EXHIBIT 1
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Combined Financial Statements
CONTENTS
Report of Independent Auditors....................................... F-2
Combined Balance Sheets - February 3, 1996 and January 28, 1995...... F-3
Combined Statements of Income - Years ended February 3, 1996 and
January 28, 1995................................................... F-4
Combined Statements of Cash Flows - Years ended February 3, 1996
and January 28, 1995............................................... F-5
Notes to Combined Financial Statements............................... F-6
F-1
Report of Independent Auditors
Cygne Designs, Inc.
We have audited the accompanying combined balance sheets of CAT US Inc. and
C.A.T. (Far East) Limited and Subsidiary (subsidiaries of Cygne Designs, Inc.
("Cygne"), referred to hereafter as "CAT", and the AnnTaylor Woven Division of
Cygne, collectively the "Companies" at February 3, 1996 and January 28, 1995 and
the related combined statements of income and cash flows for the years then
ended. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Companies at February
3, 1996 and January 28, 1995, and the combined results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ ENRST & YOUNG LLP
New York, New York
April 15, 1996, except for Note 5,
as to which the date is May 15, 1996
F-2
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Combined Balance Sheets
FEBRUARY JANUARY
3, 1996 28, 1995
---------------------------
(In Thousands)
ASSETS
Current assets:
Cash $ 200 $ 1,735
Accounts receivable--AnnTaylor, Inc. (less
allowance of $379 in 1995 and $1,427 in 1994) 22,284 13,002
Inventory 21,728 18,486
Other current assets including deferred
income taxes of $198 and $395 291 522
---------------------------
Total current assets 44,503 33,745
Fixed assets, net 4,315 2,873
Other long term assets 187 289
===========================
Total assets $49,005 $36,907
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $21,090 $10,391
Credit facility and current portion of
long-term debt 1,576 1,667
Accrued expenses 1,124 2,966
Income taxes payable 981 1,384
---------------------------
Total current liabilities 24,771 16,408
Long-term debt, less current portion 684 182
---------------------------
Total liabilities 25,455 16,590
Stockholders' equity 23,550 20,317
===========================
Total liabilities and stockholders' equity $49,005 $36,907
===========================
See accompanying notes.
F-3
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Combined Statements of Income
FEBRUARY JANUARY
3, 1996 28, 1995
-------------------------
(In Thousands)
Net sales $231,385 $193,038
Cost of goods sold 204,236 167,428
-------------------------
Gross profit 27,149 25,610
Selling, general and administrative expenses 17,387 15,019
-------------------------
Income from operations 9,762 10,591
Interest expense 1,088 707
-------------------------
Income before provision for income taxes 8,674 9,884
Provision for income taxes 2,637 3,232
=========================
Net income $ 6,037 $ 6,652
=========================
See accompanying notes.
F-4
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Combined Statements of Cash Flows
FEBRUARY JANUARY
3, 1996 28, 1995
---------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $6,037 $6,652
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 346 279
Deferred taxes 197 (395)
Changes in operating assets and liabilities:
Accounts receivable--AnnTaylor, Inc. (9,500) (1,611)
Inventory (3,242) (12,954)
Other current assets 34 (127)
Due to/from Cygne Designs, Inc. and
affiliates (1,371) 2,470
Accounts payable 9,484 1,491
Accrued expenses 801 (347)
Amounts due to AnnTaylor, Inc.--sales
adjustment (2,643) 2,014
Income taxes payable (403) 704
---------------------------
Net cash used in operating activities (260) (1,824)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (981) (1,947)
Other 102 (251)
---------------------------
Net cash used in investing activities (879) (2,199)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings (396) 1,483
---------------------------
Net cash (used in) provided by financing
activities (396) 1,483
---------------------------
Net decrease in cash (1,535) (2,540)
Cash at the beginning of the period 1,735 4,275
===========================
Cash at the end of the period $ 200 $1,735
===========================
SUPPLEMENTAL DISCLOSURES
Income taxes paid $1,615 $1,150
Interest paid 1,088 707
Equipment acquired through capital leases 807 -
See accompanying notes.
F-5
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements include the accounts of CAT US Inc. and
C.A.T. (Far East) Limited and Subsidiary referred to hereafter as "CAT", and
Cygne Designs, Inc.'s ("Cygne") wholly-owned AnnTaylor Woven Division (the
"Division"), collectively the "Companies." The Companies are affiliated by
commonality of operations and ownership. CAT US Inc. was incorporated in
Delaware on May 11, 1992. C.A.T. (Far East) Limited was incorporated in Hong
Kong on March 10, 1992. CAT US Inc. and C.A.T. (Far East) Limited commenced
operations in June 1992. C.A.T. Italy S.r.l. was incorporated on July 26,
1994 and is a wholly-owned subsidiary of C.A.T. (Far East) Limited. Cygne is
a 60% stockholder and AnnTaylor, Inc. ("AnnTaylor") is a 40% stockholder of
CAT. All material intercompany balances and transactions have been eliminated.
