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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 28, 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 November 30, 2000
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<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 October 28, 2000
and January 29, 2000.................................................... 3
Condensed Consolidated Statements of Operations for the three and nine
months ended October 28, 2000 and October 30, 1999..................... 4
Condensed Consolidated Statement of Stockholders' Equity for the
nine months ended October 28, 2000..................................... 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 28, 2000 and October 30, 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................................. 18
2
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
October January
28, 2000 29, 2000
----------- ---------
(In thousands, except
share and per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash (includes restricted cash of $1,000 and $722, respectively) $ 6,451 $ 7,020
Trade accounts receivable, net 1,951 1,853
Inventory 2,221 2,421
Other receivables and prepaid expenses 426 402
------- -------
Total current assets 11,049 11,696
Fixed assets, net 2,266 2,472
Other assets 592 600
------- -------
Total assets $13,907 $14,768
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,212 $ 1,200
Accrued expenses 1,351 2,448
Income taxes payable 5,976 5,977
------- -------
Total current liabilities 8,539 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 (115,674) (115,899)
------- -------
Total stockholders' equity 5,368 5,143
------- -------
Total liabilities and stockholders' equity $13,907 $14,768
======= =======
</TABLE>
See accompanying notes
3
<PAGE>
Cygne Designs, Inc. And Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------
October October October October
28, 2000 30, 1999 28, 2000 30, 1999
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 8,350 $22,799 $20,238 $ 49,526
Cost of goods sold 7,448 21,579 17,766 45,612
------- ------- ------- --------
Gross profit 902 1,220 2,472 3,914
Selling, general, and administrative expenses 823 1,086 2,347 3,110
Provision for impairment of Knit business
assets -- 530 -- 1,416
------- ------- ------- --------
Income (loss) from operations 79 (396) 125 (612)
Interest income 58 33 161 82
Interest expense 14 104 46 479
------- ------- ------- --------
Income (loss) before income taxes 123 (467) 240 (1,009)
Provision for income taxes 5 3 15 47
------- ------- ------- --------
Net income (loss) $ 118 $ (470) $ 225 $ (1,056)
======= ======= ======= ========
Net income (loss) per share - basic and dilutive $ 0.01 $ (0.04) $ 0.02 $ (0.08)
======= ======= ======= ========
Weighted average number of common shares outstanding 12,438 12,438 12,438 12,438
======= ======= ======= ========
</TABLE>
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 nine months
ended October 28, 2000 -- -- -- 225 225
------ ---- -------- --------- ------
Balance at October 28, 2000 12,438 $124 $120,918 $(115,674) $5,368
====== ==== ======== ========= ======
</TABLE>
See accompanying notes
5
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
October October
28, 2000 30, 1999
---------- ----------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 225 $(1,056)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for impairment of Knit business assets -- 1,416
Depreciation 258 364
Changes in operating assets and liabilities:
Trade accounts receivable (98) 3,559
Inventory 200 2,887
Other receivables and prepaid expenses (24) (174)
Accounts payable 12 (5,258)
Accrued expenses (1,097) (1,285)
Income taxes payable (1) (101)
------- --------
Net cash (used in) provided by operating activities (525) 352
INVESTING ACTIVITIES
Purchase of fixed assets, net (52) (76)
Other assets 8 --
------- --------
Net cash used in investing activities (44) (76)
FINANCING ACTIVITIES
Borrowings of short-term borrowings, net -- 32
------- --------
Net cash provided by financing activities -- 32
Effect of exchange rate changes on cash -- (6)
------- --------
Net (decrease) increase in cash (569) 302
Cash at beginning of period 7,020 3,686
------- --------
Cash at end of period $ 6,451 $ 3,988
======= ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 16 $ 431
Interest paid 46 499
</TABLE>
See accompanying notes
6
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 28, 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 and nine months ended October 28,
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 effective date of the sale was
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 M.T.G.I.-Textile
Manufacturers Group (Israel) Ltd. ("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 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 $4,700,000. 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)
October 28, 2000
2. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
October January
28, 2000 29, 2000
-------- --------
(In thousands)
Raw materials and Work-in-Process $1,765 $2,186
Finished goods 456 235
------ ------
$2,221 $2,421
====== ======
3. CREDIT FACILITIES
The Company obtains letters of credit from a domestic bank secured by a cash
deposit from the Company. At October 28, 2000 and January 29, 2000, the Company
had restricted cash at a bank of $1,000,000 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 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.
