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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 August 3, 2002
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, 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 September 13, 2002.
1
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at August 3, 2002 and February 2, 2002............3
Consolidated Statements of Operations for the
three and six months ended August 3, 2002 and August 4, 2001..................4
Consolidated Statements of Stockholders' Equity for the six
months ended August 3, 2002...................................................5
Consolidated Statements of Cash Flows for the
six months ended August 3, 2002 and August 4, 2001...........................6
Notes to Consolidated Financial Statements....................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................11
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 6. Exhibits and Reports on Form 8-K....................................16
2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
August February
3, 2002 2, 2002
------- -------
(In thousands, except
share and per share amounts)
Assets
Current assets:
Cash and cash equivalents ................................................ $ 3,023 $ 2,558
Restricted cash .......................................................... -- 146
Trade accounts receivable, net ........................................... 2,904 5,472
Inventory ................................................................ 1,081 3,733
Other receivables and prepaid expenses ................................... 913 944
-------- --------
Total current assets ........................................................ 7,921 12,853
Fixed assets, net ........................................................... 2,081 2,261
Other intangibles, net ...................................................... -- 375
Other assets ................................................................ 398 48
-------- --------
Total assets ................................................................ $ 10,400 $ 15,537
======== ========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings .................................................... -- $ 2,260
Accounts payable ......................................................... $ 1,157 1,541
Accrued expenses ......................................................... 974 1,070
Income taxes payable ..................................................... 761 5,555
-------- --------
Total current liabilities ................................................ 2,892 10,426
Long-term liabilities:
Deferred income .......................................................... 350 --
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 ...................................................... (113,884) (115,931)
-------- --------
Total stockholders' equity ..................................................... 7,158 5,111
-------- --------
Total liabilities and stockholders' equity ..................................... $ 10,400 $ 15,537
======== ========
See accompanying notes
3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
------------------ -----------------
August August August August
3, 2002 4, 2001 3, 2002 4, 2001
------- ------- ------- -------
(In thousands except per share amounts)
Net sales:
Americas and Far East ............................................ $ 6,212 $ 6,059 $ 11,419 $ 16,289
Middle East ...................................................... 706 3,171 2,598 3,171
------- ------- -------- --------
6,918 9,230 14,017 19,460
Cost of goods sold:
Americas and Far East ............................................ 5,256 5,061 10,244 13,949
Middle East ...................................................... 1,352 2,888 4,586 2,888
------- ------- -------- --------
6,608 7,949 14,830 16,837
------- ------- -------- --------
Gross profit (loss) ................................................. 310 1,281 (813) 2,623
Selling, general, and administrative expenses ....................... 817 1,094 1,819 2,388
Amortization of other intangibles ................................... -- 28 42 28
Write off of other intangibles ...................................... -- -- 213 --
Gain on sale of business ............................................ (400) -- (400) --
------- ------- -------- --------
(Loss) income from operations ....................................... (107) 159 (2,487) 207
Interest income ..................................................... 12 5 12 33
Interest expense .................................................... (104) (83) (262) (89)
------- ------- -------- --------
(Loss) income before income taxes ................................... (199) 81 (2,737) 151
Provision (benefit) for income taxes ................................ 8 10 (4,784) 19
------- ------- -------- --------
Net (loss) income .................................................. $ (207) $ 71 $ 2,047 $ 132
======= ======= ======== ========
Net income per share - basic and dilutive ........................... $ (0.02) $ 0.01 $ 0.16 $ 0.01
======= ======= ======== ========
Weighted average number of common shares outstanding ................ 12,438 12,438 12,438 12,438
======= ======= ======== ========
See accompanying notes
4
Cygne Designs, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
Common Stock
------------
Number Paid-in (Accumulated
of Shares Amount Capital Deficit) Total
--------- ------ ------- -------- -----
(In thousands)
Balance at February 2, 2002 .................. 12,438 $124 $120,918 $(115,931) $5,111
Net income for the six
months ended August 3, 2002 ............... -- -- -- 2,047 2,047
------ ---- -------- --------- ------
Balance at August 3, 2002 .................... 12,438 $124 $120,918 $(113,884) $7,158
====== ==== ======== ========= ======
See accompanying notes
5
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
-----------------
August August
3, 2002 4, 2001
------- -------
(In thousands)
Operating activities
Net income .................................................................................. $2,047 $ 132
