As Filed with the Securities and Exchange Commission on August 29, 1996
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
CYGNE DESIGNS, INC.
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(Name of Registrant as Specified In Its Charter)
CYGNE DESIGNS, INC.
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14(a)-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total Fee Paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
CYGNE DESIGNS, INC.
1372 Broadway
New York, New York 10018
(212) 354-6474
Dear Fellow Stockholder,
You are cordially invited to attend the 1996 Annual Meeting of Stockholders
of Cygne Designs, Inc., a Delaware corporation (the "Company" or "Cygne"), to be
held at The University Club, One West 54th Street, New York, New York, on
Thursday, September 19, 1996, at 9:30 a.m., New York City time, and any
adjournment or postponement thereof (the "Annual Meeting").
At the Annual Meeting, you will be asked to (i) consider and vote upon a
proposal to approve the sale (the "Proposed Sale") to AnnTaylor, Inc., a
Delaware corporation ("Ann Taylor"), of Cygne's merchandising and sourcing
capabilities used for product sales to Ann Taylor, which consists of (a) the
Company's 60% interest in each of CAT U.S. Inc., a Delaware corporation ("CAT
US"), and C.A.T. (Far East) Limited, a Hong Kong corporation ("CAT Far East"
and, together with CAT US, "CAT"), the Company's joint venture arrangement with
Ann Taylor, which owns the remaining 40% interest in CAT, and (b) the assets of
Cygne's Ann Taylor Woven Division (the "Division," and together with CAT, the
"Ann Taylor Operations"); (ii) elect five members to the Company's Board of
Directors; and (iii) transact such other business as may properly come before
the Annual Meeting.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE PROPOSED SALE IS FAIR TO
AND IN THE BEST INTERESTS OF CYGNE AND ITS STOCKHOLDERS, HAS APPROVED THE
PROPOSED SALE AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE PROPOSED
SALE. In arriving at its recommendation, Cygne's Board of Directors gave careful
consideration to a number of factors as described in the enclosed proxy
statement, including the advice of Ladenburg, Thalmann & Co. Inc. to the effect
that the consideration to be received by Cygne for the Ann Taylor Operations is
fair, from a financial point of view, to the stockholders of Cygne. Ladenburg,
Thalmann's written opinion is attached as Appendix II to the enclosed proxy
statement. You are urged to read the opinion in its entirety for a description
of the assumptions made, the matters considered and procedures followed by
Ladenburg, Thalmann & Co. Inc.
Details of the Proposed Sale, and other important information concerning
the Company, as well as the other items of business scheduled for the Annual
Meeting, appear in the accompanying Proxy Statement. Please give this material
your careful attention.
Approval of the Proposed Sale requires the affirmative vote of the holders
of a majority of the Company's issued and outstanding shares of common stock,
$.01 par value per share (the "Cygne Common Stock"). Certain officers and
directors of the Company, their spouses and certain principal stockholders have
given Ann Taylor proxies to vote an aggregate of approximately 35% of the
outstanding Cygne Common Stock in favor of the Proposed Sale and against any
other transaction or proposal that could prevent, delay or frustrate the
Proposed Sale.
We look forward to greeting personally those stockholders who are able to
be present at the meeting; however, whether or not you plan to attend the Annual
Meeting, please complete, sign and date the enclosed proxy card and mail it
promptly using the enclosed, pre-addressed, postage-paid, return envelope. If
you attend the Annual Meeting, you may vote in person if you wish, even if you
have previously returned your proxy card. Your prompt attention will be greatly
appreciated.
Very truly yours,
/s/ BERNARD M. MANUEL
---------------------------------------
Bernard M. Manuel
Chief Executive Officer
<PAGE>
CYGNE DESIGNS, INC.
1372 Broadway
New York, New York 10018
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
-------------------
Notice is hereby given that the Annual Meeting of Stockholders of Cygne
Designs, Inc., a Delaware corporation (the "Company" or "Cygne"), will be held
at The University Club, One West 54th Street, New York, New York, on Thursday,
September 19, 1996, at 9:30 a.m., New York City time, and any adjournment or
postponement thereof (the "Annual Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve the proposed sale
(the "Proposed Sale") to AnnTaylor, Inc., a Delaware corporation ("Ann
Taylor"), of Cygne's merchandising and sourcing capabilities used for
product sales to Ann Taylor, which consists of (a) the Company's 60%
interest in each of CAT U.S., Inc., a Delaware corporation ("CAT US"),
and C.A.T. Far East Limited, a Hong Kong corporation ("CAT Far East" and,
together with CAT US, "CAT"), the Company's joint venture arrangement
with Ann Taylor, which owns the remaining 40% interest in CAT, and (b)
the assets of Cygne's Ann Taylor Woven Division (the "Division" and,
together with CAT, the "Ann Taylor Operations") pursuant to a Stock and
Asset Purchase Agreement dated as of June 7, 1996, as amended as of
August 27, 1996 (the "Purchase Agreement"), by and between the Company,
Cygne Group (F.E.) Limited, a Hong Kong corporation and wholly-owned
subsidiary of the Company ("CGFE"), AnnTaylor Stores Corporation, a
Delaware corporation and parent corporation of Ann Taylor, and Ann
Taylor, the full text of which is attached as Appendix I to the enclosed
proxy statement;
2. To elect five directors to hold office until the next annual
meeting and until their successors are elected and qualified; and
3. To transact such other business as may properly come before the
Annual Meeting.
The Board of Directors of Cygne has fixed the close of business on August
21, 1996 as the record date (the "Record Date") for the determination of the
stockholders entitled to notice of and to vote at the Annual Meeting.
Accordingly, only holders of record of Cygne common stock, $.01 par value per
share ("Cygne Common Stock"), at the close of business on the Record Date will
be entitled to vote at the Annual Meeting, either by proxy or in person. Each
share of Cygne Common Stock is entitled to one vote on each matter to be acted
upon or which may properly come before the Annual Meeting.
The affirmative vote of a majority of the issued and outstanding shares of
Cygne Common Stock is required for approval of the Proposed Sale. The five
nominees for election as directors at the Annual Meeting who receive the
greatest number of votes cast for election of directors at the Annual Meeting by
the holders of the Cygne Common Stock entitled to vote at the meeting shall
become directors of Cygne.
Whether or not you plan to attend the Annual Meeting, please complete, sign
and date the enclosed proxy card and mail it promptly using the enclosed
pre-addressed, postage-paid, return envelope. If you attend the Annual Meeting,
you may vote in person if you wish, even if you have previously returned your
proxy card. Your prompt attention is appreciated.
PAUL D. BAIOCCHI
Secretary
New York, New York
August 28, 1996
<PAGE>
CYGNE DESIGNS, INC.
1372 Broadway
New York, New York 10018
This Proxy Statement is being furnished to holders of record as of the
close of business on August 21, 1996, of the common stock, $.01 par value per
share (the "Cygne Common Stock"), of Cygne Designs, Inc., a Delaware corporation
(the "Company" or "Cygne"), in connection with the solicitation of proxies by
Cygne's Board of Directors for use at the Annual Meeting of Cygne stockholders
to be held at The University Club, One West 54th Street, New York, New York, on
Thursday, September 19, 1996, at 9:30 a.m., New York City time, and at any
adjournment or postponement thereof. This Proxy Statement and the accompanying
proxy card are first being mailed to stockholders of the Company on or about
August 28, 1996.
At the Annual Meeting, stockholders of the Company will be asked (i) to
consider and vote upon a proposal to approve the sale (the "Proposed Sale") to
AnnTaylor, Inc., a Delaware corporation ("Ann Taylor"), of the Company's
merchandising and sourcing capabilities used for product sales to Ann Taylor,
which consists of (a) the Company's 60% interest in each of CAT U.S. Inc., a
Delaware corporation ("CAT US"), and C.A.T. (Far East) Limited, a Hong Kong
corporation ("CAT Far East", and together with CAT US, "CAT"), the Company's
joint venture arrangement with Ann Taylor, which owns the remaining 40% interest
in CAT, and (b) the assets of Cygne's Ann Taylor Woven Division (the "Division"
and, together with CAT, the "Ann Taylor Operations"), pursuant to a Stock and
Asset Purchase Agreement dated as of June 7, 1996, as amended as of August 27,
1996 (the "Purchase Agreement"), by and between the Company, Cygne Group (F.E.)
Limited, a Hong Kong corporation and wholly owned subsidiary of the Company
("CGFE"), Ann Taylor and AnnTaylor Stores Corporation, a Delaware corporation
and parent corporation of Ann Taylor ("ATSC"), (ii) to elect five members to the
Company's Board of Directors to hold office until the next annual meeting and
until their successors are elected and qualified, and (iii) to transact such
other business as may properly come before the Annual Meeting. A copy of the
Purchase Agreement together with the Exhibits thereto is attached as Appendix I
to this Proxy Statement.
The purchase price to be paid by Ann Taylor to Cygne for the Ann Taylor
Operations consists of (i) a number of validly issued, fully paid and
nonassessable unregistered shares of common stock, par value $.0068 per share,
of ATSC (the "Ann Taylor Common Stock") equal to the quotient obtained by
dividing (a) $36.0 million by (b) the average of the high and low sale prices of
the Ann Taylor Common Stock on the New York Stock Exchange Composite Tape on
each of the ten consecutive trading days ending on the trading day immediately
prior to the date of closing of the Proposed Sale (the "Average Trading Price");
provided, however, that the number of shares of Ann Taylor Common Stock to be
issued to the Company (the "Stock Consideration") shall not exceed 2.5 million
shares (the "Cap"), unless (x) the Cap is triggered and (y) the aggregate value,
based on the Average Trading Price, of 2.5 million shares of Ann Taylor Common
Stock is less than $32.5 million, in which event ATSC shall issue as the Stock
Consideration the number of shares of Ann Taylor Common Stock, rounded to the
nearest whole share, equal to the quotient obtained by dividing (A) $32.5
million by (B) the Average Trading Price of the Ann Taylor Common Stock, up to a
maximum of 3 million shares of Ann Taylor Common Stock, except that Ann Taylor
may elect to pay in cash, based on the Average Trading Price, that portion of
the Stock Consideration, if any, in excess of 2.5 million shares of Ann Taylor
Common Stock (the shares of Ann Taylor Common Stock to be received by Cygne in
the Proposed Sale being hereinafter referred to as the "AT Shares"), (ii) a
dollar amount in cash equal to the Adjusted Net Book Value (as defined in the
Purchase Agreement) of the inventory of the Division, and (iii) a dollar amount
in cash equal to the lesser of (a) the Net Fixed Asset Value (as defined in the
Purchase Agreement) of the Division and (b) $2,646,000.
If the Proposed Sale had closed on August 22, 1996 the purchase price to be
paid by Ann Taylor to Cygne for the Ann Taylor Operations would have been
approximately $37.3 million (consisting of 2.5 million shares of Ann Taylor
Common Stock (based on the Average Trading Price of $13.28 for the ten
consecutive trading days ending August 21, 1996) having a value of $33.2 million
(based upon such Average Trading Price) and approximately $4.1 million of cash
and the assumption of certain liabilities (based on the value of the inventory
and fixed assets and certain liabilities at August 3, 1996)). The purchase price
to be paid by Ann Taylor to Cygne will vary depending upon the closing price of
the Ann Taylor Common Stock on the date of Closing, the Average Trading Price of
the Ann Taylor Common Stock for the ten trading day period ending on the trading
day immediately prior to the closing of the Proposed Sale, the Adjusted Net Book
Value of the inventory of the Division and the Net Fixed Asset Value of the
Division on the Closing Date. It is anticipated that the closing of the Proposed
Sale (the "Closing Date") will occur on the date immediately following the date
of the Annual Meeting if the Proposed Sale is approved.
BECAUSE THE PURCHASE PRICE TO BE PAID BY ANN TAYLOR TO CYGNE IN THE
PROPOSED SALE IS A FUNCTION OF A NUMBER OF FACTORS, INCLUDING THE DETERMINATION
OF THE AVERAGE TRADING PRICE OF THE ANN TAYLOR COMMON STOCK, THE CLOSING PRICE
OF THE ANN TAYLOR COMMON STOCK ON THE CLOSING DATE, THE ADJUSTED NET BOOK VALUE
OF THE DIVISION'S INVENTORY ON THE CLOSING DATE AND THE NET FIXED ASSET VALUE OF
THE DIVISION ON THE CLOSING DATE, THE EXACT AMOUNT OF THE PURCHASE PRICE,
INCLUDING THE NUMBER OF SHARES OF ANN TAYLOR COMMON STOCK, TO BE RECEIVED FOR
THE ANN TAYLOR OPERATIONS, CANNOT BE DETERMINED UNTIL AFTER THE ANNUAL MEETING.
THE STOCKHOLDERS WILL NOT HAVE ANOTHER OPPORTUNITY TO VOTE ON THE PROPOSED SALE
AFTER THE PURCHASE PRICE TO BE RECEIVED BY THE COMPANY HAS BEEN DETERMINED.
The Board of Directors has carefully reviewed and considered the Proposed
Sale and has concluded that it is in the best interests of the Company and its
stockholders. The Board recommends that stockholders vote FOR the Proposed Sale.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement in connection
with the solicitation of proxies made hereby and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or any other person. All information pertaining to Ann Taylor and
its affiliates contained in this Proxy Statement under the headings "The
Proposed Sale--Ann Taylor Stores Corporation," "Information Relating to ATSC and
Ann Taylor" and "Comparative Per Share Data" has been supplied by Ann Taylor.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION .................................................................................. 3
THE ANNUAL MEETING ..................................................................................... 4
Time, Date and Place ................................................................................. 4
Matters to be Considered at the Annual Meeting ....................................................... 4
Record Date, Voting Securities and Quorum ............................................................ 4
Vote Required ........................................................................................ 4
Voting Agreements by Certain Directors, Officers and Principal Stockholders .......................... 4
No Appraisal Rights .................................................................................. 4
Proxies .............................................................................................. 5
THE PROPOSED SALE ...................................................................................... 5
General .............................................................................................. 5
The Company .......................................................................................... 5
Ann Taylor Stores Corporation ........................................................................ 6
Background and Reasons ............................................................................... 7
Opinion of Financial Advisor ......................................................................... 9
Recommendation of the Board of Directors ............................................................. 17
Interests of Certain Persons in the Proposed Sale .................................................... 18
Use of Proceeds; Effect on the Company's Stockholders ................................................ 18
Regulatory Approvals ................................................................................. 19
Accounting Treatment ................................................................................. 19
Certain Federal Income Tax Consequences .............................................................. 19
THE PURCHASE AGREEMENT ................................................................................. 19
Purchase Price ....................................................................................... 19
Acquired Assets and Assumed Liabilities .............................................................. 21
The Closing .......................................................................................... 22
Representations and Warranties ....................................................................... 22
Conduct of Business of CAT, the Division and Ann Taylor Prior to Closing ............................. 22
Conditions to Closing ................................................................................ 23
Termination .......................................................................................... 24
Survival and Indemnification ......................................................................... 24
Proxies .............................................................................................. 24
Consulting Agreements ................................................................................ 24
Stockholders Agreement ............................................................................... 25
Transition Arrangements .............................................................................. 26
PRO FORMA FINANCIAL INFORMATION ........................................................................ 27
ELECTION OF DIRECTORS .................................................................................. 32
ADDITIONAL INFORMATION ABOUT THE COMPANY ............................................................... 34
Business ............................................................................................. 34
Selected Financial Information ....................................................................... 45
Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 48
Executive Officers ................................................................................... 57
Executive Compensation ............................................................................... 58
Market Price Data and Related Matters ................................................................ 64
Beneficial Ownership of Cygne Common Stock ........................................................... 65
INFORMATION RELATING TO ATSC AND ANN TAYLOR ............................................................ 67
Business ............................................................................................. 67
Selected Historical Consolidated Financial Data for ATSC ............................................. 67
ATSC Preliminary Second Quarter and First Half 1996 Results .......................................... 69
ATSC Preliminary Pro Forma First Half 1996 Results ................................................... 72
ATSC Pro Forma Financial Information ................................................................. 72
Market for Ann Taylor Common Stock ................................................................... 77
Incorporation of Certain Documents by Reference ...................................................... 77
COMPARATIVE PER SHARE DATA ............................................................................. 78
RELATIONSHIP WITH INDEPENDENT AUDITORS ................................................................. 79
STOCKHOLDER PROPOSALS .................................................................................. 79
OTHER BUSINESS ......................................................................................... 79
INDEX TO FINANCIAL STATEMENTS .......................................................................... F-1
APPENDIX I --Purchase Agreement, as amended
APPENDIX II--Opinion of Ladenburg, Thalmann & Co. Inc.
</TABLE>
2
<PAGE>
AVAILABLE INFORMATION
Cygne, ATSC and Ann Taylor are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements (for Cygne and ATSC) and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Midwest
Regional Office of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and at 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material, when filed, may also be obtained from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of certain fees prescribed by the SEC. The SEC maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. Such reports, proxy
statements and other information relating to ATSC and Ann Taylor can also be
inspected at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, on which the Ann Taylor Common Stock and certain of Ann
Taylor's securities are listed.
3
<PAGE>
THE ANNUAL MEETING
Time, Date and Place
This Proxy Statement is being furnished to the holders of record as of the
close of business on August 21, 1996 of the Cygne Common Stock in connection
with the solicitation of proxies by the Board of Directors for use at the Annual
Meeting to be held on September 19, 1996 at 9:30 a.m. New York City time at The
University Club, One West 54th Street, New York, New York, and at any
adjournment or postponement thereof.
Matters to be Considered at the Annual Meeting
At the Annual Meeting, the holders of the Cygne Common Stock will be asked
to consider and vote upon (i) approval of the Proposed Sale, (ii) the election
of five directors to hold office until the next annual meeting and until their
successors are elected and qualified and (iii) such other business as may
properly come before the meeting and any adjournment thereof.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED SALE AND
RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED SALE.
Record Date, Voting Securities and Quorum
The Board of Directors has fixed the close of business on August 21, 1996,
as the record date (the "Record Date") for determining holders of record of
Cygne Common Stock entitled to receive notice of and to vote at the Annual
Meeting. Accordingly, only holders of record of Cygne Common Stock as of the
Record Date will be entitled to notice of and to vote at the Annual Meeting. As
of the Record Date, there were 12,438,038 shares of Cygne Common Stock
outstanding and entitled to vote.
Each holder of record of Cygne Common Stock on the Record Date is entitled
to cast one vote per share, exercisable in person or by a properly executed
proxy, with respect to each matter presented at the Annual Meeting.
The presence at the Annual Meeting, in person or by proxy, of the holders
of a majority of the shares of Cygne Common Stock outstanding on the Record Date
will constitute a quorum at the Annual Meeting. Votes cast by proxy or in person
at the Annual Meeting will be counted by the persons appointed by the Company to
act as the inspectors for the meeting. Shares represented by proxies that
reflect abstentions or include "broker non-votes" will be treated as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum.
Vote Required
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Cygne Common Stock on the Record Date is required to
approve the Proposed Sale. Abstentions and "broker non-votes" will have the
effect of votes against approval of the Proposed Sale.
With respect to the election of five directors at the Annual Meeting, the
five nominees receiving the highest number of affirmative votes of the shares
present in person or represented by proxy and entitled to vote, a quorum being
present, shall be elected as directors. Only votes cast for a nominee will be
counted, except that the accompanying proxy will be voted for all nominees in
the absence of instruction to the contrary. Abstentions, broker non-votes and
instructions on the accompanying proxy card to withhold authority to vote for
one or more nominees will result in the respective nominees receiving fewer
votes. However, the number of votes otherwise received by the nominee will not
be reduced by such action.
Voting Agreements by Certain Directors, Officers and Principal Stockholders
In connection with the Purchase Agreement, certain officers and directors
of the Company, their spouses and certain principal stockholders of the Company
owning an aggregate of 4,349,246 shares of the Cygne Common Stock, representing
35% of the Cygne Common Stock outstanding on the Record Date, have granted to
Ann Taylor irrevocable proxies to vote such shares (i) in favor of the Proposed
Sale and (ii) against any other transaction or proposal that could prevent or
delay the Proposed Sale or frustrate the purposes of the Purchase Agreement. See
"Additional Information About the Company--Beneficial Ownership of Cygne Common
Stock."
No Appraisal Rights
Stockholders of the Company are not entitled to appraisal rights with
respect to the Proposed Sale under Delaware law.
4
<PAGE>
Proxies
All shares of Cygne Common Stock which are represented at the Annual
Meeting by properly executed proxies received at or prior to the taking of the
vote at the Annual Meeting, and not duly and timely revoked, will be voted at
the Annual Meeting in accordance with the choices marked thereon by the
stockholders. Unless a contrary choice is marked, the shares will be voted FOR
approval of the Proposed Sale and FOR all listed nominees for director.
The Board of Directors is not aware that any other matters not referred to
herein are to be presented for action at the Annual Meeting. If any other
matters properly come before the Annual Meeting, the persons designated in the
proxy intend to vote the shares represented thereby in accordance with their
best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting or (iii) attending the Annual Meeting and voting in
person (although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy).
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. In addition to
solicitation by mail, arrangements will be made with brokers and other
custodians, nominees and fiduciaries to forward proxy solicitation materials to
beneficial owners of shares of Cygne Common Stock held of record by such
brokers, custodians, nominees and fiduciaries, and the Company may reimburse
such brokers, custodians, nominees and fiduciaries for their reasonable expenses
incurred in connection therewith. Directors and employees of the Company may
also solicit proxies in person or by telephone without receiving any
compensation in addition to their regular compensation as directors and
employees. Although the Company has no present plans to hire special employees
or paid solicitors to assist in obtaining proxies, it reserves the option
of doing so.
PROPOSAL NO. 1--THE PROPOSED SALE
General
The Company has agreed, subject to stockholder approval, to sell to Ann
Taylor the Company's merchandising and sourcing capabilities used for product
sales to Ann Taylor, which consists of (a) the Company's 60% interest in CAT,
the Company's joint venture arrangement with Ann Taylor, which owns the
remaining 40% interest in CAT, and (b) the assets of Cygne's Ann Taylor Woven
Division. The purchase price to be paid by Ann Taylor to Cygne for the Ann
Taylor Operations consists of (i) the Stock Consideration, consisting of a
number of validly issued, fully paid and nonassessable unregistered shares of
Ann Taylor Common Stock equal to the quotient obtained by dividing (a) $36.0
million by (b) the Average Trading Price; provided, however, that the number of
shares of Ann Taylor Common Stock to be issued to the Company shall not exceed
2.5 million shares unless (x) the Cap is triggered and (y) the aggregate value,
based on the Average Trading Price, of 2.5 million shares of Ann Taylor Common
Stock is less than $32.5 million, in which event ATSC shall issue the number of
shares of Ann Taylor Common Stock, rounded to the nearest whole share, equal to
the quotient obtained by dividing (A) $32.5 million by (B) the Average Trading
Price of the Ann Taylor Common Stock, up to a maximum of 3 million shares of Ann
Taylor Common Stock, except that Ann Taylor may elect to pay in cash, based on
the Average Trading Price, that portion of the Stock Consideration, if any, in
excess of 2.5 million shares of Ann Taylor Common Stock, (ii) a dollar amount in
cash equal to the Adjusted Net Book Value (as defined in the Purchase Agreement)
of the inventory of the Division, and (iii) a dollar amount in cash equal to the
lesser of (a) the Net Fixed Asset Value (as defined in the Purchase Agreement)
of the Division and (b) $2,646,000. Cygne will be subject to certain
restrictions on the timing of sales and the number of AT Shares which can be
sold at any one time. See "The Purchase Agreement."
The Company
The Company is a private label designer, merchandiser and manufacturer of
women's apparel, serving principally The Limited, Inc. and Ann Taylor. The
Company's products include a broad range of woven and knit career and casual
women's apparel. As a private label manufacturer, the Company produces apparel
upon orders from its customers for sale under the customers' own labels, rather
than producing its own inventory of apparel for sale under the Cygne name.
The manufacture of private label apparel is characterized by high volume
sales to a small number of customers at competitive prices. Although private
label gross margins are lower than in the brand name apparel industry,
5
<PAGE>
marketing expenses and collection and markdown costs are typically commensurably
lower, and inventory turns are generally higher. Inventory risks are also
reduced because the purchasing of fabric and other supplies begins only after
purchasing commitments have been obtained from customers.
The weak retailing environment, particularly in women's apparel, customers
diminishing reliance upon outside design, merchandising and sourcing services,
and liquidity pressures, all adversely affected the Company's operating results.
In response to these factors, the Company is restructuring its operations. The
Company sold the United Kingdom subsidiary of its Fenn, Wright and Manson
division ("FWM") and certain brand name rights, and discontinued the remaining
operations of FWM. In February 1996, the Company sold substantially all of its
assets relating to its GJM intimate apparel and sleepwear operations (the "GJM
Business"). In addition, upon the approval of the stockholders and the
consummation of the Proposed Sale, the Company will sell its Ann Taylor
Operations to Ann Taylor and, as a result, the Company anticipates that it will
no longer have sales to Ann Taylor. In the fiscal year ended February 3, 1996
and the first half of fiscal 1996, sales to Ann Taylor were $231.9 million and
$117.1 million, respectively, representing approximately 53% and 73%,
respectively, of the Company's net sales (excluding net sales of the recently
sold GJM Business). The Company believes that its operating results will
continue to be adversely affected as long as the weak retail environment,
particularly in women's apparel, continues and customers continue to decrease
their reliance upon outside design, merchandising and sourcing services. The
Company believes that its current financing arrangement with The Hongkong and
Shanghai Banking Corporation Limited (the "HS Bank") and the proceeds from the
Proposed Sale will alleviate the liquidity pressures faced by the Company during
fiscal 1995 and the first half of fiscal 1996, although there can be no
assurance of this. See "Pro Forma Financial Information," "Additional
Information About the Company--Business" and "--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company has been dependent on its key customers (The Limited, Inc. and
Ann Taylor) and, with the loss of Ann Taylor as a customer, a significant
portion of the Company's sales will be to various divisions of The Limited, Inc.
In fiscal 1995 and the first half of fiscal 1996, sales to The Limited, Inc. and
its various divisions, excluding the GJM Business, were $113.9 million and $28.6
million, respectively, representing 26.2% and 17.9%, respectively, of the
Company's net sales (excluding net sales of the GJM Business). There can be no
assurance that The Limited, Inc. will continue to purchase merchandise from the
Company at the same rate, or at all, in the future, or that the Company will be
able to attract new customers.
The principal executive offices of the Company are located at 1372
Broadway, New York, New York 10018 and its telephone number is (212) 354-6474.
Unless the context indicates otherwise, the term "Company" or "Cygne" includes
the operations of the Company and its subsidiaries.
Ann Taylor Stores Corporation
ATSC, through Ann Taylor, is a leading national specialty retailer of
better quality women's apparel, shoes and accessories sold primarily under the
Ann Taylor brand name. Ann Taylor merchandise represents classic styles, updated
to reflect current fashion trends. Ann Taylor's stores offer a full range of
career and casual separates, weekend wear, dresses, tops, accessories and shoes,
coordinated as part of a total wardrobing strategy.
As of August 3, 1996, Ann Taylor operated 306 stores in 40 states and the
District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store, Ann
Taylor Loft and Ann Taylor Studio. Of the 257 stores operated under the Ann
Taylor name, approximately three-quarters are located in regional malls and
upscale specialty retail centers, with the balance located in downtown and
village locations. These stores represent Ann Taylor's core merchandise line. In
1993, Ann Taylor converted its four existing clearance centers to Ann Taylor
Factory Stores, and as of August 3, 1996, operated 23 Ann Taylor Factory Stores
located in factory outlet centers. The success of the Ann Taylor Factory Stores
and consumers' continuing emphasis on value led Ann Taylor to begin testing, in
1995, Ann Taylor Loft, a separate moderate-priced store concept for customers
who appreciate the Ann Taylor style but have a smaller budget for apparel, shoes
and accessories. As of August 3, 1996 Ann Taylor operated 17 Ann Taylor Loft
stores, also located in factory outlet centers. In Fall 1994, Ann Taylor began
testing Ann Taylor Studio stores, a free-standing shoe and accessory store
concept offering the broadest assortment of Ann Taylor shoes, as well as Ann
Taylor hosiery, small leather accessories such as belts and handbags, and Ann
Taylor's "destination" fragrance and personal care line. As of August 3, 1996
Ann Taylor had nine Ann Taylor Studio stores.
On August 23, 1996, ATSC announced that Sally Frame Kasaks resigned as
Chairman and Chief Executive Officer and a Director of ATSC and Ann Taylor, and
J. Patrick Spainhour, ATSC's President and Chief Operating
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Officer, was promoted to Chairman and Chief Executive Officer. Since joining
ATSC in February 1996, Mr. Spainhour has been responsible for overseeing
business operations including finance, information systems, logistics, human
resources, store planning and real estate. He has also been responsible for
worldwide sourcing for Ann Taylor, which includes the integration of CAT and the
Division into a new sourcing division of Ann Taylor. ATSC intends to commence
immediately a search for a new President having extensive merchandising
experience.
The principal executive offices of ATSC and Ann Taylor are located at 142
West 57th Street, New York, New York 10019, and the telephone number is (212)
541-3000.
Background and Reasons
Cygne has been sourcing merchandise for Ann Taylor for more than ten years,
and Ann Taylor has become one of the Company's two largest customers. During
fiscal 1993, 1994 and 1995 and the first half of fiscal 1996, net sales to Ann
Taylor were $121.8 million, $193.4 million, $231.9 million and $117.1 million,
respectively, representing 55.3%, 37.5%, 42.9% and 73.3%, respectively, of
Cygne's net sales. Cygne supplies products to Ann Taylor directly through the
Division as well as through CAT, its 60% owned joint venture arrangement with
Ann Taylor. A substantial portion of the increase in sales to Ann Taylor during
this period resulted from increased sales by CAT, which accounted for 55.3%,
70.9%, 71.6% and 70.8% of Cygne's total net sales to Ann Taylor during fiscal
1993, 1994 and 1995 and the first half of fiscal 1996.
In June 1992, Irving Benson, Bernard Manuel and Cleveland Investment
Limited ("CIL"), the sole stockholders of the Company at that time, and Ann
Taylor formed CAT to source products for Ann Taylor in certain product
categories which the Company was not supplying to Ann Taylor and for which Ann
Taylor believed its sourcing could be improved. Ann Taylor initially owned 20%
of CAT. Effective April 30, 1993, each of Messrs. Benson and Manuel exchanged
his entire interest in, and CIL exchanged a portion of its interest in, CAT for
shares of Cygne Common Stock. Effective May 1, 1993, CIL sold the remaining
portion of its interest in CAT to Ann Taylor. As a result of these transactions,
Cygne owned 60% of CAT and Ann Taylor owned the remaining 40%. Each of Cygne and
Ann Taylor has the right to offer to purchase the other party's interest in CAT.
If an offer is made by one party, the other party has the option of accepting
its interest in CAT on the terms offered or purchasing the offering party's
interest in CAT on the same terms as offered by the offering party (the "CAT
Buy-Sell Right"). See "Additional Information About the Company--Business
- --Company History" and "--Joint Venture Arrangements."
In connection with Cygne's sourcing activities on behalf of Ann Taylor,
from time to time Ann Taylor has made advances to Cygne in order to assist it in
carrying fabric purchases made by Cygne in anticipation of the issuance by Ann
Taylor of merchandise purchase orders. Advances from Ann Taylor to Cygne
outstanding at August 3, 1996 totaled approximately $8 million. In addition, as
a joint venture partner in CAT, Ann Taylor issued a $4 million standby letter of
credit to support CAT's obligations to its principal lender. The lender has the
right under certain circumstances to draw on such letter of credit to cover
unpaid principal and interest owned by CAT.