8
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
October 28, 2000
On October 31, 1999, the effective date of sale of the Company's Israeli-based
Knit business, the Company's wholly-owned subsidiary, MTGI had its tax-free
status in Israel terminated retroactive to January 1, 1994. In June, 2000, MTGI
accepted and paid the Israeli Tax Authority assessment, including interest, of
approximately $412,000 due on account of the termination of its 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
including Israel for years 1998 and 1999. 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, results of operations and cash flow.
As of January 29, 2000, based upon tax returns filed, 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 in any three year period,
the Company's loss carryforwards for U.S. Federal and New York State and City
tax purposes would be virtually eliminated. As of January 29, 2000, based upon
tax returns filed, the Company reported net operating 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, with
an effective date 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 been designed and developed by its customers.
Net sales to unaffiliated customers and identifiable assets were as follows:
9
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
October 28, 2000
Woven
Division Corporate Total
---------- --------- -----
(In thousands)
FOR THE NINE MONTHS ENDED OCTOBER 28, 2000
Net sales $ 20,238 -- $ 20,238
Gross profit 2,472 -- 2,472
Selling, general and administrative expenses 1,624 $ 723 2,347
-------- -------- --------
Income (loss) from operations $ 848 $ (723) 125
======== ========
Interest income 161
Interest expense 46
--------
Income before income taxes 240
Provision for income taxes 15
--------
Net income $ 225
========
Depreciation expense $ 225 $ 33 $ 258
======== ======== ========
Identifiable assets $ 6,799 $ 7,108 $ 13,907
======== ======== ========
FOR THE THREE MONTHS ENDED OCTOBER 28, 2000
Net sales $ 8,350 -- $ 8,350
Gross profit 902 -- 902
Selling, general and administrative expenses 581 $ 242 823
-------- -------- --------
Income (loss) from operations $ 321 $ (242) 79
======== ========
Interest income 58
Interest expense 14
--------
Income before income taxes 123
Provision for income taxes 5
--------
Net income $ 118
========
Depreciation expense $ 75 $ 15 $ 90
======== ======== ========
10
<PAGE>
Cygne Designs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
October 28, 2000
<TABLE>
<CAPTION>
Israeli-Based Woven
Knit Business Division Corporate Total
------------- -------- --------- -----
(In thousands)
<S> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED OCTOBER 30, 1999
Net sales $ 32,007 $ 17,519 -- $ 49,526
Gross profit 1,480 2,434 -- 3,914
Selling, general and administrative expenses 685 1,498 $ 927 3,110
Provision for impairment of Knit business assets 1,416 -- -- 1,416
-------- -------- -------- --------
(Loss) income from operations $ (621) $ 936 $ (927) (612)
======== ======== ========
Interest income 82
Interest expense 479
--------
Loss before income taxes (1,009)
Provision for income taxes 47
--------
Net loss $ (1,056)
========
Depreciation expense $ 131 $ 225 $ 8 $ 364
======== ======== ======== ========
Identifiable assets $ 8,666 $ 5,898 $ 4,258 $ 18,822
======== ======== ======== ========
FOR THE THREE MONTHS ENDED OCTOBER 30, 1999
Net sales $ 18,037 $ 4,762 -- $ 22,799
Gross profit 687 533 -- 1,220
Selling, general and administrative expenses 245 530 $ 311 1,086
Provision for impairment of Knit business assets 530 -- -- 530
-------- -------- -------- --------
(Loss) income from operations $ (88) $ 3 $ (311) (396)
======== ======== ========
Interest income 33
Interest expense 104
--------
Loss before income taxes (467)
Provision for income taxes 3
--------
Net loss $ (470)
========
Depreciation expense $ 40 $ 72 $ 2 $ 114
======== ======== ======== ========
</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 an adverse decision in its federal
tax audit of GJM (US) Inc., 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 effective date of the sale was
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 M.T.G.I.-Textiles
Manufacturers Group (Israel) Ltd. ("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 included within the
assets sold to Jordache. Jordache provided financing to the
12
<PAGE>
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 $4,700,000. 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.
