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 April 29, 2000
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)
1410 BROADWAY, NEW YORK, NEW YORK 10018
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 997-7767
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
(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, $0.01 par value, 12,438,038 shares as of June 6, 2000
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at April 29, 2000 and
January 29, 2000............................................................3
Condensed Consolidated Statements of Operations for the three
months ended April 29, 2000 and May 1, 1999.................................4
Condensed Consolidated Statement of Stockholders' Equity for the
three months ended April 29, 2000...........................................5
Condensed Consolidated Statements of Cash Flows for the
three months ended April 29, 2000 and May 1, 1999...........................6
Notes to Condensed Consolidated Financial Statements...........................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................12
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.....................................16
2
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<TABLE>
<CAPTION>
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
April January
29, 2000 29, 2000
--------- ---------
ASSETS (IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
Current assets:
Cash (includes restricted cash of $933 and $722, respectively) ......... $ 6,295 $ 7,020
Trade accounts receivable, net ......................................... 807 1,853
Inventory .............................................................. 3,174 2,421
Other receivables and prepaid expenses ................................. 411 402
--------- ---------
Total current assets ...................................................... 10,687 11,696
Fixed assets, net ......................................................... 2,406 2,472
Other assets .............................................................. 592 600
--------- ---------
Total assets .............................................................. $ 13,685 $ 14,768
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 629 $ 1,200
Accrued expenses ....................................................... 1,844 2,448
Income taxes payable ................................................... 5,976 5,977
--------- ---------
Total current liabilities ................................................. 8,449 9,625
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 .................................................... (115,806) (115,899)
--------- ---------
Total stockholders' equity ................................................ 5,236 5,143
--------- ---------
Total liabilities and stockholders' equity ................................ $ 13,685 $ 14,768
========= =========
SEE ACCOMPANYING NOTES
</TABLE>
3
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Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
------------------
April May
29, 2000 1, 1999
------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net sales ............................................. $ 5,117 $13,561
Cost of goods sold .................................... 4,354 12,398
------- -------
Gross profit .......................................... 763 1,163
Selling, general, and administrative expenses ......... 698 920
------- -------
Income from operations ................................ 65 243
Interest income ....................................... (51) (20)
Interest expense ...................................... 18 182
------- -------
Income before income taxes ............................ 98 81
Provision for income taxes ............................ 5 2
------- -------
Net income ............................................ $ 93 $ 79
------- -------
Net income per share - basic and dilutive ............. $ 0.01 $ 0.01
======= =======
Weighted average number of common shares
outstanding .......................................... 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
NUMBER PAID-IN (ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ------ ------- ------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 29, 2000 ................. 12,438 $124 $120,918 $(115,899) $5,143
Net income for the three months
ended April 29, 2000 ..................... -- -- -- 93 93
------ ------ -------- ------------ ------
Balance at April 29, 2000 ................... 12,438 $124 $120,918 $(115,806) $5,236
====== ====== ======== ============= ======
SEE ACCOMPANYING NOTES
</TABLE>
5
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Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended
-------------------
April May
29, 2000 1, 1999
-------- -------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income .............................................. $ 93 $ 79
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation ....................................... 81 126
Changes in operating assets and liabilities:
Trade accounts receivable ........................ 1,046 2,601
Inventory ........................................ (753) (99)
Other receivables and prepaid expenses ........... (9) (818)
Accounts payable ................................. (571) (1,094)
Accrued expenses ................................. (604) (301)
Income taxes payable ............................. (1) (14)
-------- -------
Net cash (used in) provided by operating activities ..... (718) 480
INVESTING ACTIVITIES
Purchase of fixed assets, net ........................... (15) (121)
Other assets ............................................ 8 --
-------- -------
Net cash (used in) investing activities ................. (7) (121)
FINANCING ACTIVITIES
Borrowings (repayments) of short-term borrowings, net ... -- 450
-------- -------
Net cash provided by financing activities ............... -- 450
Net (decrease) increase in cash ......................... (725) 809
Cash at beginning of period ............................. 7,020 3,686
-------- -------
Cash at end of period ................................... $ 6,295 $ 4,495
======== =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid ....................................... $ 6 $ 32
Interest paid ........................................... 18 182
SEE ACCOMPANYING NOTES
6
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) April 29, 2000
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 April 29, 2000 are
not necessarily indicative of the results that may be expected for the fiscal
year ended February 3, 2001. 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 29, 2000. The balance sheet at January 29, 2000
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 KNIT BUSINESS
On November 15, 1999, the Company consummated the sale of its Israeli-based Knit
business to Jordache Limited ("Jordache"). The sale was effective as of October
31, 1999. The assets transfered to Jordache consisted of substantially all of
the assets used by the Israeli-based 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. The sale did not include cash,
accounts receivable, and certain other assets of the MTGI business. The
liabilities assigned to, and assumed by, Jordache were all obligations of MTGI
under the contracts and registration included within the assets sold to
Jordache. Jordache provided financing to the Company in connection with certain
knit product purchase orders being manufactured by MTGI prior to the closing.