In January 1996, management of Cygne and Ann Taylor began to discuss a
potential restructuring of their ownership of CAT. In the course of these
discussions, management of Ann Taylor indicated that an acquisition of CAT would
further Ann Taylor's strategy of increasing its control over pre-production
processes and production management. However, management of Cygne indicated that
it was not interested in negotiating a transaction involving only the sale of
CAT because of its concern that, over time, Ann Taylor would leverage the
sourcing and contracting expertise of CAT and begin to bring in-house the
sourcing of those products currently being supplied by Cygne through the
Division, which would lead to a significant deterioration of the Division's
business and value. As a result, management of Cygne indicated that it wished to
pursue a transaction that included an acquisition by Ann Taylor of both CAT and
the assets of the Division. Management of Cygne viewed such a transaction as a
potential component in its restructuring of operations to alleviate its
liquidity pressures. Ann Taylor management indicated that it would be willing to
consider such a transaction as it would mitigate supply interruption risks
arising from the liquidity pressures recently experienced by Cygne. The parties
determined to negotiate such a transaction instead of going through the
procedures and waiting periods required under the terms of the CAT Buy-Sell
Right. Accordingly, the parties continued over the next several weeks to discuss
a possible transaction involving the sale to Ann Taylor of the entire Ann Taylor
Operations.
At an April 4, 1996 meeting of the Cygne Board of Directors, Cygne
management recommended to the Board a proposed sale of the Ann Taylor
Operations, and reviewed with the Board the proposed terms. At the meeting, the
Cygne Board focused on the ability of Ann Taylor to exercise the CAT Buy-Sell
Right and the possibility it would do so and the effect of such exercise on the
Division. The Board also focused on the effect of the sale on the Company's
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continuing operations. After detailed discussions, including pricing, the Cygne
Board instructed management of Cygne to continue with negotiations, and provided
guidance with respect to acceptable terms regarding the Proposed Sale. Following
the Cygne Board meeting, management of Cygne and Ann Taylor finalized the
agreement in principle regarding the Proposed Sale, which was signed on April 8,
1996 and announced publicly on that date prior to the opening of the financial
markets.
On April 11, 1996, the Company retained Ladenburg, Thalmann & Co. Inc.
("Ladenburg") to deliver an opinion whether or not the consideration to be
received by the Company in the Proposed Sale is fair, from a financial point of
view, to the Company's stockholders and an opinion whether or not the
consideration to be received by Cygne in the Proposed Sale represents reasonable
equivalent value and fair consideration for the Ann Taylor Operations.
On May 17, 1996, the Board of Directors of the Company met to discuss the
Proposed Sale. Cygne management reviewed with the Board the status of
negotiations and the rationale for the Proposed Sale. At this meeting, Ladenburg
presented to the Cygne Board the analysis underlying its opinions with respect
to the Proposed Sale. Ladenburg gave its written opinion to the effect that, as
of May 17, 1996 and based upon and subject to certain matters, the consideration
to be received by the Company pursuant to the Proposed Sale is fair, from a
financial point of view, to the Company's stockholders. In addition, at the same
meeting, Ladenburg delivered an opinion to the Board to the effect that the
consideration to be received by Cygne in the Proposed Sale represents reasonable
equivalent value and fair consideration for the Ann Taylor Operations. Cygne's
counsel reviewed with the Board a draft of the Purchase Agreement and the
exhibits. Following these presentations, the Cygne Board determined that the
Proposed Sale is fair to and in the best interests of the Company and the
Company's stockholders and unanimously approved the Proposed Sale. See
"--Opinion of Financial Advisor."
Between May 17, 1996 and June 7, 1996, management of Cygne and Ann Taylor
finalized the Purchase Agreement and the exhibits thereto. The Purchase
Agreement was executed on Friday, June 7, 1996 and announced prior to the
opening of the financial markets on Monday, June 10, 1996. The Purchase
Agreement originally provided that the purchase price to be paid by Ann Taylor
to Cygne for the Ann Taylor Operations would consist of (i) the number of
unregistered shares of Ann Taylor Common Stock equal to the quotient obtained by
dividing (a) $36.0 million by (b) the Average Trading Price; provided, however,
that the number of shares of Ann Taylor Common Stock to be issued shall not
exceed 2.5 million, (ii) a dollar amount in cash equal to the Adjusted Net Book
Value (as defined in the Purchase Agreement) of the inventory of the Division
and (iii) a dollar amount in cash equal to the lesser of (a) the Net Fixed Asset
Value (as defined in the Purchase Agreement) of the Division and (b) $2,646,000.
In August 1996, in response to a decline in the price of the Ann Taylor
Common Stock, management of Cygne and Ann Taylor discussed possible amendments
to the terms of the Proposed Sale to protect Cygne if the value of the Ann
Taylor Common Stock to be issued to Cygne in the Proposed Sale would be less
than $32.5 million. On August 8, 1996, the Board of Directors met to discuss the
Proposed Sale and the possible amendments to the terms of the Proposed Sale. The
Board unanimously approved the terms of possible amendments to the terms of the
Proposed Sale. Following the Cygne Board meeting, management of Cygne and Ann
Taylor finalized the terms of an amendment to the terms of the Proposed Sale
which provided, among other things, for the issuance of up to an additional
500,000 shares of Ann Taylor Common Stock to Cygne in the event the Average
Trading Price of the Ann Taylor Common Stock at the Closing Date was less than
$13.00. The amendment to the Purchase Agreement was executed on August 27, 1996.
On August 27, 1996, Ladenburg delivered a written bring-down opinion to the
Cygne Board to the effect that, as of August 27, 1996 and based upon and subject
to certain matters, the consideration to be received by the Company in the
Proposed Sale is fair, from a financial point of view, to Cygne's stockholders.
The Company believes that the failure to consummate the Proposed Sale could
adversely affect its financial condition and results of operations. The Company
believes that its current financing arrangement with the HS Bank, together with
the proceeds from the Proposed Sale, will alleviate the liquidity pressures
faced by the Company during 1995 and the first half of 1996, although there can
be no assurance of this. In the event the Proposed Sale is not consummated,
Cygne will continue to face these liquidity pressures, which will adversely
affect its results of operations and financial condition. In addition, the
Company's current financing arrangement reduces from $30.0 million to $22.5
million on August 31, 1996, to $15.0 million on October 31, 1996, to $10.0
million on November 30, 1996, $5.0 million on December 31, 1996 and matures on
January 31, 1997. If the Proposed Sale is not consummated, the Company will
likely not have sufficient working capital in light of the reduction in
availability under the current financing arrangement with the HS Bank unless the
Company is able to obtain additional financing from third parties, which the
Company believes is unlikely absent consummation of the Proposed Sale. The
Company has requested the HS Bank
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to postpone the August 31, 1996 reduction to the Closing Date. There can be no
assurance, however, that the HS Bank will agree to the Company's request.
Finally, if the Proposed Sale is not consummated, the Company believes it is
likely that Ann Taylor will exercise the CAT Buy-Sell Right, and will then
leverage the sourcing and contracting expertise of CAT and begin to bring
in-house the sourcing of those products currently being supplied by the
Division, which would lead to a significant deterioration of the Division's
sales, diminish the Divisions's profits over time, and diminish the Division's
present and future value. See "Additional Information About the
Company--Business-Joint Venture Arrangements" and "--Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
Opinion of Financial Advisor
On August 27, 1996 Ladenburg delivered a written bring-down opinion to the
Board of Directors of Cygne to the effect that, as of such date, the
consideration to be received by Cygne in the Proposed Sale is fair, from a
financial point of view, to the stockholders of Cygne (the "Opinion"). A copy of
the Opinion of Ladenburg dated August 27, 1996 is attached hereto as Appendix
II. Cygne stockholders are urged to read the Opinion in its entirety for
assumptions made and matters considered by Ladenburg.
Information and Materials Considered
In connection with rendering its Opinion, Ladenburg reviewed such
information as it deemed necessary or appropriate for the purpose of rendering
its Opinion. Ladenburg reviewed the agreement in principle (the "Agreement in
Principle") relating to the proposed sale of CAT and the Division by Cygne to
Ann Taylor dated April 8, 1996 and the Purchase Agreement.
For CAT, Ladenburg reviewed information including, but not limited to, the
following: (i) detailed internal financial statements, (ii) audited financial
statements for the two fiscal years ended January 28, 1995 and February 3, 1996,
unaudited financial statements for the fiscal quarter ended May 4, 1996 and
preliminary results for the fiscal quarter ended August 3, 1996, (iii) a
detailed analysis of historical selling, general and administrative expenses,
(iv) management's four-year projected financial statements, (v) the agreement,
dated July 13, 1993, by and among Cygne, CGFE, CAT US, CAT Far East and Ann
Taylor relating to the establishment of CAT as a joint venture arrangement to
source products for Ann Taylor (the "CAT Agreement"), (vi) the employment
agreement between CAT and Dwight Meyer, the President of CAT, including the
waiver and amendment agreement thereto, and (vii) publicly available market
information regarding the industry, CAT and its competitors. In addition,
Ladenburg met with management of CAT at its offices in New York to discuss the
historical and prospective industry environment and operating results for CAT.
For the Division, Ladenburg reviewed information including, but not limited
to, the following: (i) detailed internal financial statements, (ii) a detailed
analysis of historical selling, general and administrative expenses, (iii)
management's four-year projected financial statements assuming the Division
continued to operate under its current conditions, (iv) management's three-year
projected financial statements assuming that Cygne had sold CAT and retained the
Division, and (v) publicly available market information regarding the industry,
the Division and its competitors. Ladenburg met with management of the Division
to discuss the historical and prospective industry environment and operating
results for the Division. Additionally, Ladenburg reviewed combined audited
financial statements for CAT and the Division for the fiscal year ended February
3, 1996, combined unaudited financial statements for CAT and the Division for
the fiscal quarter ended May 4, 1996 and combined preliminary results for CAT
and the Division for the fiscal quarter ended August 3, 1996.
For ATSC, Ladenburg reviewed information including, but not limited to, the
following: (i) audited financial statements, unaudited financial statements for
the fiscal quarter ended May 4, 1996 and preliminary results for the fiscal
quarter ended August 3, 1996, (ii) pro forma financial statements giving effect
to the Proposed Sale and the completion of the sale by ATSC's financing vehicle,
Ann Taylor Finance Trust (the "AT Trust"), of $87.5 million Convertible Trust
Originated Preferred Securities ("TOPrS") (which closed in May 1996 with total
gross proceeds of $100,625,000), (iii) a detailed analysis of historical
selling, general and administrative expenses, (iv) a breakdown of ATSC's
purchases by supplier for fiscal 1995, (v) management's four-year projected
financial statements, (vi) the Offering Memorandum for the TOPrS financing,
(vii) ATSC's common stock price and volume trading history, and (viii) publicly
available market information regarding the industry, ATSC and its competitors.
Ladenburg met with the management of ATSC to discuss the historical and
prospective industry environment and operating results for ATSC. Additionally,
on August 26, 1996, Ladenburg discussed with the management of ATSC the
resignation of
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Sally Frame Kasaks, ATSC's Chairman and Chief Executive Officer, and the
appointment of J. Patrick Spainhour as Chairman and Chief Executive Officer on
August 23, 1996.
In addition, Ladenburg reviewed certain information for Cygne, but did not
perform any analyses of this information. The information Ladenburg reviewed for
Cygne included, but was not limited to, the following: (i) detailed internal
financial statements, (ii) audited financial statements, (iii) a detailed
analysis of historical selling, general and administrative expenses, (iv) pro
forma historical financial statements giving effect to the Proposed Sale, (v)
management's three-year projected financial statements, and (vi) publicly
available market information regarding the industry, Cygne and its competitors.
Ladenburg met with management of Cygne to discuss the Proposed Sale, the
historical and prospective industry environment and operating results for Cygne,
CAT, the Division and ATSC.
In rendering its Opinion, Ladenburg assumed and relied upon the accuracy
and completeness of all financial and other material furnished to it by the
Company, CAT, the Division and ATSC regarding the Company, CAT, the Division,
ATSC, the Proposed Sale, the industry in which the companies operate and their
respective competition. Ladenburg did not independently verify the information
provided to it by the Company, CAT, the Division or ATSC. Ladenburg did not
attempt to make or obtain an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of the Company, CAT, the Division or
ATSC. Ladenburg was not authorized to, and did not, solicit third party
indications of interest in acquiring all or part of CAT or the Division, and it
was not asked to consider, and its Opinion does not address, the consideration
the Company may have received from a third-party purchaser, the relative merits
of the Proposed Sale as compared to any alternative business strategies that
might exist for CAT or the Division or the effect of any other transaction in
which CAT or the Division might engage. Ladenburg was not requested to and did
not make any recommendation to the Cygne Board as to the form or amount of the
consideration to be received by Cygne in the Proposed Sale, which was determined
through arms-length negotiation between ATSC and Cygne. Ladenburg's Opinion is
necessarily based upon information available to it, and financial, stock market
and other conditions and circumstances existing and disclosed to it as of the
date of the Opinion.
Although Ladenburg reviewed Cygne's three-year projected financial results
for its businesses remaining after the Proposed Sale, Ladenburg expressed no
opinion on, nor was it asked to opine as to, the viability, value or solvency of
Cygne prior to or after giving effect to the consummation of the Proposed Sale.
Ladenburg did not consider the effects of the Proposed Sale on the future
performance of the remaining assets of Cygne, nor did Ladenburg express an
opinion as to Cygne's planned use of proceeds arising from the Proposed Sale, in
reaching its conclusion as to whether or not the consideration to be received by
Cygne in the Proposed Sale is fair, from a financial point of view, to the
stockholders of Cygne.
THE FULL TEXT OF THE WRITTEN OPINION OF LADENBURG DATED AUGUST 27, 1996,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX II AND IS INCORPORATED HEREIN
BY REFERENCE. CYGNE STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. LADENBURG'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE
STOCKHOLDERS OF CYGNE OF THE CONSIDERATION TO BE RECEIVED BY CYGNE IN THE
PROPOSED SALE FROM A FINANCIAL POINT OF VIEW AND DOES NOT ADDRESS ANY OTHER
ASPECT OF THE PROPOSED SALE. THE SUMMARY OF THE OPINION OF LADENBURG SET FORTH
IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
Overview of Analyses
Ladenburg used both quantitative and qualitative assessments to evaluate
CAT, the Division and ATSC. Ladenburg's determination that the consideration to
be received by Cygne in the Proposed Sale is fair, from a financial point of
view, to the stockholders of Cygne is based on all the quantitative and
qualitative analyses described herein. In reaching its conclusion, Ladenburg
evaluated the Proposed Sale on a combined basis, as if both CAT and the Division
were purchased together, as contemplated by the Proposed Sale. Since a portion
of the consideration in the Proposed Sale consists of shares of ATSC, Ladenburg
also evaluated ATSC to determine the value of this portion of the consideration.
The CAT Agreement provides that at any time after July 1, 1995, either the
Company or Ann Taylor may offer to purchase the other party's interest in CAT.
The party receiving the offer then has the option of accepting the offer and
selling its interest in CAT on the terms as offered or purchasing the offering
party's interest in CAT on the same terms as offered by the offering party. The
closing of such purchase can occur at any time on or after February 5, 1996,
upon six months' prior notice.
For its quantitative evaluations, Ladenburg calculated a range of values
for the entity being valued using five separate approaches: (i) a Market
Multiples Analysis based upon comparable publicly traded companies, (ii) an
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Acquisition Multiples Analysis based upon acquisitions of comparable companies
over the previous three years, (iii) a Discounted Cash Flow Analysis, (iv) a
Debt Capacity Analysis, and (v) for CAT and the Division, a Net Book Value
Analysis. For ATSC, Ladenburg also reviewed the historical trading price and
volume of the Ann Taylor Common Stock. In making its determination, however,
Ladenburg reached the conclusion that certain approaches were more relevant,
represented more direct comparability or provided a higher degree of certainty
than others. Accordingly, Ladenburg weighted certain analyses more heavily than
others. In determining the proper application of certain valuation multiples and
discount rates, Ladenburg considered the qualitative aspects of the entity being
valued, including its access to capital, customer and product concentration,
ownership structure, management team, nature of customer relationship, market
position and intensity of competition.
For purposes of valuing CAT, the contractual obligation to pay the
President of CAT an amount equal to 10% of the implied valuation for all of CAT
is treated as a debt obligation as it is not an ordinary charge. Ladenburg
therefore subtracted this amount from equity value in all its valuation analyses
of CAT. The actual amount to be paid to the President of CAT as a result of the
Proposed Sale is to be paid by ATSC pursuant to the terms of the Purchase
Agreement and has not been disclosed to Ladenburg; however, ATSC stated in the
offering memorandum for the TOPrS financing that it will assume the obligation
to make payments to the President of CAT of approximately $2.0 million becoming
due under his existing employment agreement with CAT as a result of the Proposed
Sale. Therefore, Ladenburg has concluded that ATSC has assumed an additional
liability of CAT of $2.0 million.
Qualitative Considerations
In addition to quantitative analyses discussed below, Ladenburg considered
a number of qualitative factors related to CAT, the Division and Ann Taylor.
Ladenburg did not apply weightings to any of these qualitative analyses. Among
the qualitative factors relating to CAT and the Division, Ladenburg noted that
(i) the CAT Agreement with Ann Taylor prevents Cygne from transferring any or
all of its shares of CAT to any third party without the consent of Ann Taylor
and grants Ann Taylor the right to offer to buy all the shares of CAT owned by
Cygne; (ii) if Cygne were forced to sell its interest in CAT under the CAT
Buy-Sell Right, but retained the Division, it is likely that over time Ann
Taylor would, consistent with its announced business strategy to bring its
sourcing functions in-house, leverage the sourcing and contracting expertise of
CAT and begin to bring in-house the sourcing of those products currently being
supplied by the Division, which would lead to a significant deterioration of the
Division's sales, diminish the Division's profits over time, and diminish the
Division's present and future value; (iii) because both CAT and the Division
generate all of their revenues from sales of products to Ann Taylor and the CAT
Agreement does not obligate Ann Taylor to source products through CAT but
prohibits CAT from sourcing products for any other person, if Ann Taylor were to
shift all, or a substantial portion, of its orders to different suppliers, or if
it were to bring such product sourcing in-house, the viability of CAT and/or the
Division would be severely impaired; (iv) both CAT and the Division have
historically operated at margins well below those of comparable companies; (v)
both CAT and the Division are primarily designated sourcing operations with no
manufacturing operations of their own and no manufacturing expertise, no
proprietary technology and no brand name ownership rights; (vi) Cygne's
liquidity constraints adversely affected the Division's ability to deliver goods
on a timely basis; and (vii) since the Division has historically been an
operation within Cygne and has not reported its financial information
separately, its financial data has been derived based on certain assumptions and
allocations rather than on actual operating information, which Ladenburg does
not believe are necessarily indicative of the performance the Division may have
achieved on a stand-alone basis. Ladenburg noted that the projected operating
results for the Division were prepared based on the same assumptions and
allocations and, therefore, are not necessarily indicative of the projected
operating performance of the Division on a stand-alone basis.
Among the qualitative factors relating to ATSC, Ladenburg noted that (i)
ATSC experienced a significant decline in its operating results in fiscal year
1995 and the first half of 1996; (ii) the shares of Ann Taylor Common Stock to
be issued to Cygne in connection with the Proposed Sale as consideration for CAT
and the Division are subject to a lock-up provision which prevents Cygne from
selling or transferring these shares for a period of time and limits their sale
thereafter; (iii) at the time the Opinion was rendered, ATSC had experienced 14
consecutive months of comparable store sales declines; (iv) notwithstanding the
decline in ATSC's operating results during fiscal year 1995, ATSC has on average
over the past three years produced strong financial results compared to its
competitors; (v) the Proposed Sale should provide significant operating
efficiencies for ATSC, thereby improving its financial and strategic position by
increasing its control over pre-production processes and production management
in order to (a) shorten lead times, (b) improve merchandise quality and (c)
reduce costs; (vi) the Proposed Sale provides a platform for ATSC to standardize
its pre-production work for its other suppliers, which is expected to lead to
greater consis-
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tency in merchandise production; (vii) the TOPrS financing significantly
improved ATSC's financial position and liquidity; (viii) the market showed
renewed confidence in ATSC and its new strategic plan by oversubscribing to the
TOPrS financing; and (ix) ATSC is one of the strongest and best recognized brand
names in specialty retailing with a reputation for better quality women's
apparel, shoes and accessories.
Quantitative Analyses
Valuation of the Ann Taylor Common Stock.
Ladenburg evaluated the Ann Taylor Common Stock through the various methods
described below. For the analysis based on historical numbers, Ladenburg used
ATSC's historical operating results adjusted to reflect the Proposed Sale. The
purpose of valuing ATSC's shares was to determine the consideration in the
Proposed Sale. Since the portion of the consideration to be comprised of shares
of Ann Taylor Common Stock will be issued only upon the successful completion of
the Proposed Sale, Ladenburg believed it was appropriate to use the pro forma
results because Cygne will receive shares of ATSC which will represent the
combined operations of ATSC, CAT and the Division. Ladenburg assumed that Cygne
would receive an aggregate of 2,500,000 shares of Ann Taylor Common Stock, based
on the average of the high and low sale price of the Ann Taylor Common Stock for
each day in the ten trading day period ending on the day prior to the date of
the Opinion.
(a) Historical and Projected Financial Performance. Ladenburg reviewed
ATSC's historical financial performance for the three fiscal years ended
February 3, 1996 and the fiscal quarters ended May 4, 1996 and August 3,
1996 and its projected performance, as provided by ATSC's management, for
the four fiscal years ending January 31, 2000.
(b) Historical Market Price Analysis. Ladenburg examined the closing
market prices of the Ann Taylor Common Stock over the 90-day trading period
prior to August 27, 1996 during which time the closing market price ranged
from $12.00 to $23.25 and had an average high and low trading price of
$14.15 per share for the ten trading days ending August 26, 1996, the day
prior to the date of the Opinion.
(c) Market Multiples Analysis. Ladenburg conducted a market multiples
analysis for ATSC which determined the implied public market value based on
the multiples of comparable public companies. Ladenburg derived results
based upon the multiples of the following group of public companies which
Ladenburg believes are comparable to ATSC: Cato Corporation; Dress Barn,
Inc.; Gap, Inc.; Harold's Stores, Inc.; Intimate Brands, Inc.; Land's End,
Inc.; The Limited, Inc.; Liz Claiborne, Inc.; and The Talbots, Inc. (the
"AT Peer Group").
Ladenburg derived the following median common stock trading multiples
for the AT Peer Group: (i) earnings before interest, taxes, depreciation
and amortization ("EBITDA"); (ii) operating income ("EBIT"); (iii) net
income; (iv) projected net income; and (v) book value. EBITDA and EBIT
multiples are based on total enterprise value divided by each financial
measure, respectively. Enterprise value is defined as the market value of
common stock (i.e., the total shares outstanding multiplied by the stock
price per share), plus total debt, less cash and cash equivalents. The net
income, projected net income and book value multiples are derived by
dividing the market value of the Ann Taylor Common Stock or per share stock
price by the appropriate financial item for the AT Peer Group. The equity
valuations for ATSC based on EBITDA and EBIT were calculated by multiplying
ATSC's EBITDA and EBIT by the median EBITDA and EBIT multiples for the AT
Peer Group, then subtracting average borrowings to finance working capital
needs and adding cash and cash equivalents. For the valuations based on net
income, projected net income and book value, Ladenburg multiplied ATSC's
net income, projected net income and book value by the median net income,
projected net income and book value multiples, respectively, for the AT
Peer Group to arrive at equity values. This range of equity values was
divided by the total number of shares of Ann Taylor Common Stock
outstanding, including those shares assumed to be issued to Cygne in the
Proposed Sale, to derive a range of equity values per share. Ladenburg then
applied a 10% discount to these per share equity values due to the
restrictions on Cygne's ability to dispose of the AT Shares.
The median market multiples for the AT Peer Group were as follows: (i)
9.9x as a multiple of EBITDA, (ii) 11.6x as a multiple of EBIT, (iii) 18.8x
as a multiple of net income, (iv) 17.3x as a multiple of projected net
income for fiscal year one, (v) 14.7x as a multiple of projected net income
for fiscal year two, and (vi) 2.9x as a multiple of book value. The results
of this analysis indicated a range of per share equity values of $3.57 to
$34.06, the median of which was $11.25.
(d) Acquisition Multiples Analysis. Ladenburg conducted an acquisition
multiples analysis which was similar to the market multiples analysis but
instead relied upon multiples from comparable merger and
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acquisition transactions in the women's retail apparel industry. For
purposes of this analysis, the purchase price was equal to the amount paid
for the target's equity and the transaction value was equal to the purchase
price, plus the target's outstanding interest-bearing debt, less cash and
cash equivalents. Ladenburg compared multiples from merger and acquisition
transactions of the following target and acquiring companies, respectively:
the acquisition of the retail operations of Petrie Stores Corp. by E.M.
Warburg, Pincus & Co.; the acquisition of R.H. Macy & Co. Inc. by Federated
Department Stores; the acquisition of the women's apparel division of the
Luxottica Group SpA by Casual Corner Group, Inc.; the acquisition of A Pea
in the Pod, Inc. by Mothers Work, Inc.; the acquisition of Neiman
Marcus-Contempo Casuals by Wet Seal, Inc.; the acquisition of 35 stores of
American Outfitters, Inc. by Forman Enterprises, Inc.; the acquisition of
Broadway Stores by Federated Department Stores; the acquisition of US Shoe
Corp by Casual Corner Group, Inc.; and the acquisition of Adrienne
Vittadini, Inc. by Marisa Christina, Inc.
The median multiples for the selected transactions were as follows: (i)
9.7x as a multiple of EBITDA, (ii) 19.6x as a multiple of EBIT, (iii) 40.6x
as a multiple of net income, and (iv) 0.9x as a multiple of book value. The
range of equity values was divided by the number of shares of Ann Taylor
Common Stock outstanding, including those shares assumed to be issued to
Cygne in the Proposed Sale, to derive equity value per share. Ladenburg
then applied a 10% discount to these per share equity values due to the
restrictions on Cygne's ability to dispose of the AT Shares. The range of
implied equity values per share of Ann Taylor Common Stock was $10.78 to
$12.51, the median of which was $11.22.
(e) Debt Capacity Analysis. Ladenburg conducted a debt capacity
analysis which derived an unleveraged equity value based on the amount a
financial buyer could reasonably expect to pay for a company assuming the
maximum amount of debt financing and equity to the extent leveraged buy-out
returns of 35% to 40% could be obtained. The analysis determines equity
values based on operating projections and general assumptions indicated by
current market conditions. Ladenburg constructed capital structures that
meet the current risk-return requirements of senior and subordinated
lenders as well as private equity investors. Capital structures were
derived by assuming a minimum EBITDA-to-interest coverage ratio of two
times.
Senior debt was limited to what could be reasonably collateralized by
ATSC's assets, principally accounts receivable, inventory, real estate and
fixed assets. Senior debt was assumed to be limited to the sum of (i) 75%
of accounts receivable, (ii) 50% of the sum of inventory and letters of
credit to purchase inventory, (iii) 70% of real estate and (iv) 50% of
fixed assets. Ladenburg assumed an interest rate on the senior debt equal
to prime plus 2.5%, or 10.75%, and an interest rate on the subordinated
debt equal to 6.5% above the rate on the seven year treasury note, or
12.99%. The amount of subordinated debt was limited to maintain an
EBITDA-to-interest coverage ratio of two times. Ladenburg assumed warrants
to purchase common stock for a nominal purchase price would be granted to
the purchasers of the subordinated debt to increase returns to these
investors to the 20% to 25% range.
The sum of the senior debt, subordinated debt and equity, less fees to
consummate such a transaction, provided an implied debt capacity valuation
for ATSC. The equity value was divided by the number of shares of Ann
Taylor Common Stock outstanding, including those shares assumed to be
issued to Cygne in the Proposed Sale, to derive equity value per share.
Ladenburg then applied a 10% discount to this per share equity value due to
the restrictions on Cygne's ability to dispose of the AT Shares. The
implied equity value per share of the Ann Taylor Common Stock was $18.08.
(f) Discounted Cash Flow Analysis. Ladenburg conducted a discounted
cash flow analysis which derived equity values based on the present value
of future net cash flows, less current total debt, plus current total cash.
The cash flows were discounted using a range of discount rates based on the
median of the weighted average cost of capital for the AT Peer Group. For
purposes of this analysis, annual free cash flow equaled de-levered net
income, plus depreciation and amortization, less capital expenditures, less
the change in working capital. In the exit year, free cash flow also
included proceeds from the sale of the business, which is typically assumed
for valuation purposes as a more representative "terminal value" rather
than using cash flows in perpetuity. The terminal value was determined by
applying an exit multiple based on the median EBITAmultiple of comparable
public companies. Ladenburg applied discount rates of 5.13% to 6.13% and
exit multiples of 11.1x to 12.1x. The equity value was divided by the
number of shares of Ann Taylor Common Stock outstanding, including those
shares assumed to be issued to Cygne in the Proposed Sale and the shares of
Ann Taylor Common Stock issuable upon conversion of the TOPrS, as the
valuation per share represented a substantial premium to the conversion
price, to derive equity value per share. Accordingly, the face amount of
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the TOPrS was excluded from total debt in this valuation approach.
Ladenburg applied a 10% discount to the per share equity values due to the
restrictions on Cygne's ability to dispose of the AT Shares. The equity
value per share ranged from $36.19 to $41.03, the median of which was
$38.57.
Valuation of CAT and the Division.
Ladenburg evaluated CAT and the Division, through various methods described
below, to derive implied aggregate equity values for the sum of 60% of the value
of CAT, representing Cygne's ownership interest in CAT, and 100% of the value of
the Division.
(a) Historical and Projected Financial Performance. Ladenburg reviewed
CAT's historical financial performance for each of the three fiscal years
in the three-year period ended February 3, 1996 and the fiscal quarters
ended May 4, 1996 and August 3, 1996 and its projected performance, as
provided by management, for each of the four fiscal years in the four-year
period ending January 29, 2000. Ladenburg also reviewed the Division's
historical financial performance for the two fiscal years ended February 3,
1996 and the fiscal quarters ended May 4, 1996 and August 3, 1996 and its
projected performance, as provided by management, for each of the four
fiscal years in the four-year period ending January 29, 2000.
(b) Market Multiples Analysis. Ladenburg conducted a market multiples
analysis for CAT and the Division using similar methodology as the market
multiples analysis performed for ATSC. For purposes of its analysis,
Ladenburg selected the following public companies which it believes are
comparable: Chic By H.I.S., Inc.; Donnkenny, Inc.; Howard B. Wolf, Inc.;
Intimate Brands, Inc.; Kellwood Company; Norton McNaughton, Inc.; Salant
Corporation; Tarrant Apparel Group; V.F. Corporation; and Warnaco Group,
Inc. (the "Ann Taylor Operations Peer Group"). Ladenburg excluded certain
other apparel manufacturers with strong brand names because Ladenburg found
these to be not comparable to CAT and the Division, which have no
meaningful brand name.
Ladenburg derived the following median common stock trading multiples for
the Ann Taylor Operations Peer Group: (i) EBITDA; (ii) operating income
(EBIT); (iii) net income; (iv) projected net income; and (v) book value
multiples. Ladenburg applied a 20% discount to the median Ann Taylor
Operations Peer Group multiples to account for the qualitative and
quantitative difference between CAT and the Division and the Ann Taylor
Operations Peer Group. The reasons for this discount include, but are not
limited to: (i) the CAT Buy-Sell Right restriction on Cygne's interest in
CAT, (ii) the low value-added nature of the businesses, (iii) ATSC
representing the sole customer for CAT and the Division's products, (iv)
significantly below average operating margins, and (v) liquidity
constraints faced by the Division.
Equity valuations based on EBITDA and EBIT were calculated by multiplying
each of CAT's and the Division's EBITDA and EBIT by the discounted median
EBITDA and EBIT multiples for the Ann Taylor Operations Peer Group, then
subtracting average borrowings to finance working capital needs and adding
cash and cash equivalents. For valuations based on net income, projected
net income and book value, Ladenburg multiplied CAT and the Division's
values by the appropriate discounted median multiples for the Ann Taylor
Operations Peer Group to arrive at equity value. The range of equity values
for CAT was reduced by $2.0 million, representing the estimated cost of
satisfying the contractual obligation to the President of CAT. Ladenburg
multiplied the resulting range by 60%, representing Cygne's ownership of
CAT, and added it to the range of values for the Division.
The median market multiples for the Ann Taylor Operations Peer Group were
as follows: (i) 7.7x as a multiple of EBITDA, (ii) 9.5x as a multiple of
EBIT, (iii) 17.3x as a multiple of net income, (iv) 12.7x as a multiple of
projected earnings for fiscal year one, (v) 9.7x as a multiple of projected
earnings for fiscal year two, and (vi) 1.3x as a multiple of book value.