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ............................................................................. 198 199
Amortization of other intangibles ....................................................... 42 28
Write off of other intangibles ........................................................... 213 --
Settlement of income tax liability ....................................................... (4,800) --
Gain on sale of business ................................................................. (400) --
Changes in operating assets and liabilities:
Restricted cash .......................................................................... 146 --
Trade accounts receivable ................................................................ 2,534 (1,393)
Inventory ................................................................................ 1,306 (274)
Other receivables and prepaid expenses ................................................... 443 (236)
Other assets ............................................................................. -- (11)
Accounts payable ......................................................................... 187 495
Accrued expenses ......................................................................... 64 173
Income taxes payable ..................................................................... 6 3
------ ------
Net cash provided by (used in) operating activities ......................................... 1,986 (884)
Investing activities
Purchase of fixed assets .................................................................... (18) (204)
Purchase of other intangibles ............................................................... (40) (220)
Proceeds from sale of business .............................................................. 400 --
------ ------
Net cash provided by (used in) investing activities ......................................... 342 (424)
------ ------
Financing activities
Repayment of short -term debt, net .................................................... (1,863) --
------ ------
Net cash used in financing activities .................................................. (1,863) --
------ ------
Net increase (decrease) in cash ............................................................. 465 (1,308)
Cash at beginning of period ................................................................. 2,558 2,378
------ ------
Cash at end of period ....................................................................... $3,023 $1,070
====== ======
Supplemental disclosures:
Income taxes paid ........................................................................... $ 10 $ 17
====== ======
Interest paid ............................................................................... $ 262 $ 89
====== ======
See accompanying notes
6
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
August 3, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Cygne Designs,
Inc. ("Cygne") and its subsidiaries (collectively the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 six months ended August 3, 2002 are not necessarily indicative
of the results that may be expected for the fiscal year ended February 1, 2003.
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 February
2, 2002. The balance sheet at February 2, 2002 has been derived from the audited
financial statements at that date. The Company's fiscal year ends on the
Saturday nearest to January 31.
NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with Financial
Accounting Standards Board SFAS No. 128, "Earnings per Share". In computing
dilutive income (loss) per share for the three and six months ended August 3,
2002, and August 4, 2001, no effect has been given to outstanding options since
the exercise of any of these items would have an antidilutive or no effect on
net income (loss) per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United State of America requires management to make
estimates and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of financial
statements and the reported amount of revenue and expenses during the period.
Actual results could differ from those estimates.
2. ACQUISITION AND DISPOSITION OF COMPANIES
On May 13, 2001, with an effective date of May 1, 2001, the Company acquired
from Best Knits, L.L.C ("Best Knits") the rights and obligation of all customer
purchase orders held by Best Knits at the closing date and the trade name and
domain name "Best Knits". Best Knits, located in Irbid, Jordan, was a
manufacturer of private label women's knit tops for sale to retailers located in
the United States. The Company (i) assumed all outstanding vendor purchase
orders issued by Best Knits directly related to the acquired customer purchase
orders, (ii) purchased from Best Knits all raw materials on hand directly
related to acquired customer purchase orders, (iii) entered into a lease with
Best Knits for the eighteen month period starting May 1, 2001, (a) for the
66,000 square feet being used by Best Knits, (b) its approximately 550 sewing
machines, (c) its cutting and pressing equipment and (d) its office furniture
and equipment, (iv) hired substantially all of the approximately 650 employees
employed by Best Knits and (v) agreed to purchase from Best Knits for $500,000
its trade name and customer relationships of which $200,000 was paid at the
closing and the remaining $300,000 to be paid by a non-interest bearing note
payable in fifteen monthly installments of $20,000 commencing August 1, 2001.
7
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)- Continued
The Company accounted for this transaction as a purchase. In addition the
Company recorded $200,000 of goodwill during the third quarter of 2001. The
resulting goodwill and other intangible assets were being amortized over their
estimated useful life of three years. The unamortized goodwill of $180,000 was
written off at February 2, 2002 and the unamortized other intangible assets of
$213,000 were written off at May 4, 2002.
