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 November 2, 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 December 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 November 2, 2002 and February 2, 2002...........3
Consolidated Statements of Operations for the
three and nine months ended November 2, 2002 and November 3, 2001..............4
Consolidated Statements of Stockholders' Equity for the nine
months ended November 2, 2002..................................................5
Consolidated Statements of Cash Flows for the
nine months ended November 2, 2002 and November 3, 2001........................6
Notes to Consolidated Financial Statements.....................................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................11
ITEM 3. Quantitative and Qualitative Disclosures About Master Risks..........16
ITEM 4. Controls and Procedures..............................................16
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..................17
ITEM 6. Exhibits and Reports on Form 8-K.....................................17
2
Cygne Designs, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
November February
2, 2002 2, 2002
--------- ---------
(In thousands, except
share and per share amounts)
Assets
Current assets:
Cash and cash equivalents ......................................... $ 2,613 $ 2,558
Restricted cash ................................................... -- 146
Trade accounts receivable, net .................................... 2,411 5,472
Inventory ......................................................... 2,107 3,733
Other receivables and prepaid expenses ............................ 849 944
--------- ---------
Total current assets ................................................. 7,980 12,853
Fixed assets, net .................................................... 2,014 2,261
Other intangibles, net ............................................... -- 375
Other assets ......................................................... 374 48
--------- ---------
Total assets ......................................................... $ 10,368 $ 15,537
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings .......................................... -- $ 2,260
Accounts payable ............................................... $ 1,495 1,541
Accrued expenses ............................................... 887 1,070
Income taxes payable ........................................... 707 5,555
--------- ---------
Total current liabilities ...................................... 3,089 10,426
Long-term liabilities:
Deferred income ................................................ 327 --
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 ............................................... (114,090) (115,931)
--------- ---------
Total stockholders' equity ........................................... 6,952 5,111
--------- ---------
Total liabilities and stockholders' equity ........................... $ 10,368 $ 15,537
========= =========
See accompanying notes
3
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
--------------------- ---------------------
November November November November
2, 2002 3, 2001 2, 2002 3, 2001
-------- -------- ------- -------
(In thousands except per share amounts)
Net sales:
Americas and Far East .............................. $ 5,366 $ 6,307 $16,785 $22,596
Middle East ........................................ -- 5,503 2,598 8,674
------- ------- ------- -------
5,366 11,810 19,383 31,270
Cost of goods sold:
Americas and Far East .............................. 4,701 5,122 14,945 19,071
Middle East ........................................ -- 5,465 4,586 8,353
------- ------- ------- -------
4,701 10,587 19,531 27,424
Gross profit (loss) ................................... 665 1,223 (148) 3,846
Selling, general, and administrative expenses ......... 823 1,040 2,642 3,428
Amortization of other intangibles ..................... -- 47 42 75
Write off of other intangibles ........................ -- -- 213 --
Gain on sale of business .............................. -- -- (400) --
------- ------- ------- -------
(Loss) income from operations ......................... (158) 136 (2,645) 343
Interest income ....................................... 10 -- 22 33
Interest expense ...................................... (50) (118) (312) (207)
------- ------- ------- -------
(Loss) income before income taxes ..................... (198) 18 (2,935) 169
Provision (benefit) for income taxes .................. 8 5 (4,776) 24
------- ------- ------- -------
Net (loss) income .................................... $ (206) $ 13 $ 1,841 $ 145
======= ======= ======= =======
Net income per share--basic and dilutive .............. $ (0.02) $ 0.00 $ 0.15 $ 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 nine
months ended November 2, 2002 ............ -- -- -- 1,841 1,841
------ ---- -------- --------- ------
Balance at November 2, 2002 ................. 12,438 $124 $120,918 $(114,090) $6,952
====== ==== ======== ========= ======
See accompanying notes
5
Cygne Designs, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
----------------------
November November
2, 2002 3, 2001
------- -------
(In thousands)
OPERATING ACTIVITIES
Net income ................................................ $ 1,841 $ 145
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ........................................... 290 292