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 $4,762,000 for the
three months ended October 30, 1999 and pro forma loss from operations of
$308,000. Pro forma net loss for the three months ended October 30, 1999 would
have been $286,000 or $0.02 on a per share basis. The Company would have had pro
forma net sales of $17,519,000 for the nine months ended October 30, 1999 and
pro forma income from operations of $9,000. Pro forma net loss for the nine
months ended October 30,1999 would have been $16,000 or break-even on a per
share basis.
During the third quarters of 2000 and 1999, The Limited, Inc. accounted for 97%
and 23%, respectively, of Cygne's net sales. During the third quarters of 2000
and 1999, The Limited, Inc. accounted for 97% and 100%, respectively, of the
Woven division sales. During the nine months of 2000 and 1999, The Limited, Inc.
accounted for 98% and 39%, respectively, of Cygne's net sales. During the first
nine months of 2000 and 1999, The Limited, Inc. accounted for 98% of the Woven
division sales. As a result of the sale of the Israeli-based Knit business, the
remaining business is more dependent on The Limited, Inc. than it has been in
the past. 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 historically has been subject to
substantial cyclical variation, with purchases of apparel and related goods
tending to decline during recessionary periods when disposable income is low.
This could have a material adverse effect on the Company's business. 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 and nine months ended October 28, 2000
and October 30, 1999 and expresses for the periods certain data as a percentage
of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
October October October October
28, 2000 30, 1999 28, 2000 30, 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
==== ==== ==== ====
Gross profit 10.8 5.4 12.2 7.9
Selling, general, and administrative expenses 9.9 4.8 11.6 6.2
Provision for impairment of Knit business assets -- 2.3 -- 2.9
---- ---- ---- ----
Income (loss) from operations 0.9 (1.7) 0.6 (1.2)
Interest income (expense), net 0.5 (0.3) 0.6 (0.8)
---- ---- ---- ----
Income (loss) before income taxes 1.4 (2.0) 1.2 (2.0)
Provision for income taxes 0.0 -- 0.1 0.1
---- ---- ---- ----
Net income (loss) 1.4 (2.0) 1.1 (2.1)
==== ==== ==== ====
</TABLE>
THREE AND NINE MONTHS ENDED OCTOBER 28, 2000 COMPARED TO THREE AND NINE MONTHS
ENDED OCTOBER 30, 1999
The Company sold its Israeli-based Knit business with an effective date of
October 31, 1999. Accordingly, the Company's results of operations for the
period January 30, 2000 through October 28, 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. See "General" for proforma information
regarding net sales, income from operations, and net income assuming the Knit
business was sold on January 31, 1999, the first day of the fiscal year.
NET SALES
Net sales for the third quarter of 2000 were $8,350,000, a decrease of
$14,449,000 or 63% from $22,799,000 in the third quarter of 1999. Net sales for
the nine months of 2000 were
14
<PAGE>
$20,238,000, a decrease of $29,288,000 or 59% from $49,526,000 in the nine
months of 1999. Sales of the Israeli-based Knit division, which was sold on
October 31, 1999, for the third quarter and nine months of 1999 were $18,037,000
and $32,007,000, respectively.
Woven division net sales for the third quarter of 2000 were $8,350,000, an
increase of $3,588,000 or 75% from $4,762,000 in the third quarter of 1999.
Woven division net sales for the nine months of 2000 were $20,238,000, an
increase of $2,719,000 or 16% from $17,519,000 for the comparable period in
1999. The increases in sales were attributed to increased sales to The Limited,
Inc. The Limited, Inc. accounted for 97% of the Woven division net sales for the
third quarter of 2000 compared to 100% in the comparable period in 1999 and 98%
of the Woven division net sales for the nine months of 2000 and 1999.
GROSS PROFIT
The gross profit for the third quarter of 2000 was $902,000, a decrease of
$318,000 from the gross profit of $1,220,000 for the comparable period in 1999.
Gross profit for the nine months of 2000 was $2,472,000, a decrease of
$1,442,000 from the gross profit of $3,914,000 in the comparable period in 1999.
Gross profit of the Israeli-based Knit division, which was sold on October 31,
1999, for the third quarter and nine months of 1999 was $687,000 and $1,480,000,
respectively.