The result of this analysis indicated a range of combined equity values for
60% of CAT and 100% of the Division from $14.2 million to $51.7 million,
the median of which was $46.2 million.
(c) Acquisition Multiples Analysis. Ladenburg conducted an acquisition
multiples analysis using similar methodology as the acquisition multiples
analysis performed for ATSC. Ladenburg compared multiples from merger and
acquisition transactions of the following target and acquiring companies,
respectively: the acquisition of New Retail Concepts, Inc. by Stanrob
Associates; the acquisition of Classic Golf of America by the Ben Hogan
Company; the acquisition of Panda Group by Orbit International; the
acquisition of the Evan-Picone division of Crystal Brands, Inc. by Jones
Investment Company, Inc.; the acquisition of Salem
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Sportswear Corp. by Fruit of the Loom, Inc.; the acquisition of Nutmeg
Industries, Inc. by V.F. Corporation; the acquisition of the hosiery units
of Hartstone Group Plc by Courtaulds Textiles Plc; and the acquisition of
Magellan Industries by Claremont Garments (Holdings) Plc. Ladenburg applied
a 20% discount to the median acquisition multiples to account for the
qualitative and quantitative difference between CAT and the Division and
the comparable companies, as noted above. The range of equity values for
CAT was reduced by $2.0 million, representing the estimated cost of
satisfying the contractual obligation to the President of CAT. Ladenburg
multiplied the resulting range by 60%, representing Cygne's ownership of
CAT, and added it to the range of values for the Division.
The median multiples for the selected transactions were as follows: (i)
6.3x as a multiple of EBITDA, (ii) 11.2x as a multiple of EBIT, (iii) 22.5x
as a multiple of net income, and (iv) 2.9x as a multiple of book value.
This analysis indicated a range of combined equity values for 60% of CAT
and 100% of the Division from $33.9 million to $64.6 million, the median of
which was $49.3 million.
(d) Debt Capacity Analysis. Ladenburg conducted a debt capacity
analysis using similar methodology as the debt capacity analysis performed
for ATSC. For CAT and the Division, senior debt to finance an acquisition
was limited by the seasonal working capital needs of the entities. Because
these entities must have sufficient cash or availability under a revolving
line of credit to finance their peak working capital needs, no senior debt
was available to CAT or the Division to finance a financial buyer's
purchase of the entities. Furthermore, based on management's projections,
CAT and the Division would be required to raise working capital from
subordinated debt to finance seasonal working capital needs in excess of
availability under the revolving line of credit. The equity value for CAT
was reduced by $2.0 million, representing the estimated cost of satisfying
the contractual obligation to the President of CAT. Ladenburg multiplied
the resulting value by 60%, representing Cygne's ownership of CAT, and
added it to the value for the Division. This analysis indicated a combined
equity value for 60% of CAT and 100% of the Division of $38.4 million.
(e) Discounted Cash Flow Analysis. Ladenburg conducted a discounted
cash flow analysis using similar methodology as the discounted cash flow
analysis performed for ATSC. The cash flows were discounted using a range
of discount rates based on the median of the weighted average cost of
capital for the Ann Taylor Operations Peer Group. These discount rates were
increased over the median weighted average cost of capital for the Ann
Taylor Operations Peer Group by dividing the median by 80%, representing
the excess of 100% over 20%. This approach was taken to account for the
qualitative and quantitative difference between CAT and the Division and
the Ann Taylor Operations Peer Group, as noted above. The terminal value
was determined by applying an exit multiple based on the median EBITDA
multiple of the Ann Taylor Operations Peer Group discounted by 20% for the
reasons noted above. Ladenburg applied discount rates of 8.51% to 9.51% and
exit multiples of 5.6x to 6.6x. The range of equity values for CAT was
reduced by $2.0 million, representing the estimated cost of satisfying the
contractual obligation to the President of CAT. Ladenburg multiplied the
resulting range by 60%, representing Cygne's ownership of CAT, and added it
to the range of values for the Division. This analysis indicated a range of
combined equity values for 60% of CAT and 100% of the Division from $71.0
million to $80.5 million, the median of which was $75.8 million.
(f) Net Book Value Analysis. Ladenburg analyzed the net book value of
the assets of CAT and the Division. For each of CAT and the Division,
Ladenburg took the total assets and subtracted the total liabilities based
on projected August 31, 1996 balance sheets. The equity value for CAT was
reduced by $2.0 million, representing the estimated cost of satisfying the
contractual obligation to the President of CAT. Ladenburg multiplied the
resulting value by 60%, representing Cygne's ownership of CAT, and added it
to the value for the Division. This analysis indicated a combined equity
value for 60% of CAT and 100% of the Division of $21.0 million.
Valuation Weightings
In reaching its Opinion, Ladenburg ascribed different weightings to the
different valuation analyses for each entity based upon both the degree of
relevance of the approach and the degree of reliability inherent to the
underlying numbers upon which the valuation analysis relies.
CAT and the Division. In valuing CAT and the Division, the Debt Capacity
Analysis and the Net Book Value Analysis were given the lowest weightings of 15%
and 5%, respectively. Ladenburg believes the Debt Capacity Analysis applies an
inappropriate capital structure to companies with a heavy reliance upon letters
of credit and
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seasonal working capital needs, which Ladenburg believes are most appropriately
capitalized with a high percentage of equity and excess borrowing capacity of at
least 20% of a company's borrowing base at the time of peak working capital
requirements. In addition, the Debt Capacity Analysis also relies heavily upon
the ability of a company to provide equity investors with returns of 35% to 40%
based upon projected financial results of the company. Ladenburg believes the
projections developed for the Division to be uncertain, because they are based
on historical information which has been derived based on certain assumptions
and allocations rather than on actual operating information, as noted in the
qualitative considerations discussed above. More importantly, Ladenburg does not
believe that a potential equity investor could be easily persuaded to base his
or her return assumptions upon the projections for either CAT or the Division in
light of their historical operating performance and certain other qualitative
considerations noted earlier.
Ladenburg found the Net Book Value Analysis to be less relevant than other
approaches as it represents CAT's and the Division's financial condition at a
point in time. Due to the seasonal nature of their businesses, this value varies
during the course of the year. Furthermore, the Net Book Value Analysis may be
affected by many factors other than a company's historical earnings and is not
reflective of its future earnings potential. Ladenburg believes that ongoing
businesses are more appropriately valued based upon their historical and
potential earnings and cash flow characteristics.
Ladenburg placed a 20% weighting upon the Discounted Cash Flow Analysis.
This approach relies entirely upon a company's ability to generate earnings and
cash flow in the future. In general, Ladenburg believes valuation analyses that
rely upon projections to be less accurate and less dependable techniques than
those that rely upon historical financial information, as there can be no
assurance that a company will meet its projected level of performance.
Ladenburg placed a 30% weighting upon the Market Multiples Analysis.
Ladenburg believes this approach is more reliable because it is based primarily
upon historical operating results and the median valuation by the public markets
of a number of comparable publicly-traded companies. In addition, this analysis
includes a broad cross-section of comparable companies and, therefore, is more
indicative of the aggregate market value of such apparel companies.
Additionally, a broader sampling population provides a lower statistical margin
of error.
As the Proposed Sale represents an acquisition, Ladenburg also placed a 30%
weighting on the Acquisition Multiples Analysis because it is based primarily
upon historical operating data and acquisitions. Ladenburg believes that
although this analysis could be considered the most relevant analysis because it
is based on actual acquisitions, it is not weighted more heavily than the Market
Multiples Analysis because the universe of comparable transactions does not
represent as broad a cross section of companies as available in that analysis
and the information for these acquisitions is not readily available.
These weightings generated a weighted average range of combined equity
values for 60% of CAT and 100% of the Division from $35.4 million to $57.8
million, with a weighted average median of $50.6 million.
ATSC. As noted above, Ladenburg believed analyses based on historical
operating performance to be a more meaningful indicator of value than those
based on projections. Thus, Ladenburg weighted the valuation analyses for ATSC
based on historical financial data more heavily than those based on projections.
Ladenburg applied weightings to the ATSC valuations as follows: the Market
Multiples Analysis at 30%, the Acquisition Multiples Analysis at 30%, the
Discounted Cash Flow Analysis at 20%, and the Debt Capacity Analysis at 20%.
Ladenburg did not perform a Net Book Value Analysis because it was viewed as a
poor indicator of ATSC's value due to the seasonal nature of ATSC's business and
because it does not accurately reflect the market value of ATSC's brand name,
real estate or lease holdings. These weightings generated a weighted average
range of per share equity values for ATSC from $15.16 to $25.79, with a weighted
average median of $18.07.
Determination of Consideration
For purposes of Ladenburg's analysis the consideration to be paid to Cygne
in the Proposed Sale consists of (i) the AT Shares, (ii) cash equal to (a) the
Adjusted Net Book Value (as defined in the Purchase Agreement) of the inventory
of the Division and (b) the lesser of (1) the Net Fixed Asset Value (as defined
in the Purchase Agreement) of the Division and (2) $2,646,000, (iii) the payment
of all accounts receivable for finished goods delivered to and accepted by Ann
Taylor and (iv) the forgiveness by ATSC of the inventory advance it had
previously made to the Division. Ladenburg calculated a value of $32.3 million
for the 2,500,000 shares of Ann Taylor Common Stock
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assumed to be issued under the Purchase Agreement (based on the average of the
high and low sale price in each of the ten trading days ending the day prior to
the date of the Opinion) by multiplying such number of shares by $12.94, which
was the closing price of the stock on August 26, 1996, the day preceding the
delivery of the Opinion, discounted by 10%. Ladenburg used the market price
because it was below the range of per share equity values it had calculated for
ATSC. Ladenburg calculated a net book value of $2.2 million for the Division by
taking its inventories and net fixed assets and subtracting its liabilities
based on the projected August 31, 1996 balance sheet. The sum of the components
of the consideration to be received by Cygne generated a total consideration of
$55.5 million.
Comparison of the Consideration to the Values of CAT and the Division
Ladenburg concluded that the consideration to be received by the Company in
the Proposed Sale is fair, from a financial point of view, to the stockholders
of Cygne, as of August 27, 1996, based on, among other things, the fact that the
total consideration falls within the range of values for 60% of CAT and 100% of
the Division.
Limitations of Analyses
Although each analysis employed by Ladenburg in rendering its Opinion is
summarized above, the above summary does not purport to be a complete
description of Ladenburg's analyses and contains those aspects of the
Ladenburg's analyses deemed most relevant. In its analyses, Ladenburg made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, based on, among
other things, information provided to (and relied upon by) Ladenburg by Cygne
and ATSC, many of which are beyond the control of Cygne and ATSC or Ladenburg.
Any estimates contained in Ladenburg's analyses are not necessarily indicative
of actual values, which may be significantly more or less favorable than as set
forth therein. Additionally, estimates of the value of businesses do not purport
to be appraisals or necessarily to reflect the prices at which businesses
actually may be sold. Because such estimates are inherently subject to
uncertainty since the assumptions upon which such estimates are based may not
materialize, neither Cygne, Ladenburg nor any other person assumes
responsibility for the accuracy of such estimates. Ladenburg's analysis does not
reflect, among other things, changes since the date of the Opinion for CAT's,
the Division's or ATSC's respective businesses or prospects, changes in general
business and economic conditions or any other transaction or event that has
occurred or that may occur and that was not anticipated at the time such
materials were prepared.
Ladenburg is an internationally recognized investment banking firm which,
as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, merchant banking, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. The
Board selected Ladenburg on the basis of the firm's expertise and reputation.
Ladenburg has been engaged to render this Opinion and the opinion regarding
fair value in connection with the Proposed Sale and Ladenburg has received a fee
in connection therewith of $300,000. In addition, Cygne agreed to reimburse
Ladenburg for its related expenses. Cygne also agreed, in a separate letter
agreement, to indemnify Ladenburg, its affiliates and each of their respective
directors, officers, agents, consultants and employees and each person, if any,
controlling Ladenburg or any of its affiliates against certain liabilities,
including liabilities under Federal securities laws. In the ordinary course of
its business Ladenburg may trade the securities of the Company or ATSC for its
own account and for the account of its customers, and may at any time hold a
long or short position in such securities. Ladenburg has rendered financial
advisory services in the past to Cygne for which it received customary
compensation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED SALE IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED SALE AND RECOMMENDS TO THE
COMPANY'S STOCKHOLDERS THAT THEY VOTE FOR THE APPROVAL OF THE PROPOSED SALE.
In reaching its conclusion, the Board of Directors considered a number of
factors, including the following:
(i) information concerning the financial performance, business
operations and prospects of the Ann Taylor Operations;
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(ii) Ann Taylor's stated intent to reduce its reliance upon outside
design, merchandising and sourcing services and the likely effect of such
reduction on the financial performance and prospects of the Ann Taylor
Operations;
(iii) the terms of the CAT Agreement, which permits either Ann Taylor
or Cygne to purchase the other party's interest in CAT at any time upon six
months' prior notice, Ann Taylor's indication that it was considering
exercising its right to purchase Cygne's interest and Ann Taylor's ability
thereafter to leverage the sourcing and contracting expertise of CAT and
begin to bring in-house the sourcing of those products currently being
supplied by the Division;
(iv) the Company's future prospects, including the continued liquidity
pressures which would be faced by the Company absent consummation of the
Proposed Sale;
(v) the proposed structure and terms of the Proposed Sale as reflected
in the Purchase Agreement;
(vi) the opinion of Ladenburg to the Board that, subject to the
matters set forth therein, the consideration to be received by the Company
pursuant to the Proposed Sale is fair, from a financial point of view, to
the Company's stockholders;
(vii) the opinion of Ladenburg to the Board, dated May 17, 1996, that
the consideration to be received by Cygne in the Proposed Sale represents
reasonable equivalent value and fair consideration for the Ann Taylor
Operations; and
(viii) the effect of the Proposed Sale on the stockholders of the
Company and the possible negative impact on the market price of the Cygne
Common Stock.
The Board of Directors did not assign relative weights to the factors
discussed above.
Interests of Certain Persons in the Proposed Sale
In considering the recommendation of the Cygne Board of Directors with
respect to the Proposed Sale, stockholders should be aware that on the Closing
Date the Company will enter into two 3-year consulting agreements with Ann
Taylor for the services of Mr. Bernard Manuel, the Company's Chairman of the
Board and Chief Executive Officer, and Mr. Irving Benson, the Company's
President and a director, to facilitate the integration of CAT and the Division
into Ann Taylor's operations. These agreements, which provide for an annual fee
of $225,000 for the services of each of Messrs. Benson and Manuel, will
automatically be assigned to the consultant if his employment with the Company
is terminated for any reason. See "The Purchase Agreement--Consulting
Agreements."
In addition, Messrs. Benson and Manuel and their respective spouses have
pledged all their shares of Cygne Common Stock to the HS Bank the Company's
senior lender, to secure the obligations of the Company to the HS Bank. On the
Closing Date, the AT Shares will be pledged to the HS Bank, and the pledge of
shares of Cygne Common Stock by Messrs. Benson and Manuel and their respective
spouses will be released upon satisfaction of certain other conditions. See
"Additional Information About the Company--Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The consummation of the Proposed Sale will constitute a "change in control
of the Company" for purposes of employment agreements with the Company's
executive officers and the Company's stock option plans. As a result, if the
Company fails to renew the employment agreement of any executive officer for a
period of two years following the Closing of the Proposed Sale, such executive
will be entitled to certain specified severance payments. In addition, all
options will become immediately exercisable upon consummation of the Proposed
Sale. See "Additional Information About the Company--Executive Compensation."
Use of Proceeds; Effect on the Company's Stockholders
The Proposed Sale will not result in any changes in the rights of the
Company's stockholders. As described elsewhere in this Proxy Statement, the
Company is required to pledge substantially all of its assets, including the AT
Shares to be received at the closing of the Proposed Sale, to the HS Bank in
connection with its credit facility. It is anticipated that a portion of the AT
Shares will be liquidated by the Company within four months of the Closing Date
in order to pay down amounts borrowed under the Company's credit facility with
the HS Bank and the Company's trade credit facilities. Cygne will be subject to
certain restrictions on the timing of sales and the number of AT Shares which
can be sold at any one time. See "The Purchase Agreement--Stockholders
Agreement." The market prices for
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securities of apparel retailers, including ATSC, have been volatile. Factors
such as announcements by ATSC of variations in its monthly sales, quarterly
financial results and changes in the apparel retail industry and general market
and economic conditions, among other things, could cause the market price of the
Ann Taylor Common Stock to fluctuate significantly. Because of the limitations
on the Company's ability to sell the AT Shares, there can be no assurance that
the Company will receive $36 million upon disposition of the AT Shares.
Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission ("FTC"), the Proposed Sale may not be consummated until notification
has been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and a
waiting period has expired or been terminated. Pursuant to the HSR Act,
notification and report forms were filed on behalf of the Company and Ann Taylor
with the FTC and the Antitrust Division on June 26, 1996. On July 8, 1996, the
Federal Trade Commission granted early termination of the waiting period
required by the HSR Act.
At any time before or after the consummation of the Proposed Sale, and
notwithstanding the expiration of the waiting period under the HSR Act, federal
and state antitrust and other governmental authorities may take such action
under the antitrust laws as they deem necessary or desirable in the public
interest. Such action might include seeking to enjoin the consummation of the
Proposed Sale or requiring the divestiture by Ann Taylor of all or part of the
assets acquired by Ann Taylor pursuant to the Proposed Sale. Private parties
also may seek to take legal action under the antitrust laws under certain
circumstances.
Accounting Treatment
The Proposed Sale will be accounted for as a sale of certain assets and a
transfer of certain liabilities. Upon the consummation of the Proposed Sale, the
excess of the sum of the purchase price received by the Company and the
liabilities assumed by Ann Taylor over the book value of the assets sold will be
recognized as a gain on the Company's books. See "Pro Forma Financial
Information."
Certain Federal Income Tax Consequences
The Proposed Sale will not have any Federal income tax consequences to the
Company's stockholders. The Company will recognize a gain on the sale of the
Division equal to the excess of the purchase price received by the Company and
the liabilities assumed by Ann Taylor over the book value of the assets sold.
The Company will recognize a gain on the sale of CAT equal to the excess of the
purchase price received over its basis in the CAT Stock.
THE PURCHASE AGREEMENT
The following is a description of the material elements of the Purchase
Agreement. This description is qualified in its entirety by reference to the
complete text of the Purchase Agreement, a copy of which is attached as Appendix
I. Terms which are not otherwise defined in this summary or elsewhere in this
Proxy Statement shall have the meaning set forth in the Purchase Agreement. All
stockholders are urged to read the Purchase Agreement in its entirety.
Purchase Price
Upon the terms and subject to the conditions of the Purchase Agreement,
ATSC and Ann Taylor will deliver to the Company, on the Closing Date, (i) the
Stock Consideration, consisting of a number of validly issued, fully paid and
nonassessable unregistered shares of Ann Taylor Common Stock equal to the
quotient obtained by dividing (a) $36.0 million by (b) the average of the high
and low sale prices of the Ann Taylor Common Stock for the ten trading day
period ending on the trading day immediately prior to the Closing Date;
provided, however, that the number of shares of Ann Taylor Common Stock to be
issued to the Company shall not exceed 2.5 million shares, unless (x) the Cap is
triggered and (y) the aggregate value, based on the Average Trading Price, of
2.5 million shares of Ann Taylor Common Stock is less than $32.5 million, in
which event ATSC shall issue as the Stock Consideration the number of shares of
Ann Taylor Common Stock, rounded to the nearest whole share, equal to the
quotient obtained by dividing (A) $32.5 million by (B) the Average Trading Price
of the Ann Taylor Common Stock, up to a maximum of 3 million shares, except that
Ann Taylor may elect to pay in cash, based on the Average Trading Price, that
portion of the Stock
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Consideration, if any, in excess of 2.5 million shares of Ann Taylor Common
Stock (the shares of Ann Taylor Common Stock received by Cygne being referred to
as the "AT Shares"), (ii) a dollar amount in cash equal to the Adjusted Net Book
Value of the Inventory of the Division (the "Inventory Consideration"), (iii) a
dollar amount in cash equal to the lesser of (a) the net book value of the
leasehold improvements, furniture, fixtures and equipment that are used by the
Division and are located at the NY Facility and the Florence Facility and (b)
$2,646,000 (the "Fixed Asset Consideration"). The "Adjusted Net Book Value" is
equal to the tangible net book value of the Inventory of the Division, less (i)
the $7,895,000 of advances made by Ann Taylor to the Company which are being
forgiven, (ii) the obligations under the capital and certain other leases
relating to the assets of the Division being acquired and (iii) the accounts
payable associated with the Inventory of the Division.
At the Closing, Ann Taylor will deliver to Cygne, among other things, (i)
one or more stock certificates representing the AT Shares, and (ii) cash, by
wire transfer of immediately available funds in an amount equal to the sum of
(a) 80% of the estimated Inventory Consideration (the "Initial Payment Amount"),
(b) the Fixed Asset Consideration, (c) all undisputed accounts receivable from
Ann Taylor and CAT for finished goods that have been received, quality checked
and accepted, (d) the deposits on the portion of the NY Facility which Ann
Taylor will sublease and (e) the portion of the Stock Consideration, if any,
that Ann Taylor elects to pay in cash. In addition, Ann Taylor will deliver to a
bank account in Ann Taylor's name the remaining 20% of the estimated Inventory
Consideration, which amount will be pledged to Cygne to secure Ann Taylor's
obligation to make a post-closing payment under certain circumstances.
Beginning two (2) days prior to the Closing Date, Cygne and Ann Taylor will
jointly conduct a physical count of all Inventory as of the Closing Date. As
promptly as practicable thereafter, but in no event more than thirty (30) days
following the Closing Date, Cygne will prepare and deliver to Ann Taylor a
reasonably detailed statement setting forth the Adjusted Net Book Value of the
Inventory (the "Seller Statement"). Ann Taylor will have thirty (30) days after
its receipt of the Seller Statement to object to the Seller Statement, including
an objection to items included by Cygne in the Inventory that, in Ann Taylor's
good faith determination, were not properly included as Inventory. If Ann Taylor
does not timely object, the Seller Statement will become final and binding on
Cygne and Ann Taylor (the "Closing Date Statement"). If Ann Taylor timely
objects, Cygne and Ann Taylor and their respective independent accountants will
negotiate in good faith and use reasonable best efforts to resolve any disputes.
If a resolution is reached, such resolution will be final and binding on the
parties, the Adjusted Net Book Value of the Inventory will be set forth in a
mutually acceptable statement and such statement will be the Closing Date
Statement. If a final resolution is not reached within fifteen (15) days after
Ann Taylor has submitted its statement of objection, any remaining disputes will
be resolved by a third firm of independent accountants (the "Reviewing
Accountants") selected jointly by the parties' independent accounting firms. The
Reviewing Accountants will be instructed to resolve any matters in dispute as
promptly as practicable, but in no event more than thirty (30) days, and to set
forth their resolution in a statement setting forth the Adjusted Net Book Value
of the Inventory (the "Accountant Statement"). In such event, the determination
of the Reviewing Accountants shall be final and binding on Cygne and Ann Taylor
and the Accountant Statement shall be the Closing Date Statement. Cygne and Ann
Taylor will each pay one-half of the fees and expenses of the Reviewing
Accountants. The Closing Date Statement will be prepared in accordance with GAAP
applied in a manner consistent with the combined financial statements of CAT and
the Division included elsewhere herein, except that Inventory will be valued at
cost, not the lower of cost or market, and the Inventory, regardless of
condition, will be valued as follows: (i) raw materials will be valued at cost,
including, without limitation, to the extent actually incurred: FOB or CF
purchase price, as the case may be; inspection costs; re-dyeing and/or
refinishing charges; duty; freight and brokerage charges; fabric commission;
insurance; and storage charges; provided, however, that such valuation applies
only to raw materials available to Ann Taylor (i.e., excludes shrinkage); and
(ii) work-in-progress will include (A) raw material costs as determined above;
and (B) making charges to the extent such charges have been paid by Cygne.
Notwithstanding the foregoing, finished goods rejected or canceled by Ann Taylor
prior to the Closing Date will not be included in the Assets and such finished
goods will remain in Cygne's possession. If the Adjusted Net Book Value set
forth in the Closing Date Statement exceeds the Initial Payment Amount, Ann
Taylor will pay the difference to Cygne, first through the distribution of the
Pledged Amount (together with interest thereon), and thereafter from its general
corporate funds, together with interest of 8% per annum thereon. If the Adjusted
Net Book Value set forth in the Closing Date Statement is less than the Initial
Payment Amount, Cygne will pay the difference to Ann Taylor in immediately
available funds, plus interest on such amount from the Closing Date to the date
of payment at the rate of 8% per annum. In such event, Ann Taylor will retain
the Pledged Amount and all interest earned thereon.
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Acquired Assets And Assumed Liabilities
Upon the terms and subject to the conditions of the Purchase Agreement, at
the Closing, the Company will sell, transfer, assign and deliver to Ann Taylor
(i) all of the Company's right, title and interest in and to the shares of CAT
US owned by the Company (the "CAT US Shares"), free and clear of all liens,
encumbrances, security interests, mortgages, pledges, claims, options or
restrictions of any kind, other than restrictions on transfer imposed under
federal and state securities laws (collectively, "Liens"); (ii) the following
items of inventory (the "Inventory"): (a) fabric and trim owned by the Company
for use by the Division in the production of merchandise for Ann Taylor
("Division Fabric and Trim") as of February 3, 1996 and identified on an annex
to the Purchase Agreement; (b) Division Fabric and Trim purchased since February
3, 1996 pursuant to written commitments or purchase orders issued by Ann Taylor
to the extent not used as of the Closing Date in the production of merchandise
for Ann Taylor and (c) work-in-progress owned by the Company for use by the
Division in the production of merchandise for Ann Taylor pursuant to purchase
orders issued by Ann Taylor; (iii) the capital leases and other agreements
relating to certain of the Company's equipment identified on an annex to the
Purchase Agreement ("Capital Leases") and other contracts, personal property
leases and other commitments to which the Company is a party to the extent they
relate to the business of the Division and which are identified on an annex to
the Purchase Agreement (collectively with the Capital Leases, the "Contracts");
(iv) the Company's or its affiliate's rights as tenant with respect to the
fifth, sixth and nineteenth floors of the Company's facility located at 1372
Broadway, New York City, New York (the "NY Facility"); (v) all leasehold
improvements, furniture, fixtures and equipment owned by the Company or subject
to a Capital Lease relating to and used exclusively or primarily in the business
of the Division at the Closing and which are located at the NY Facility or the
Company's facility in Florence, Italy (the "Florence Facility"), including those
listed on an annex to the Purchase Agreement; (vi) all licenses, permits,
registrations, renewals thereof and applications therefor, variances,
exemptions, orders, approvals and authorizations issued by any governmental,
regulatory or administrative agency or authority (domestic or foreign), held by
the Company or any affiliate of the Company of or relating to the business of
the Division, including all quota allocations for the export of goods to the
United States and elsewhere, necessary or desirable for the lawful conduct of
the business of the Division, to the extent transferable under applicable law;
(vii) all purchase orders, bills of lading, trust receipts, warehouse receipts
and other documents of title of whatever kind and description relating to the
Inventory; (viii) all rights under insurance policies covering Inventory in
transit and all rights and claims under insurance policies for damage to any
Assets (as defined below) to the extent not repaired or replaced prior to the
Closing; (ix) all goodwill, intellectual property rights, patents, trademarks,
service marks, copyrights (including all copyrights in computer software and
databases), licenses and applications therefor (if any), know-how, processes,
methods, techniques, formulae, designs, drawings, patterns, trade secrets,
proprietary information, sketches, technical information, computer software,
databases and other proprietary or confidential information of or relating to
the business of the Division and all rights in any licenses to or from any third
party of or for the foregoing (collectively, the "Intellectual Property"), it
being understood, however, that the rights to the Intellectual Property shall be
non-exclusive unless such Intellectual Property relates solely to the business
of the Division and the Company's rights therein are exclusive; (x) all
intangible assets of or relating to the business of the Division, including
claims against third parties; and (xi) all books and records (including all
computerized records and storage media and associated software) relating solely
to the business of the Division and, to the extent practicable, those portions
of the Company's other books and records that relate to the business of the
Division (collectively, "Books and Records"), including, without limitation, all
Books and Records relating to the employees of, and the purchase of materials,
supplies and services for, the business of the Division, but not including the
tax returns, general ledger or corporate minute books and capital stock books of
the Company (together with the items listed in clauses (ii)--(x) above, the
"Assets").
In addition, upon the terms and subject to the conditions of the Purchase
Agreement, at the Closing, CGFE shall sell, convey, assign, transfer and deliver
to Ann Taylor, and Ann Taylor shall purchase, acquire and accept from CGFE, all
right, title and interest in and to the Shares of CAT Far East owned by CGFE
(the "CAT Far East Shares" and, together with the CAT US Shares, the "CAT
Shares"), free and clear of all Liens.
At the Closing, Ann Taylor will (i), subject to the consent of the landlord
thereunder, sublease, or enter into new leases with respect to, the fifth, sixth
and nineteenth floors of the NY Facility; (ii) assume Cygne's obligations under
the Contracts, and (iii) assume all outstanding accounts payable relating to the
Inventory. In addition, at the Closing Ann Taylor will provide substitute
letters of credit or provide an alternative form of financial support in respect
of letters of credit posted by Cygne (i) for raw materials and making charges
related to fabric and work-in-progress
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included in the Assets and (ii) to secure the Company's and its affiliates'
obligations under the lease relating to the NY Facility.
The Closing
It is anticipated that the closing (the "Closing") of the transactions
contemplated by the Purchase Agreement will take place on the first business day
following the Annual Meeting or if the conditions to closing set forth in the
Purchase Agreement shall not have been satisfied or waived by such date, as soon
as practicable after such conditions shall have been satisfied or waived.
Representations And Warranties
In the Purchase Agreement, each of the parties has made various
representations and warranties. In addition, a condition to closing under the
Purchase Agreement is that each of Ann Taylor's and the Company's
representations and warranties in the Purchase Agreement (i) that are qualified
as to materiality shall be true and correct in all respects as of the Closing
Date and (ii) that are not qualified as to materiality shall be true and correct
in all material respects as of the Closing Date. See "--Conditions to Closing."
The representations and warranties survive for a period following the Closing.
See "--Survival and Indemnification."
Conduct of Business of CAT, the Division and Ann Taylor Prior to Closing
The Purchase Agreement contains certain covenants and agreements of the
parties including the Company's agreement, among other things, to conduct the
business of the Division and to cause CAT to conduct the business of CAT in the
ordinary course consistent with past practice and use its reasonable best
efforts to preserve their respective current relationships with suppliers,
contract manufacturers, factories and others having business dealings with them.