Amortization of other intangibles ..................... 42 75
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 ............................ 3,027 (982)
Inventory ............................................ 280 800
Other receivables and prepaid expenses ............... 508 (562)
Other assets -- 525
Accounts payable ..................................... 525 247
Accrued expenses ..................................... (23) 199
Income taxes payable ................................. (48) 8
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 1,601 747
INVESTING ACTIVITIES
Purchase of fixed assets .................................. (43) (346)
Purchase of goodwill and other intangibles ................ (40) (480)
Proceeds from sale of business ............................ 400 --
------- ------
Net cash provided by (used in) investing activities ....... 317 (826)
------- ------
FINANCING ACTIVITIES
Repayment of short-term debt, net ........................ (1,863) --
------- ------
Net cash used in financing activities ..................... (1,863) --
------- ------
Net increase (decrease) in cash ........................... 55 (79)
Cash at beginning of period ............................... 2,558 2,378
------- ------
Cash at end of period ..................................... $ 2,613 $2,299
======= ======
SUPPLEMENTAL DISCLOSURES:
Income taxes paid ......................................... $ 18 $ 16
====== ======
Interest paid ............................................. $ 312 $ 207
====== ======
See accompanying notes
6
Cygne Designs, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
November 2, 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 nine months ended November 2, 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 nine months ended November 2,
2002, and November 3, 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" (the "Jordanian business"). 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.
In an agreement dated June 10, 2002 modified by an amendment dated July 29,
2002, the Company sold its Jordanian business to Century Investment Group
("CIG") for $833,000 plus the assumption of all outstanding liabilities of the
Jordan company of approximately $943,000. The first $400,000 was paid at the
closing, $433,000 is to be paid on April 30, 2003 and the balance of $350,000 is
to be paid no later than February 5, 2006. The payment of $350,000 represents
the consideration received by the Company for its agreement not to compete with
CIG for knit business in Jordan for five years starting June 1, 2002. In
connection with the non-compete agreement, the Company recorded deferred income
of $350,000, which it is amortizing to income over a five-year period, starting
July 2002.
3. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
November February
2, 2002 2, 2002
-------- --------
(In thousands)
Raw materials and Work-in-process ........... $1,917 $1,831
Finished goods .............................. 190 1,902
------ ------
$2,107 $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 November 2, 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 (1.55% at
November 2, 2002) plus 3% or (ii) the prime rate (4.25% at November 2, 2002)
plus 0.5% and are secured by substantially all of the Company's assets. The
Facility is subject to various financial covenants. At November 2, 2002, the
Company failed to achieve one of the required financial covenants and as a
result, the Company is in default of the Agreement. The Company is currently in
discussions with GMACC to remedy this default. 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. At November 2, 2002 the Company had no
borrowings.
In August 2001, the Jordanian Company entered into credit facility arrangement
with the Egyptian Arab Land Bank. The agreement provided for a credit facility
of $2,800,000, subject to a borrowing base formula. The security for this
facility was the customers' letters of credit. The Jordanian Company 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 that date. On
July 29, 2002, CIG, the buyer of the Jordanian Company, agreed to pay the
Jordanian Company's bank debt of 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") has concluded its 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). The IRS and the Company executed a settlement
agreement dated August 14, 2002 reflecting the March 2002 verbal commitment that
no tax payment due. 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. 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 2005 through 2022. 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 2005 through
2022.
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
In an agreement dated June 10, 2002 modified by an amendment dated July 29,
2002, the Company sold its Jordanian business to Century Investment Group
("CIG") for $833,000 plus the assumption of all outstanding liabilities of the
Jordan company of approximately $943,000. The first $400,000 was paid at the
closing, $433,000 is to be paid on April 30, 2003 and the balance of $350,000 is
to be paid no later than February 5, 2006. The payment of $350,000 represents
the consideration received by the Company for its agreement not to compete with
CIG for knit business in Jordan for five years starting June 1, 2002. In
connection with the non-compete agreement, the Company recorded deferred income
of $350,000, which it is amortizing to income over a five-year period, starting
July 2002.
