increase in net sales for the first quarter of 1999 compared to the first
quarter of 1998 was primarily attributable to an increase in sales to divisions
of The Limited, Inc. of $2.4 million and sales to new customers of $5.0 million.
Woven division sales for the first quarter of 1999 were $5.4 million, an
increase of $3.2 million or 142% from $2.2 million in the first quarter of 1998.
The increase in sales to The Limited, Inc. of $3.8 million was offset by a
decrease in sales to other customers.
Knit division sales for the first quarter of 1999 were $8.2 million, an
increase of $4.1 million or 103% from $4.0 million in the first quarter of 1998.
The decrease in sales to The Limited, Inc. of $1.4 million was offset by an
increase in sales to other customers.
Gross Profit
The gross profit for the first quarter of 1999 was $1.2 million, an
increase of $1.4 million from the gross loss of $0.2 million in the first
quarter of 1998. The gross margin for the first quarter of 1999 was 8.6%
compared to a gross margin loss in the first quarter of 1998.
The Woven division had a gross profit in the first quarter of 1999 of $0.8
million, a $1.2 million increase from the gross loss of $0.3 million in the
first quarter of 1998. The gross margin for the first quarter of 1999 was 15.1%
compared to a gross margin loss in the first quarter of 1998.
The Knit division had a gross profit in the first quarter of 1999 of $0.3
million, an increase of $0.2 million or 186% from $0.1 million in the first
quarter of 1998. The gross margin for the first quarter of 1999 was 4.3%
compared to 3.0% in the first quarter of 1998.
13
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 1999
were $0.9 million, a decrease of $0.1 million or 9% from $1.0 million in the
first quarter of 1998. The decrease in expense was attributed to a reduction of
SG&A expenses of $0.2 million in Corporate SG&A offset by an increase in the
Woven division SG&A of $0.1 million.
The Woven division SG&A expenses for the first quarter of 1999 were $0.4
million, an increase of $0.1 million or 26% from $0.3 million in the first
quarter of 1998. The increase was attributable to increased staff to support the
Woven division sales increase of 142%.
The Knit division SG&A expenses were $0.2 million in the first quarter of
1999 and 1998, respectively.
The Corporate SG&A expenses for the first quarter of 1999 were $0.3
million, a decrease of $0.2 million or 38% from $0.5 million in the first
quarter of 1998. The decrease was primarily attributable to severance expense
incurred in the first quarter of 1998.
Interest
Net interest expense for the first quarter of 1999 was $162,000 as compared
to net interest income of $51,000 in the first quarter of 1998. The decrease was
primarily attributable to a reduction in the Company's cash balance and
increased borrowings, which were used to fund the Company's operations.
Provision for Income Taxes
The provision for income taxes for the first quarter of 1999 represents
provision for minimum state income taxes and taxes payable to foreign countries
for income earned in the foreign countries. As of May 1, 1999, based upon tax
returns filed and to be filed the Company expects to report a net operating loss
carryforward for U.S. Federal income tax purposes of approximately $108,000,000.
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 May 1, 1999, based upon tax returns filed and to be filed the Company
expects to report net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $70,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2014.
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 May 1, 1999 the Company had
restricted cash at a bank of $1.6 million as collateral for letters of credit.
14
<PAGE>
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 1.0% 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 May 1, 1999, outstanding loans under this facility were
$3,091,000 and letters of credit aggregating $3,795,000 had been issued. This
facility, which supports the operations of the Knit business, will terminate
upon the closing of the sale of the Knit business.
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 May
1, 1999 the outstanding balance was $113,000. This facility, which supports the
operations of the Knit business, will terminate upon the closing of the sale of
the Knit business.
The loans to the Israeli subsidiary will be repaid from the proceeds from
the Knit Disposition and this credit facility will terminate.
Net cash provided by operating activities for the first quarter of 1999 was
$0.5 million compared to net cash provided by operating activities of $0.3
million in the comparable prior period of 1998. The reduction in the net loss in
1999 from 1998 was approximately $1,407,000, which was offset by an increase in
working capital requirements.
The Company's financial performance for the next twelve months will depend
upon a variety of factors, including the amount of sales to The Limited, Inc.
and the completion of the Knit Disposition. If the Company would incur
significant operating losses during the next twelve 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.
15
<PAGE>
PART II OTHER INFORMATION
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
Current Report of Form 8-K dated March 25, 1999, reporting
that Cygne Designs, Inc. had agreed to sell substantially
all the assets of its Knit division to Jordache Limited.
16
<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)
June 14, 1999 By: /s/ Bernard M. Manuel
--------------------------------------
Bernard M. Manuel, Chairman of the
Board and Chief Executive Officer
June 14, 1999 By: /s/ Roy E. Green
--------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
17
<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> 3-MOS
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-END> MAY-1-1999
<CASH> 4,495
<SECURITIES> 0
<RECEIVABLES> 5,618
<ALLOWANCES> 0
<INVENTORY> 3,198
<CURRENT-ASSETS> 19,457
<PP&E> 3,944
<DEPRECIATION> 1,264
<TOTAL-ASSETS> 22,687
<CURRENT-LIABILITIES> 16,562
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 6,001
<TOTAL-LIABILITY-AND-EQUITY> 22,687
<SALES> 13,561
<TOTAL-REVENUES> 13,561
<CGS> 12,398
<TOTAL-COSTS> 12,398
<OTHER-EXPENSES> 920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (162)
<INCOME-PRETAX> 81
<INCOME-TAX> 2
<INCOME-CONTINUING> 79
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