On June 10, 2002, the Company entered into an agreement effective date of
June 1, 2002 to sell its Middle East Knit business located in Jordan to the
House and Garden Company D/B/A Century Knits ("CK") and Century Investment Group
("CIG") ("Jordan Knit disposition"). The Jordan Knit disposition consisted of
certain assets of Prosperity Textiles Ltd. ("Prosperity") the Company's wholly
owned subsidiary in Jordan. The purchase price was $400,000 which was paid at
the closing plus the book value of the assets sold which approximated
$1,400,000. Prosperity retained all of its cash, accounts receivables and
accounts payable. CK assumed substantially all of the customer and vendor
purchase orders. On July 29, 2002, the Agreement was amended whereby CK on or
before April 30, 2003 will pay $433,000 with 8% interest to the Company for all
of the assets purchased and assume all of Prosperity's outstanding liabilities
and bank debt at July 29, 2002 (in the aggregate $967,000). CK's obligations
under this amendment are guaranteed by CIG, and CIG shall indemnify Prosperity
against subsequent claims by Prosperity suppliers. In addition, the Company
agreed not to compete with CK for Knit business in Jordan for five years in
consideration of $350,000 payable without interest, on January 31, 2003 and
January 31 of each subsequent year in installments equal to the lesser of (i)
$200,000, (ii) any remaining unpaid balance, or (iii) 20% of the net income of
CK for the preceding calendar year; provided however, that any unpaid balance at
January 31, 2006 shall be paid to the Company by CIG on or before February 5,
2006. In connection with the non-compete agreement, the Company recorded
deferred income of $350,000 and a receivable of $350,000 which it is amortizing
the income over a five year period.
3. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
August February
3, 2002 2, 2002
------- -------
(In thousands)
Raw materials and Work-in-Process ............ $ 921 $1,831
Finished goods ............................... 160 1,902
------ ------
$1,081 $3,733
====== ======
4. CREDIT FACILITIES
The Company has obtained letters of credit from domestic banks through use of a
cash deposit to secure the letters of credit. The Company had restricted cash at
a bank of $146,000 at February 2, 2002, to secure letters of credit from a
domestic bank. There were no outstanding letters of credit at August 3, 2002.
8
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)- Continued
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC. ("GMACCC"). The Agreement provides
for a Revolving Facility of $8,000,000 ("Facility"), including a letter of
credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings
under this Facility bear a rate of interest of the lesser of (i) LIBOR ( 1.94%
at August 3, 2002) plus 3% or (ii) the prime rate (4.75% at August 3, 2002) plus
0.5% and are secured by substantially all of the Company's assets. In addition,
the Facility is subject to various financial covenants including requirements
for tangible net worth and fixed charge coverage ratios, among other covenants.
At August 3, 2002, the Company failed to achieve one of the required financial
covenants and as a result the Company is in default of the Agreement. If the
Company is unable to remedy the default and GMACCC terminates the credit
facility, the Company's business may be adversely affected. The facility
terminates on May 10, 2004, but can be terminated earlier by GMACCC upon default
under the Agreement. At August 3, 2002 the Company had no borrowings.
In August 2001, Prosperity Textiles Ltd. ("Prosperity") a wholly owned
subsidiary of the Company located in Jordan, entered into credit facility
arrangement with the Egyptian Arab Land Bank. The aggregate credit facility was
$2,800,000 and could have been used for both short-term borrowings and the
issuance of documentary letters of credit. The security for this facility was
the customers' letters of credit. The borrowing limits for this facility was (i)
50% of the sales value of customers' letters of credit for garments to be
shipped by Prosperity and (ii) 80% of its trade receivables for which the Bank
had the customers' letters of credit. Prosperity was notified on May 13, 2002
that no additional borrowings or letters of credit would be permitted and that
the facility would be terminated as soon as the balances outstanding were
repaid. Prosperity had borrowings of $491,000 and letters of credit outstanding
of $475,000 under the facility on this date. On July 29, 2002, CK (the buyer of
Prosperity) agreed to pay Prosperity's bank debt (approximately $397,000). See
note 2.
5. 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,
results of operations and cash flow. See Note 6 for information regarding income
tax audits.