The Company historically has been dependent on one or more key customers. A
significant portion of the Company's sales have been and are expected to
continue to be to Lerner New York formerly a division of Limited Brands. On
November 27, 2002 Limited Brands announced the sale of Lerner New York to an
investor team led by Richard P. Crystal and Bear Stearns Merchant Banking. Mr.
Crystal remains in his position as President and Chief Executive Officer of
Lerner New York. For the third quarter of 2002, sales to Lerner New York
accounted for 100% of Cygne's net sales. For the nine months of 2002, sales to
Lerner New York and AMC were 80% and 13, respectively, of Cygne's net sales. If
the sale of the Jordanian business had taken place at February 2, 2002, sales to
Lerner New York for the nine months would have been 92%, of Cygne's net sales.
For the third quarter of 2001 sales to Lerner New York and AMC accounted for 47%
and 27%, respectively, of Cygne's net sales. For the nine months of 2001 sales
to Lerner New York, Dillard's and AMC were 52%, 18% and 18% respectively of
Cygne's net sales. Although Cygne has a long-established relationship with
Lerner New York, its key customer, Cygne does not have long-term contracts with
Lerner New York. The Company's future success will be dependent upon its ability
to attract new customers and to maintain its relationship with Lerner New York.
There is no assurance that Lerner New York 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 Lerner New York, Lerner New York has the ability to exert
significant control over the Company's business decisions, including prices.
The Company is continuing to review its business operations and could incur
additional costs in the future associated with the restructuring of its
operations.
11
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.
CRITICAL ACCOUNTING POLICIES
Several of the Company's accounting policies involve significant judgements and
uncertainties. The policies with the greatest potential effect on the results of
operations and financial position include the estimated collectibility of
accounts receivable and the recovery value of inventory. For accounts
receivable, the Company estimates the net collectibility, considering both
historical and anticipated deductions taken by customers. If the Company
incorrectly anticipates these trends or unexpected events occur, the results of
operations could be materially affected.
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated statements of
operations for the three and nine months ended November 2, 2002 and November 3,
2001 and expresses for the periods certain data as a percentage of net sales:
Three Months Ended Nine Months Ended
----------------------- -----------------------
November November November November
2, 2002 3, 2001 2, 2002 3, 2001
------- ------- ------- -------
Americas and Far East ................................. 100.0% 53.4% 86.6% 72.3%
Middle East ........................................... -- 46.6 13.4 27.7
----- ----- ----- -----
Net sales ............................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit (loss) ................................... 12.4 10.3 (0.8) 12.3
Selling, general, and administrative expenses ........ 15.3 8.8 13.6 11.0
Amortization of other intangibles ..................... -- 0.3 0.2 0.2
Write off of other intangibles ........................ -- -- 1.1 --
Gain on sale of business .............................. -- -- (2.1) --
----- ----- ----- -----
(Loss) income from operations ......................... (2.9) 1.2 (13.6) 1.1
Interest income ....................................... 0.2 -- 0.1 0.1
Interest expense (1.0) (1.0) (1.6) (0.6)
----- ----- ----- -----
(Loss) income before income taxes ..................... (3.7) 0.2 (15.1) 0.6
Provision (benefit) for income taxes .................. 0.1 0.1 (24.6) 0.1
----- ----- ----- -----
Net (loss) income ..................................... (3.8) 0.1 9.5 0.5
===== ===== ===== =====
THREE AND NINE MONTHS ENDED NOVEMBER 2, 2002 COMPARED TO THREE AND NINE MONTHS
ENDED NOVEMBER 3, 2001
The company reduced the size of its Middle East Knit business ("MEKB"),
consisting of the Company's Jordanian business, in April 2002 and sold MEKB in
June 2002. Accordingly, the Company's results of operations for the period
February 3, 2002 through November 2, 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 1,
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 third quarter of 2002 were $5,366,000, a decrease of
$6,444,000, or 55%, from $11,810,000 in the third quarter of 2001. Net sales for
the nine months of 2002 were $19,383,000, a decrease of $11,887,000, or 38%,
from $31,270,000 in the nine months of 2001.