The Company agreed that, without the prior written consent of Ann Taylor, with
respect to the Division, it shall not, and shall cause CAT not to, (i) incur any
liabilities, obligations or indebtedness of any nature (whether absolute,
accrued, contingent or otherwise and whether due or to become due), except items
incurred in the ordinary course of business and consistent with past practice,
none of which shall exceed, except in connection with the manufacture of women's
apparel for Ann Taylor pursuant to purchase orders and/or written fabric
commitments provided by Ann Taylor (as to which there shall not be any such
dollar limitation), $50,000 (counting liabilities or obligations arising from
one transaction or a series of related transactions, and all periodic
installments or payments under any lease or other agreement providing for
periodic installments or payments, as a single obligation or liability); (ii)
permit, allow or suffer any of the Assets or any assets of CAT, as the case may
be, to be subjected to any Lien, restriction or charge of any kind, other than
Permitted Liens and Liens in favor of the HS Bank, Mitsubishi Corporation and
Mitsubishi International Corporation existing on the date of the Purchase
Agreement; (iii) fail to maintain the properties, machinery and equipment of CAT
or the Division, as the case may be, in good operating condition and repair
(ordinary wear and tear excepted); (iv) fail to maintain all required policies
of insurance listed on an annex to the Purchase Agreement and all policies of
insurance relating to CAT, as the case may be, in full force and effect, at
least at such levels as in effect on June 7, 1996, through and including the
Closing Date, or take, or fail to take, any action that would enable the
insurers under such policies to avoid liability for claims arising out of
occurrences prior to the Closing; (v) revise, amend or enter into any employment
agreement or arrangement or pay any bonus or increase the rate of compensation
of, or pay or agree to pay any benefit to, including, without limitation,
severance benefits, any CAT Employee or any employee of the Division whom Ann
Taylor has indicated in writing it intends to offer employment, as the case may
be, except as may be required by any employee benefit plan, arrangement or
agreement that is maintained at any time during the five calendar years
preceding June 7, 1996 (a "Plan") or by applicable law; provided, however, that
the Company may implement planned annual increases in the rates of compensation
in the ordinary course of business consistent with past practice, provided that
such increases are disclosed to Ann Taylor prior to becoming effective; (vi)
enter into, adopt or amend any Plan, except as may be required by applicable
law; (vii) sell any inventory other than to Ann Taylor in the ordinary course of
business or inventory rejected by Ann Taylor in the ordinary course of business,
or sell, lease, transfer or otherwise dispose of any other Asset or any asset of
CAT, as the case may be, other than in the ordinary course of business; (viii)
acquire or agree to acquire on behalf of CAT or the Division, as the case may
be, any assets which are material, individually or in the aggregate, to CAT or
the Division, as the case may be, other than fabric and other apparel components
necessary to manufacture women's apparel pursuant to purchase orders issued by
Ann Taylor; (ix) modify, amend or terminate certain leases or contracts or enter
into any other similar contract, agreement or commitment by which CAT or the
Division, as the case may be,
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or any Asset or any asset of CAT, as the case may be, may be bound, other than
purchase and sale orders entered into in connection with the manufacture of
women's apparel for Ann Taylor pursuant to purchase orders issued by Ann Taylor;
(x) fail to maintain (a) the accounts and Books and Records of the Division and
(b) the accounts and books and records of CAT, as the case may be, in the usual,
regular and ordinary manner on a basis consistently applied; (xi) terminate,
discontinue, close or dispose of any facility or business operation of CAT or
the Division, as the case may be; (xii) make any capital expenditure or any
commitment for capital expenditures with respect to CAT or the Division, as the
case may be, for additions to property, plant, equipment or intangible capital
assets which individually exceeds $50,000 or, in the aggregate, exceeds
$250,000; (xiii) cancel any debt or waive any claim or right of substantial
value with respect to CAT or the Division, as the case may be; (xiv) pay, loan
or advance any amount to, or sell, transfer or lease any property or asset
(real, personal or mixed, tangible or intangible) to, any affiliate of the
Company, or enter into any contract, agreement or commitment with any affiliate
of the Company; or (xv) agree, whether in writing or otherwise, to do any of the
foregoing.
Ann Taylor has agreed that, prior to the Closing Date, it (a) will conduct
its business in the ordinary course consistent with past practice and use its
reasonable best efforts to preserve its current relationships with suppliers,
contract manufacturers, factories and others having business dealings with it,
(b) will not effect a stock split or combination with respect to, declare a
stock dividend on or engage in a recapitalization of, the Ann Taylor Common
Stock and (c) will not, and will not permit any of its affiliates to, take any
action which would reasonably be expected to have a Material Adverse Effect on
CAT or the business of the Division.
Conditions to Closing
The obligations of Ann Taylor and the Company to consummate the Closing are
subject to the satisfaction of the following conditions: (i) the stockholders of
the Company shall have approved the Proposed Sale; (ii) no statute, rule,
regulation, order, decree or injunction shall have been enacted, entered,
promulgated or enforced by a Governmental Entity which prohibits the
consummation of the transactions contemplated by the Purchase Agreement and
shall be in effect; (iii) all required waiting periods under the HSR Act shall
have expired or been terminated; (iv) each of the HS Bank, Mitsubishi
International Corporation and Mitsubishi Corporation, the Company's lenders,
shall have consented to the Proposed Sale and agreed to release Liens on the
Assets and the CAT Shares at the closing; and (v) in the event Ann Taylor enters
into the Subleases at the time of Closing, the Company shall have obtained from
the landlords under the leases its consent to such Subleases. On July 8, 1996
the Federal Trade Commission granted early termination of the waiting period
required by the HSR Act.
Ann Taylor's Obligations
In addition, the obligation of Ann Taylor to consummate the Closing is
subject to the satisfaction, or waiver by Ann Taylor, of the following further
conditions: (i) that each of the Company's representations and warranties in the
Purchase Agreement (a) that are qualified as to materiality shall be true and
correct in all respects as of the Closing Date and (b) that are not qualified as
to materiality shall be true and correct in all material respects as of the
Closing Date; (ii) that the Company shall have performed and complied with in
all material respects all agreements, obligations, covenants and conditions
required of it by the Purchase Agreement; (iii) that Ann Taylor shall have
received at the Closing a certificate to the effect of items (i) and (ii) above,
dated the Closing Date and duly executed on behalf of the Company; (iv) the
Company shall deliver to Ann Taylor an opinion of legal counsel relating to the
Proposed Sale; (v) the HS Bank shall have entered into an amended and restated
credit agreement with CAT on substantially the terms set forth in a previously
provided commitment letter; (vi) Ann Taylor shall have obtained consent to the
Proposed Sale from lenders under Ann Taylor's credit agreement; (vii) there
shall not have occurred a material change that would reasonably be expected to
result in a material adverse effect to the business of the Division or CAT; and
(viii) CAT shall have entered into a new employment agreement reasonably
satisfactory to Ann Taylor with Mr. Meyer, the President of CAT.
The Company's Obligations
In addition, the obligations of the Company to consummate the Closing is
subject to the satisfaction, or waiver by the Company, of the following further
conditions: (i) that each of Ann Taylor's representations and warranties in the
Purchase Agreement (a) that are qualified as to materiality shall be true and
correct in all respects as of the Closing Date and (b) that are not qualified as
to materiality shall be true and correct in all material respects; (ii) that Ann
Taylor
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in all material respects shall have performed and complied with all agreements,
obligations, covenants and conditions required of it by the Purchase Agreement;
(iii) that the Company shall have received at the Closing a certificate to the
effect of items (i) and (ii) above, dated the Closing Date and duly executed on
behalf of Ann Taylor; (iv) Ann Taylor shall have delivered to the Company an
opinion of legal counsel relating to the Proposed Sale; (v) the Company shall
have been released with respect to its obligations under CAT's credit facility;
and (vi) there shall not have occurred a material change that would reasonably
be expected to result in a material adverse effect on Ann Taylor.
Termination
The Purchase Agreement may be terminated (i) by mutual written consent of
the Company and Ann Taylor; (ii) by either the Company or Ann Taylor if the
Closing shall not have occurred on or before September 30, 1996 (unless the
Closing has not occurred due to the failure of such party to perform or comply
with any of the agreements or covenants in the Purchase Agreement to be complied
with prior to Closing); (iii) by either Ann Taylor or the Company, if (a) the
stockholders of the Company fail to approve the Proposed Sale at the Annual
Meeting, or (b) any event, fact or condition shall occur or exist that makes it
impossible to satisfy a condition to such party's obligation to consummate the
transactions contemplated by the Purchase Agreement unless the occurrence or
existence of such event, fact or condition shall be due to the failure of such
party to perform or comply with any of the agreements or covenants of the
Purchase Agreement to be performed or complied with by such party prior to the
Closing; and (iv) by the Company if the Stock Consideration (including any cash
paid in lieu of the issuance of shares of Ann Taylor Common Stock) to be
received by Cygne at the Closing has a value of less than $32.5 million.
Survival and Indemnification
All representations and warranties in the Purchase Agreement or in any
other document delivered in connection with the Closing shall survive the
Closing until April 30, 1997, except that all representations and warranties in
the Purchase Agreement or any other documents delivered pursuant to the Purchase
Agreement relating to (i) title to the CAT Shares, the Assets and the AT Shares
shall survive the Closing indefinitely and (ii) CAT (other than representations
relating to the valid title to the CAT shares) shall not survive the Closing.
Pursuant to the Purchase Agreement, the parties agreed that they will
indemnify, defend and hold harmless the other party and its affiliates,
directors, officers, employees and agents, at any time after the Closing, from
and against all demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, costs and expenses which are asserted against,
resulting to, imposed upon or incurred by the other resulting from certain
occurrences (collectively "Damages"). Each party's indemnity obligation for
breaches of representations and warranties is limited to a maximum of $3.6
million. In addition, except with respect to the representations and warranties
of Cygne as to the CAT Shares and title to the Assets and the representations
and warranties of Ann Taylor as to the AT Shares, each party is obligated to
indemnify the other party only for Damages in excess of $500,000.
Proxies
Pursuant to the Purchase Agreement, each of Bernard Manuel, Isabelle
Manuel, Irving Benson, Dianne Benson, Roy Green, as trustee of the Bernard
Manuel 1992 Irrevocable Trust for Children, GJM International Ltd., Fenn, Wright
and Manson (Antilles) N.V. ("FWM N.V."), and Cleveland Investment Limited has
granted to certain officers of Ann Taylor a proxy to vote the 1,147,215 shares,
161,339 shares, 885,061 shares, 116,339 shares, 322,678 shares, 493,181 shares,
601,148 shares and 622,285 shares, respectively, of Cygne Common Stock over
which he, she or it has voting authority (i) for the approval of the Proposed
Sale and (ii) against any other transaction or proposal that could (x) prevent
or delay the consummation of the transactions contemplated by the Purchase
Agreement or (y) frustrate the purposes of the Purchase Agreement. The shares
owned by these individuals and entities represent approximately 35% of the
outstanding Cygne Common Stock. See "Additional Information About the
Company--Beneficial Ownership of Cygne Common Stock."
Consulting Agreements
In order to facilitate the integration of CAT and the Division into Ann
Taylor's operations, at the Closing the Company will enter into two 3-year
consulting agreements (the "Consulting Agreements") with Ann Taylor for the
services of Mr. Bernard Manuel, the Company's Chairman and Chief Executive
Officer, and Mr. Irving Benson, the Company's President. Mr. Manuel will provide
advice with regard to fabric and material sourcing, particularly with
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respect to suppliers and factories in Hong Kong and Asia, and Mr. Benson will
provide advice with regard to design, merchandising and product development.
Cygne will make available up to 30% of Messrs. Benson's and Manuel's time, for
which the Company will receive an annual consulting fee of $225,000 for each of
Messrs. Benson and Manuel. The Consulting Agreement for each of Messrs. Benson
and Manuel provides that if his employment with the Company should cease for any
reason, or if the Company is liquidated or dissolved, whether through Chapter 7
of the U.S. Bankruptcy Laws or otherwise, then the Consulting Agreement shall
automatically be assigned to and assumed by him, and he shall be entitled to
receive all compensation due thereunder and shall, to the extent applicable,
assume and perform all of Cygne's obligations thereunder. The Consulting
Agreement requires each of the Company and Messrs. Benson and Manuel to keep all
non-public proprietary information of Ann Taylor confidential. The Consulting
Agreement prohibits, during the term of the Agreement and for a period of one
year thereafter (the "Non-Solicitation Period"), each of the Company and Messrs.
Benson and Manuel from directly or indirectly inducing or soliciting any
employee or consultant of Ann Taylor to leave his or her business association
with Ann Taylor. The Consulting Agreement prohibits, during the Non-Solicitation
Period, Ann Taylor from directly or indirectly inducing or soliciting any
employee or consultant of the Company to leave his or her business association
with the Company. Ann Taylor has the right to terminate each Consulting
Agreement under certain circumstances, including the consultant's death or
material breach of the Consulting Agreement by Cygne or the consultant.
Stockholders Agreement
Upon the Closing of the Proposed Sale, the Company will enter into a
stockholders agreement with ATSC (the "Stockholders Agreement") pursuant to
which (i) Cygne will receive shelf registration rights with respect to the AT
Shares, (ii) Cygne will be subject to a three-year standstill agreement, (iii)
the AT Shares will not be transferable except under certain circumstances and
(iv) the AT Shares will be present or represented by proxy at all meetings of
stockholders for purposes of determining the presence of a quorum at such
meetings and will be voted in the same proportion as the votes cast by all other
stockholders of ATSC.
Shelf Registration. The Stockholders Agreement will provide that as soon as
practicable, but no later than 15 business days after the Closing, ATSC will
file a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), to permit the resale of the AT Shares, and will use its
reasonable best efforts to cause the registration statement to be declared
effective by the SEC as promptly as practicable. ATSC will be obligated to use
its reasonable best efforts to keep the registration statement effective under
the Securities Act until the earliest to occur of (i) the date all the AT Shares
have been sold, (ii) the third anniversary of the Closing or (iii) the date the
AT Shares can be resold without registration under the Securities Act pursuant
to Rule 144(k) under the Securities Act. Following the first anniversary of the
effective date of the registration statement (the "Effective Date"), if
requested by ATSC, Cygne will not effect any public sale or distribution of any
AT Shares during the 10-day period prior to the date on which ATSC has notified
Cygne that it intends to commence the sale of equity securities (or securities
convertible into equity securities) pursuant to an underwritten public offering,
whether primary or secondary, through the 120-day period following the closing
of such offering. In addition, ATSC is permitted to not maintain the
effectiveness of the registration statement if to do so would require ATSC to
disclose a material financing, acquisition or other corporate development the
disclosure of which ATSC determines would not be in the best interests of ATSC
and its stockholders. ATSC will pay all expenses relating to the registration of
the AT Shares under the Securities Act other than the fees of counsel for Cygne
and any commissions. The Stockholders Agreement contains standard indemnity
provisions with respect to each of the parties, and prohibits the transfer of
the shelf registration rights except in connection with a pledge of the AT
Shares in a bona fide transaction to secure indebtedness of Cygne for borrowed
money to a lender that agrees in a writing reasonably satisfactory to ATSC to be
subject to the terms of the Stockholders Agreement. Cygne is obligated to pledge
the AT shares, and to transfer the related shelf registration rights, to the HS
Bank to secure its indebtedness to the HS Bank.
Standstill Provisions. The Stockholders Agreement will provide that during
the three-year term of the agreement, neither Cygne nor CGFE shall, and each
shall cause each of its Affiliates (as defined in the Stockholders Agreement)
not to, singly or as part of a "group", directly or indirectly, through one or
more intermediaries or otherwise, (i) make, or in any way participate, directly
or indirectly, in, any "solicitation" of "proxies" (as such terms are defined or
used in Regulation 14A under the Exchange Act), with respect to the AT Shares or
any securities of ATSC subsidiaries (including by the execution of actions by
written consent), become a "participant" in any "election contest" (as such
terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to
ATSC or seek to advise or influence any person or entity with respect to the
voting of any shares of ATSC Common Stock or any
25
<PAGE>
securities of ATSC subsidiaries; (ii) initiate, propose or participate in the
solicitation of stockholders for the approval of one or more stockholder
proposals with respect to ATSC, as described in Rule 14a-8 under the Exchange
Act, or induce or encourage any other individual or entity to initiate any
stockholder proposal relating to ATSC; (iii) form, join, influence or
participate in a "group", or act in concert with any other person or entity, for
the purpose of acquiring, holding, voting or disposing of any securities of ATSC
or ATSC subsidiaries or taking any other actions prohibited under the standstill
provisions of the Stockholders Agreement; (iv) hold any discussions with another
person regarding, make any proposal to or any public announcement relating to a
tender or exchange offer for any securities of ATSC or ATSC subsidiaries, or a
merger, business combination, sale of assets, liquidation, restructuring,
recapitalization or other extraordinary corporate transaction relating to ATSC
or any ATSC subsidiary or its material assets or take any action which might
require ATSC to make a public announcement regarding any of the foregoing; (v)
cause the merger of Cygne or CGFE with or into, the consolidation of Cygne or
CGFE with, or the sale of the business or assets of Cygne or CGFE substantially
as an entirety to, any other person unless (A) Cygne or CGFE, as the case may
be, is the surviving person or the surviving person agrees in writing to be
bound by the Stockholders Agreement and (B) within 120 days after consummation
of the transaction, the surviving person disposes of all shares of ATSC Common
Stock owned by it (in excess of those owned by Cygne or CGFE, as the case may
be, prior to consummation of the transaction); (vi) act, alone or in concert
with others (including by providing financing for another party), to seek or
offer to control ATSC; (vii) deposit any AT Shares in a voting trust or subject
any AT Shares to any arrangement or agreement with respect to the voting
thereof; (viii) execute any written consents; (ix) enter into any discussions,
negotiations, arrangements or understandings with or provide any information to
any third party with respect to any of the foregoing; (x) disclose any
intention, plan or arrangement inconsistent with the foregoing prohibitions or
advise or assist any other person in connection with any activity included in
the foregoing prohibitions; or (xi) seek, request or propose any waiver,
modification, amendment or termination of any provision of the standstill
provisions of the Stockholders Agreement (other than any request or proposal
made or solicited by ATSC).
Transfer Restrictions. Prior to the Effective Date, the Company cannot
transfer the AT Shares except pursuant to a pledge to secure indebtedness of
Cygne for borrowed money. After the Effective Date, Cygne is permitted to
transfer the AT Shares unless the registration statement covering the resale of
such shares is not effective or up-to-date. However, except for transfers (i) in
connection with a tender offer with respect to which ATSC does not recommend
rejection, (ii) pursuant to a settlement of the class action lawsuit pending
against Cygne (see "Additional Information about the Company--Business--Legal
Proceedings"), (iii) pursuant to a pro rata dividend or other pro rata
distribution to all Cygne stockholders or (iv) pursuRant to an underwritten
public offering, Cygne is prohibited from transferring more than two percent of
the then outstanding shares of Ann Taylor Common Stock in any two-week period.
In addition, Cygne will be obligated to instruct any underwriter of a public
offering or any placement agent, broker or other agent that (x) no transfers of
any AT Shares may knowingly be made to any person who beneficially owns in
excess of five percent (5%) of the then outstanding shares of Ann Taylor Common
Stock, and (y) no transfer of more than two percent (2%) of the then outstanding
Ann Taylor Common Stock may knowingly be made to a single purchaser (or group of
related purchasers). According to its Quarterly Report on Form 10-Q for the
fiscal quarter ended May 4, 1996, at May 31, 1996 ATSC had 23,087,334 shares of
common stock outstanding.
Transition Arrangements
Cygne will lease to Ann Taylor the second floor of its Florence Facility
for a period of five years, although either party can terminate the lease upon
six months' notice. In the event Cygne terminates the lease, it will be
obligated to repurchase the leasehold improvements from Ann Taylor at their
then-net book value. The rent will be $6,666.67 per month. In addition, Cygne
will make available to Ann Taylor trim and consolidation services at its Miami,
Florida facility for a period of two years from the Closing Date, or such
shorter period that Cygne maintains a Miami facility. Ann Taylor will pay Cygne
$40,000 per year (representing 50% of the amount of rent paid by Cygne under the
lease for the Miami facility applicable to the portion of the Miami facility
relating to the trim and consolidation warehouse).
Ann Taylor will allow up to two of Cygne's employees access to the CAD-CAM
marking and grading work stations in the NY Facility free of charge from the
Closing Date through the end of fiscal 1996. At the end of fiscal 1996 Cygne
shall have the option to purchase the CAD-CAM equipment at its net book value.
In addition, Ann Taylor will allow up to three pattern makers and up to six
sewers to use the sample room at the NY Facility and related equipment free of
charge for a period of 60 days following the Closing Date.
26
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements are based upon the consolidated historical statements of the Company
adjusted to give effect to (i) the February 9, 1996 sale of substantially all of
the assets of the Company's GJM intimate apparel and sleepwear business to
Warnaco, Inc. for approximately $12.5 million in cash and the assumption of
certain liabilities of the GJM Business (the "GJM Disposition") and (ii) the
Proposed Sale. The aggregate purchase price to be paid to the Company in the
Proposed Sale consists of unregistered shares of Ann Taylor Common Stock having
a market value of approximately $33.2 million (based on the average trading
price for the ten consecutive trading days ending August 21, 1996) and a cash
payment in an amount equal to the tangible net book value of the Division's
fixed assets and inventory, less the amount of certain liabilities to be assumed
by Ann Taylor. See "The Purchase Agreement."
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 4,
1996 gives effect to the Proposed Sale assuming it had occurred on May 4, 1996
and the purchase price had been received at that time. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year ended February 3,
1996 give effect to both the GJM Disposition and the Proposed Sale as if such
transactions had occurred at the beginning of the periods. The Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the fiscal quarter
ended May 4, 1996 gives effect to the Proposed Sale as if such transaction had
occurred at beginning of the period.
The Company did not declare any cash dividends during the periods for which
financial data is presented. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable. The
unaudited pro forma financial information set forth below is not necessarily
indicative of the Company's financial position or the results of operations that
actually would have occurred if the transactions had been consummated on the
dates shown. In addition, they are not intended to be a projection of results of
operations that may be obtained in the Company's future. The unaudited pro forma
financial information should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Proxy Statement.
Based on preliminary second quarter and first half results, if the Proposed
Sale had been consummated on February 4, 1996, and after giving effect to the
GJM Disposition, the Company's pro forma net sales, gross profit, loss from
operations, net loss and net loss per share for the six months ended August 3,
1996 would have been $42.6 million, $4.7 million, $3.9 million, $3.7 million and
$0.29, respectively. See "Additional Information About the Company --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Preliminary Second Quarter and First Half Results."
27
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
May 4, 1996
(In Thousands)
<CAPTION>
Ann Taylor
As Reported Operations Adjustments Pro Forma
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash ........................................... $ 8,473 $ 59 $ 0 $ 8,414
Trade accounts receivable ...................... 40,511 27,063 0 13,448
Inventory ...................................... 13,441 10,223 0 3,218
Other receivables and prepaid expenses ......... 9,372 130 0 9,242
Investment in ATSC ............................. 0 0 33,200(a) 33,200
Deferred income taxes .......................... 4,066 198 (3,868)(b) 0
------- ------- ------- -------
Total current assets ......................... 75,863 37,673 29,332 67,522
Fixed assets .................................... 13,211 4,179 0 9,032
Other assets .................................... 761 151 0 610
Deferred income taxes ........................... 2,000 0 (2,000)(b) 0
Goodwill ........................................ 2,699 0 0 2,699
------- ------- ------- -------
Total Assets ................................. $94,534 $42,003 $27,332 $79,863
======= ======= ======= =======
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities:
Accounts payable ............................... $18,846 $12,267 $ 0 $ 6,579
Short-term borrowings .......................... 29,178 6,082 (8,869)(c) 14,227
Trade/bank facilities .......................... 9,110 0 0 9,110
Accrued expenses ............................... 13,136 628 0 12,508
Income taxes payable ........................... 5,878 1,390 0 4,488
Current portion of long-term debt .............. 2,003 0 0 2,003
------- ------- ------- -------
Total current liabilities .................... 78,151 20,367 (8,869) 48,915
Long-term debt .................................. 1,409 546 0 863
Deferred rent credits ........................... 1,463 0 0 1,463
------- ------- ------- -------
Total Liabilities ............................ 81,023 20,913 (8,869) 51,241
Minority Interest in Subsidiaries ................ 4,466 4,466 0 0
Stockholders' Equity ............................. 9,045 16,624 36,201 28,622
------- ------- ------- -------
Total Liabilities and Stockholders' Equity.... $94,534 $42,003 $27,332 $79,863
======= ======= ======= =======
</TABLE>
See accompanying notes.
28
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED FEBRUARY 3, 1996
(In thousands, except per share amounts)
<CAPTION>
GJM Ann Taylor Pro Forma
As reported Business Operations Adjustments Pro Forma
--------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $ 540,063 $105,123 $231,385 $ 0 $ 203,555
Cost of goods sold ............................. 510,761 91,222 204,236 0 215,303
--------- -------- -------- ------- ---------
Gross profit (loss) ............................ 29,302 13,901 27,149 0 (11,748)
Selling, general and administrative expenses.... 72,182 12,037 17,387 274(a) 43,032
Gain on sale of subsidiary ..................... (4,742) 0 0 4,742(b) 0
Loss on sale of GJM Business ................... 31,239 31,239 0 0 0
Write-off of goodwill .......................... 48,949 0 0 0 48,949
Amortization of intangibles .................... 3,425 1,357 0 0 2,068
--------- -------- -------- ------- ---------
(Loss) income from operations .................. (121,751) (30,732) 9,762 5,016 (105,797)
Other income ................................... 0 0 0 0 0
Interest expense ............................... 8,813 2,710 1,088 (2,926)(c) 2,089
--------- -------- -------- ------- ---------
(Loss) income before income taxes and
minority interests ........................... (130,564) (33,442) 8,674 2,090 (107,886)
(Benefit) provision for income taxes ........... (6,216) (553) 2,637 (8,300)(d) 0
--------- -------- -------- ------- ---------
(Loss) income before minority interests ........ (124,348) (32,889) 6,037 10,390 (107,886)
Income attributable to minority interests ...... 1,710 0 1,710 0 0
--------- -------- -------- ------- ---------
Net (loss) income .............................. $(126,058) $(32,889) $ 4,327 $10,390 $(107,886)
========= ======== ======== ======= =========
Net (loss) per share ........................... $ (10.04) $ (8.60)
========= =========
Weighted average number of common
shares outstanding ........................... 12,550 12,550
========= =========
</TABLE>
See accompanying notes.
29
<PAGE>
<TABLE>
CYGNE DESIGNS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED MAY 4, 1996
(In thousands, except per share amounts)
UNAUDITED
<CAPTION>
Ann Taylor Pro Forma
As Reported Operations Adjustments Pro Forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales ............................................. $83,756 $60,527 $ 0 $23,229
Cost of goods sold .................................... 73,044 52,544 0 20,500
------- ------- ----- -------
Gross profit .......................................... 10,712 7,983 0 2,729
Selling, general and administrative expenses .......... 9,159 4,427 68(a) 4,800
Amortization of intangibles ........................... 91 0 0 91
------- ------- ----- -------
Income (loss) from operations ......................... 1,462 3,556 (68) (2,162)
Other income (expense) ................................ (388) 0 0 (388)
Interest expense ...................................... 935 183 670(b) 82
------- ------- ----- -------
Income (loss) before taxes and minority interests ..... 915 3,373 602 (1,856)
Provision (benefit) for income taxes .................. 436 1,216 780 0
------- ------- ----- -------
Income (loss) before minority interests ............... 479 2,157 (178) (1,856)
Income attributable to minority interests ............. 448 448 0 0
------- ------- ----- -------
Net income (loss) ..................................... $ 31 $ 1,709 $(178) $(1,856)
======= ======= ===== =======
Net income (loss) per share ........................... $ 0.00 $ (0.15)
======= =======
Weighted average number of common and
common equivalent shares outstanding ................ 12,438 12,438
======= =======
</TABLE>
See accompanying notes.
30
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AT MAY 4, 1996 AND FOR THE YEAR ENDED
FEBRUARY 3, 1996 AND THE QUARTER ENDED MAY 4, 1996
Note 1. Balance Sheet Footnotes
(a) Estimated market value of Ann Taylor Common Stock (based on the Average
Trading Price for the ten consecutive trading days ending August 21, 1996).
(b) Elimination of deferred taxes realized upon consummation of the
transaction.
(c) Cash proceeds from sale of the Division's assets, less liabilities assumed,
used to pay a portion of amounts outstanding amounts under the Company's
bank facility.
Note 2. Income Statement Footnotes
(a) Excess of allocated overhead to be borne by the Company in the future, less
expenses assumed by Ann Taylor in excess of Company allocations to the Ann
Taylor Operations financial data.
<TABLE>
<CAPTION>
Year Ended Quarter Ended
February 3, 1996 May 4, 1996
---------------- ------------
<S> <C> <C>
Allocated overhead amounts to be borne by the Company .................. $938,000 $304,000
Excess of rent, utilities, real estate depreciation and amortization,
taxes for floor space to be assumed in excess of allocation .......... (214,000) (123,000)
Excess of administrative salaries to be assumed in excess of
allocation, less $450,000 consulting fees to be paid by
Ann Taylor ........................................................... (450,000) (113,000)
-------- --------
Net adjustment ......................................................... $274,000 $ 68,000
======== ========
</TABLE>
- ------------
(b) Elimination of gain on sale of subsidiary.
(c) Interest reduction upon paydown of outstanding balances under credit
facilities as of the beginning of the respective periods using proceeds
from the sale of the Division's assets less liabilities assumed.
(d) Elimination of deferred taxes assumed realized upon consummation of the
Proposed Sale as of the beginning of the respective periods.
31
<PAGE>
PROPOSAL NO. 2 -- ELECTION OF DIRECTORS
Five directors (constituting the entire Board) are to be elected at the
Annual Meeting. Unless otherwise specified, the enclosed proxy will be voted in
favor of the persons named below to serve until the next annual meeting of
stockholders and until their successors shall have been duly elected and shall
qualify. In the event any of these nominees shall be unable to serve as a
director, the shares represented by the proxy will be voted for the person, if
any, who is designated by the Board of Directors to replace the nominee. All
nominees have consented to be named and have indicated their intent to serve if
elected. The Board of Directors has no reason to believe that any of the
nominees will be unable to serve or that any vacancy on the Board of Directors
will occur.
The nominees, their ages, the year in which each first became a director
and their principal occupations or employment during the past five years are:
Year First
Became Principal Occupation During
Nominee Age Director the Past Five Years
- ------- --- --------- ---------------------------
Irving Benson .............. 57 1984 President of the Company
since the Company's
incorporation in October 1984
and Vice Chairman since April
1994; founder of the
Company's predecessor in
1975.
James G. Groninger ......... 52 1993 President of The Bay South
Company since January 1995;
Managing Director of
PaineWebber Incorporated from
April 1988 through December
1994.
Stuart B. Katz ............. 41 1993 Senior Managing Director of
Furman Selz LLC since January
1994; various other positions
with Furman Selz LLC,
including Managing Director
and Senior Vice President,
since 1985.
Bernard M. Manuel .......... 49 1988 Chief Executive Officer of
the Company since October
1988 and Chairman of the
Board since December 1989.
Trevor J. Wright ........... 51 1994 Executive Vice
President--Design of the
Company since June 1995;
Group Executive Design
Director of the Company from
April 1995 through June 1995;
Design Director of Fenn,
Wright and Manson,
Incorporated, which was
acquired by the Company in
April 1994, and its
predecessors since 1973.
Mr. Wright was appointed a director of the Company upon the consummation of
the FWM Acquisition pursuant to the terms of the Purchase Agreement, dated as of
December 7, 1993, as amended, by and among the Company, FWM and FWM N.V.
Pursuant to the terms of such agreement, so long as Mr. Wright remains a
director of the Company, he will be consulted regarding future additions to the
Company's Board of Directors, but will have no veto rights over any such
appointment. See "Additional Information About the Company--Business--Company
History" and "--Executive Compensation--Employment Agreements."
Mr. Groninger is a director of Designs, Inc. and NPS Pharmaceuticals. Mr.
Manuel is a director of Designs, Inc.
In September 1993 the Company established an Audit Committee and a
Compensation Committee, each consisting of Messrs. Groninger and Katz. The Audit
Committee is charged with reviewing the Company's annual audit and meeting with
the Company's independent accountants to review the Company's internal controls
and financial management practices, and the Compensation Committee reviews
compensation practices, recommends compensation for the Company's executives and
key employees and functions as the Committee under the Company's 1993 Stock
Option Plan. The Compensation Committee met once and acted five times by
unanimous written consent during the year ended February 3, 1996. The Audit
Committee met three times during the year ended February 3, 1996.
During the fiscal year ended February 3, 1996, the Board of Directors held
eight meetings and acted twice by unanimous written consent in lieu of a
meeting. Each director attended at least 75% of the meetings of the Board of
Directors and of all committees of the Board of Directors on which he served
during the fiscal year ended February 3, 1996.
32
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Cygne Common Stock, to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and greater than ten
percent beneficial owners are required by the SEC to furnish the Company with
copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that during the fiscal year ended February 3, 1996 all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than ten percent beneficial owners were complied with.
Compensation of Directors
Each non-employee director of the Company receives $3,500 for each Board of
Directors meeting attended, and $1,500 for each meeting of any committee of the
Board of Directors attended. In addition, directors who are not employees of the
Company are compensated through stock options.