6. 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 of GJM (US) Inc. was
acquired by the Company). The IRS had informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16,000,000 (including some
penalties but not interest). Representatives of the IRS have informally stated
to the Company that the IRS will not allege any tax deficiency against the
Company as a result of this audit. The Company has signed a closing agreement,
which reflects such informal statements. The Company expects a final closing
agreement to be fully signed by the IRS shortly. As a result of this settlement,
the Company reversed a tax accrual of $4,800,000 established in connection with
the potential deficiency at May 4, 2002.
The Company is subject to other ongoing tax audits in several jurisdictions
including Guatemala for the years ended 1998, 1999 and 2000. 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.
9
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)- Continued
As of February 2, 2002, based upon tax returns filed, the Company reported a net
operating loss carryforward for U.S. Federal income tax purposes of
approximately $113,000,000. If unused, these loss carryforwards will expire in
the Company's taxable years ending 2011 through 2019. Under Section 382 of the
U.S. Internal Revenue Code, if there is a more than a 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 February 2, 2002, based upon tax returns filed, the Company reported a net
operating loss carryforward for New York State and City tax purposes (on a
separate company basis) of approximately $74,000,000. If unused, these loss
carryforwards will expire in the Company's taxable years ending in 2011 through
2019.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to an annual impairment test in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company adopted the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002.
8. SEGMENT INFORMATION
Based on the criteria in SFAS No. 131, the Company operates in one segment of
the apparel market - women's career and casual apparel.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise noted, all references to a year are to the fiscal year of the
Company commencing in that calendar year and ending on the Saturday nearest
January 31 of the following year.
Statements in this report concerning the Company's business outlook or future
economic performance; anticipated results of operations, revenues, expenses, or
other financial items; private label and brand name products and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance, or other matters,
are "forward-looking statements" as that term is defined under the Federal
Securities Laws. Forward-looking statements are subject to risks, uncertainties,
and other factors which could cause actual results to differ materially from
those stated in such statements. Such risks, uncertainties, and factors include,
but are not limited to, a decline in demand for merchandise offered by the
Company, 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 an adverse tax
ruling, risk of operations and suppliers in foreign countries, competition,
termination of its credit facilities 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
February 2, 2002. The Company assumes no obligation to update or revise any such
forward-looking statements.
GENERAL
On June 10, 2002, the Company entered into an agreement effective date of
June 1, 2002 to sell its Middle East Knit business located in Jordan to the
House and Garden Company D/B/A Century Knits ("CK") and Century Investment Group
("CIG") ("Jordan Knit disposition"). The Jordan Knit disposition consisted of
certain of the assets of Prosperity Textiles Ltd. ("Prosperity") the Company's
wholly owned subsidiary in Jordan. The purchase price was $400,000 which was
paid at the closing plus the book value of the assets sold which approximated
$1,400,000. Prosperity retained all of its cash, accounts receivables and
accounts payable. CK assumed substantially all of the customer and vendor
purchase orders. On July 29, 2002, the Agreement was amended whereby CK on or
before April 30, 2003 will pay $433,000 with 8% interest to the Company for all
of the assets purchased and assume all of Prosperity's outstanding liabilities
and bank debt at July 29, 2002 (in the aggregate $967,000). CK's obligations
under this amendment are guaranteed by CIG, and CIG shall indemnify Prosperity
against subsequent claims by Prosperity suppliers. In addition, the Company
agreed not to compete with CK for Knit business in Jordan for five years in
consideration of $350,000 payable without interest, on January 31, 2003 and
January 31 of each subsequent year in installments equal to the lesser of (i)
$200,000, (ii) any remaining unpaid balance, or (iii) 20% of the net income of
CK for the preceding calendar year; provided however, that any unpaid balance at
January 31, 2006 shall be paid to the Company by CIG on or before February 5,
2006. In connection with the non-compete agreement, the Company recorded
deferred income of $350,000 and a receivable of $350,000 which it is amortizing
the balance over a five year period.
The Company historically has been dependent on one or more key customers. A
significant portion of the Company's sales are expected to continue to be to
Limited Brands (Lerner New York division). For the second quarter of 2002, sales
to Limited Brands and AMC accounted for 90%, and 8%, respectively, of Cygne's
net sales. For the first six months of 2002, sales to Limited Brands, AMC and
Dillard's were 72%, 17% and 7%, respectively. If the sale of Prosperity had
taken place at February 2, 2002, sales to Limited Brands for the second quarter
and six months would have been 99% and 92% respectively, of Cygne's net sales.