Americas and Far East
Net sales for the third quarter of 2002 was $5,366,000, a decrease of $941,000
or 15% from $6,307,000 in the third quarter of 2001. The decrease in sales was
primarily attributable to Dillard's of $586,000, Lerner New York of $163,000 and
all others of $192,000. Lerner New York accounted for 100% of the net sales for
the Americas and Far East for the third quarter of 2002 compared to 88% in the
comparable period in 2001. Net sales for the Americas and Far East for the nine
months of 2002 were $16,785,000, a decrease of $5,811,000 or 26% from
$22,596,000 in the nine months of 2001. Lerner New York accounted for 92% of the
net sales for the Americas and Far East for the nine months of 2002 compared to
72% in 2001. The decrease in sales for the nine months was caused by a decrease
in sales primarily to Dillard's of $4,613,000, Lerner New York of $769,000 and
all others of $429,000.
Middle East
Net sales for the nine months of 2002 were $2,598,000, compared to net sales in
the third quarter and nine months of 2001 of $5,503,000 and $8,674,000
respectively.
GROSS PROFIT (LOSS)
The gross profit for the third quarter of 2002 was $665,000, a decrease of
$558,000 from the gross profit of $1,223,000 for the comparable period in 2001.
The gross loss for the nine months of 2002 was $148,000, a decrease of
$3,994,000 from the gross profit of $3,846,000 for the comparable period in
2001.
Americas and Far East
The gross profit for the third quarter of 2002 was $665,000, a decrease of
$520,000 from the gross profit of $1,185,000 for the comparable period in 2001.
The gross profit for the nine months of 2002 was $1,840,000, a decrease of
$1,685,000 from the gross profit of $3,525,000 for the comparable period in
2001. The decrease in gross profit was primarily attributable to lower sales in
2002 compared to 2001, higher unabsorbed factory overhead at the Company's
Guatemala facility in 2002 due to the lower than anticipated sales volume during
the first quarter of 2002 and a less favorable product mix in 2002 compared to
2001.
Middle East
The gross loss for the nine months of 2002 was $1,988,000, compared to gross
profit for the third quarter and nine months of 2001 of $38,000 and $321,000,
respectively. The gross loss was attributable to unabsorbed overhead and
termination expenses at the Company's Jordanian business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the third quarter of 2002 were
$823,000, a decrease of $217,000 from $1,040,000 in the comparable period in
2001. Selling, general, and administrative expenses for the nine months of 2002
were $2,642,000, a decrease of $786,000 from $3,428,000 in the comparable period
in 2001.
13
The decreases in selling, general and administrative expenses for the third
quarter and nine months of 2002, compared to the comparable periods in 2001 were
primarily attributable to the closing of the Dallas sales office during October
2001 and a reduction in personnel in the New York office, partially offset by
the establishment of a sales and marketing team to service the Jordanian
business. As a result of the sale of the Jordanian 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 during
the first quarter ended May 4, 2002.
INTEREST
Interest expense for the third quarter ended November 2, 2002 was $50,000
compared to interest expense of $118,000 for the comparable period in 2001. The
decrease in interest expense in 2002 compared to 2001 was primarily attributable
to elimination of borrowings required to fund the working capital requirements
of the Middle East operations which was sold June 10, 2002 partially offset by
fees for the new domestic credit facility.