The Company has adopted a Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), pursuant to which options to acquire a maximum of an
aggregate of 100,000 shares of Cygne Common Stock may be granted to non-employee
directors. Options granted under the Directors' Plan do not qualify as incentive
stock options within the meaning of Section 422 of the Code. The Directors' Plan
provides for the automatic grant to each of the Company's non-employee directors
of (1) an option to purchase 10,000 shares of Cygne Common Stock on the date of
such director's initial election or appointment to the Board of Directors, and
(2) an option to purchase 2,000 shares of Cygne Common Stock on each annual
anniversary of such election or appointment, provided that such individual is on
such anniversary date a non-employee director. The options will have an exercise
price of 100% of the fair market value of the Cygne Common Stock on the date of
grant, have a ten-year term and become exercisable in four equal annual
installments commencing on the first anniversary of the grant thereof, subject
to acceleration in the event of a change of control (as defined in the
Directors' Plan). The options may be exercised by payment in cash, check or
shares of Cygne Common Stock. On April 15, 1993 Mr. Groninger was elected as a
director of the Company and was granted an option to purchase 10,000 shares of
Cygne Common Stock at a purchase price of $4.00 per share, the fair market value
of the Cygne Common Stock on the date of grant. On September 28, 1993 Mr. Katz
was elected as a director of the Company and was granted an option to purchase
10,000 shares of Cygne Common Stock at a purchase price of $16.875 per share,
the fair market value of the Cygne Common Stock on the date of grant. On each of
April 15, 1994, April 15, 1995 and April 15, 1996, the anniversary dates of his
initial election to the Board of Directors, Mr. Groninger was granted options to
purchase 2,000 shares of Cygne Common Stock at a purchase price of $23.50,
$11.75 and $1.75 per share, respectively, the fair market values of the Cygne
Common Stock on the dates of grant. On each of September 28, 1994 and September
28, 1995, the anniversary dates of his initial election to the Board of
Directors, Mr. Katz was granted options to purchase 2,000 shares of Cygne Common
Stock at a purchase price of $22.50 and $3.25 per share, respectively, the fair
market values of the Cygne Common Stock on the dates of grant.
Vote Required
The five nominees receiving the highest number of affirmative votes of the
shares present in person or represented by proxy and entitled to vote, a quorum
being present, shall be elected as directors. Only votes cast for a nominee will
be counted, except that the accompanying proxy will be voted for all nominees in
the absence of instruction to the contrary. Abstentions, broker non-votes and
instructions on the accompanying proxy card to withhold authority to vote for
one or more nominees will result in the respective nominees receiving fewer
votes.
THE BOARD OF DIRECTORS DEEMS "PROPOSAL NO. 2--ELECTION
OF DIRECTORS" TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND
RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
33
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
Unless otherwise noted, all references to (i) a year refer to the fiscal
year of the Company commencing in that calendar year and ending on the Saturday
nearest January 31 of the following year and (ii) pro forma combined numbers
refer to the pro forma results of operations of the Company after giving effect
to (a) the acquisition (the "FWM Acquisition") of Fenn, Wright and Manson,
Incorporated ("FWM"), which was consummated on April 6, 1994, and (b) the
acquisition (the "GJM Acquisition") from G.J.M. International Limited ("GJM
International") of the business operations of GJM International ("GJM"), which
was consummated on October 7, 1994, as if such acquisitions had been consummated
on the first day of such periods. On April 7, 1995 Cygne sold the United Kingdom
subsidiary of FWM ("FWM U.K.") and certain brand name rights that had been
acquired in the FWM Acquisition (the "FWM UK Disposition"). On February 9, 1996,
the Company sold substantially all of the assets relating to its GJM operations
(the "GJM Disposition"). Unless the context indicates otherwise, the terms
"Company" or "Cygne" includes the operations of the Company and its subsidiaries
as then in existence. This Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.
Business
General
The Company is a private label designer, merchandiser and manufacturer of
women's apparel, serving principally The Limited, Inc. and Ann Taylor. The
Company's products include a broad range of woven and knit career and casual
women's apparel. As a private label manufacturer, the Company produces apparel
upon orders from its customers for sale under the customers' own labels, rather
than producing its own inventory of apparel for sale under the Cygne name.
The manufacture of private label apparel is characterized by high volume
sales to a small number of customers at competitive prices. Although private
label gross margins are lower than in the brand name apparel industry, marketing
expenses and collection and markdown costs are typically commensurably lower,
and inventory turns are generally higher. Inventory risks are also reduced
because the purchasing of fabric and other supplies begins only after purchasing
commitments have been obtained from customers.
The weak retailing environment, particularly in women's apparel, customers
diminishing reliance upon outside design, merchandising and sourcing services,
and liquidity pressures, all adversely affected the Company's operating results.
In response to these factors, the Company is restructuring its operations. The
Company sold the United Kingdom subsidiary of FWM and certain brand name rights,
and discontinued the remaining operations of FWM. In February 1996, the Company
sold substantially all of its assets relating to its GJM intimate apparel and
sleepwear operations. In addition, upon the approval of the stockholders and the
consummation of the Proposed Sale, the Company will sell its Ann Taylor
Operations to Ann Taylor and, as a result, the Company anticipates that it will
no longer have sales to Ann Taylor. In the fiscal year ended February 3, 1996
and the first half of fiscal 1996, sales to Ann Taylor were $231.9 million and
$117.1 million, respectively, representing approximately 53% and 73%,
respectively, of the Company's net sales (excluding net sales of the recently
sold GJM Business). The Company believes that its operating results will
continue to be adversely affected as long as the weak retail environment,
particularly in women's apparel, continues and customers continue to decrease
their reliance upon outside design, merchandising and sourcing services. The
Company believes that its current financing arrangement with the HS Bank and the
proceeds from the Proposed Sale will alleviate the liquidity pressures faced by
the Company during 1995 and the first half of 1996, although there can be no
assurance of this. See "Pro Forma Financial Information" and "--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company has been dependent on its key customers (The Limited, Inc. and
Ann Taylor) and, with the loss of Ann Taylor as a customer, a significant
portion of the Company's sales will be to various divisions of The Limited, Inc.
In 1995 and the first half of 1996, sales to The Limited, Inc. and its various
divisions, excluding the GJM Business, were $113.9 million and $28.6 million,
respectively, or 26.2% and 17.9%, respectively, of total Company sales. There
can be no assurance that The Limited, Inc. will continue to purchase merchandise
from the Company at the same rate, or at all, in the future, or that the Company
will be able to attract new customers.
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The Company is currently exploring opportunities to utilize its
manufacturing and sourcing expertise in the production and sale of licensed
brand name apparel. The Company has recently entered into two agreements with
Kenzo, a French company ("Kenzo"), for an exclusive license for the manufacture
and distribution of certain men's and women's ready to wear garments lines in
North America under the Kenzo label. See "--Kenzo License Agreements."
Company History
Cygne Designs, Ltd. ("CDL"), the Company's predecessor, was founded in 1975
by Irving Benson, the current Vice Chairman and President of the Company. Over
the following nine years, Mr. Benson increased his interest in CDL to 50%. In
October 1984, Mast Holdings, Inc. ("Mast Holdings"), a wholly owned subsidiary
of The Limited, Inc., acquired the assets of CDL through Cygne, a newly formed
80% subsidiary, and Mr. Benson acquired a 15% ownership interest in Cygne. In
March 1988, Mast Holdings sold its Cygne shares to Cygne Acquisition Corp.
("Cygne Acquisition"), a company formed by Mr. Benson and Cygne Acquisition
Partners L.P. ("Cygne Partners"), a European investment group formed by Amvent
Inc. ("Amvent"), its general partner (the "1988 Acquisition"). In the 1988
Acquisition, Mr. Benson exchanged his shares of Cygne for 29% of the common
stock of Cygne Acquisition. Following the 1988 Acquisition, Cygne Acquisition
was merged into Cygne, and Cygne Partners owned approximately 71% of the Cygne
Common Stock and 100% of its outstanding preferred stock. Mr. Benson owned the
remaining 29% of the Cygne Common Stock. At the time of the 1988 Acquisition,
Amvent, a company then 50% owned by Bernard M. Manuel, the current Chairman and
Chief Executive Officer of the Company, entered into a management agreement with
the Company pursuant to which Amvent was engaged to advise the Company with
respect to, among other things, corporate strategy, acquisition and divestiture
strategies and debt and equity financings, although it had no involvement with
the day-to-day operations of the Company.
In 1988 and 1989, the Company suffered severe liquidity problems. See
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations--General." Consequently, during 1989 a number of corporate
transactions took place in an effort to restructure the capital of the Company.
These transactions culminated in a reorganization of Cygne in December 1989,
which resulted in the replacement of the European investment group as indirect
common stockholders of Cygne. At that time, Amvent's Chairman, Mr. Manuel,
became Chairman and Chief Executive Officer of Cygne on a full-time basis, the
Company was recapitalized and Messrs. Manuel and Benson and Cleveland Investment
Limited ("CIL"), a principal stockholder, became the direct holders of all the
outstanding shares of Cygne Common Stock.
In June 1992, Messrs. Benson and Manuel, CIL and Ann Taylor purchased 2,667
shares, 2,667 shares, 2,666 shares and 2,000 shares, respectively, of common
stock of CAT US and 40,000 shares, 40,000 shares, 40,000 shares and 30,000
shares, respectively, of CAT Far East, companies newly-formed to source products
for Ann Taylor in certain product categories which the Company was not supplying
and for which Ann Taylor believed its sourcing could be improved. Effective
April 30, 1993, each of Messrs. Benson and Manuel and CIL exchanged 2,667
shares, 2,667 shares, and 666 shares, respectively, of their shares of common
stock of CAT US and 40,000 shares, 40,000 shares and 10,000 shares,
respectively, of their shares of common stock of CAT Far East for an aggregate
of 717,473 shares, 717,473 shares and 179,167 shares, respectively, of Cygne
Common Stock. Effective May 1, 1993, CIL sold 2,000 shares of CAT US common
stock and 30,000 shares of CAT Far East common stock to Ann Taylor for
$1,639,734. As a result of these transactions, Cygne owned 60% of CAT and Ann
Taylor owned the remaining 40%. See "--Joint Venture Arrangements." The
acquisition of CAT represented the reorganization of entities under common
control and has been accounted for similar to a pooling of interests.
In December 1992, Messrs. Benson and Manuel each purchased 200 shares of
common stock of Cygne Knits Limited and one share of common stock of Cygne Far
East Limited (collectively "Knits"), companies formed to provide cut-and-sewn
knitwear and sweaters to its customers other than Ann Taylor. Effective April
30, 1993, each of Messrs. Benson and Manuel contributed their shares of Cygne
Far East Limited to Cygne Knits Limited and exchanged their respective shares of
Cygne Knits Limited for 230,390 shares of Cygne Common Stock. The acquisition of
Knits represents the reorganization of entities under common control and has
been accounted for similar to a pooling of interests.
In June 1993, Messrs. Benson and Manuel and CIL entered into an agreement
to sell 765,000 shares of Cygne Common Stock, aggregating approximately 9.7% of
the then outstanding Cygne Common Stock (after giving effect to the Company's
initial public offering), to Limited Direct Associates L.P., a limited
partnership consisting of a
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wholly-owned subsidiary and certain operating divisions of The Limited, Inc.
(the "Limited Partnership"). Such sale was effected on July 29, 1993, at a price
per share of $8.00.
In 1993, in two transactions, the Company acquired T.Wear Company S.r.l.
and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for an
aggregate of $500,000 and 150,000 shares of Cygne Common Stock. These acquired
companies, along with Knits, represent the Company's T-Wear Group, which is
responsible for the design, merchandising and manufacturing of the Company's
knit apparel, with the exception of sweaters.
In April 1994, the Company acquired FWM, a designer, merchandiser and
manufacturer of women's and men's apparel primarily serving prominent specialty
retail store chains and department stores in the U.S. and the United Kingdom.
FWM's products included a range of women's and men's sportswear, which were
marketed primarily under its retail customers' private labels and, to a limited
degree, under FWM's own brand names. The purchase price for FWM was $44 million,
consisting of 2,000,000 unregistered shares of Cygne Common Stock and $10,000 in
cash. Additional costs related to this acquisition approximated $1.4 million.
Immediately following the FWM Acquisition, the Limited Partnership exercised its
option to acquire 10% of FWM from FWM N.V., the sole shareholder of FWM prior to
the FWM Acquisition, and, as a result, received 200,000 shares of Cygne Common
Stock, which it subsequently sold in June 1994. In April 1995, the Company sold
to FWM N.V. its branded business in the United Kingdom in exchange for 600,000
shares of Cygne Common Stock. During 1995 management took various actions to
reverse a decline in FWM's business. However, during October 1995, management
determined that such actions were not having the desired results and, by October
28, 1995, eliminated all of the operations of FWM except its menswear business,
which it subsequently discontinued. See "--Management's Discussion and Analysis
of Financial Condition and Results of Operations--General."
In October 1994, Cygne acquired GJM, a Hong Kong based designer,
merchandiser and manufacturer of women's intimate apparel, from GJM
International, a company wholly-owned by Mr. W. Glynn Manson. The purchase price
for GJM was $15.2 million, consisting of 650,000 unregistered shares of Cygne
Common Stock, $10,000 in cash and the assumption of approximately $1.9 million
of indebtedness owed by GJM International to The Limited, Inc. In addition,
Cygne paid $3.0 million to Mr. Manson, Chairman and Chief Executive Officer of
GJM, and $200,000 to another executive officer of GJM, in consideration for
non-compete agreements of 15 years and four years, respectively. Additional
costs related to this acquisition approximated $1.7 million. Cygne also issued
options to purchase an aggregate of 165,000 shares of Cygne Common Stock to
certain key personnel of GJM. In February 1996, the Company sold the GJM
Business to Warnaco Inc. ("Warnaco"). In the transaction, Warnaco paid Cygne
$12.5 million in cash and assumed certain liabilities of the GJM Business. The
Company is obligated to indemnify Warnaco for any claims for taxes arising out
of the operation of the GJM Business prior to the sale of the GJM Business to
Warnaco.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of Cygne Common Stock and $3.1 million in cash.
Additional costs related to this acquisition approximated $730,000. Cygne also
issued options to purchase an aggregate of 55,000 shares of Cygne Common Stock
to the two former shareholders of TSA in connection with their entering into
consulting agreements with TSA. In January 1996, the Company determined to close
TSA and the Company anticipates that TSA's operations will terminate by the end
of the third quarter of 1996.
In June 1996, the Company entered into the Purchase Agreement with Ann
Taylor, pursuant to which Ann Taylor will acquire Cygne's 60% interest in CAT
and the assets of the Division that are used in sourcing merchandise for Ann
Taylor. See "The Proposed Sale" and "The Purchase Agreement." The Company does
not expect Ann Taylor to continue as a customer following this transaction.
Industry Outlook: The "Private Brand" Concept
Private label sourcing affords retailers an opportunity to offer products
compatible with the fashion attitudes and lifestyles of the market segments they
choose to serve that are less expensive than brand name products of comparable
quality and fashion outlook, yet carry significantly higher margins. These
retailers rely, in part, upon distinctive private label programs which allow
these retailers to create fashion viewpoints that are readily identifiable.
These retailers have less need for the imprimatur of other brand names because
the retailers' names or their proprietary store brands have achieved consumer
recognition. Moreover, to substantially reduce the risk of purchasing goods
which are out of step with prevailing fashion trends, most successful retailers
have developed systems to continually test consumer tastes and therefore have
greater assurance of consumer acceptance before placing large orders for goods.
In order to benefit from this testing, retailers must develop short lead time
sourcing, so as to capitalize on successful
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products and reduce inventory exposure. Cygne has positioned itself as a
"private brand" developer and manufacturer. The Company believes that its
development skills in design and merchandising are essential because few
retailers can maintain freshness and creativity without external input. The
Company's sourcing skills are equally necessary to meet the challenge of short
lead times and high volume production of quality products at attractive prices
required by its customers.
The apparel industry in general, and the women's apparel industry in
particular, have been subject to substantial cyclical variation. In the recent
past, the purchase of apparel and related goods has declined as a result of
numerous factors. As a result of this decline, various retailers, including
certain of the Company's customers have experienced financial difficulty. The
effect of these factors has been increased competition and reduced operating
margins for both the retailers and their suppliers. Retailers, including
customers of the Company, are increasingly designing and sourcing private label
products themselves rather than utilizing outside vendors like the Company.
Products
The Company currently participates in three principal segments of the
women's apparel market: career sportswear, casual sportswear and dresses. Career
and casual woven sportswear are generally conceived and merchandised as groups
including jackets, skirts, pants, shorts, shirts or blouses, tops and sweaters.
Although the constituent items are sold by the Company's customers as separates,
these groups are carefully coordinated as to fabrics, colors and styles so they
can be merchandised and worn together. In addition, the Company also sources
shoes and accessories for Ann Taylor, which activities will cease upon the
consummation of the Proposed Sale.
The Company believes that the breadth of its product line enables it to
maximize account penetration by offering each of its customers a broad range of
products with a coherent fashion outlook and the convenience of a one-stop
vendor dedicated to that retailer's market segment.
Design, Merchandising and Sales
Cygne's design, merchandising and sales activities are integrated into a
single development process which includes design, merchandising, technical,
manufacturing and quality assurance personnel. This process begins with a
broad-based research in color and fabric fashion trends. Combining the results
of this research with an in-depth understanding of a customer's market
positioning, the Company works closely with its customer to develop products
coordinated as to fabrics, colors and styles. Prices are negotiated throughout
the development process rather than by salespersons at the end of the
development process. This process leads first to customer fabric commitments and
ultimately to purchase orders for specific products.
In addition, the Company has formed a design studio utilizing many of the
Company's designers which, in addition to serving U.S. customers, designs and
develops apparel collections for certain Japanese retailers.
Sourcing and Manufacturing
Cygne believes that controlling the manufacturing of its products is
critical to the Company's business. The Company has focused on controlling the
sourcing and contract manufacturing of its products by nurturing direct and
stable relationships with a small number of dependable suppliers and factories,
and by developing a strong internal manufacturing organization complemented by
overseas subsidiaries and agents. Although historically substantially all of its
manufacturing was conducted by third parties, the Company in 1993 began to
expand its manufacturing capabilities by operating its own cutting factories and
sewing factories in order to reduce the percentage of its products manufactured
by third parties. The Company believes that operating its own cutting factories
and sewing factories enhances its ability to provide, within its customers' time
requirements, creative product lines which meet current fashion trends and are
of good quality and attractively priced. Approximately 11% of the Company's net
sales resulted from sales of products manufactured by its sewing factories
(including those owned and leased by GJM) in 1995. Excluding the net sales
resulting from products manufactured by its sewing factories owned or leased by
GJM, approximately 1% of the Company's 1995 net sales resulted from sales of
products manufactured by its sewing factories. The percentage of products
manufactured at such facilities will vary depending on the mix of the Company's
products. See "--Manufacturing." The Company is currently exploring
opportunities to utilize its manufacturing and sourcing expertise in the
production and sale of licensed brand name apparel. See "--Kenzo License
Agreements."
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Supplies
Cygne generally supplies the raw materials to its domestic manufacturers
and frequently supplies the raw materials to foreign manufacturers. Otherwise,
the raw materials are purchased directly by the manufacturer in accordance with
the Company's specifications. Raw materials, which are in most instances made
and/or colored specifically to the Company's order, consist principally of piece
goods and trims, and are purchased from over 200 domestic and foreign textile
mills, converters and trim suppliers. In 1995, three fabric suppliers accounted
for an aggregate of approximately 32% of the Company's fabric purchases,
including one supplier which accounted for approximately 22% of the Company's
fabric purchases and approximately 18% of the Company's fabric and trim
purchases. Two trim suppliers accounted for an aggregate of approximately 49% of
the Company's trim purchases in 1995, including one supplier which accounted for
39% of the Company's trim purchases. Although the Company expects that during
1996 it will purchase its supplies from fewer suppliers, it does not believe
that its concentration of suppliers will materially fluctuate. The Company
believes that these raw materials, including fabric, are readily available from
numerous domestic and foreign sources.
Cygne's foreign finished goods purchases are frequently made on a letter of
credit basis, while its domestic purchases are generally made on an open order
basis. The Company does not have formal long-term arrangements with any of its
suppliers. The Company has experienced little difficulty in satisfying its raw
material requirements and considers its sources of supply adequate.
Overseas Network
Cygne's ability to source fabrics and monitor the manufacture of its
products is reinforced by foreign affiliates and agents. The Company believes
that this broad geographical network affords it both flexibility and control.
Cygne's presence overseas includes:
China and Hong Kong: The Company sources products and controls their
manufacture in Hong Kong, the People's Republic of China and Southeast
Asia through wholly-owned subsidiaries. In 1995 and 1994 (on a combined
pro forma basis), the People's Republic of China and Hong Kong provided
Cygne with products representing approximately 38% and 44%, respectively,
of its net sales, of which approximately 15% and 12%, respectively, was
for GJM. All countries sourced through the Hong Kong offices provided
Cygne with products representing approximately 40% and 51%, respectively,
of its 1995 and 1994 (on a pro forma combined basis) net sales.
South Korea: The Company sourced products and controlled the
manufacture of its products in South Korea through a majority owned
subsidiary, which it closed in 1995. In each of 1995 and 1994 (on a pro
forma basis), South Korea provided Cygne with products representing
approximately 12% of Cygne's net sales.
Guatemala: The Company controls the manufacture of its products in
Guatemala through a wholly-owned subsidiary. In 1995 and 1994 (on a pro
forma basis), Guatemala provided Cygne with products representing
approximately 5% and 8%, respectively, of Cygne's net sales.
Brazil: The Company sourced products in Brazil in 1995 and 1994 through
two agents. In 1995 and 1994 (on a pro forma basis), Brazil provided
Cygne with products representing approximately 6% and 5%, respectively,
of Cygne's net sales. In February 1995, Cygne acquired TSA to source
products in Brazil through these agents. In January, 1996, the Company
determined to close TSA and the Company anticipates that operations will
terminate by the end of the third quarter of 1996. See "--Company
History."
Italy and Israel: The Company conducts substantial fabric research and
purchases a significant amount of woven fabrics from Italy through an
agent which in February 1994 became a majority owned subsidiary. Woven
fabrics used by the Company which were purchased in Italy represented
approximately $18.4 million or 45% of the Company's woven fabric usage in
1995. In addition, in 1994 the Company acquired an Italian manufacturer
which produces, in Italy and Israel, primarily knits. These countries
provided Cygne with products representing approximately 9% of Cygne's
sales for each of 1995 and 1994 (on a pro forma basis).
Manufacturing
Cygne's manufacturing strategy is designed to allow the Company to deliver
quality garments at attractive prices within the time constraints set by its
customers. Private label manufacturing usually operates on a tighter
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schedule than brand name manufacturing because goods are not manufactured until
purchase orders are received and the Company's customers strive for quick
response time in order to react on a real-time basis to market changes and test
results. Delivery cycles vary according to the type of products manufactured,
but frequently occur within a period of six weeks from fabric delivery to
garment delivery. Meeting customer delivery requirements is both essential and
difficult given the global nature of the manufacturing process, which might
involve, for example, yarn from Eastern Europe, weaving and fabric finishing in
Italy, trims and accessories from the U.S. and manufacturing in Guatemala.
In order to strengthen its control of contract manufacturers, Cygne focuses
on forging informal partnerships with a small number of dependable factories
chosen for their ability to meet the Company's production requirements. In many
cases, the Company uses a majority of a factory's capacity, which enables the
Company to demand the adaptation of production scheduling and methods required
to meet its quality, productivity and timing needs. In addition, Cygne has built
an internal organization and sourcing network to meet the demanding delivery
schedules and pricing constraints of its customers. During 1995, approximately
42% of the Company's finished products (based on units produced) were produced
in the People's Republic of China and Hong Kong (of which 16% was for GJM)
approximately 14% in the Caribbean and Central and South America, approximately
12% in South Korea, approximately 4% in the Philippines, approximately 11% in
Italy and Israel, approximately 9% in other countries, and approximately 8% in
the U.S. The Company believes that this allocation will allow it to meet its
current quality, delivery and cost control requirements. However, the Company
closely reviews its product sourcing on an ongoing basis and may alter this
allocation to meet changing conditions and demands.
In addition to strengthening its control of contract manufacturers, the
Company began a process of vertical integration of its manufacturing capability
with the acquisition in October 1991 of a cutting room in Florida which now
serves as the consolidation center for all shipments of U.S. fabric, cutwork and
trim to Caribbean and Central American factories. In 1994 and 1995, the Company
acquired cutting facilities in Italy and Israel, acquired, through the GJM
Acquisition, manufacturing facilities in the People's Republic of China, the
Philippines and Sri Lanka, and began to manufacture products in Guatemala. In
connection with the GJM Disposition, the manufacturing facilities in the
People's Republic of China, the Philippines and Sri Lanka were sold or closed.
Approximately 92% of Cygne's net sales in 1995 resulted from sales of its
products which were manufactured outside the United States, of which
approximately 12% was manufactured by Cygne and approximately 88% by
non-affiliated contract manufacturers. If the GJM Disposition and the Proposed
Sale had occurred prior to 1995, 87% of the Company's net sales in 1995 would
have resulted from sales of its products which were manufactured outside the
United States, of which 3% would have been manufactured by Cygne and
approximately 97% by non-affiliated contract manufacturers. Cygne intends to
continue to utilize foreign contract manufacturers for a significant percentage
of its manufacturing requirements. The Company's manufacturers are located in
several countries in the Far East (including the People's Republic of China),
the Caribbean and South and Central America. In addition, the Company owns and
operates manufacturing facilities in Guatemala and leases and operates
manufacturing facilities in Israel. Foreign manufacturing is subject to a number
of risks, including work stoppages, transportation delays and interruptions,
political instability, foreign currency fluctuations, economic disruptions,
expropriation, nationalization, the imposition of tariffs and import and export
controls, changes in governmental policies (including U.S. policy toward these
countries) and other factors which could have an adverse effect on the Company's
business. Further, revocation of "most favored nation" status for the People's
Republic of China, where a significant portion of its products are manufactured,
could have a material adverse effect on the Company. In addition, the Company
may be subject to risks associated with the availability of and time required
for the transportation of products from foreign countries. The occurrence of
certain of these factors may delay or prevent the delivery of goods ordered by
customers, and such delay or inability to meet delivery requirements would have
a severe adverse impact on the Company's results of operations and could have an
adverse effect on the Company's relationships with its customers. Furthermore,
the occurrence of certain of these factors in countries in which Cygne owns or
leases and operates manufacturing facilities could result in the impairment or
loss of the Company's investment in such countries. The loss of any one or more
of its foreign manufacturers could have an adverse effect on the Company's
business until alternative supply arrangements were secured.
During 1988 and 1989, and to a lesser extent in 1990 and 1991, the Company
experienced difficulties in obtaining timely delivery of products (primarily
woven products) of acceptable quality which resulted, in many cases, in
rejections or chargebacks by customers. During 1994, the Company experienced
difficulties in obtaining timely delivery of products (primarily knit products)
of acceptable quality which resulted, in many cases, in rejections
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or chargebacks by customers. In addition, during 1995, the Company experienced
increased rejections or cancellations by customers with respect to certain of
its products. Cygne believes that in some cases these difficulties resulted from
not having sufficient access to and control over the manufacturing process for
such products as well as shortened manufacturing times attributable to delays in
obtaining required raw materials due to the liquidity pressures faced by the
Company. There can be no assurance that the Company will not continue to
experience such difficulties in the future. See "--Management's Discussion and
Analysis of Financial Condition and Results of Operations--General."
Cygne relied solely on contract manufacturers for the production of its
products through the first quarter of 1993. Cygne only began operating its own
sewing factories, all of which are located outside the United States, during the
second quarter of 1993. Operating manufacturing facilities rather than
contracting with independent manufacturers requires the Company to maintain a
higher level of working capital. In addition, reduced sales would have an even
greater adverse impact on the Company's results in light of the fixed costs
needed to own and operate its own factories. A substantial portion of the
Company's manufacturing operations are located outside the U.S. and,
accordingly, the Company is subject to many of the same risks as relying on
foreign contract manufacturers. The Company currently operates manufacturing
facilities in Guatemala and Israel. See "--Properties."
Kenzo License Agreements
In August 1996 the Company entered into two license agreements with Kenzo
(the "Kenzo License Agreements") pursuant to which Kenzo granted to the Company
an exclusive license to manufacture and distribute in the area governed by the
North American Free Trade Agreement (i.e., Canada, Mexico and the United States
of America) (i) the men's and women's ready to wear garments line bearing the
KENZO JEANS label and (ii) the women's ready to wear garments line bearing the
KENZO STUDIO label. The Kenzo License Agreements have an initial term of five
years commencing with the Autumn/Winter 1997 season and concluding with the
Spring/Summer 2002 season. The Kenzo License Agreements will be automatically
renewed for a successive five year period under certain circumstances and upon
the agreement of the parties as to minimum royalty payments for the successive
five year period. The Company has agreed to pay Kenzo royalties of eight percent
of the invoiced sales (which is defined as the net consolidated wholesale
turnover invoiced by the Company, its subsidiaries and its sublicensees to third
parties, excluding any affiliates of the Company) in return for the right to use
the Kenzo trademark and the KENZO JEANS label or KENZO STUDIO label, as
applicable. Regardless of the sales actually generated by the Company under each
Kenzo License, the Company is obligated to pay minimum royalties of $200,000,
$300,000, $350,000, $400,000, and $450,000 for the years commencing with the
Autumn/Winter season during 1997, 1998, 1999, 2000 and 2001, respectively. The
minimum royalty payment under each Kenzo License Agreement for 1997 has been
paid, and must be paid in advance for each subsequent year on the anniversary
date of the Kenzo License Agreement. In addition, the Company is obligated each
year to make payments for advertising for the KENZO JEANS and KENZO STUDIO
products in an amount equal to six percent of the annual turnover (as defined
above) for the first two years covered by the Kenzo License Agreements and three
percent for each subsequent year. The Kenzo License Agreements provide for the
immediate termination by a party upon the occurrence of a serious default by the
other party of a term of the applicable Kenzo License Agreement. In addition,
Kenzo may terminate the License Agreements (i) if in any year after the first
two years of the License Agreement net sales of the licensed products are less
than the amount which would result in the payment of minimum royalties for such
year, (ii) in the event that Bernard Manuel ceases to actually manage the
Company, except in the event of an agreement between Kenzo and the successor
Chief Executive Officer or Chairman of the Board of the Company, or (iii) in the
event of a change in the majority of the actual control of the Company, unless
prior to such a change in control the Company and Kenzo agree to continue the
License Agreements. The Kenzo License Agreements represent an opportunity for
the Company to utilize its manufacturing and sourcing expertise in the
production and sale of licensed brand name apparel. The Kenzo License Agreements
represent a new area of the apparel business for the Company, and there can be
no assurance the Company will be successful in exploiting the Kenzo License
Agreements.
Technology
Cygne currently uses advanced computer assisted engineering technology in
its marking and grading department, linked by modem to plotters in its Guatemala
factory. The Company used a portion of the proceeds from its public offerings to
acquire additional CAD/CAM equipment and software, compatible with its current
systems, to provide fully integrated capabilities, including design,
patternmaking and computerized cutting. A portion of this equipment is being
sold in the Proposed Sale.
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Quality Assurance
The Company's comprehensive quality assurance program is designed to ensure
that its products are consistently at the high end of the quality standards of
its customers. The Company's program is carried out by approximately 29 people,
including design technicians and quality assurance technicians. In addition, the
Company employs inspectors in its overseas offices and requires its overseas
agents to employ similarly qualified quality control personnel whose recruitment
and retention are subject to the Company's approval.
Foreign manufactured piece goods are usually inspected both prior to
shipment by the Company's overseas offices or agents as well as upon arrival at
their manufacturing destination. The Company's garment quality assurance program
begins with a technical value analysis of the garment to be produced, followed
by a critical analysis of factory-made prototypes. This "engineering" phase,
conducted by design technicians working closely with patternmakers, is essential
to lower production costs, to optimize fabric utilization and to ensure that
quality is built into a garment before manufacturing begins. Once a factory
prototype, or "countersample," is approved, the program involves extensive
work-in-process review designed to ensure that manufactured garments will meet
both the Company's and its customer's final inspection standards.