For the second quarter of 2001 sales to Limited Brands, AMC and Dillard's
accounted for 56%, 27% and 9%, respectively, of Cygne's net sales. For the first
six months of 2001 sales to Limited Brands, Dillard's and AMC were 55%, 26% and
13% respectively of Cygne's net sales. Although Cygne has a long-established
relationship with Limited Brands, its key customer, Cygne does not have
long-term contracts with Limited Brands. The Company's future success will be
dependent upon its ability to attract new customers and to maintain its
relationship with Limited Brands.
11
There is no assurance that Limited Brands 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 Limited Brands, Limited Brands has the ability to exert
significant control over the Company's business decisions, including prices.
Furthermore, Limited Brands 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 Limited Brands.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the 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.
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements of
operations for the three and six months ended August 3, 2002 and August 4, 2001
and expresses for the periods certain data as a percentage of net sales:
Three Months Ended Six Months Ended
------------------ ----------------
August August August August
3, 2002 4, 2001 3, 2002 4, 2001
------- ------- ------- -------
Americas and Far East ............................................ 89.8 65.4 81.5 83.7
Middle East ...................................................... 10.2 34.6 18.5 16.3
----- ----- ----- -----
Net sales ........................................................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit (loss) .............................................. 4.5 13.9 (5.8) 13.5
Selling, general, and administrative expenses ................... 11.8 11.9 13.0 12.3
Amortization of other intangibles ................................ -- 0.3 0.3 0.1
Write off of other intangibles ................................... -- -- 1.5 --
Gain on sale of business ......................................... (5.8) -- (2.9) --
----- ----- ----- -----
(Loss) income from operations .................................... (1.5) 1.7 (17.7) 1.1
Interest expense ................................................. (1.6) (0.9) (1.9) (0.5)
Interest income .................................................. 0.2 0.1 0.1 0.2
----- ----- ----- -----
(Loss) income before income taxes ................................ (2.9) 0.9 (19.5) 0.8
Provision (benefit) for income taxes ............................. 0.1 0.1 (34.1) 0.1
----- ----- ----- -----
Net (loss) income ................................................ (3.0) 0.8 14.6 0.7
===== ===== ===== =====
THREE AND SIX MONTHS ENDED AUGUST 3, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
AUGUST 4, 2001
The company reduced the size of its Middle East Knit business ("MEKB") in April
2002 and sold MEKB in June 2002. Accordingly, the Company's results of
operations for the period February 3, 2002 through August 3, 2002, included the
MEKB operations for the period February 3, 2002 to May 31, 2002 whereas the
results of operations for the comparable period include the results of MEKB
since its inception May 6, 2001. See "General" for additional information.
The Company's continuing business is in the Americas and Far East category.
12
NET SALES
Net sales for the second quarter of 2002 were $6,918,000, a decrease of
$2,312,000, or 25%, from $9,230,000 in the second quarter of 2001. Net sales for
the first six months of 2002 were $14,017,000, a decrease of $5,443,000, or 28%,
from $19,460,000 in the first six months of 2001.
AMERICAS AND FAR EAST
Net sales for the second quarter of 2002 were $6,212,000, an increase of
$153,000 or 3% from $6,059,000 in the second quarter of 2001. The increase in
sales to Limited Brands of $1,016,000 was offset by a decrease in sales
primarily to Dillard's of $834,000. Limited Brands accounted for 99% of the net
sales for the Americas and Far East for the second quarter of 2002 compared to
86% in the comparable period in 2001. Net sales for the Americas and Far East
for the first six months of 2002 were $11,419,000, a decrease of $4,870,000 or
30% from $16,289,000 in the first six months of 2001. The decrease in sales for
the first six months was caused by a decrease in sales primarily to Dillard's of
$4,027,000 and Limited Brands of $606,000.
MIDDLE EAST
Net sales for the second quarter and six months of 2002 were $706,000 and
$2,598,000 respectively, compared to $3,171,000 in the second quarter and first
six months of 2001.
GROSS PROFIT (LOSS)
The gross profit for the second quarter of 2002 was $310,000, a decrease of
$971,000 from the gross profit of $1,281,000 for the comparable period in 2001.