Interest expense for the nine months ended November 2, 2002 was $312,000
compared to interest expense of $207,000 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.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes of $8,000, for the third quarter ended
November 2, 2002 is for minimum state income and foreign taxes. The benefit for
income taxes of $4,776,000 for the nine months ended November 2, 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 $24,000
provision for minimum state income and foreign taxes. The Company and the IRS
have executed a settlement agreement for this proposed deficiency with no tax
payment was due. The provision for income taxes for the three and nine months
ended November 3, 2001 of $5,000 and $24,000, respectively, represents minimum
state income 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 2005 through
2022. 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.
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 2005 through
2022.
14
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 November 2, 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 (1.55% at
November 2, 2002) plus 3% or (ii) the prime rate (4.25% at November 2, 2002)
plus 0.5% and are secured by substantially all of the Company's assets. The
Facility is subject to various financial covenants. At November 2, 2002, the
Company failed to achieve one of the required financial covenants and as a
result the Company is in default of the Agreement. The Company is in discussions
with GMACC to remedy this default. 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. At November 2, 2002 the Company had no borrowings.
In August 2001, the Jordanian Company entered into credit facility arrangement
with the Egyptian Arab Land Bank. The aggregate credit facility was $2,800,000.
This facility was terminated on May 13, 2002.
Net cash provided by operating activities for the nine months of 2002 was
$1,601,000 compared to net cash provided by operating activities of $747,000 in
2001. The increase in net cash provided by operating activities was primarily
the result of a decrease in trade accounts receivable, other receivables and
inventory, offset by a loss before income tax benefit. Net cash provided by
investing activities for 2002 was $317,000 compared to net cash used in
investing activities in 2001 of $826,000. In 2002, the net cash provided by
investing activities was composed of $400,000 in proceeds from sale of the
Jordanian business, offset by $40,000 in payments for other intangibles and
$43,000 for purchases of fixed assets. The cash used in investing activities in
2001 were comprised of purchase of fixed assets of $346,000 and $480,000 for
payments for other intangibles in connection with the acquisition of the
Jordanian business.
The Company's financial performance for the next twelve months will depend on a
variety of factors, including the amount of sales to Lerner New York and the
successful collection of the $783,000 outstanding receivables from the sale of
the Jordanian business. If the Company has significant operating losses or if
its ability to borrow under its credit facilities is limited or terminated, the
Company could 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
PART 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe it has a material exposure to market risk. The
Company's earnings may be affected by changes in short-term interest rates as a
result of borrowings under it credit facility. At the Company's current
borrowing levels; a two percent increase in interest rates affecting the
Company's credit facility would not have a material effect on the Company's
year-to-date and projected 2002 and actual 2002 net income.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-14 (c) and 15d-14 (c) of the Securities
Exchange act of 1934, as amended) as of a date (the "Evaluation Date") within 90
days before the filing date of this quarterly report, have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective and designed to ensure that material information relating to the
Company and the Company's consolidated subsidiaries would be made known to them
by others within those entities to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the
evaluation date.
16
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The annual meeting of stockholders of Cygne Designs, Inc. was held on
December 3, 2002.
b. The following persons, comprising the entire board of directors, were
elected at the annual meeting pursuant to the following vote tabulation:
Name In Favor Withheld
---- -------- --------
James Groninger ........... 11,528,758 127,790
Bernard M. Manuel ......... 11,528,758 127,790
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
17
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 13, 2002 By: /s/ Bernard M. Manuel
----------------------
Bernard M. Manuel,
Chairman of the Board
and Chief Executive Officer
December 13, 2002 By: /s/ Roy E. Green
-----------------
Roy E. Green,
Senior Vice President,
Chief Financial Officer and
Treasurer and Secretary
18
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 November 2, 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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made know to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regards to
significant deficiencies and material weaknesses.
December 13, 2002
By: /s/ Bernard M. Manuel
---------------------
Bernard M. Manuel
Chairman and 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 November 2, 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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made know to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors ( or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regards to
significant deficiencies and material weaknesses.
December 13, 2002
By: /s/ Roy E. Green
----------------
Roy E. Green
Senior Vice President-Chief Financial Officer