Joint Venture Arrangements
In May 1992, Cygne, Messrs. Benson and Manuel, CIL and Ann Taylor entered
into a joint venture arrangement through CAT to provide Ann Taylor with a fully
dedicated direct sourcing capability for the following product categories:
denim, casual bottoms, shirts, blouses and soft dressing, knits, and sweaters.
In late 1993, CAT began to source shoes for Ann Taylor, and subsequently began
to source accessories for Ann Taylor. Although CAT is obligated to work
exclusively for Ann Taylor, Ann Taylor is permitted to, and does, source these
products from other sources. Prior to the Proposed Sale, Cygne owns 60% of CAT,
and Ann Taylor owns the remaining 40%; until May 1, 1993 Ann Taylor owned 20% of
CAT. The agreement between Cygne and Ann Taylor provides that after July 1,
1995, either the Company or Ann Taylor may offer to purchase the other party's
interest in CAT. The party receiving the offer then has the option of accepting
the offer and selling its interest in CAT on the terms offered or purchasing the
offering party's interest in CAT on the terms offered. The closing of such
purchase can occur at any time upon six months' prior notice. Subject to the
approval of the stockholders, the Company will sell its interest in CAT to Ann
Taylor upon the terms described herein. There can be no assurance the
transaction with Ann Taylor will be consummated. The Company does not expect Ann
Taylor to continue as a customer following this transaction. See "The Purchase
Agreement" and "--Company History."
During 1993, 1994 (pro forma), 1995 and the first half of 1996, 14.2%,
23.1%, 30.7% and 51.9%, respectively, of the Company's combined net sales,
representing 55.3%, 71.3%, 42.9% and 70.8%, respectively, of its net sales to
Ann Taylor, were made by CAT. CAT and the Division accounted for approximately
53% and 73.3% of the Company's net sales (excluding net sales of the recently
sold GJM Business) for 1995 and the first half of 1996, respectively. See
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
The President of CAT is entitled to an annual bonus equal to a specified
percentage of the consolidated net income before taxes of CAT. In addition, upon
the sale or transfer of all or a portion of the capital stock or all or
substantially all of the assets of CAT, this individual has an option to
receive, as consideration for the termination of this bonus, a one-time lump sum
payment equal to a specified percentage of the value of such corporation
determined on the basis of the sales price of such stock or assets.
Competition
The private label industry is highly fragmented, and the Company faces
intense competition, including competition from its own customers (including
their affiliates) who have, or may establish, their own internal product
development and sourcing capabilities. Most independent competitors are small
entrepreneurial firms that do not have comparable design and merchandising
capabilities or the means to evolve into professionally managed organizations.
Some of the Company's competitors, however, are larger in size and have greater
resources than the Company.
The Company competes primarily on the basis of price, quality and short
lead time high volume manufacturing. The Company believes that its competitive
advantages include an integrated approach to low cost manufacturing,
41
<PAGE>
design capability and superior flexibility in responding to changing consumer
demand within the industry's product delivery constraints.
The Company believes that certain of its own customers (including their
affiliates), who possess, to varying degrees, the know-how and internal
resources to develop and source directly a portion of their requirements,
constitute its major competition. For example, The Limited, Inc., through its
sourcing subsidiary, Mast Industries, Inc., which is an affiliate of a company
which once owned Cygne (see "--Company History"), procures directly a
substantial portion, but not a majority, of its product requirements. In
addition, The Limited Stores, which is the Company's largest customer among the
divisions of The Limited, Inc., has formed an internal design and product
development group as well as added a direct sourcing department. Ann Taylor is
also following the concept of sourcing directly a portion of its requirements as
is reflected by the Proposed Sale.
The Company believes that its business will depend upon its ability to
provide product lines which meet current fashion trends and are of good quality
and attractively priced within its customers' time requirements, as well as its
ability to maintain relationships with key customers. There can be no assurance
that the Company will be successful in this regard.
Import Restrictions
The Company imports more than 80% of its products from a number of foreign
countries, including the People's Republic of China, El Salvador, Guatemala,
Hungary, Israel, Romania and Thailand. The Company's ability to meet its
customers' pricing requirements will depend, in large part, on its ability to
manufacture its products in countries where manufacturing costs are low.
However, because of quota limits, the Company's manufacturing flexibility is
reduced, increasing the risk that the Company will need to manufacture more of
its products in countries where manufacturing costs are higher.
Textile Agreements
Prior to January 1, 1995, apparel imports from most countries were subject
to bilateral textile agreements under the Multifiber Arrangement ("MFA") of the
General Agreement on Tariffs and Trade ("GATT") which allowed the imposition of
visa and quota restrictions on certain apparel and textile articles including a
significant portion of those currently sold by the Company. Under the Uruguay
Round Agreements Act, the United States agreed to phase out these bilateral
quotas in three stages over a ten year period. The agreement became effective on
January 1, 1995 for the 124 member countries of the World Trade Organization
("WTO"), which include the countries listed above with the exception of the
People's Republic of China. Those textile quotas in effect on December 31, 1994
will remain in effect until they are "phased-out" during the ten-year period.
However, these quotas are subject to a growth formula which uses as a basis the
growth rate set forth in the bilateral textile agreements in effect as of
December 31, 1994 and provides for additional growth of 16%, 25% and 27% of the
base growth rate in the respective phase-out periods. It is believed that the
quotas affecting most of the products imported by the Company are not likely to
be phased out until the end of the third and final stage, i.e., on January 1,
2005. Once "phased-out," quotas cannot be imposed except in accordance with GATT
rules. These rules generally forbid bilateral quota agreements and other
discriminatory, country-specific restraints. However, some form of global quota
is still possible after completion of the ten year phase-out period. Under
limited circumstances, a new quota (called a "transitional safeguard") may be
imposed during the ten-year phase-out period if there is demonstrable evidence
of serious damage, or actual threat of serious damage, to a domestic industry
producing like or competitive products due to a sharp and substantial increase
in imports of a particular product. The United States may also counteract
illegal transshipping practices by imposing new quotas, issuing chargebacks
against existing quotas or imposing embargoes. Such action can be taken against
both the actual country of origin and countries through which such merchandise
was transshipped. While it is not possible to forecast the likelihood of such
occurrences, the imposition of new quotas and/or chargebacks could impact the
Company's ability to source imported merchandise.
Textile and apparel imports from the People's Republic of China and other
non-members of the WTO will continue to be subject to bilateral textile
agreements negotiated under the MFA. Under these agreements, the United States
may impose quota restraints on importations of specific categories of
merchandise not presently subject to such quota restraints. The bilateral
textile agreement with The People's Republic of China expires on December 31,
1996. The People's Republic of China is seeking membership in the WTO. Should
its application be approved, imports from The People's Republic of China may
become subject to the quota phase-outs discussed above or modifications thereof.
42
<PAGE>
Origin Rules
As part of the Uruguay Round Agreements Act, Congress adopted specific
rules of origin for textile and apparel products which became effective on July
1, 1996. The origin of the product dictates the duty rate and quota rules
applicable to the product. Under the prior rules of origin, the country where
the last substantial transformation of the product occurs is generally
considered the country of origin of that product. For most apparel products,
this rule dictates that the country where the fabric is cut into garment
components will be the country of origin for the finished product even though
the assembly of the article occurred in another country. Only when a complex
assembly process is required will the country of assembly become the origin of
the product. Under the new rules, the country of assembly will generally dictate
the origin of the apparel. This change could raise the cost of the merchandise
produced by the Company.
Duty Rates
The products imported by the Company are subject to "Most Favored Nation
(MFN)" or column 1 rates of duty which range from zero to 38% ad valorem. As a
result of the Uruguay Round Agreements Act, many of these rates will be reduced
over five to fifteen years resulting on average in a 12% reduction from current
rates of duty.
On December 8, 1993, Congress adopted the North American Free Trade
Agreement ("NAFTA") under which originating apparel and other products from
Mexico and Canada are immediately exempt from quota restrictions and subject to
duty rates which are being reduced to zero over the next ten years. Similar
tariff rate preferences and quota exemptions are being phased in for certain
non-originating apparel products cut and sewn in Mexico and Canada. Negotiations
have begun to expand NAFTA to possibly include certain Central and South
American countries. Additionally, "NAFTA Parity" legislation has been introduced
to confer similar quota and duty benefits on countries subject to the Caribbean
Basin Economic Recovery Act (CBERA) including Guatemala.
Imports from the People's Republic of China receive MFN duty rates under a
waiver of the Jackson-Vanik Amendment to the Trade Act of 1974. Under this
statute, certain countries and non-market economies are prohibited from
receiving MFN rates of duties and other trade benefits unless an annual waiver
is issued by the President. The People's Republic of China has received a
Jackson-Vanik Waiver annually since 1979. On May 18, 1996 President Clinton
renewed the waiver. Congress may pass legislation disapproving the one-year
extension of MFN to China, but an attempt to do so was defeated in the House. If
MFN for China had been discontinued, goods from China would have been subject to
"column 2" rates of duty, which range up to 90% ad valorem. However, current
duty rates will remain in effect at least until July 2, 1997. The loss of MFN
status for the People's Republic of China could adversely affect the Company's
ability to supply products to its customers.
Additional Restrictions
In the ordinary course of its business the Company is, from time to time,
subject to claims by the U.S. Customs Service for additional duties and other
charges. Similarly, from time to time, the Company is entitled to refunds from
the U.S. Customs Service due to the overpayment of duties.
The U.S. and other countries in which the Company's products are
manufactured or sold may, from time to time, impose new quotas, duties, tariffs,
or other restrictions, including trade sanctions or revocation of "most favored
nation" status, or adversely adjust presently prevailing quotas or duty rates,
which could adversely affect the Company's operations and its ability to import
products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, the maintenance of overseas offices, allocation of production to
merchandise categories where more quota is available and shifts of production
among countries and manufacturers. The Company also purchases quantities of
temporary quota in certain countries.
The Company's ability to import its products is subject to the cost and
availability of transportation to the U.S., the demand for production capacity
abroad by other manufacturers, economic or political instability resulting in
the disruption of trade from exporting countries, any significant fluctuation in
the value of the dollar against foreign currencies and restrictions on the
transfer of funds. The Company's operations have not been materially affected by
any of the foregoing factors to date, although there can be no assurance that
these factors will not adversely affect the Company in the future.
43
<PAGE>
Customs Audits
On November 25, 1991, the U.S. Customs Service commenced a consumption
entry audit of FWM for the calendar year 1990. The review of FWM's records has
been completed by the individual auditor assigned to the case, and he has
informally reported to FWM and its customs attorney that he has made no negative
findings. His statements are not binding and are still subject to further review
by his superiors and others in the Regulatory Audit Division of the U.S. Customs
Service. No assurance can be given that his statements will be reflected in the
final report issued by the Regulatory Audit Division. To date, no final report
has been issued.
On October 17, 1995, the U.S. Customs Service commenced a Compliance
Assessment Review of CAT for the 1994 calendar year. The purpose of this review
was to determine CAT's level of compliance with its Customs reporting
obligations and its valuation of merchandise. The review was completed in March
1996 by the individual auditor assigned to the case who informally advised CAT
that he had made no negative findings. The auditor's statements are not binding
and are still subject to further review by his superiors and others in the
Regulatory Audit Division of the U.S. Customs Service. No assurances can be
given that his statements will be reflected in the final report issued by the
Regulatory Audit Division. To date, no final report has been issued.
Backlog
At May 4, 1996 the Company had unfilled confirmed customer orders of
approximately $81.4 million. The amount of unfilled orders at a particular time
is affected by a number of factors, including the scheduling of manufacture and
shipping of the product which, in some instances, depends on the customer's
demands. Accordingly, a comparison of unfilled orders from period to period is
not necessarily meaningful and may not be indicative of eventual actual
shipments during the quarter. The Company's experience has been that the
cancellations, rejections or returns of orders do not materially reduce the
amount of sales realized from its backlog.
Employees
At June 30, 1996, the Company had approximately 1,077 full-time employees,
including approximately 626 employees at its factories in Guatemala and Israel.
The Company considers its relations with its employees to be satisfactory.
Properties
The Company currently conducts its operations from a number of facilities
in the U.S. and abroad. The Company's executive and general offices are located
at 1372 Broadway, New York, New York. The Company occupies approximately 125,000
square feet at such premises in New York pursuant to leases which expire in 2010
and its average annual rental expense (exclusive of escalation amounts) is
approximately $2.6 million. In connection with the Proposed Sale, it is
anticipated that Ann Taylor will sublease approximately 60,000 square feet of
this space. See "The Purchase Agreement--Acquired Assets and Assumed
Liabilities."
The Company also leases a trim consolidation center in Miami, Florida, two
offices in Hong Kong and an office and cutting facility and sewing facility in
Israel. The Company owns an office in Italy and a sewing facility in Guatemala.
In connection with the Proposed Sale, Ann Taylor will lease a portion of the
office in Italy. See "The Purchase Agreement--Transition Agreements." The
Company believes that its existing facilities are well maintained and in good
operating condition and are adequate for its present level of operations for the
foreseeable future.
Legal Proceedings
On December 11, 1995, a class action complaint was filed against the
Company, certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class of purchasers of the Company's stock during the period
September 28, 1993 through April 28, 1995. The complaint seeks unspecified money
damages and alleges that the Company and the other defendants violated federal
securities laws in connection with various public statements made by the Company
and certain of its officers and directors during the putative class period. On
April 9, 1996, all of the defendants filed motions to dismiss the complaint. The
plaintiffs have filed oppositions to the motions to dismiss and the defendants
have filed their reply memoranda and the motions are under consideration by the
court.
44
<PAGE>
The Company believes that all of the allegations contained in the complaint are
without merit and intends to continue to defend the action vigorously. An
adverse decision in this action could have a material adverse effect on the
Company's financial condition and results of operations.
The Company is involved in various other 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 and results of operations.
Selected Financial Information
The following tables summarize certain selected financial information which
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto of the Company included elsewhere herein. The
selected financial information as of and for the fiscal years ended January 30,
1993, January 29, 1994, January 28, 1995 and February 3, 1996 have been derived
from the consolidated financial statements of the Company, which have been
audited by Ernst & Young LLP, independent auditors. The selected financial
information as of and for the fiscal year ended February 1, 1992 has been
derived from the consolidated financial statements of the Company, which have
been audited by Mahoney Cohen Rashba & Pokart, P.C. (predecessor firm of Rashba
& Pokart P.C.), independent auditors. The selected financial information as of
May 4, 1996 and for the fiscal quarters ended April 29, 1995 and May 4, 1996,
which have been derived from unaudited financial statements, has been prepared
on the same basis as the audited financial statements included elsewhere herein
and, in the opinion of the Company, include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
and results of operations for these periods. The results of operations for the
fiscal quarter ended May 4, 1996 are not necessarily indicative of the results
to be expected for the full fiscal year.
45
<PAGE>
<TABLE>
<CAPTION>
Year (1) First Quarter (2)
----------------------------------------------------- -------------------
1991 1992 1993 (3) 1994 (4) 1995 1995 1996
------- -------- -------- -------- --------- -------- -------
(In thousands, except per share amounts)
Statement of Operations
Data (5)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... $70,423 $124,693 $220,201 $516,105 $ 540,063 $128,367 $83,756
Cost of goods sold ........... 58,471 102,718 181,326 433,700 510,761 117,239 73,044
------- -------- -------- -------- --------- -------- -------
Gross profit ................. 11,952 21,975 38,875 82,405 29,302 11,128 10,712
Selling, general and
administrative .............. 10,342 15,430 23,794 54,261 72,182 19,208 9,159
(Gain) on sale of subsidiary,
net ......................... -- -- -- -- (4,742) (4,742) --
Loss on sale of GJM
Business, net ............... -- -- -- -- 31,239 -- --
Write off of goodwill ........ -- -- -- -- 48,949 -- --
Amortization of goodwill ..... -- -- 137 2,505 3,425 956 91
------- -------- -------- -------- --------- -------- -------
Income (loss) from
operations .................. 1,610 6,545 14,944 25,639 (121,751) (4,294) 1,462
Other income (expense) ....... -- -- -- -- -- -- (388)
Interest expense ............. 1,525 2,585 4,272 7,620 8,813 2,111 935
------- -------- -------- -------- --------- -------- -------
Income (loss) before income
taxes and minority
interests ................... 85 3,960 10,672 18,019 (130,564) (6,405) 915
Provision (benefit) for
income taxes ................ -- 703 3,897 5,568 (6,216) (2,122) 436
------- -------- -------- -------- --------- -------- -------
Net income (loss) before
minority interests .......... 85 3,257 6,775 12,451 (124,348) (4,283) 479
Less minority interests ...... -- 124 631 1,642 1,710 397 448
------- -------- -------- -------- --------- -------- -------
Net income (loss) ............ $ 85 $ 3,133 $ 6,144 $ 10,809 $(126,058) $ (4,680) $ 31
======= ======== ======== ======== ========= ======== ========
Net income (loss) per share .. $ 0.02 $ 0.59 $ 0.92 $ 0.93 $ (10.04) $ (0.36) $ 0.00
======= ======== ======== ======== ========= ======== ========
Number of shares used in
computation of net income
per share (6) ............... 5,305 5,305 6,705 11,658 12,550 12,886 12,438
======= ======== ======== ======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year (1)
------------------------------------------------- First Quarter
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (as of end of period)
Cash and accounts receivable ............... $ 4,458 $20,966 $35,687 $ 79,123 $ 40,604 $48,984
Assets held for sale ....................... -- -- -- -- 15,200 --
Inventory .................................. 8,041 10,256 14,311 57,570 29,999 13,441
Goodwill, net .............................. -- -- 3,577 76,659 2,790 2,699
Total assets ............................... 13,622 33,807 66,973 253,528 117,145 94,534
Long-term debt (7) ......................... 4,531 4,596 1,273 1,460 1,562 1,409
Subordinated debt due to affiliates ........ 4,508 4,508 -- -- -- --
Series A Redeemable Preferred Stock ........ 1,250 1,250 -- -- -- --
Stockholders' (deficiency) equity .......... (2,259) 892 34,497 141,692 9,046 9,045
- ----------------------
</TABLE>
(1) The Company's fiscal year ends on the Saturday closest to January 31. The
fiscal year ended February 3, 1996 consisted of 53 weeks. All other years
presented consist of 52 weeks. 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. The Company has never declared or
paid cash dividends on its Common Stock.
46
<PAGE>
(2) References are to the fiscal quarter ended April 29, 1995 and May 4, 1996.
(3) The income statement and balance sheet data include the results of
operations and assets and liabilities, respectively, of CAT US and CAT Far
East, which began operations in June 1992, although these entities did not
become subsidiaries of the Company until April 30, 1993. See
"--Business--Company History" and "--Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(4) The income statement data include the results of operations of CAT US and
CAT Far East, which began operations in June 1992, and Cygne Knits Limited
and Cygne Far East Limited, which began operations in February 1993,
although these entities did not become subsidiaries of the Company until
April 30, 1993. See "--Business--Company History" and "--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) The income statement data includes the results of operations of FWM, which
was acquired on April 6, 1994 and includes the GJM Business from its
purchase in October 1994 to its sale in February 1996. See
"--Business--Company History" and "--Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(6) See Notes 1 and 2 of Notes to Consolidated Financial Statements of the
Company.
(7) Includes subordinated debt to affiliates.
47
<PAGE>
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. Except as otherwise noted, the following
discussion and analysis of financial condition and results of operations gives
effect to (a) the FWM Acquisition, which was consummated on April 6, 1994, and
(b) the GJM Acquisition, which was consummated on October 7, 1994.
On April 7, 1995, Cygne sold the United Kingdom subsidiary of FWM and
certain brand name rights which were acquired in the FWM Acquisition (the "FWM
UK Disposition"). On February 9, 1996, the Company sold substantially all of the
assets relating to its GJM intimate apparel and sleepwear operations (the "GJM
Disposition"). In June 1996 the Company signed a definitive agreement with
respect to the Proposed Sale. See "Pro Forma Financial Information" and
"--Business--Company History."
Upon consummation of the Proposed Sale, the Company will continue in three
principal segments of the women's apparel market: career sportswear, casual
sportswear and dresses. In addition, upon the consummation of the Proposed Sale,
the Company anticipates that it will no longer have sales to Ann Taylor. The
Company has been dependent on its key customers (The Limited, Inc. and Ann
Taylor) and, with the loss of Ann Taylor as a customer, its business is
dependent upon maintaining its relationship with The Limited, Inc. and its
ability to attract new customers. However, there can be no assurance that the
Company will be able to do so. This Proxy Statement contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in this Proxy Statement.
General
The Company was acquired from a wholly owned subsidiary of The Limited,
Inc. by its current management and others in March 1988. See
"--Business--Company History." In 1988 and 1989, the Company suffered severe
liquidity problems which arose primarily from its inability to obtain timely
delivery of products of acceptable quality and which resulted, in many cases, in
rejections and chargebacks. In December 1989, the Company's capital was
restructured, new management joined the Company and a new manufacturing strategy
was formulated.
The Company gradually implemented this manufacturing strategy, first by
developing relationships with reliable manufacturers during 1990 and then,
during 1991, by increasing significantly its own manufacturing and quality
assurance staff. This investment in additional personnel was made in
anticipation of increased sales, which began to materialize in the second half
of 1991 as a result of the Company's improved manufacturing performance. With
its manufacturing strategy implemented, the Company began to extend its existing
product line in 1992 to include shirts, blouses, denim and knits, and in 1993 to
include sweaters and shoes. In 1994 the Company expanded its product line to
include soft dressing, dresses, intimate apparel and sleepwear. Certain of these
new products, including knits, intimate apparel, sleepwear and products produced
by CAT, inherently carry lower gross margins than woven products but also
require less selling, general and administrative expenses. As a result, the
Company's gross profit, income from operations and net income has varied as a
percentage of net sales from quarter to quarter based upon the woven, knits,
intimate apparel and sleepwear and CAT product mix.
In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with Ann Taylor to source products exclusively for Ann
Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20%
interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT increased
to 40%. As a result of such change in ownership, Ann Taylor has a 40% interest
in the net income of CAT, which interest is reflected in Cygne's consolidated
statements of income as "income attributable to minority interests." This
decrease in Cygne's ownership decreased Cygne's share of CAT's net income
commencing with the second quarter of 1993. Had Ann Taylor acquired a 40%
interest in CAT at the date CAT commenced operations, the Company's net income
for 1993 and 1992 would have been $6.0 million and $3.0 million, respectively,
and net income per share would have been $0.90 and $0.57, respectively. See
"--Business--Company History" and "--Joint Venture Arrangements."
Effective April 30, 1993, the Company acquired Cygne Knits Limited and
Cygne Far East Limited (collectively, "Knits") companies organized to provide
cut-and-sewn knitwear and sweaters to Cygne's customers other than Ann Taylor,
from Messrs. Benson and Manuel. The acquisition of Knits represents the
reorganization of entities under common control, and has been accounted for
similar to a pooling of interests. See "--Business--Company History."
48
<PAGE>
In August 1993, the Company completed an initial public offering of an
aggregate of 2,760,000 shares of Cygne Common Stock at a purchase price of
$10.00 per share in an underwritten public offering. The net proceeds of the
offering were used to retire certain indebtedness and for general corporate
purposes, including working capital. In June 1994, the Company sold 2,300,000
shares of Cygne Common Stock at a purchase price of $18.25 per share in an
underwritten public offering. In addition, certain stockholders of the Company,
including Mr. Benson, FWM N.V. and the Limited Partnership, sold an aggregate of
1,725,000 shares of Cygne Common Stock in such offering. See "--Beneficial
Ownership of Cygne Common Stock." The net proceeds to the Company of the
offering were used to retire certain indebtedness and for general corporate
purposes, including working capital and fixed asset purchases.
In 1993, in two transactions, the Company acquired T.Wear Company S.r.l.
and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for an
aggregate of $500,000 and 150,000 shares of Cygne Common Stock. These acquired
companies, along with Knits, represent the Company's T-Wear Group, which is
responsible for the design, merchandising and manufacturing of the Company's
knit apparel, with the exception of sweaters.
On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of Cygne Common Stock and $10,000 in
cash. Additional costs related to this acquisition approximated $1.4 million.
The excess of the purchase price over the fair value of the net assets acquired
of $47.8 million was recorded as goodwill and was being amortized over a
twenty-five year period. In April 1995, the Company sold FWM's United Kingdom
subsidiary to FWM N.V. for 600,000 shares of Cygne Common Stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. In connection with the elimination of
the FWM operations, the Company wrote-off the remaining $44.5 million of
goodwill in fiscal 1995. See Note 2 of Notes to Consolidated Financial
Statements of the Company.
On October 7, 1994, Cygne acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of Cygne Common Stock,
$10,000 in cash and the assumption of approximately $1.9 million of debt owed by
GJM International to The Limited, Inc., as well as non-compete payments
aggregating $3.2 million. Additional costs related to this acquisition
approximated $1.7 million. The excess of the purchase price over the fair value
of the net assets acquired of approximately $27.7 million was recorded as
goodwill and was being amortized over a twenty-five year period. See Note 2 of
Notes to Consolidated Financial Statements of the Company.
In February 1996, the Company sold the GJM Business to Warnaco. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. The Company is obligated to indemnify Warnaco
for any claims for taxes arising out of the operation of the GJM Business prior
to the sale of the GJM Business to Warnaco. The Company used all the proceeds of
the sale to repay outstanding senior bank indebtedness. See "--Liquidity and
Capital Resources."
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of Cygne Common Stock and $3.1 million in cash.
Additional costs related to this acquisition approximated $730,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $4.5 million was recorded as goodwill and was being amortized over
a twenty-five year period. Cygne also issued options to purchase an aggregate of
55,000 shares of Cygne Common Stock to the two former shareholders of TSA in
connection with their entering into consulting agreements with TSA. In January
1996, the Company determined to close TSA and the Company anticipates that
operations would terminate by the end of the third quarter of 1996. As a result,
the Company incurred a loss of approximately $6.4 million in fiscal 1995,
primarily resulting from the write-off of goodwill associated with the
acquisition.
In June 1996, the Company entered into the Purchase Agreement pursuant to
which Ann Taylor will, subject to, among other things, approval by the
stockholders of the Company at the Annual Meeting, acquire Cygne's 60% interest
in CAT and the assets of the Division that are used in sourcing merchandise for
Ann Taylor. The purchase price to be paid by Ann Taylor to Cygne in the
transaction consists of unregistered shares of Ann Taylor Common Stock having a
market value of $36 million (based on the average high and low sale price of the
Ann Taylor Common Stock in the ten trading days prior to closing), but in no
event is ASTC obligated to issue more than 2.5 million shares (subject to
increase to up to 3 million shares if 2.5 million shares has a value of less
than $32.5 million), and a cash payment in an amount equal to the tangible net
book value of the inventory and fixed assets of Cygne's Ann Taylor Woven
Division, less certain assumed liabilities of the Division. In order to
facilitate the integration of CAT and the
49
<PAGE>
Division into Ann Taylor's operations, Cygne has agreed to make available up to
30% of Messrs. Benson's and Manuel's time and will receive an aggregate fee of
$450,000 per year. ASTC has agreed to register the shares issued to Cygne for
resale, although Cygne will be subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time. See "The
Proposed Sale" and "The Purchase Agreement."
During 1993, 1994, 1995 and the first half of 1996, Ann Taylor accounted
for 55.3%, 37.5%, 42.9% and 73.3% of Cygne's net sales, respectively, and The
Limited, Inc. (consisting primarily of The Limited Stores, Lerner and, in 1993,
Express) accounted for 38.6%, 36.8% and 34.1% and 17.9% of Cygne's net sales,
respectively (38.6%, 36.0% and 26.2% during 1993, 1994 and 1995 excluding sales
made by the GJM Business). Net sales in 1995 include sales to The Limited, Inc.
by the Company's FWM division, which operations were discontinued in 1995, and
by the GJM Business, which was sold in February 1996. The Limited, Inc.
beneficially owns, through an affiliated partnership, 6.9% of the outstanding
Cygne Common Stock. In addition, the Company is currently overdue on payment of
an approximately $1,258,000 unsecured note payable to The Limited, Inc. See Note
8 of Notes to Consolidated Financial Statements of the Company.
Although Cygne has long-established relationships with its key customers,
Cygne does not have long-term contracts with any of its customers, including The
Limited, Inc. See "--Business--Company History" and "--Joint Venture
Arrangements." Upon the consummation of the Proposed Sale, the Company
anticipates that it will no longer have sales to Ann Taylor. The Company has
been dependent on its key customers and, with the loss of Ann Taylor as a
customer, its future success will be dependent upon its ability to attract new
customers. There can be no assurance that The Limited, Inc. will continue to
purchase merchandise from the Company at the same rate in the future, or that
the Company will be able to attract new customers. In addition, as a result of
the Company's dependence on The Limited, Inc., particularly after the Proposed
Sale, The Limited, Inc. has the ability to exert significant control over the
Company's business decisions, including prices. Furthermore, The Limited, Inc.
procures directly a substantial portion, but not a majority, of its product
requirements through its sourcing subsidiary, and such subsidiary will continue
to be a major competitor of the Company with respect to the Company's business
with The Limited, Inc. In addition, The Limited Stores, which is the Company's
largest customer among the divisions of The Limited, Inc., has formed an
internal design and product development group as well as added a direct sourcing
department. During 1995, sales to certain division of The Limited, Inc.
decreased significantly and the Company anticipates that sales to The Limited,
Inc. will continue to decrease in 1996.
The apparel industry 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. The Company believes that the weakness
of retail sales of women's apparel in 1994 and 1995 adversely affected its
operating results, and believes that its operating results will continue to be
adversely affected as long as this weakness continues. In addition, various
retailers, including some of Cygne's customers, have experienced financial
difficulties during recent years which have increased the risk of extending
credit to such retailers.
Results of Operations
The following table is derived from the Company's consolidated statements
of operations and expresses for the periods indicated certain income statement
data as a percentage of net sales:
<TABLE>
<CAPTION>
Percentage of Net Sales
----------------------------------------------------
Year First Quarter
----------------------------- ------------------
1995 1994 1993 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................................. 94.6 84.0 82.3 87.2 91.3
Gross profit ........................................ 5.4 16.0 17.7 12.8 8.7
Selling, general and administrative ................. 13.4 10.5 10.8 10.9 14.2
Amortization of intangibles ......................... 0.6 0.5 0.1 0.1 0.7
(Loss) income from operations ....................... (22.5) 5.0 6.8 1.8 (3.3)
Net (loss) income ................................... (23.3) 2.1 2.8 0.0 (3.6)
- ------------------
</TABLE>
(1) Each of the years indicated includes 52 weeks except for 1995 which
includes 53 weeks.
50
<PAGE>
First Quarter 1996 Compared to First Quarter 1995
Net Sales
Net sales for the first quarter of 1996 decreased 34.8% to $83.8 million
from $128.4 million for the comparable period in 1995. The $44.6 million
decrease in net sales for the first quarter of 1996 was primarily attributable
to the sale of the GJM Business on February 9, 1996 ($15.4 million) and to
discontinued customers and product lines ($38.0 million), partially offset by an
increase in sales to Ann Taylor.
Net sales to Ann Taylor for the quarter ended May 4, 1996 amounted to $60.5
million, or 72% of the Company's net sales. Upon consummation of the Proposed
Sale, the Company anticipates that it will no longer have sales to Ann Taylor.
Gross Profit
Gross profit for the first quarter of 1996 was $10.7 million, a decrease of
$400,000 or 3.7% from the comparable period in 1995. However, gross margin
(gross profit as a percentage of net sales) increased to 12.8% in the first
quarter of 1996 from 8.7% in the first quarter of 1995. Gross margin in the
first quarter of 1995 was adversely affected by low margins on sales to
discontinued customers. Certain of the Company's products inherently carry lower
gross margins than the woven products. The Company expects that gross profit as
a percentage of net sales will vary from quarter to quarter depending on the mix
of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 1996
were $9.2 million, representing a decrease of $9.0 million or 49.6% over the
first quarter of 1995. As a percentage of net sales, selling, general and
administrative expenses were 10.9% in the first quarter of 1996, compared to
14.2% in the comparable prior year period. The decrease in these expenses and as
a percentage of net sales were primarily attributable to reductions in the
Company's overhead as well as the disposition of the GJM Business.