On April 8, 1996, AnnTaylor agreed in principle to acquire Cygne's 60% interest
in CAT and the net assets, as defined, of the Division. The accompanying
combined balance sheets at February 3, 1996 and January 28, 1995, and the
combined statements of operations and cash flows for the years then ended
reflect the Companies historical cost basis prior to the AnnTaylor acquisition.
Certain corporate expenses incurred by Cygne were allocated to the Division
including officers' and administrative salaries, occupancy costs, depreciation
and amortization, professional fees and other selling, general and
administrative expenses amounting to $449,000 and $2,316,000, $1,167,000 and
$730,000, $212,000 and $200,000, $343,000 and $117,000, and $5,806,000 and
$4,722,000, in fiscal 1995 and fiscal 1994, respectively. Costs charged to the
Division for these services are allocated based on specific identification of
direct expenses, where applicable, or the Division's proportionate share of such
expenses. Interest expense, amounting to $1,088,000 and $707,000 for fiscal 1995
and fiscal 1994, respectively, was allocated at market rates to the Division for
intercompany indebtedness to Cygne. Management believes such expense allocations
are reasonable and proper.
F-6
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts transferred to/from Cygne in fiscal 1995 and fiscal 1994 represent
Cygne's investment in and advances to the Division on a historical basis
adjusted for equity in operations and intercompany transactions. Expenses
allocated to the Division not settled become a permanent component of
Cygne's investment.
FISCAL YEAR
The Companies' fiscal year ends on the Saturday nearest to January 31.
PRINCIPAL BUSINESS ACTIVITY
Pursuant to an agreement, CAT is engaged in the design, manufacturing and sale
of women's apparel exclusively to AnnTaylor. This agreement further provides
that AnnTaylor will pay to CAT the delivered cost for the apparel, plus a
commission and reimbursement of certain expenses, as defined. Either party may
terminate this agreement upon six months notice.
The Division's principal operation is to source woven merchandise for AnnTaylor.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE
Revenue is recognized upon shipment of merchandise.
F-7
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment, furniture and fixtures is provided
for by the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
term of the related lease.
FOREIGN CURRENCY TRANSLATION
The Companies consider the United States dollar to be the functional currency
for its operations in Hong Kong and Italy.
INCOME TAXES
Deferred income taxes are calculated on the liability method.
2. INVENTORY
Inventory consists of the following:
FEBRUARY JANUARY
3, 1996 28, 1995
-----------------------------
Fabric $17,212,000 $12,093,000
Finished goods, including in-transit inventory 4,516,000 6,393,000
=============================
$21,728,000 $18,486,000
=============================
F-8
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
3. FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization
and are summarized below together with estimated useful lives used in computing
depreciation and amortization:
FEBRUARY JANUARY ESTIMATED
3, 1996 28, 1995 USEFUL LIVES
-----------------------------------
Equipment, furniture and fixtures $3,990,000 $2,535,000 3-10
Leasehold improvements 1,792,000 1,458,000 3-15
------------------------
5,782,000 3,993,000
Less accumulated depreciation and
amortization 1,467,000 1,120,000
========================
$4,315,000 $2,873,000
========================
4. LEASES
The future minimum lease payments due (on a fiscal year basis) under a
noncancellable operating lease for office space in Hong Kong is $360,000 in
1996. The lease stipulates that fair market rent shall be paid from January 1997
through January 1999.
Total rent expense for fiscal 1995 and fiscal 1994 was approximately $628,000
and $225,000, respectively. In addition, CAT was charged rent of approximately
$89,000 and $98,000, respectively, by Cygne under an office sharing arrangement
for these respective periods.
5. CREDIT FACILITIES
CAT has an agreement with a bank whereby the bank provides CAT with letters of
credit in an amount not to exceed $40,000,000, including loans against imports
up to $8,000,000 at an interest rate of 0.5% above the prime rate of 8.25% at
February 3, 1996. The facility is subject to periodic review by the bank. Open
letters of credit at February 3, 1996 amounted to approximately $27,925,000.
F-9
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
5. CREDIT FACILITIES (CONTINUED)
The bank has a first lien over all of CAT's accounts receivable and inventory.
AnnTaylor has provided the bank with a $4,000,000 standby letter of credit.
Cygne has guaranteed 60% of the credit facility. In addition, 60% of CAT US
Inc.'s stock owned by Cygne has been pledged to the bank as collateral for CAT
US Inc.'s credit facility. The CAT (Far East) Limited stock owned by Cygne has
been pledged for the Cygne line of credit facility from the same bank.
CAT's facility is provided by the same bank that provides Cygne with its primary
working capital facility. At February 3, 1996, Cygne was not in compliance with
its credit agreement's working capital requirements, current ratio, leverage
ratio and tangible net worth financial covenants. The bank has permanently
waived all defaults under Cygne's credit agreement. In addition, on May 15,
1996, Cygne received a commitment letter from the bank to provide them with a
new credit facility to replace the existing facility.