In consideration of the sale to Jordache of the assets, Jordache paid the
Company approximately $4.7 million before transaction costs. The Company has
used the proceeds from the sale together with MTGI retained cash and collections
of MTGI accounts receivable to pay transaction costs, repay MTGI bank
borrowings, and to pay other MTGI liabilities.
7
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Unaudited)(continued)
April 29, 2000
Since the sale of the Israeli-based Knit business, the Company has contacted
potential customers concerning the sale of Knit products under the customers'
own labels. In addition, the Company has arrangements in place to produce Knit
products in Guatemala and China. While the Company has no confirmed orders at
this time, the Company expects that such orders will be forthcoming.
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
April January
29, 2000 29, 2000
-------- --------
($ in thousands)
Raw materials and Work-in-Process ...... $3,089 $2,186
Finished goods ......................... 85 235
------ ------
$3,174 $2,421
====== ======
3. CREDIT FACILITIES
The Company obtains letters of credit from a domestic bank secured by a cash
deposit from the Company. At April 29, 2000 and January 29, 2000, the Company
had restricted cash at a bank of $933,000 and $722,000, respectively, to secure
letters of credit.
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.
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 $16,000,000 (including some
penalties but not interest). Depending on the amount of the
8
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Unaudited)(continued)
April 29, 2000
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.
On October 31, 1999, the effective date of sale of the Company's Israeli-based
Knit business, the Company's wholly-owned subsidiary, M.T.G.I. - Textile
Manufacturers Group (Israel) Ltd. ("MTGI") had its tax-free status in Israel
terminated retroactive to January 1, 1994. On June 2, 2000, the Israeli Tax
Authority ("Authority") has issued an assessment, including interest, of
approximately $412,000 on the tax returns due by MTGI on account of the
termination of MTGI's tax-free status for the years ending December 31, 1994
through December 31, 1997.
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.
As of April 29, 2000, based upon tax returns filed and to be filed for the
fiscal year ended January 29, 2000, the Company reported a net operating loss
carryforward for U.S. Federal income tax purposes of approximately $114,000,000.
If unused, these loss carryforwards will expire in the Company's taxable years
ending 2011 through 2015. 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 April 29, 2000, based upon tax returns filed and to be filed for the
fiscal year ended January 29, 2000, the Company reported net opreating loss
carryforwards for New York State and City tax purposes (on a separate company
basis) of approximately $75,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2014.
6. SEGMENT INFORMATION
Prior to the sale of its Israeli-based Knit business on November 15, 1999,
effective as of October 31, 1999 (see Note 1), based on the criteria in SFAS No.
131, the Company operated in two segments of the apparel market: woven career
and casual women's sportswear and knit career and casual women's sportswear.
Since the sale, the Company operates in one segment of the apparel market -
women's career and casual sportswear, which is referred to in this segment note
and elsewhere as the Woven division. The Company sources and manufactures
garments which have
9
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Unaudited)(continued)
April 29, 2000
been designed and developed by the customer. Net sales to unaffiliated customers
and identifiable assets were as follows:
WOVEN
DIVISION CORPORATE TOTAL
-------- --------- -----
($ in thousands)
FOR THE THREE MONTHS ENDED APRIL 29, 2000
Net Sales ........................................ $5,117 -- $5,117
Gross profit ..................................... 763 -- 763
Selling, general and administrative .............. 465 233 698
------ ------ -------
Income (loss) from operations .................... 298 (233) 65
Interest income .................................. (51)
Interest expense ................................. 18
-------
Income before income taxes ....................... 98
Provision for income taxes ....................... 5
-------
Net income ....................................... $ 93
=======
Depreciation expense ............................. $ 75 $ 6 $ 81
====== ====== =======
Identifiable assets .............................. $6,805 $6,880 $13,685
====== ====== =======
10
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<TABLE>
<CAPTION>
ISRAELI-
BASED
KNIT WOVEN
BUSINESS DIVISION CORPORATE TOTAL
-------- -------- --------- --------
($ in thousands)
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED MAY 1, 1999
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 income taxes ....................... 81
Provision for income taxes ....................... 2
--------
Net income ....................................... $79
========
Depreciation expense ............................. $ 45 $ 78 $ 3 $ 126
======== ======== ========= ========
Identifiable assets .............................. $ 9,733 $ 7,507 $ 5,447 $ 22,687
======== ======== ========= ========
</TABLE>
11
<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 WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE STATED IN SUCH STATEMENTS. SUCH RISKS, UNCERTAINTIES, AND FACTORS INCLUDE,
BUT ARE NOT LIMITED TO, A DECLINE IN DEMAND FOR MERCHANDISE OFFERED BY THE
COMPANY OR 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, AND GENERAL ECONOMIC CONDITIONS, AS
WELL AS OTHER RISKS DETAILED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
JANUARY 29, 2000. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE OR REVISE ANY SUCH
FORWARD-LOOKING STATEMENTS.