Bad Debt Expense
Bad debt expense of $1.1 million in the first quarter of 1995 resulted from
the bankruptcy filing of a customer.
Amortization of Intangibles
The amortization of intangibles for the first quarter of 1996 was $91,000,
a decrease of $856,000 over the first quarter of 1995. The decrease was
primarily attributable to the write-offs subsequent to the first quarter of 1995
of intangibles recorded in connection with the FWM Acquisition and the sale of
the GJM Business.
Interest Expense
Interest expense for the first quarter of 1996 was $935,000, a decrease of
$1.2 million or 55.7% over the comparable prior year period. The decrease in the
interest expense is primarily attributable to the reduction in anticipation
taken by customers and the sale of the GJM Business.
Provision for Income Taxes
The provision for income taxes in the first quarter of 1996 primarily
represents tax on CAT's income. At February 3, 1996, the Company had net
operating loss carryforwards of approximately $84 million, which can be used to
offset future taxable income.
1995 Compared to 1994
Net Sales
Net sales were $540.1 million in 1995, an increase of $24.0 million or 4.6%
from 1994. Net sales for 1995 decreased by $52.6 million or 8.9% compared to
historical pro forma combined net sales of $592.7 million for 1994. If the sale
of the GJM Business and the Proposed Sale had occurred on January 29, 1995, the
Company's net sales for
51
<PAGE>
1995 would have been approximately $203.6 million, which includes sales by FWM
and sales to certain discontinued customers. If the Proposed Sale is
consummated, the Company anticipates that its primary customer will be The
Limited, Inc. During 1995, excluding sales of the GJM Business, but including
sales of FWM, the Company had net sales to The Limited, Inc. of approximately
$113.9 million. During 1995 sales to Ann Taylor increased significantly,
including sales through CAT, the Company's joint venture arrangement with Ann
Taylor, and sales to certain divisions of The Limited, Inc. decreased
significantly and the Company anticipates that sales to The Limited, Inc. will
continue to decrease in 1996.
Gross Profit
Gross profit for 1995 was $29.3 million, a decrease of $53.1 million or
64.4% from 1994 and a decrease of $62.6 million or 68.1% from the historical
pro forma combined gross profit of $91.9 million for 1994. Gross margin, which
is gross profit as a percentage of net sales, decreased to 5.4% for 1995 from
16.0% in 1994 and from 15.5% on a pro forma combined basis for 1994. The
decreases in gross profit and in gross margin for 1995 resulted primarily from
costs relating to chargebacks from customers, the reorganization of certain
production operations, settlements with vendors, underutilization of Company
owned manufacturing facilities, and changes in the mix of products sold. The
Company's knit, intimate apparel, sleepwear and CAT products inherently carry
lower gross margins than woven products. The Company expects that gross profit
as a percentage of net sales will vary from quarter to quarter depending on
the mix of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1995 were $72.2 million,
representing an increase of 33.0% over 1994 and an increase of 13.9% over 1994
on a historical pro forma combined basis. As a percentage of net sales, selling,
general and administrative expenses were 13.4% for 1995, compared to 10.5% in
the prior year and to 10.7% on a historical pro forma combined basis for the
prior year. The increase in these expenses as a percentage of net sales was
primarily attributable to an increase in the number of employees and other
expenses to support an anticipated growth in sales; however, the growth in sales
was lower than expected. In light of the lower than expected sales growth and in
connection with the Company's restructuring, the Company reduced personnel and
other selling, general and administrative expenses.
Amortization of Intangibles
The amortization of intangibles for 1995 was $3.4 million, a decrease of
$0.1 million from 1994 on a historical pro forma basis. After the write-offs of
goodwill in 1995 and the sale of the GJM Business the Company has $2.8 million
of goodwill as of February 3, 1996 which will be amortized on a straight line
basis over the next 7.5 years.
Interest Expense
Interest expense for 1995 was $8.8 million, an increase of $1.2 million or
15.7% over the prior year. For 1995, interest expense decreased by $0.3 million
or 0.3% over 1994 on a historical pro forma combined basis. The increase in 1995
over 1994 was primarily attributable to significant additional borrowings under
the Company's credit facilities needed to fund the Company's increased working
capital requirements as well as an increase in the average interest rate paid.
Provision (Benefit) for Income Taxes
The Company's effective federal, state and foreign income tax rate
(benefit) provision was (4.8%) in 1995, and 30.9% in 1994, and 33.1% in 1994 on
a pro forma basis. The Company's income tax benefit for 1995 of $6.2 million is
attributable to the Company's net loss offset by valuation allowances
established.
1994 Compared to 1993
Net Sales
Net sales were $516.1 million in 1994, an increase of $295.9 million or
134% over 1993. Net sales for 1994 include $119.5 million generated by FWM
subsequent to its acquisition on April 6, 1994 and $42.4 million generated by
GJM subsequent to its acquisition on October 7, 1994. The balance of the
increase in sales of $134 million represents an increase of 61% over 1993.
Approximately $70 million of this increase was generated by CAT, a 104%
52
<PAGE>
increase over 1993, approximately $45 million of the increase was the result of
the addition of new customers, with the balance of the increase resulting from
an increase in the number of programs and the size of such programs that the
Company designed for its existing customers. The Company considers a program to
be multiple styles from one fabric for one customer or a group of fabrics that
present one look for a customer.
Gross Profit
Gross profit for 1994 was $82.4 million, an increase of $43.5 million or
112% over 1993. Gross profit as a percentage of net sales decreased to 16.0% for
1994 from 17.7% for 1993. The change in gross profit as a percentage of net
sales resulted from changes in the mix of products sold and from losses
associated with higher than normal returns of knitwear product.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1994 were $54.3 million,
an increase of $30.5 million or 128% over 1993. As a percentage of net sales,
selling, general and administrative expenses were 10.5% for 1994, compared to
10.8% for 1993. The increase in expense in 1994 was primarily attributable to
the increased number of employees and other expenses required to service the
larger sales volume resulting in part from the FWM Acquisition and the GJM
Acquisition.
Amortization of Intangibles
The amortization of intangibles for 1994 was $2.5 million, an increase of
$2.4 million over 1993. The increase was primarily attributable to the
amortization of intangibles in connection with the FWM Acquisition and the GJM
Acquisition.
Interest Expense
Interest expense for 1994 was $7.6 million, an increase of approximately
$3.3 million or 78% over 1993. The increase was primarily attributable to
additional borrowings under the Company's credit facilities and an increase in
customer discounts for early payments needed to fund the Company's increased
working capital requirements resulting from its growth, as well as increases in
interest rates. These increases in interest expense were offset somewhat by the
elimination of interest paid in 1993 on debt which was repaid in August 1993
with proceeds of the Company's initial public offering.
Provision for Income Taxes
The Company's effective federal, state and foreign income tax rate was
30.9% for 1994 as compared to 36.5% in 1993. The decrease in the effective
income tax rate in 1994 was primarily attributable to lower tax rates in foreign
jurisdictions offset somewhat by the amortization of intangibles which is not
deductible for tax purposes.
Preliminary Second Quarter and First Half Results
Net sales for the second quarter ended August 3, 1996 were $75.9 million, a
decrease of $56.2 million or 42.5% from the comparable prior period. Net sales
for the six months ended August 3, 1996 were $159.6 million, a decrease of
$100.8 million or 38.7% from the comparable prior period.
The decreases in net sales for the second quarter and six months of $56.2
million and $100.8 million, respectively, were primarily attributable to the
sale of the GJM Business on February 9, 1996, which generated sales of $20.6
million and $36.0 million, respectively, in the comparable 1995 periods,
discontinued customers and product lines, which generated sales of $28.5 million
and $66.5 million, respectively, in the comparable 1995 periods and decreases in
sales to The Limited, Inc. of $10.5 million and $4.8 million, respectively.
These decreases were partially offset by increases in sales to customers other
than The Limited, Inc. and Ann Taylor of $4.0 million and $1.5 million,
respectively, and, for the first six months of 1996, an increase in sales to Ann
Taylor of $5.0 million.
Gross profit for the second quarter of 1996 was $9.7 million, a decrease of
$3.0 million or 23.7% from the comparable prior period. Gross profit for the
first six months of 1996 was $20.4 million, a decrease of $3.4 million or 14.4%
from the comparable prior period. Income from operations for the second quarter
of 1996 was $1.4 million
53
<PAGE>
compared to a loss from operations of $4.4 million in the comparable prior
period. Income from operations for the first six months of 1996 was $2.9 million
compared to a loss from operations of $8.7 million in the comparable prior
period. Net loss for the second quarter of 1996 was $88,000, or $0.01 on a per
share basis, compared to a net loss of $5.1 million, or $0.41 on a per share
basis, in the comparable prior period. Net loss for the first six months of 1996
was $57,000, or breakeven on a per share basis, compared to a net loss of $9.8
million, or $0.77 on a per share basis, in the comparable prior period.
For the second quarter and first six months of 1996 CAT and the Division
had combined net sales to Ann Taylor of $56.6 million and $117.1 million, or
74.5% and 73.3% of the Company's net sales, respectively, and combined net
income of $1.5 million and $3.2 million, respectively. Upon consummation of the
Proposed Sale, the Company anticipates that it will no longer have sales to Ann
Taylor.
If the Proposed Sale had been consummated on February 4, 1996 and after
giving effect to the GJM Disposition, the Company would have had pro forma net
sales of $19.3 million and $42.6 million for the second quarter and first six
months of 1996, respectively. Pro forma gross profit for the second quarter and
first six months of 1996 would have been $2.0 million and $4.7 million,
respectively. Pro forma loss from operations for the second quarter and first
six months of 1996 would have been $1.7 million and $3.9 million, respectively.
Pro forma net loss for the second quarter and first six months of 1996 would
have been $1.8 million and $3.7 million, respectively. The pro forma net loss
per share for the second quarter and first six months would have been $0.15 and
$0.29, respectively.
Liquidity and Capital Resources
The Company finances its operations primarily through financing from
lending institutions, financing from customers and third party trade credit
facilities, cash from operations and the issuance of debt and equity securities.
During the quarter ended October 28, 1995, Cygne and CAT each entered into
a Credit Agreement with the HS Bank, which modified and, in the case of Cygne,
FWM and GJM, consolidated the previous credit arrangement with the HS Bank. The
modifications included (i) the consolidation of the Cygne, FWM and GJM
facilities, previously aggregating up to $76,400,000, into one facility of up to
$70,000,000 (ii) an increase in the CAT facility from up to $28,000,000 to up to
$40,000,000, (iii) a requirement under each agreement to comply with certain
financial covenants as well as various other restrictions, (iv) an increase in
the Cygne facility interest rate and (v) the elimination of the requirement to
maintain a certain certificate of deposit as additional security for the prior
separate GJM credit facility. Borrowings under these facilities, which may be
terminated by the HS Bank or the Company at any time as to future borrowings
upon proper notice, are subject to certain borrowing base limitations and the HS
Bank's agreement as to amount, purpose, interest rate, maturity and collateral.
Borrowings under these facilities are due on the earlier of demand or the
maturity date specified by the HS Bank for each borrowing. Amounts outstanding
under the Cygne agreement bear interest at 1.25% above the prime rate through
January 31, 1996 and between 1% and 1.75% above the prime rate thereafter
depending upon the working capital, as defined, of the Company, exclusive of
CAT. Amounts outstanding under the CAT agreement bear interest at 0.5% above the
prime rate. Each agreement provides for additional interest at 2% per annum on
amounts not paid when due. The HS Bank facilities are cross guaranteed by Cygne
and certain of its subsidiaries and are secured by a first lien on substantially
all the assets of the Company including a pledge of 65% of the capital stock of
certain of Cygne's foreign subsidiaries, except for CAT Far East as to which 60%
of the capital stock is pledged.
On May 15, 1996, the Company received a commitment letter from HS Bank
providing the Company with a new credit facility to replace the prior facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the Proposed Sale; thereafter
the facility reduces to $22.5 million and further reduces to $15 million at
October 31, 1996; $10 million at November 30, 1996; $5 million at December 31,
1996 and matures on January 31, 1997. Borrowings under this facility are subject
to borrowing base limitations. The Company pledged substantially all of its
assets, including the AT Shares to be received at the closing of the Proposed
Sale, as security for its obligations under the credit facility. The Company
intends to use a portion of the purchase price to be received in the Proposed
Sale, including proceeds from the disposition of the AT Shares, to repay amounts
outstanding under thisfacility. The Company has requested the HS Bank to
postpone the August 31, 1996 initial reduction date to September 30, 1996. There
can be no assurance the HS Bank will agree to the Company's request. If the HS
Bank does not postpone the August 31, 1996 date and requires repayment of
amounts outstanding under the facility in excess of $22.5 million, the Company
may have difficulty in making, and may be unable to make, such payment, in which
event the HS Bank may declare all amounts outstanding under the facility to be
immediately due and payable. In addition, the reduction in the amount available
for borrowing under the facility prior to consummation of the Proposed Sale
could have a material adverse effect on the Company's ability to conduct its
business.
54
<PAGE>
The following table sets forth information with respect to the HS Bank
facilities:
August 3, 1996
-------------------------
Direct Open Direct
Total Borrowing Letters of Borrowings
Facility (1) Limit (2) Credit Outstanding
------------ --------- --------- -----------
(In thousands)
Cygne ........... $30,000 $30,000 $ 3,861 $15,975
CAT (3) ........ 40,000 8,000 38,630 356
------- ------- ------- -------
Total ......... $70,000 $38,000 $42,491 $16,331
======= ======= ======= =======
- --------------------
(1) The total facility, less any direct borrowings outstanding, is available
for letters of credit.
(2) Consists principally of revolving loans and borrowings against
imports/exports.
(3) Cygne has guaranteed 60% of the indebtedness outstanding under this
facility and Ann Taylor, which owns 40% of CAT, has provided the HS Bank
with a $4,000,000 standby letter of credit.
Certain foreign subsidiaries have credit facilities which had an aggregate
of approximately $1.6 million outstanding at February 3, 1993. Borrowings under
these facilities, which are payable on demand, are secured by a lien on certain
assets of these subsidiaries.
Cygne has agreements with two third parties not affiliated with the
Company, but affiliated with each other, whereby these parties made available to
the Company a trade credit facility. The trade credit facility has been
suspended. At May 4, 1996, $9.1 million of this facility was outstanding. The
Company has reached an agreement in principle to restructure the amounts
outstanding under this trade credit facility.
In addition, from time to time customers finance the purchase of raw
materials on behalf of the Company, and the Company anticipates that they will
continue to do so, although there can be no assurance of this.
Net cash used in operating activities in 1995 and for the first quarter of
1996 was $1.1 million and $1.0 million, respectively. The net use of cash in
1995 resulted primarily from the net loss adjusted for net noncash expenses. The
cash used in the first quarter of 1996 resulted primarily from decreases in
accounts payable and an increase in accounts receivable substantially offset by
decreases in inventory.
Net additions to fixed assets aggregated approximately $7.9 million for the
year. These expenditures primarily consisted of construction at and the purchase
of equipment for the Company's manufacturing facilities and improvements to the
Company's design, office and showroom facilities. Net additions to fixed assets
aggregated approximately $161,000 for the first quarter of 1996.
As discussed above, the financing of the Company's operations currently
depends primarily upon financing provided by the HS Bank and, to a lesser
extent, third party vendors. As a result of the Company not being in compliance
with the financial covenants in its HS Bank credit facility and the liquidity
pressures faced by the Company, third party vendors have been less willing to
extend credit to the Company than in prior years. Although the HS Bank has
waived the defaults, there can be no assurance that such third party vendors
will continue to extend credit to the Company.
During 1995 and the first half of 1996, the Company experienced liquidity
pressures primarily as a result of the negative cash flow caused by the
Company's operating losses. The Company believes that its current financing
arrangement with the HS Bank and the proceeds from the Proposed Sale will
alleviate the liquidity pressures faced by the Company during 1995 and the first
half of 1996. However, there can be no assurance that the Proposed Sale will
occur. If the Proposed Sale is not approved by the stockholders or otherwise
does not occur or if the Company's current financing arrangement with the HS
Bank is terminated, the Company will face the liquidity pressures previously
experienced which would adversely affect the Company's financial condition and
results of operations.
Tax Audits
The Company is subject to ongoing tax audits in several jurisdictions.
Although there can be no assurances, the Company believes any adjustments that
may arise as a result of these audits will not have a material adverse effect on
the Company's financial position.
55
<PAGE>
Inflation
The Company does not believe that the relatively moderate rates of
inflation which have been experienced in the U.S., where it competes, have had a
significant effect on its net sales or profitability.
Foreign Currency Exchange
The Company negotiates substantially all its purchase orders with its
foreign manufacturers in U.S. dollars. Thus, notwithstanding any fluctuation in
foreign currencies, the Company's cost for any purchase order is not subject to
change after the time the order is placed. However, the weakening of the U.S.
dollar against local currencies could lead certain manufacturers to increase
their U.S. dollar prices for products. The Company believes it would be able to
compensate for any such price increase.
Fluctuations in Quarterly Operating Results
Historically, the Company achieved its highest sales in the third and
fourth quarters. The acquisitions of FWM and GJM increased the percentage of the
Company's sales recorded in the third and fourth quarters. This pattern resulted
primarily from the timing of shipments of each season. Merchandise for the fall,
the Company's largest season, is shipped principally in the third quarter.
Merchandise for the spring, the next largest season, is shipped principally in
the fourth quarter. In addition, due to the nature of GJM's business, GJM
typically incurred a net loss in the first half of each year. In addition to
these seasonal fluctuations, a large portion of the Company's sales volume is
usually scheduled for the last few business days of that quarter or the first
few business days of the following quarter. Therefore, small schedule changes,
which may be made at the request of the Company's customers, can have a
substantial effect on the sales volume and operating results of any given
quarter. The Company anticipates that as a result of the GJM Disposition and the
discontinuation of the FWM operations, the percentage of the Company's sales in
the third and fourth quarters may decrease.
The following table sets forth selected unaudited quarterly financial data
for the most recent nine quarters. The quarterly financial data reflects, in the
opinion of the Company, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such periods. Results of any one or more quarters are not necessarily indicative
of annual results or continuing trends.
<TABLE>
<CAPTION>
1994 1995 (1) 1996
------------------------------------ --------------------------------------- ------
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. 1 Qtr. 2 Qtr.3 (2) Qtr. 4 (3) Qtr. 1
------ ------ ------ ------ ------ ------ --------- ---------- ------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............ $79,171 $119,640 $159,878 $157,416 $128,367 $132,067 $160,080 $119,549 $83,756
Gross profit ......... 13,562 19,284 222,202 27,537 11,128 12,676 10,934 (5,436) 10,712
Operating income
(loss) .............. 4,490 5,118 6,306 9,725 (4,294) (4,444) (43,416) (69,595) 1,462
Net income (loss) .... 1,662 1,958 2,573 4,616 (4,680) (5,055) (43,266) (73,057) 31
Net income (loss)
per share ........... $0.19 $0.17 $0.20 $0.35 $(0.36) $(0.41) $(3.48) $(5.87) $0.00
Number of shares used
in computation of
net income (loss)
per share (4) ....... 8,847 11,707 12,867 13,210 12,886 12,438 12,438 12,438 12,438
</TABLE>
- ---------------------
(1) The fourth quarter of 1995 includes 14 weeks; all other quarters include 13
weeks.
(2) Includes a $39 million write-off of goodwill.
(3) Includes loss on sale of the GJM Business of $31 million plus the write-off
of goodwill of $12 million.
(4) See Notes 1 and 2 of Notes to Consolidated Financial Statements of the
Company.
56
<PAGE>
Executive Officers
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Bernard M. Manuel ................. 49 Director, Chairman of the Board and Chief Executive Officer
Irving Benson ..................... 57 Director, Vice Chairman and President
Trevor J. Wright .................. 51 Director, Executive Vice President-Design
Roy E. Green ...................... 63 Senior Vice President-Chief Financial Officer and Treasurer
Gary C. Smith ..................... 46 Senior Vice President-Manufacturing
Paul D. Baiocchi .................. 49 Vice President, General Counsel and Secretary
</TABLE>
Bernard M. Manuel has served as Chief Executive Officer and a director of
the Company, as well as in several additional executive positions, since he
joined the Company in October 1988. He currently serves as the Chairman of the
Board, Chief Executive Officer and a director. Mr. Manuel has been a director of
Designs, Inc., a retailer selling exclusively apparel and accessories
manufactured or licensed by Levi Strauss & Co., Inc., since 1990 and is a
director of several private companies in the U.S. and Europe. From 1983 until he
joined the Company, Mr. Manuel was involved, through Amvent, a company he
founded, in the transfer of technology between Europe and the U.S. and related
venture capital and merger and acquisition activities, as well as in the apparel
industry. Mr. Manuel earned a Bachelor's of Science in Mathematics and several
graduate degrees in Mathematics and in Economics from the University of Paris,
an M.S. in Political Science from the "Institut d'Etudes Politiques" in Paris
and an M.B.A. with high honors (Baker Scholar) from the Harvard Business School,
where he was awarded both the Loeb Rhodes Fellowship for excellence in finance
and the Melvin T. Copeland prize for top performance in marketing.
Irving Benson has served as President and a director of the Company, as
well as in various additional executive positions, since the Company was
incorporated in October 1984. Mr. Benson oversees all aspects of design and
merchandising for the Company. Mr. Benson currently serves as Vice Chairman,
President and a director. Mr. Benson founded the Company's predecessor, CDL, in
1975 and has been with such predecessor and the Company ever since. Mr. Benson
has spent over thirty years in the apparel industry. Mr. Benson attended New
York University where he studied International Marketing.
Trevor J. Wright has served as Executive Vice President-Design of the
Company since June 1995, a director of the Company since April 1995 and Group
Executive Design Director of the Company from April 1995 through June 1995. From
1973 until April 1995 Mr. Wright served as Design Director of FWM, which was
acquired by the Company in April 1994. Mr. Wright received a B.Econ Honors
degree in Economics from the University of Birmingham.
Roy E. Green has served as Chief Financial Officer of the Company, as well
as in various additional executive capacities, since October 1987. He currently
serves as Senior Vice President-Chief Financial Officer and Treasurer of the
Company. From 1974 until he joined the Company, Mr. Green was employed by Cluett
Peabody & Co., first as the Chief Financial Officer of its Arrow Co. division
until 1979, then as Vice President and Controller until 1985, and finally as
Chief Financial Officer. He has also worked as a certified public accountant for
J. K. Lasser & Co. and Hurdman & Cranstown. Mr. Green received a Bachelor's
degree in Business Administration from Rutgers University. Mr. Green is a
certified public accountant.
Gary C. Smith served as Vice President-Manufacturing of the Company from
July 1991 until April 1993 when he was elected Senior Vice
President-Manufacturing. Mr. Smith is responsible for all phases of
manufacturing, shipment and quality control. From September 1990 until he joined
Cygne in July 1991, Mr. Smith worked for Ellen Tracy, responsible for production
and manufacturing. From September 1989 until August 1990 he was Vice President
of Production of Bonjour International. From 1986 until 1989, he was Vice
President-Manufacturing for Bernard Chaus. Mr. Smith received a Bachelor's
degree in Engineering from the Georgia Institute of Technology.
Paul D. Baiocchi has served as Vice President, General Counsel and
Secretary of the Company since March 1994. Prior to joining the Company, Mr.
Baiocchi was a partner of Fulbright & Jaworski L.L.P., counsel to the Company,
from January 1989 to November 1993 and of counsel to that firm from November
1993 to March 1994. From January 1982 to January 1989, he was a partner of
Reavis & McGrath, which merged with Fulbright & Jaworski effective January 1,
1989. Mr. Baiocchi received a Bachelor's degree from Dartmouth College and a
J.D. from Harvard Law School.
57
<PAGE>
The Company is dependent to a significant degree on the efforts of Bernard
M. Manuel, Chairman of the Board and Chief Executive Officer, and Irving Benson,
Vice Chairman and President. Manuel and Benson each have an employment agreement
with the Company which includes restrictions on competition by them in certain
circumstances after termination of employment, subject to certain conditions.
See "--Executive Compensation--Employment Agreements." The loss of the services
of any of Messrs. Manuel and Benson could have an adverse effect on the
Company's business. In connection with the Proposed Sale, Cygne has agreed to
make available for a three-year period the services of Messrs. Manuel and
Benson. The Company will make available up to 30% of Messrs. Benson's and
Manuel's time. The Company's business is dependent upon its ability to attract
and retain qualified employees. See "The Purchase Agreement--Consulting
Agreements."
Executive Compensation
The following table shows all the cash compensation paid or to be paid by
the Company or its subsidiaries as well as certain other compensation paid or
accrued during the fiscal years indicated to the Chief Executive Officer of the
Company and each of the four other most highly compensated executive officers of
the Company for such period in all capacities in which they served.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Securities
Other Annual Underlying All Other
Year Salary Compensation Options/SARs Compensation (1)
---- -------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Bernard M. Manuel .................... 1995 $458,429 -- -- --
Chairman of the Board 1994 $452,115 -- 55,000 $ 355
and Chief Executive Officer 1993 $385,011 -- 55,000 $ 348
Irving Benson ........................ 1995 $503,500 $11,705(2) -- $ 900
Vice Chairman and 1994 $452,115 $11,705(2) 55,000 $ 917
President 1993 $381,101 $10,965 55,000 $ 900
W. Glynn Manson ...................... 1995 $362,200 $12,000(2) -- --
Formerly Vice Chairman of 1994 $102,300 $26,231(4) 40,000 --
the Company and Chief Operating
Officer of the GJM Group(3)
Trevor J. Wright ..................... 1995 $292,207 $13,750(2) -- $3,648(6)
Executive Vice President--Design 1994 $247,920(5) $ 5,013(2) 21,500 $6,555(6)
Gary C. Smith ........................ 1995 $273,995 -- 78,750(7) $ 361
Senior Vice President-- 1994 $253,846 -- 30,000 $ 208
Manufacturing 1993 $228,172 -- 30,000 $ 204
</TABLE>
- ------------------
(1) Consists of certain insurance premiums on term life insurance paid by the
Company for the benefit of the named individuals.
(2) Represents a car allowance provided to the executive.
(3) Compensation amounts reflected for 1994 are for the period beginning
October 7, 1994, the date Mr. Manson commenced his employment with the
Company, through January 28, 1995, the last day of the Company's 1994
fiscal year. Mr. Manson resigned as an officer of the Company and its
subsidiaries on February 9, 1996 and as a director of the Company on April
17, 1996.
(4) Represents a housing allowance provided to Mr. Manson.
(5) Compensation amounts reflected for 1994 are for the period beginning April
7, 1994, the date Mr. Wright commenced his employment with the Company,
through January 28, 1995, the last day of the Company's 1994 fiscal year.
(6) Includes $3,295 and $6,234 for 1995 and 1994, respectively, representing
the Company's matching contribution pursuant to its 401(k) defined
contribution plan.
(7) Consists of 58,750 shares issuable upon the exercise of options that were
granted during 1994 and 1993 which were repriced during 1995 and 20,000
shares issuable upon the exercise of options that were both granted and
repriced during 1995. See "--Ten Year Option Repricings."
58
<PAGE>
The following table sets forth information with respect to option grants
during the fiscal year ended February 3, 1996 to the persons named in the
Summary Compensation Table.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable
Number of % of Total Value at
Securities Options Exercise Market Assumed Annual Rate
Underlying Granted to or Base Price on of Stock Price
Options Employees in Price Date Expiration Appreciation for Option
Granted (#)(1) Fiscal Year (2) ($/sh) of Grant Date Term (3)
------------- --------------- ------ -------- ---------- ------------------------
5% ($) 10% ($)
--------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Bernard M. Manuel ...... -- -- -- -- -- -- --
Irving Benson .......... -- -- -- -- -- -- --
W. Glynn Manson ........ -- -- -- -- -- -- --
Trevor J. Wright ....... -- -- -- -- -- -- --
Gary C. Smith .......... 28,750(4) 2.1% $2.00 $2.00 4/14/03 $23,431 $54,539
Gary C. Smith .......... 30,000(5) 2.2% $2.00 $2.00 5/30/04 $28,680 $68,610
Gary C. Smith .......... 20,000(6) 1.5% $2.00 $2.00 3/19/05 $22,080 $54,320
</TABLE>
- ---------------
(1) Options granted under the Company's 1993 Stock Option Plan become
immediately exercisable upon a change in control of the Company. The
Proposed Sale will constitute a change in control for purposes of the
option plan.
(2) Based upon options to purchase 1,341,500 shares granted to all employees
in the fiscal year ended February 3, 1996 (including options to purchase
shares that were granted in prior years and were repriced during the
fiscal year ended February 3, 1996).
(3) These amounts represent assumed rates of appreciation in the price of
Cygne Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual
gains, if any, on stock option exercises will depend on the future price
of the Cygne Common Stock and overall stock market conditions. There is no
representation that the rates of appreciation reflected in this table will
be achieved.
(4) These options, which were originally granted in April 1993 and repriced on
October 11, 1995, are presently exercisable as to 21,250 shares and these
options will become exercisable as to an additional 7,500 shares on April
15, 1997.
(5) These options, which were originally granted in May 1994 and repriced on
October 11, 1995, are presently exercisable as to 15,000 shares and these
options will become exercisable as to an additional 7,500 shares on each
of May 31, 1997 and May 31, 1998.
(6) These options, which were originally granted in March 1995 and repriced on
October 11, 1995, are presently exercisable as to 5,000 shares and these
options will become exercisable as to an additional 5,000 shares on each
of March 21, 1997, March 21, 1998 and March 21, 1999.
The following table sets forth information with respect to (i) stock
options exercised in the fiscal year ended February 3, 1996 by the persons
named in the Summary Compensation Table and (ii) unexercised stock options
held by such individuals on February 3, 1996.
<TABLE>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Unexercised Value of Unexercised,
Options Held at In-the-Money Options at
Fiscal Year End (#) Fiscal Year End (1)
---------------------------- --------------------------
Shares
Acquired on Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard M. Manuel ....... -- -- 41,250 68,750 $ 0 $ 0
Irving Benson ........... -- -- 41,250 68,750 $ 0 $ 0
W. Glynn Manson ......... -- -- 10,000 30,000 $ 0 $ 0
Trevor J. Wright ........ -- -- 5,375 16,125 $ 0 $ 0
Gary C. Smith ........... -- -- 21,250 57,500 $ 0 $ 0
</TABLE>
- ----------------------------
(1) Based on a closing stock price of Cygne Common Stock on February 2, 1996 of
$1.1875.
59
<PAGE>
Ten-Year Option Repricings
The following table sets forth information related to each option repricing
during the last ten years of options to purchase Cygne Common Stock held by any
executive officer of the Company. The vesting terms and expiration dates were
not amended at the time of repricing.
<TABLE>
TEN-YEAR OPTION REPRICINGS
<CAPTION>
Length of Original
Number of Market Price of Exercise Price Option Term
Options Stock at Time at Time of New Remaining at Date of
Repriced or or Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
---- ---- ----------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Baiocchi 10/11/95 10,000 $2.00 $20.50 $2.00 102 months
Paul D. Baiocchi 10/11/95 5,000 $2.00 $18.50 $2.00 104 months
Paul D. Baiocchi 10/11/95 10,000 $2.00 $10.00 $2.00 113 months
Roy E. Green 10/11/95 30,000 $2.00 $ 4.00 $2.00 90 months
Roy E. Green 10/11/95 30,000 $2.00 $18.50 $2.00 104 months
Roy E. Green 10/11/95 20,000 $2.00 $10.00 $2.00 113 months
Gary C. Smith 10/11/95 28,750 $2.00 $ 4.00 $2.00 90 months
Gary C. Smith 10/11/95 30,000 $2.00 $18.50 $2.00 104 months
Gary C. Smith 10/11/95 20,000 $2.00 $10.00 $2.00 113 months
</TABLE>
Employment Agreements
The Company entered into employment agreements, effective as of May 1,
1993, with Irving Benson, Roy Green and Gary Smith for initial three-year terms
ending April 30, 1996 and entered into an amended and restated employment
agreement with Bernard Manuel, effective as of January 1, 1995, for an initial
term ending April 30, 1996. Each of such employment agreements has been
automatically renewed for a one year term ending April 30, 1997. The Company has
also entered into an employment agreement, effective as of April 4, 1994, with
Paul Baiocchi, the Company's Vice President, General Counsel and Secretary,
which has been automatically renewed until April 3, 1997. In connection with the
FWM Acquisition, the Company entered into an employment agreement, effective as
of April 7, 1994, with Trevor Wright for a three-year term ending April 6, 1997.