The gross loss for the first six months of 2002 was $813,000, a decrease of
$3,436,000 from the gross profit of $2,623,000 for the comparable period in
2001.
AMERICAS AND FAR EAST
The gross profit for the second quarter of 2002 was $956,000, a decrease of
$42,000 from the gross profit of $998,000 for the comparable period in 2001. The
gross profit for the first six months of 2002 was $1,175,000, a decrease of
$1,165,000 from the gross profit of $2,340,000 for the comparable period in
2001. The decrease in gross profit was primarily attributable to lower sales in
2002 compared to 2001 and higher unabsorbed factory overhead at the Company's
Guatemala facility due to the lower than anticipated sales volume during the
first quarter of 2002.
MIDDLE EAST
The gross loss for the second quarter and first six months of 2002 was $646,000
and $1,988,000, respectively compared to gross profit of $283,000 for the second
quarter and first six months of 2001. The gross loss was attributable to the
factory's unabsorbed overhead and termination expenses of factory employees at
the Company's Middle East Knit business, which was sold in June 2002.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the second quarter of 2002
were $816,000, a decrease of $356,000 from $1,172,000 in the comparable period
in 2001. Selling, general, and administrative expenses for the first six months
of 2002 were $1,819,000, a decrease of $607,000 from $2,426,000 in the
comparable period in 2001.
13
The decreases in selling, general and administrative expenses for the second
quarter and first six months of 2002, compared to the comparable periods in 2001
were primarily attributable to the closing of the Dallas sales office during
October 2001, partially offset by the establishment of a sales and marketing
team to service the Middle East business. As a result of the sale of the Middle
East business in June 2002, this sales and marketing team has been eliminated.
AMORTIZATION AND WRITE OFF OF OTHER INTANGIBLES
Other intangibles which arose in connection with the May 2001 acquisition of the
business of Best Knits, L.L.C. were being amortized over thirty six months. The
unamortized balance of $213,000 was written off as a result of impairment.
INTEREST
Interest expense for the second quarter ended August 3, 2002 was $104,000
compared to interest expense of $83,000 for the comparable period in 2001. The
increase in interest expense in 2002 compared to 2001 was primarily attributable
to increased borrowings to fund the working capital requirements of the Middle
East operations and fees for the new domestic credit facility.
Interest expense for the first six months ended August 3, 2002 was $262,000
compared to interest expense of $89,000 for the comparable period in 2001. The
increase in interest expense in 2002 compared to 2001 was primarily attributable
to increased borrowings to fund the working capital requirements of the Middle
East operations and the fees for the new domestic credit facility.
Interest income for the second quarter ended August 3, 2002 was $12,000 compared
to interest income of $5,000 for the comparable period in 2001. The increase in
interest income in 2002 compared to 2001 was attributable to increased cash
available for short-term investments during the second quarter of 2002.
Interest income for the first six months ended August 3, 2002 was $12,000
compared to interest income of $33,000 for the comparable period in 2001. The
decrease in interest income in 2002 compared to 2001 was attributable to
increased working capital requirements as a result of the acquisition of the
Middle East operations.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes of $8,000, for the second quarter ended August 3,
2002 represent a provision for minimum state income taxes and foreign taxes. The
benefit for income taxes of $4,784,000 for the first six months ended August 3,
2002 represents the reversal of a tax accrual of $4,800,000 established in
connection with a potential tax deficiency proposed by the IRS partially offset
by a $16,000 provision for minimum state income taxes and foreign taxes. The
Company and the IRS have informally settled this matter and the Company is not
liable for any tax deficiency. (See note 6 to the consolidated financial
statements) The provision for income taxes for the three and six months ended
August 4, 2001 of $10,000 and $19,000, respectively, represents a provision for
minimum state income taxes and foreign taxes. As of February 2, 2002, based upon
tax returns filed, the Company reported a net operating loss carryforward for
U.S. Federal income tax purposes of approximately $113,000,000. If unused, these
loss carryforwards will expire in the Company's taxable years ending 2011
through 2019. Under Section 382 of the U.S. Internal Revenue Code, if there is
more than a 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.
14
As of February 2, 2002, 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 $74,000,000. If unused, these loss
carryforwards will expire in the Company's taxable years ending in 2011 through
2019.