GENERAL
On November 15, 1999, the Company consummated the sale of its Israeli-based Knit
business to Jordache Limited ("Jordache"). The sale was effective as of October
31, 1999. The assets transfered to Jordache consisted of substantially all of
the assets used by the Israeli-based 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. The sale did not include cash,
accounts receivable, and certain other assets of the MTGI business. The
liabilities assigned to, and assumed by, Jordache were all obligations of MTGI
under the contracts and registration included within the assets sold to
Jordache. Jordache provided financing to the Company in connection with certain
knit product purchase orders being manufactured by MTGI prior to the closing.
In consideration of the sale to Jordache of the assets, Jordache paid the
Company approximately $4.7 million before transaction costs. The Company has
used the proceeds from the sale together with MTGI retained cash and collections
of MTGI accounts receivable to pay transaction costs, repay MTGI bank
borrowings, and to pay other MTGI liabilities.
Since the sale of the Israeli-based Knit business, the Company has contacted
potential cutomers concerning the sale of Knit products under the customers own
labels. In addition, the Company has arrangements in place to produce Knit
products in Guatemala and China. While the Company
12
<PAGE>
has no confirmed orders at this time, the Company expects such orders will be
forthcoming.
If the sale of the Israeli-based Knit business had been consummated on January
31, 1999, the Company would have had pro forma net sales of $5,389,000 for the
three months ended May 1, 1999 and pro forma income from operations of $95,000.
Pro forma net income for the three months ended May 1, 1999 would have been
$53,000 or a breakeven on a per share basis.
During the first quarter of 2000 and 1999, The Limited, Inc. (Lerner) accounted
for 97% and 50%, respectively, of Cygne's net sales. During the first quarter of
2000 and 1999, The Limited, Inc. accounted for 97% and 99% of the Woven division
business, respectively. As a result of the sale of the Israeli-based Knit
business, the remaining business is more dependent on The Limited, Inc. than it
was. Although Cygne has a long- established relationship with The Limited, Inc.,
its key customer, Cygne does not have long-term contracts with The Limited, Inc.
The Company's future success will be dependent upon its ability to attract new
customers and to maintain its relationship with The Limited, Inc. There can be
no assurance that The Limited, Inc. will continue to purchase merchandise from
the Company at the same rate or at all in the future, or that the Company will
be able to attract new customers. In addition, as a result of the Company's
dependence on The Limited, Inc., The Limited, Inc. has the ability to exert
significant control over the Company's business decisions, including prices.
Furthermore, The Limited, Inc. procures directly a substantial portion of its
apparel product requirements through its sourcing subsidiary, and such
subsidiary will continue to be a major competitor of the Company with respect to
the Company's business with The Limited, Inc. In addition, the apparel divisions
of The Limited, Inc. have formed direct sourcing departments.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the further restructuring of its
operations.
The apparel industry is highly competitive and historicaly has been subject to
substantial cyclical variation, with purchases of apparel and related goods
tending to decline during recessionary periods when disposable income is low.
This could have a material adverse effect on the Company's business. Retailers,
including customers of the Company, are increasingly sourcing private label
products themselves rather than utilizing outside vendors like the Company.
13
<PAGE>
RESULTS OF OPERATIONS
The following table is derived from the Company's condensed consolidated
statements of operations for the three months ended April 29, 2000 and May 1,
1999 and expresses for the periods certain data as a percentage of net sales:
Three Months Ended
------------------
April May
29, 2000 1, 1999
-------- -------
Net sales ........................................... 100% 100%
======= =======
Gross profit ........................................ 14.9 8.6
Selling, general, and administrative expenses ....... 13.6 6.8
------- -------
Income from operations .............................. 1.3 1.8
Interest (expense) income, net ...................... 0.6 (1.2)
------- -------
Income before income taxes .......................... 1.9 0.6
Provision for income taxes .......................... 0.1 0.0
------- -------
Net income .......................................... 1.8 0.6
======= =======
THREE MONTHS ENDED APRIL 29, 2000 COMPARED TO THREE MONTHS ENDED MAY 1, 1999.
The Company sold its Israeli-based Knit business effective October 31, 1999.
Accordingly, the Company's results of operations for the period January 30, 2000
through April 29, 2000 do not include the results of the Knit business sold,
whereas the results of operations for the comparable period in 1999 do include
the results of the Knit business sold. As a result, a comparison of 2000 and
1999 may not be meaningful to the extent effected by the sale of the
Israeli-based Knit business.