The Woven division had a gross profit of $902,000 for the third quarter of 2000,
an increase of $369,000 from $533,000 for the comparable period in 1999. The
Woven division gross profit for the nine months of 2000 was $2,472,000, an
increase of $38,000 from $2,434,000 in the comparable period in 1999. The
increase in gross profit for the three and nine months was primarily
attributable to increased sales, favorable resolution of prior years' disputes,
offset by additional cost to service the increased sales volume.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the third quarter of 2000 were
$823,000, a decrease of $263,000 from $1,086,000 in the comparable prior period
in 1999. Selling, general and administrative expenses for the nine months of
2000 were $2,347,000, a decrease of $763,000 from $3,110,000 in the comparable
period in 1999. Selling, general, and administrative expenses of the Israeli-
based Knit division for the third quarter and nine months of 1999 were $245,000
and $685,000, respectively.
The Woven division expenses for the third quarter of 2000 were $581,000, an
increase of $51,000 from $530,000 in the comparable period in 1999. The Woven
division expenses for the nine months of 2000 were $1,624,000, an increase of
$126,000 from $1,498,000 for the comparable period in 1999. The increase for the
third quarter and nine months of 2000 compared to the comparable period in 1999
was primarily attributable to an increase in occupancy expense.
The Corporate expenses for the third quarter of 2000 were $242,000, a decrease
of $69,000 from $311,000 in the comparable period in 1999. Corporate expense for
the nine months of 2000 were
15
<PAGE>
$723,000, a decrease of $204,000 from $927,000 for the comparable period in
1999. The decrease for the third quarter and nine months of 2000 compared to the
comparable period in 1999 was primarily attributable to a decrease in personnel.
INTEREST
Net interest income for the third quarter of 2000 was $44,000 compared to net
interest expense of $71,000 for the comparable period in 1999. Net interest
income for the nine months of 2000 was $115,000 as compared to net interest
expense of $397,000 for the comparable period in 1999. The decrease in interest
expense for the three and nine months 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 IMPAIRMENT OF KNIT BUSINESS ASSETS
In connection with the Company's agreement to sell its Knit business, the
Company recorded on the condensed consolidated statements of operations for the
three and nine months ended October 30, 1999 a provision for impairment of Knit
business assets in the amount of $530,000 and $1,416,000 respectively, which
consists of a loss on assets to be sold, transaction costs (including taxes) and
a reduction of the purchase price by the adjusted net income ( as defined) of
the Knit business from August 1, 1999 through October 31, 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes of $5,000 and $15,000 for the three and nine
months ended October 28, 2000, respectively, and of $3,000 and $47,000 for the
three and nine months ended October 30, 1999, respectively, represents a
provision for minimum state income taxes. As of January 29, 2000, based upon tax
returns filed, 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 in any three year period, the Company's loss carryforwards for U.S.
Federal and New York State and City tax purposes would be virtually eliminated.
As of January 29, 2000, based upon tax returns filed, the Company reported net
operating 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.
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.
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In 1999, the Company received proceeds of approximately $4,700,000 from the sale
of the Israeli-based Knit business ("MTGI"). In addition, the retained cash and
accounts receivable and certain other assets of the Knit business aggregated
approximately $4,500,000. The Company has used the cash proceeds from the sale
together with MTGI's cash and the collection of MTGI's accounts receivable to
pay transaction costs (including the Israeli Tax Authority assessment for the
termination of MTGI's tax free status) related to the sale, repay MTGI's bank
borrowings, 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, and
Cygne has obtained letters of credit issued from a domestic bank secured by a
cash deposit from the Company. At October 28, 2000, the Company had restricted
cash at a bank of $1,000,000 as collateral for letters of credit.
Net cash used in operating activities for the nine months of 2000 was $525,000
compared to cash provided by operating activities of $352,000 in 1999. The
increase in net cash used in operating activities was primarily the result of a
increased 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 an adverse decision 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 and
cash flow. The Company is continuing to review its business operations and could
incur additional costs in the future associated with the restructuring of its
operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial data schedule (for SEC use only)
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
December 1, 2000 By: /s/ Bernard M. Manuel
---------------------------------
Bernard M. Manuel, Chairman of the Board
and Chief Executive Officer
December 1, 2000 By: /s/ Roy E. Green
--------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer and Secretary
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