Based on the agreement between AnnTaylor and CAT, AnnTaylor shall reimburse CAT
for any finance charges incurred by CAT in financing AnnTaylor merchandise
purchases. Finance charges reimbursable by AnnTaylor for fiscal 1995 and 1994,
amounted to approximately $627,000 and $ 541,000, respectively. Such amounts
were netted against amounts due to AnnTaylor.
The Companies also have equipment financing outstanding at February 3, 1996 and
January 28, 1995 of $1,173,000 and $366,000, respectively.
F-10
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
6. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following:
YEAR ENDED
FEBRUARY JANUARY
3, 1996 28, 1995
----------------------------
Pretax income:
United States $4,944,000 $6,681,000
Foreign 3,730,000 3,203,000
----------------------------
$8,674,000 $9,884,000
============================
CAT files its own Federal income tax return. The Division is included in Cygne's
Federal income tax return. The Division is charged by Cygne for taxes as if it
filed a separate return.
Significant components of the provision for income taxes are as follows:
YEAR ENDED
FEBRUARY JANUARY
3, 1996 28, 1995
----------------------------
Current:
Federal $1,719,000 $2,570,000
Foreign 353,000 542,000
State 368,000 515,000
----------------------------
Total current 2,440,000 3,627,000
Deferred:
United States 215,000 (391,000)
Foreign (18,000) (4,000)
----------------------------
$2,637,000 $3,232,000
============================
F-11
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the Companies deferred tax assets (liabilities) are as
follows:
YEAR ENDED
FEBRUARY JANUARY
3, 1996 28, 1995
----------------------------
Deferred tax (liabilities) assets:
United States:
Employee benefit accruals $ - $242,000
Depreciation (7,000) 8,000
Inventory cost capitalization 121,000 79,000
Cost basis of fixed assets 62,000 62,000
----------------------------
176,000 391,000
Foreign:
Depreciation 22,000 4,000
----------------------------
Total U.S. and foreign deferred tax
assets $198,000 $395,000
============================
Undistributed earnings of C.A.T. (Far East) Limited and Subsidiary amounted to
approximately $7,700,000 at February 3, 1996. Those earnings are considered to
be indefinitely reinvested in Hong Kong and if repatriated would be taxable to
the stockholders. Accordingly, no provision for U.S. federal and state income
taxes has been provided thereon.
F-12
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
7. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following (in thousands):
CAT INVESTMENT OF
---------------------------- CYGNE DESIGNS,
ADDITIONAL INC. IN
COMMON PAID-IN RETAINED ANNTAYLOR
TOTAL STOCK CAPITAL EARNINGS WOVEN DIVISION
-----------------------------------------------------
Balance at January
29, 1994 $ 9,487 $20 $2 $ 2,402 $ 7,063
-----------------------------------------------------
Transfers to/from
Cygne Designs, Inc. 4,178 - - - 4,178
Net income for the
year ended January
28, 1995 6,652 - - 3,998 2,654
-----------------------------------------------------
Balance at January
28, 1995 $20,317 $20 $2 $ 6,400 $13,895
-----------------------------------------------------
Transfers to/from
Cygne Designs, Inc. (2,804) - - - (2,804)
Net income for the
year ended February
3, 1996 6,037 - - 4,275 1,762
-----------------------------------------------------
Balance at February
3, 1996 $23,550 $20 $2 $10,675 $12,853
=====================================================
CAT US Inc. had 10,000 shares of $.01 par value common stock authorized,
issued and outstanding at February 3, 1996. C.A.T. (Far East) Limited had
150,000 of HK$1 ordinary shares authorized, issued and outstanding at
February 3, 1996.
8. COMMITMENTS AND OTHER MATTERS
The CAT Businesses have employment agreements with two officers which provide
for minimum aggregate annual payments of approximately $200,000 in fiscal 1995,
$175,000 in fiscal 1996 and $44,000 in fiscal 1997. In addition, these officers
may receive additional compensation based on pretax income of the CAT, as
defined.
F-13
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Notes to Combined Financial Statements (continued)
8. COMMITMENTS AND OTHER MATTERS (CONTINUED)
The employment agreement entered into with one of the officers provides that, in
the event of a transfer of the CAT's common stock or in the event of a transfer
of all or substantially all of the CAT's assets during the officer's employment,
the officer shall have the option to receive a lump-sum bonus equal to 10% of
the CAT's valuation (as defined) at the time of such transfer.
Substantially all cash is held on deposit at one financial institution.
9. RELATED PARTY TRANSACTIONS
CAT paid approximately $225,071 and $190,000 to Cygne for administrative and
other services (including rent) during fiscal 1995 and fiscal 1994,
respectively.
10. SUBSEQUENT EVENT
On April 8, 1996, AnnTaylor agreed in principle to acquire Cygne's 60% interest
in CAT and the net assets, as defined, of the Division.
F-14