NET SALES
Net sales for the first quarter of 2000 were $5,117,000, a decrease of
$8,444,000 or 62% from $13,561,000 in the first quarter of 1999. The
Israeli-based Knit division sales for the first quarter of 1999 were $8,172,000.
The Company's Woven division sales for the first quarter of 2000 were
$5,117,000, a decrease of $272,000 or 5% from $5,389,000 for the comparable
period in 1999. The decrease in sales was attributed to sales to The Limited,
Inc., which accounted for 97% of the sales for the three months of 2000 compared
to 99% in the comparable period in 1999.
14
<PAGE>
GROSS PROFIT
The gross profit for the first quarter of 2000 was $763,000, a decrease of
$400,000 from the gross profit of $1,163,000 for the comparable period in 1999.
The Israeli-based Knit division gross profit for the first quarter of 1999 was
$349,000.
The Company's Woven division had a gross profit of approximately $800,000 for
the first quarter of both 2000 and 1999.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the first quarter of 2000 were
$698,000, a decrease of $222,000 or 24% from $920,000 in the comparable prior
period in 1999. The Israeli- based Knit division's selling, general, and
administrative expenses for the first quarter of 1999 were $201,000.
The Woven division expenses for the first quarter of 2000 were $465,000, an
increase of $45,000, or 11% from $420,000 in the comparable period in 1999. The
increase for the first quarter of 2000 compared to the comparable period in 1999
was primarly attributable to an increase in occupancy expense.
The Corporate expenses for the first quarter of 2000 were $233,000, a decrease
of $66,000, or 22% from $299,000 in the comparable prior period in 1999. The
decrease for the first quarter of 2000 compared to the comparable period in 1999
was primarily attributable to a decrease in staff.
INTEREST
Net interest income for the first quarter of 2000 was $33,000 as compared to net
interest expense of $162,000 for the comparable period in 1999. The decrease in
interest expense for the first quarter of 2000 compared to the comparable prior
period was primarily attributable to decreased borrowings as a result of the
sale of the Israeli-based Knit business.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of 2000 represents a
provision for minimum state income taxes. As of April 29, 2000, based upon tax
returns filed and to be filed for the fiscal year ended January 29, 2000, the
Company reported a net operating loss carryforward for U.S. Federal income tax
purposes of approximately $114 million. If unused, these loss carryforwards will
expire in the Company's taxable years ending 2011 through 2015. 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.
15
<PAGE>
As of April 29, 2000, based upon tax returns filed and to be filed for the
fiscal year ended January 29, 2000, the Company reported net operating loss
carryforwards for New York State and City tax purposes (on a separate company
basis) of approximately $75 million. 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.
In fiscal 1999, the Company received proceeds of approximately $4.7 million
before transaction costs, subject to post closing adjustments, from the sale of
the Israeli-based Knit business. In addition, the retained cash and accounts
receivable and certain other assets of the Knit business aggregated
approximately $4.5 million. The Company has used the cash proceeds from the
sale, MTGI's cash on hand, and the collection of MTGI's accounts receivable to
pay the transaction costs (including the Israeli Tax Authority assessment for
the termination of MTGI's tax free status) related to the sale, repay bank
borrowings related to MTGI, and to pay other MTGI liabilities. The excess cash
received from the transaction is being used for general working capital
purposes.
Since February 1, 1997, the Company has not had a domestic credit facility.
Since the expiration of its prior bank domestic credit facility, Cygne has
obtained letters of credit issued from a domestic bank secured by a cash deposit
from the Company. At April 29, 2000, the Company had restricted cash at its bank
of $0.9 million as collateral for letters of credit.
Net cash used in operating activities for the first quarter of 2000 was $0.7
million compared to cash provided by operating activities of $0.5 million in
1999. The increase in net cash used in operating activities was primarily the
result of an increase in working capital requirements.
The Company's financial performance for the next twelve months will depend on a
variety of factors, including the amount of sales to The Limited, Inc. If the
Company has significant operating losses or adverse decisions in its federal tax
audit of GJM (US) Inc., which requires the Company to pay a significant amount
of tax, the Company will face severe liquidity pressures which would adversely
affect the Company's financial condition and results of operations. The Company
is continuing to review its business operations and could incur additional costs
in the future associated with the restructuring of its operations.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial data schedule (for SEC use only)
16
<PAGE>
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.
June 6, 2000 BY:/S/ BERNARD M. MANUEL
----------------------------------
Bernard M. Manuel,
Chairman of the Board
and Chief Executive Officer
June 6, 2000 BY:/S/ ROY E. GREEN
----------------------------------
Roy E. Green,
Senior Vice President,
Chief Financial Officer
and Treasurer and Secretary
18