LIQUIDITY AND CAPITAL RESOURCES
The Company has obtained letters of credit from domestic banks through use of a
cash deposit to secure the letters of credit. The Company had restricted cash at
a bank of $146,000 at February 2, 2002, to secure letters of credit. There were
no outstanding letters of credit at August 3, 2002.
On May 11, 2001 the Company entered into a Revolving Credit and Security
Agreement with GMAC Commercial Credit LLC. ("GMACCC"). The Agreement provides
for a Revolving Facility of $8,000,000 ("Facility"), including a letter of
credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings
under this Facility bear a rate of interest of the lesser of (i) LIBOR (1.94% at
August 3, 2002) plus 3% or (ii) the prime rate (4.75% at August 3, 2002) plus
0.5% and are secured by substantially all of the Company's assets. In addition,
the Facility is subject to various financial covenants including requirements
for tangible net worth and fixed charge coverage ratios, among other covenants.
At August 3, 2002, the Company failed to achieve one of the required financial
covenants and as a result the Company is in default of the Agreement. If the
Company is unable to remedy the default and GMACCC terminates the credit
facility, the Company's business may be adversely affected. The facility
terminates on May 10, 2004, but can be terminated earlier by GMACCC upon default
under the Agreement. At August 3, 2002 the Company had no borrowings.
In August 2001, Prosperity Textiles Ltd. ("Prosperity") a wholly owned
subsidiary of the Company located in Jordan, entered into credit facility
arrangement with the Egyptian Arab Land Bank. This arrangement can be terminated
by either party at any time. The aggregate credit facility was $2,800,000 and
could have been used for both short-term borrowings and the issuance of
documentary letters of credit. The borrowing limits for this facility was (i)
50% of the sales value of customers' letters of credit for garments to be
shipped by Prosperity and (ii) 80% of its trade receivables for which the Bank
had the customers' letters of credit. Prosperity was notified on May 13, 2002
that no new borrowings or additional letters of credit would be permitted and
that the facility would be terminated as soon as the balances outstanding were
repaid. Prosperity had borrowings of $491,000 and letters of credit outstanding
of $475,000 under this facility on this date. On July 29, 2002, CK (the buyer of
Prosperity) agreed to pay Prosperity's bank debt (approximately $397,000). See
"General" for more information.
Net cash provided by operating activities for the six months of 2002 was
$1,986,000 compared to net cash used in operating activities of $884,000 in
2001. The increase in net cash provided by operating activities was primarily
the result of a decrease in trade accounts receivable and inventory, offset by a
loss before income tax benefit. Net cash provided by investing activities for
2002 was $342,000 compared to net cash used in investing activities in 2001 of
$424,000. In 2002, $400,000 represented proceeds from sale of the Middle East
business, $40,000 was for payments for other intangibles purchased in 2001 in
connection with the acquisition of the Middle East business and $18,000 was for
purchases of fixed assets. The purchase of fixed assets in 2001 was $204,000 and
$220,000 was for payments for other intangibles was in connection with the
acquisition of the Middle East business.
The Company's financial performance for the next twelve months will depend on a
variety of factors, including the amount of sales to Limited Brands and the
successful liquidation of the Jordanian subsidiary. If the Company has
significant operating losses or if its ability to borrow under its credit
facilities is limited or terminated, 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.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
16
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.
September 13, 2002 By: /s/ Bernard M. Manuel
----------------------------------------
Bernard M. Manuel, Chairman of the Board
and Chief Executive Officer
September 13, 2002 By: /s/ Roy E. Green
----------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
and Secretary
17
CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER
I, Bernard M. Manuel, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Cygne Designs, Inc. for
the period ending August 3, 2002.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a fact or omit to state a material fact under which such statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
September 13, 2002
By: /s/ BERNARD M. MANUEL
----------------------------------
Bernard M. Manuel
Chairman & Chief Executive Officer
CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER
I, Roy E. Green, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Cygne Designs, Inc. for
the period ending August 3, 2002.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a fact or omit to state a material fact under which such statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
September 13, 2002
By: /s/ ROY E. GREEN
---------------------------------------------
Roy E. Green
Senior Vice President-Chief Financial Officer