Each of the foregoing agreements (collectively, the "Employment
Agreements") provides for automatic renewal for successive one year terms unless
either party notifies the other to the contrary at least 90 days prior to its
expiration. The Employment Agreements require each employee to devote
substantially all of his time and attention to the business of the Company as
necessary to fulfill his duties. Pursuant to the Employment Agreements Messrs.
Manuel, Benson, Wright, Green, Smith and Baiocchi are currently entitled to an
annual salary at a rate of $494,000, $494,000, $306,000, $234,612, $271,656 and
$195,000, respectively, subject to annual cost of living increases. The
Employment Agreements also provide for the payment of bonuses in such amounts as
may be determined by the Board. Under the Employment Agreements, the employee
may terminate his employment upon 30 days' notice. The Employment Agreements
provide that in the event the employee's employment is terminated by the Company
at any time for any reason other than justifiable cause, disability or death, or
the Company shall fail to renew the agreement at any time within two years
following a "Change of Control of the Company," the Company shall pay the
employee the employee's base salary and permit participation in benefit programs
for the greater of (i) the remaining term of the agreement or (ii) two years (in
the case of Messrs. Manuel, Benson and Wright), one year (in the case of Messrs.
Green and Smith) or six months (in the case of Mr. Baiocchi). In the event the
Company elects not to renew the agreement (other than within two years following
a "Change in Control of the Company"), the Company will, (a) in the case of
Messrs. Manuel, Benson and Wright, pay the employee a severance payment equal to
the lesser of (i) two months' salary plus one sixth of the employee's most
recently declared bonus for each year the employee has been employed by the
Company or (ii) one year's annual salary, (b) in the case of Messrs. Green and
Smith, pay the employee a severance payment equal to the lesser of (i) one
month's salary plus one-twelfth of the employee's most recently
60
<PAGE>
declared bonus for each year the employee has been employed by the Company or
(ii) six months' salary, and (c), in the case of Mr. Baiocchi, pay him a
severance payment equal to the lesser of (i) one month's salary plus one-twelfth
of his most recently declared bonus for each year he has been employed by the
Company or (ii) three months' salary. Each agreement contains confidentiality
provisions, whereby each executive agrees not to disclose any confidential
information regarding the Company, as well as non-competition covenants. The
non-competition covenants survive the termination of an employee's employment
for the greater of (i) the remaining term of the agreement or (ii) two years (in
the case of Messrs. Manuel, Benson and Wright), one year (in the case of Messrs.
Green and Smith) and six months (in the case of Mr. Baiocchi), except in the
event the Company elects not to renew the agreement, terminates the employee's
employment within two years following a "Change in Control of the Company" or
fails to make required severance payments.
For purposes of the Employment Agreements, a "Change in Control of the
Company" shall be deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Cygne Common
Stock would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of Cygne Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or
(ii) the stockholders of the Company shall approve any plan or proposal for
liquidation or dissolution of the Company, or (iii) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act), shall become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
40% or more of the outstanding Cygne Common Stock other than pursuant to a plan
or arrangement entered into by such person and the Company, or (iv) during any
period of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period. If the Proposed Sale is consummated a
change in control of the Company shall be deemed to have occurred and if the
Company shall fail to renew the employment agreement for any of Messrs. Manuel,
Benson, Wright, Green, Smith or Baiocchi within two years of the Closing Date of
the Proposed Sale then such employee shall become entitled to the previously
discussed severance arrangement.
The Employment Agreements also provide that if, in connection with a change
of ownership or control of the Company or a change in ownership of a substantial
portion of the assets of the Company (all within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), an
excise tax is payable by the employee under Section 4999 of the Code, then the
Company will pay to the employee additional compensation which will be
sufficient to enable the employee to pay such excise tax as well as the income
tax and excise tax on such additional compensation, such that, after the payment
of income and excise taxes, the employee is in the same economic position in
which he would have been if the provisions of Section 4999 of the Code had not
been applicable.
In connection with the GJM Acquisition, the Company and Mr. Manson entered
into an employment agreement for a three year term commencing on October 7,
1994, having terms substantially similar to the terms of the employment
agreement between the Company and Mr. Benson, except that Mr. Manson's salary
was $395,000 per annum. During February 1996 the Company sold substantially all
of the assets relating to its GJM operations. Mr. Manson resigned as an officer
of the Company on February 9, 1996 and as a director of the Company on April 17,
1996.
In connection with the FWM Acquisition, Mr. Wright was granted, pursuant to
the Company's 1993 Stock Option Plan, options to purchase 21,500 shares of Cygne
Common Stock at an exercise price of $22.75, the fair market value of the Cygne
Common Stock on the date of grant (April 7, 1994), such options to become
exercisable in four equal annual installments commencing on the first
anniversary of the date of grant. In connection with the GJM Acquisition, Mr.
Manson was granted options to purchase 40,000 shares of Cygne Common Stock at an
exercise price of $20.50, the fair market value of the Cygne Common Stock on the
date of grant (October 7, 1994), such options to become exercisable in four
equal installments commencing on the first anniversary of the date of grant. In
connection with the GJM Disposition, the term of such options were extended to
October 7, 1999 and options to purchase an additional 40,000 shares of Cygne
Common Stock at an exercise price of $1.00 per share (the fair market value on
the date of grant) for a period of five years were granted on February 9, 1996;
however, such options immediately
61
<PAGE>
terminate if the value of certain assets sold in the GJM Disposition as finally
determined in the post-closing audit of the net assets is substantially less
than the initial estimated value.
In connection with the Proposed Sale, on the Closing Date the Company will
enter into two 3-year consulting agreements with Ann Taylor for the services of
Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the Company's President and a director, to
facilitate the integration of CAT and the Division into Ann Taylor's operations.
These agreements, which provide for an annual fee of $225,000 for the services
of each of Messrs. Benson and Manuel, will automatically be assigned to the
consultant if his employment with the Company is terminated for any reason. See
"The Proposed Sale--Interests of Certain Persons in the Proposed Sale" and "The
Purchase Agreement--Consulting Agreements."
Compensation Committee Report on Executive Compensation
The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act or under the Exchange Act,
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under such Acts.
The Compensation Committee is comprised of two directors. As members of the
Compensation Committee, it is our responsibility to determine the most effective
total executive compensation strategy based on the Company's business and
consistent with stockholders' interests. Our specific duties entail reviewing
the Company's compensation practices, recommending compensation for executives
and key employees and administering the Company's 1993 Stock Option Plan and
Incentive Bonus Plan.
The Company is a private label designer, merchandiser and manufacturer of
women's apparel. One of the Company's strengths is its strong management team,
many of whom have been with the Company for a significant period of time. The
central goal of the Compensation Committee is to ensure that the Company's
remuneration policy is such that the Company is able to attract, retain and
reward capable employees who can contribute both short- and longer-term to the
continued success of the Company. Equity participation and a strong alignment to
stockholders' interest are key elements of the Company's compensation
philosophy. The Company's executive compensation program consists of three
parts: base salary, annual bonus and stock options.
Changes made in 1993 to the Code impose certain limitations on the
deductibility of executive compensation paid by public companies for taxable
years beginning in or after 1994. In general, under the new limitations, the
Company will not be able to deduct annual compensation paid to certain executive
officers in excess of $1,000,000 except to the extent that such compensation
qualifies as "performance-based compensation" (or meets other exceptions not
here relevant). Non-deductibility would result in additional tax cost to the
Company. It is possible that at least some of the cash and equity based
compensation paid or payable to the Company's executive officers will not
qualify for the "performance-based compensation" exclusion under the new
deduction limitation provisions of the Code. The Compensation Committee
anticipates that in making compensation decisions it will give consideration to
the net cost to the Company (including for this purpose, the potential
limitation on deductibility of executive compensation).
Base salary represents the fixed component of the executive compensation
program. Determinations of base salary levels are established on an annual
review of marketplace competitiveness with similar companies, and on internal
relationships. Periodic increases in base salary relate to individual
contributions to the Company's overall performance, relative marketplace
competitiveness levels, length of service and the industry's annual competitive
pay practice movement.
Bonuses represent the variable component of the executive compensation
program that is tied to the Company's performance and individual achievement. In
June 1994, the Company adopted an incentive compensation plan (the "Incentive
Plan") for those employees of the Company and its subsidiaries (other than CAT
US and CAT Far East, which prior to the consummation of the Proposed Sale are
40% owned by Ann Taylor) whose contribution is important to the Company's
performance. The Incentive Plan is administered by the Compensation Committee.
Under the Incentive Plan, employees participating in the Incentive Plan are
divided into three groups: a group consisting of specified senior executives of
the Company and its subsidiaries ("Group I"); a group consisting of division
merchandising managers and merchandising managers ("Group II"); and a group
consisting of other employees whose contribution is important to the Company's
performance, but not easily linked to divisional or the
62
<PAGE>
Company's performance ("Group III"). Group I employees' incentive compensation
is based on the performance of their respective business unit as measured by
such unit's earnings before taxes, depreciation and amortization and on the
Company's performance as measured by earnings per share, in each case as
measured against the Company's budget. Group II employees' incentive
compensation is based upon a combination of division performance (measured in
terms of contribution to the Company's overhead and profits as compared to the
division's budget), the Company's performance (as measured against the Company's
budget) and individual performance. Group III employees' incentive compensation
is based upon a combination of individual performance and the Company's
performance (as measured against the Company's budget). No amounts were earned
pursuant to the Incentive Bonus Plan for the year ended February 3, 1996.
The Compensation Committee, which administers the Company's stock option
plan, believes that one important goal of the executive compensation program
should be to provide executives, key employees and consultants who have
significant responsibility for the management, growth and future success of the
Company with an opportunity to increase their ownership and potentially gain
financially from the Company's stock price increases. This approach ensures that
the best interests of the stockholders, executives and employees will be closely
aligned. Therefore, executive officers and other key employees of the Company
are granted stock options from time to time, giving them a right to purchase
shares of Cygne Common Stock at a specified price in the future. The grant of
options is based primarily on an employee's potential contribution to the
Company's growth and financial results. In determining the size of option
grants, the Compensation Committee considers the number of options owned by such
officer, the number of options previously granted and currently outstanding, and
the aggregate size of the current option grants. Options generally are granted
at the prevailing market value of the Cygne Common Stock and will only have
value if the Company's stock price increases. Generally, options become
exercisable in equal amounts over four years and the individual must be employed
by the Company for such options to become exercisable. In order to further the
Compensation Committee's goal of providing a continued incentive to the
Company's employees to achieve the highest level of performance, during the last
fiscal year the Compensation Committee repriced certain options which carried
exercise prices above the then fair market value of Cygne Common Stock.
1995 Compensation to Chief Executive Officer
The base salary for Mr. Manuel during 1995 was $494,000, which was
unchanged since June 1994. The Compensation Committee determined in June, 1995
that, in light of the Company's financial condition, it was not appropriate to
increase Mr. Manuel's salary. In addition, in June, 1995, Mr. Manuel, along with
several other executive officers, accepted a reduction in salary. During the
fiscal year ended February 3, 1996, Mr. Manuel was not granted any stock
options.
Performance Graph
The Stock Price Performance Graph below shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act or under the Exchange Act,
except to the extent the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
Set forth below is a line graph which compares the cumulative total
shareholder return on the Company's Common Stock against the cumulative total
return of the S&P 500 Index and the S&P Textile-Apparel Index for the period
from July 30, 1993, when the Company's Common Stock was first publicly traded,
to February 2, 1996 (the last business day of the Company's fiscal year).
63
<PAGE>
<TABLE>
GRAPHICAL REPRESENTATION OF DATA TABLE BELOW
TOTAL STOCKHOLDER RETURN FROM JULY 30, 1993
VS. THE TOTAL RETURN S&P 500 STOCK INDEX AND
THE TOTAL RETURN S&P TEXTILE-APPAREL INDEX
<CAPTION>
7/30/93 1/28/94 1/27/95 2/2/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
CYGNE DESIGNS .......................................... $100.00 $156.10 $112.20 $ 11.59
TOTAL RETURN S&P 500 STOCK INDEX ....................... 100.00 108.30 109.50 151.92
TOTAL RETURN S&P TEXTILE-APPAREL INDEX ................. 100.00 99.34 100.43 114.61
</TABLE>
Market Price Data and Related Matters
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CYDS". Cygne Common Stock was initially offered to the public on
July 30, 1993 at $10.00 per share. The following table sets forth for the
periods indicated the high and low reported sale prices per share for the Cygne
Common Stock as reported by the Nasdaq National Market.
High Low
------ ------
Fiscal Year Ended January 28, 1995
First Quarter ................................. $25.00 $15.75
Second Quarter ................................ $23.50 $18.00
Third Quarter ................................. $27.00 $10.25
Fourth Quarter ................................ $16.00 $11.50
Fiscal Year Ended February 3, 1996
First Quarter ................................. $13.00 $ 5.50
Second Quarter ................................ $ 7.00 $ 4.00
Third Quarter ................................. $ 6.00 $ 1.88
Fourth Quarter ................................ $ 4.13 $ 0.63
Fiscal Year Ended February 1, 1997
First Quarter ................................. $ 3.00 $ 1.00
Second Quarter ................................ $ 1.625 $ 0.875
Third Quarter (through August 27) ............. $ 1.0625 $ 0.75
64
<PAGE>
The number of stockholders of record of Cygne Common Stock on August 27,
1996 was approximately 93, and management estimates that there are over 800
beneficial owners of the Cygne Common Stock. On April 4, 1996, the business day
preceding the Company's announcement that it had entered into a letter of intent
with Ann Taylor wih respect to the Proposed Sale, the closing sale price of the
Cygne Common Stock was $2.00 per share. On August 27, 1996, the last business
day preceding the date of this Proxy Statement, the closing sale price of Cygne
Common Stock was $0.875 per share.
Cygne has never declared or paid a cash dividend on the Cygne Common Stock.
The Company anticipates that all future earnings will be retained by the Company
for the development of its business. Accordingly, Cygne does not anticipate
paying cash dividends on the Cygne Common Stock in the foreseeable future. The
payment of any future dividends will be at the discretion of the Company's Board
of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the Company
and general business conditions.
Beneficial Ownership of Cygne Common Stock
The following table sets forth information as of July 31, 1996 (except as
otherwise noted in the footnotes) regarding the beneficial ownership (as defined
by the SEC) of the Cygne Common Stock by (i) each person known by the Company to
own beneficially more than five percent of the outstanding Cygne Common Stock;
(ii) each director and nominee for director of the Company; (iii) each executive
officer named in the Summary Compensation Table (see "--Executive
Compensation"); and (iv) all directors and executive officers of the Company as
a group. Except as otherwise specified, the named beneficial owner has the sole
voting and investment power over the shares listed. In connection with the
Purchase Agreement, certain officers and directors of the Company, their spouses
and certain principal stockholders of the Company owning an aggregate of
4,349,246 shares of the Cygne Common Stock, representing 35% of the Cygne Common
Stock outstanding on the Record Date, have granted to Ann Taylor irrevocable
proxies to vote such shares (i) in favor of the Proposed Sale and (ii) against
any other transaction or proposal that could prevent or delay the Proposed Sale
or frustrate the purposes of the Purchase Agreement. See "The Purchase
Agreement--Proxies."
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Beneficial Ownership Cygne
Name and Address of Cygne Common Stock (1) Common Stock
---------------- ------------------------- ------------
<S> <C> <C>
Limited Direct Associates, L.P.
c/o The Limited, Inc.
Three Limited Parkway
Post Office Box 16000
Columbus, Ohio 43230 (2) ......................... 854,319 6.9%
Cleveland Investment Limited
5/F Ho Lee Commercial Building
38-44 D'Aguilar Street Central
Hong Kong (3) .................................... 622,285 5.0%
Irving Benson and Dianne Benson (4) ............... 1,070,150 8.6%
James G. Groninger (5) ............................ 14,000 *
Stuart B. Katz (6) ................................ 8,500 *
Bernard M. Manuel and Isabelle Manuel (7) ......... 1,441,304 11.5%
Trevor J. Wright (8) .............................. 151,479 1.2%
Roy E. Green (9) .................................. 365,178 2.9%
Gary C. Smith (10) ................................ 41,250 *
Directors and executive officers as a group
(9 persons) (4)(5)(6)(7)(8)(9)(10)(11) ......... 3,076,861 24.2%
</TABLE>
- -----------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
which generally attribute beneficial ownership of securities to persons who
possess sole or shared voting power and/or investment power with respect to
those securities.
(2) This figure is based upon information set forth in an amended Schedule 13D
dated October 13, 1994, filed by Limited Direct Associates, L.P. (the
"Limited Partnership") with the SEC. The Limited Partnership, a limited
partnership consisting of a
65
<PAGE>
wholly-owned subsidiary and certain operating divisions of The Limited,
Inc., had granted each of Messrs. Benson and Manuel the right to vote
382,500 shares for a period of three years ending July 29, 1996.
(3) Cleveland Investment Limited has granted certain officers of Ann Taylor a
proxy to vote these shares (i) for the approval of the Proposed Sale and
(ii) against any other transaction or proposal that could (x) prevent or
delay the consummation of the transactions contemplated by the Purchase
Agreement or (y) frustrate the purposes of the Purchase Agreement. See "The
Purchase Agreement--Proxies."
(4) Consists of 885,061 shares owned by Irving Benson, 116,339 shares owned by
Mr. Benson's wife, Dianne Benson, and 68,750 shares issuable pursuant to
options which are exercisable within 60 days of July 31, 1996. Mr. and Mrs.
Benson, however, each disclaim any beneficial ownership of the other's
shares. Does not include an aggregate of 123,839 shares owned by Mr. and
Mrs. Benson's two children nor an aggregate of 41,250 shares which are the
subject of options granted to Mr. Benson which are not exercisable within
60 days of July 31, 1996. Mr. and Mrs. Benson have granted certain officers
of Ann Taylor a proxy to vote their shares (i) for the approval of the
Proposed Sale and (ii) against any other transaction or proposal that could
(x) prevent or delay the consummation of the transactions contemplated by
the Purchase Agreement or (y) frustrate the purposes of the Purchase
Agreement. See "The Purchase Agreement--Proxies." Mr. Benson's address is
c/o the Company, 1372 Broadway, New York, New York 10018.
(5) Includes 9,000 shares issuable pursuant to options which are exercisable
within 60 days of July 31, 1996. Does not include 7,000 shares which are
the subject of options which are not exercisable within 60 days of July 31,
1996.
(6) Consists of shares issuable pursuant to options which are exercisable
within 60 days from July 31, 1996. Does not include 5,500 shares which are
the subject of options which are not exercisable within 60 days of July 31,
1996.
(7) Includes 1,147,215 shares owned by Bernard M. Manuel, 161,339 shares owned
by Mr. Manuel's wife, Isabelle Manuel, 64,000 shares owned by The Bernard
M. Manuel Foundation (the "Foundation"), of which Mr. Manuel is the sole
trustee, and 68,750 shares issuable pursuant to options which are
exercisable within 60 days of July 31, 1996. Mr. and Mrs. Manuel, however,
each disclaim any beneficial ownership of the other's shares. Mr. Manuel
disclaims beneficial ownership of the shares owned by the Foundation which
he has the right to vote. Does not include 322,678 shares owned by The
Bernard M. Manuel 1992 Irrevocable Trust for Children established by Mr.
Manuel for the benefit of his children nor an aggregate of 41,250 shares
which are the subject of options granted to Mr. Manuel which are not
exercisable within 60 days of July 31, 1996. Mr. and Mrs. Manuel have
granted certain officers of Ann Taylor a proxy to vote their shares (i) for
the approval of the Proposed Sale and (ii) against any other transaction or
proposal that could (x) prevent or delay the consummation of the
transactions contemplated by the Purchase Agreement or (y) frustrate the
purposes of the Purchase Agreement. See "The Purchase Agreement--Proxies."
Mr. Manuel's address is c/o the Company, 1372 Broadway, New York, New York
10018.
(8) Consists of 140,729 shares owned by FWM N.V. which Mr. Wright may be deemed
to beneficially own by reason of his ownership of 23.41% of the outstanding
shares of the indirect sole stockholder of FWM N.V. and 10,750 shares
issuable pursuant to options which are exercisable within 60 days of July
31, 1996. Does not include 10,750 shares which are the subject of options
which are not exercisable within 60 days of July 31, 1996. FWM N.V. has
granted certain officers of Ann Taylor a proxy to vote the 601,148 shares
owned by it (i) for the approval of the Proposed Sale and (ii) against any
other transaction or proposal that could (x) prevent or delay the
consummation of the transactions contemplated by the Purchase Agreement or
(y) frustrate the purposes of the Purchase Agreement. See "The Purchase
Agreement--Proxies."
(9) Consists of 322,678 shares owned by The Bernard M. Manuel 1992 Irrevocable
Trust for Children, of which Mr. Green is Trustee, and 42,500 shares
issuable pursuant to options which are exercisable within 60 days of July
31, 1996. Mr. Green disclaims beneficial ownership of the shares owned by
the trust. Does not include 37,500 shares which are the subject of options
granted to Mr. Green which are not exercisable within 60 days of July 31,
1996. Mr. Green in his capacity as trustee of the Bernard M. Manuel 1992
Irrevocable Trust for Children has granted certain officers of Ann Taylor a
proxy to vote the trust's shares (i) for the approval of the Proposed Sale
and (ii) against any other transaction or proposal that could (x) prevent
or delay the consummation of the transactions contemplated by the Purchase
Agreement or (y) frustrate the purposes of the Purchase Agreement. See "The
Purchase Agreement--Proxies."
(10) Consists of shares issuable pursuant to options which are exercisable
within 60 days of July 31, 1996. Does not include 37,500 shares which are
the subject of options which are not exercisable within 60 days of July 31,
1996.
(11) Includes 10,000 shares issuable pursuant to options granted to an executive
officer not listed above which are exercisable within 60 days of July 31,
1996, but does not include 15,000 shares which are subject to options
granted to such executive officer which are not exercisable within 60 days
of July 31, 1996.
66
<PAGE>
INFORMATION RELATING TO ATSC AND ANN TAYLOR
Business
ATSC, through Ann Taylor, is a leading national specialty retailer of
better quality women's apparel, shoes and accessories sold primarily under the
Ann Taylor brand name. Ann Taylor merchandise represents classic styles, updated
to reflect current fashion trends. Ann Taylor's stores offer a full range of
career and casual separates, weekend wear, dresses, tops, accessories and shoes,
coordinated as part of a total wardrobing strategy.
As of August 3, 1996, Ann Taylor operated 306 stores in 40 states and the
District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store, Ann
Taylor Loft and Ann Taylor Studio. Of the 257 stores operated under the Ann
Taylor name, approximately three-quarters are located in regional malls and
upscale specialty retail centers, with the balance located in downtown and
village locations. These stores represent the Company's core merchandise line.
In 1993, Ann Taylor converted its four existing clearance centers to Ann Taylor
Factory Stores, and as of August 3, 1996, operated 23 Ann Taylor Factory Stores
located in factory outlet centers. The success of the Ann Taylor Factory Stores
and consumers' continuing emphasis on value led Ann Taylor to begin testing, in
1995, Ann Taylor Loft, a separate moderate-priced store concept for customers
who appreciate the Ann Taylor style but have a smaller budget for apparel, shoes
and accessories. As of August 3, 1996 Ann Taylor operated 17 Ann Taylor Loft
stores, also located in factory outlet centers. In Fall 1994, Ann Taylor began
testing Ann Taylor Studio stores, a free-standing shoe and accessory store
concept offering the broadest assortment of Ann Taylor shoes, as well as Ann
Taylor hosiery, small leather accessories such as belts and handbags, and Ann
Taylor's "destination" fragrance and personal care line. As of August 3, 1996
Ann Taylor had nine Ann Taylor Studio stores.
On August 23, 1996, ATSC announced that Sally Frame Kasaks resigned as
Chairman and Chief Executive Officer and a Director of ATSC and Ann Taylor, and
J. Patrick Spainhour, ATSC's President and Chief Operating Officer, was promoted
to Chairman and Chief Executive Officer. Since joining ATSC in February 1996,
Mr. Spainhour has been responsible for overseeing business operations including
finance, information systems, logistics, human resources, store planning and
real estate. He has also been responsible for worldwide sourcing for Ann Taylor,
which includes the integration of CAT and the Division into a new sourcing
division of Ann Taylor. ATSC intends to commence immediately a search for a new
President having extensive merchandising experience.
Selected Historical Consolidated Financial Data for ATSC
The following selected historical financial information for the fiscal
years indicated has been derived from the audited consolidated financial
statements of ATSC. ATSC's consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994, and consolidated balance sheets as of
February 3, 1996 and January 28, 1995, as audited by Deloitte & Touche LLP,
independent auditors, are included in ATSC's Annual Report on Form 10-K for the
fiscal year ended February 3, 1996 (the "Form 10-K"), which is incorporated by
reference in this Proxy Statement. The following selected financial statements
for the fiscal quarters ended May 4, 1996 and April 29, 1995 have been derived
from the unaudited consolidated financial statements of ATSC. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis" and the consolidated financial statements and notes thereto of ATSC
incorporated by reference herein through the Form 10-K. See "Available
Information" and "Incorporation of Certain Documents by Reference." All
references to years are to the fiscal year of ATSC, which ends on the Saturday
nearest January 31 in the following calendar year. All fiscal years for which
financial information is set forth below had 52 weeks, with the exception of
1995, which had 53 weeks.
67
<PAGE>
<TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR ATSC
<CAPTION>
Fiscal Years Ended First Quarter Ended
------------------------------------------------- -----------------------------------------
Feb. 1, Jan. 30, Jan. 29, Jan. 28, Feb. 3, Apr. 29, May 4,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
(dollars in thousands, except per square foot data and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Statement Information:
Net sales, including leased shoe
departments(a) ................. $437,711 $468,381 $501,649 $ 658,804 $ 731,142 $ 168,306 $ 184,467
Cost of sales ................... 234,136 264,301 271,749 357,783 425,225 91,355 101,313
-------- -------- -------- ---------- ---------- ---------- ----------
Gross profit .................. 203,575 204,080 229,900 301,021 305,917 76,951 83,154
Selling, general and
administrative expenses ........ 150,842 152,072 169,371 214,224 271,136 62,451 70,254
Distribution center restructuring
charge (b) ..................... -- -- 2,000 -- -- -- --
Amortization of goodwill (c) .... 9,506 9,504 9,508 9,506 9,506 2,377 2,377
-------- -------- -------- ---------- ---------- ---------- ----------
Operating income .............. 43,227 42,504 49,021 77,291 25,275 12,123 10,523
Interest expense (d) ............ 33,958 21,273 17,696 14,229 20,956 4,498 6,121
Stockholder litigation
settlement (e) ................. -- 3,905 -- -- -- -- --
Other (income) expense, net ..... 542 259 (194) 168 38 57 (131)
-------- -------- -------- ---------- ---------- ---------- ----------
Income before income taxes
and extraordinary loss ......... 8,727 17,067 31,519 62,894 4,281 7,568 4,533
Income tax provision ............ 7,703 11,150 17,189 30,274 5,157 4,077 2,721
-------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss ............. 1,024 5,917 14,330 32,620 (876) 3,491 1,812
Extraordinary loss (f) .......... 16,835 -- 11,121 868 -- -- --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) ............. $(15,811) $ 5,917 $ 3,209 $ 31,752 $ (876) $ 3,491 $ 1,812
======== ======== ======== ========== ========== ========== ==========
Income (loss) per share before
extraordinary loss ............. $ .05 $ .28 $ .66 $ 1.40 $ (.04) $ .15 $ .08
Extraordinary loss per share (f). (.87) -- (.51) (.04) -- -- --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) per share ... $ (.82) $ .28 $ .15 $ 1.36 $ (.04) $ .15 $ .08
======== ======== ======== ========== ========== ========== ==========
Weighted average shares
outstanding (in thousands) ..... 19,326 21,196 21,929 23,286 23,209 23,499 23,220
Operating Information:
Percentage increase (decrease)
in total comparable store
sales (g) ...................... (5.6)% (1.0)% 2.3% 13.7% (8.9)% (0.7)% (6.0)%
Percentage increase (decrease)
in owned comparable store
sales (g)(h) ................... (0.9)% 0.8% 4.0% 13.7% (8.9)% (0.7)% (6.0)%
Net sales per square foot (i) ... $ 642 $ 600 $ 576 $ 627 $ 518 N/A N/A
Number of stores:
Open at beginning of the period. 170 200 219 231 262 262 306
Opened during the period ....... 33 20 13 35 48 15 4
Expanded during the period ..... 3 5 12 25 30 12 --
Closed during the period ....... 3 1 1 4 4 2 3
Open at the end of the period .. 200 219 231 262 306 275 307
Total store square footage at
end of period .................. 746,000 814,000 929,000 1,173,000 1,651,000 1,323,000 1,666,000
Capital expenditures ............ $ 10,004 $ 4,303 $ 25,062 $ 61,341 $ 78,378 $ 16,412 $ 2,391
Depreciation and amortization,
including goodwill (c) ......... $ 15,709 $ 16,990 $ 18,013 $ 21,293 $ 28,294 $ 5,943 $ 8,379
Working capital turnover (j) .... 12.8x 16.8x 12.1x 8.5x 7.8x N/A N/A
Inventory turnover (k) .......... 4.6x 5.3x 4.9x 4.6x 4.3x N/A N/A
Balance Sheet information
(at end of Period):
Working capital (1) ............. $ 26,224 $ 29,539 $ 53,283 $ 102,181 $ 86,477 $ 121,455 $ 87,998
Goodwill, net (c) ............... 351,549 342,045 332,537 323,031 313,525 320,654 311,148
Total assets .................... 491,747 487,592 513,399 598,254 678,709 632,730 669,819
Total debt ...................... 211,917 195,474 189,000 200,000 272,458 225,300 178,393
Stockholders' equity ............ 229,464 245,298 259,271 326,112 325,688 329,709 327,552
</TABLE>
- ------------
(a) Prior to 1990, all shoes sold in Ann Taylor Stores were "Joan & David"
shoes, sold in leased shoe departments by Joan & David Helpern, Inc.
("Joan & David") pursuant to a license agreement. In 1990, ATSC introduced
a line of Ann Taylor brand shoes. Beginning in August 1990, Joan & David
began a scheduled withdrawal of its leased shoe departments, vacating
departments in groups of stores every six months through the end of fiscal
1992. As of February 1, 1993, Joan & David no longer operated leased shoe
departments in any Ann Taylor stores. Sales from leased shoe departments
were $8,207,000 in fiscal 1992 and $16,056,000 in fiscal 1991.
68
<PAGE>
(b) Relates to the relocation of Ann Taylor's distribution center, completed in
late Spring 1995, and represents a charge of $1,100,000 principally for
severance and job training benefits and $900,000 for the write-off of the
net book value of certain assets not used in the new facility. This charge
reduced fiscal 1993 net earnings by $0.05 per share.
(c) As a result of ATSC's leveraged buyout of Ann Taylor which was effective as
of January 29, 1989, $380,250,000, representing the excess of the allocated
purchase price over the fair value of Ann Taylor's net assets, was recorded
as goodwill and is being amortized on a straight-line basis over 40 years.
(d) Includes non-cash interest expense of $1,004,000, $978,000, $4,199,000,
$8,581,000, and $12,243,000 in fiscal 1995, 1994, 1993, 1992 and 1991, and
$389,000 and $193,000 in the first quarter 1996 and 1995, respectively,
from amortization of deferred financing costs, and in 1993, 1992 and 1991,
from accretion of original issue discount and, in 1992 and 1991, from the
issuance of additional 10% junior subordinated exchange notes due 2004.
(e) Relates to the settlement in January 1993 of a stockholder class action
lawsuit that was filed against ATSC and certain other defendants in October
1991.
(f) In fiscal 1994, Ann Taylor incurred an extraordinary loss of $1,522,000
($868,000, or $0.04 per share, net of income tax benefit), in connection
with the prepayment of long-term debt with the proceeds of a public sale of
common stock of ATSC. In fiscal 1993, Ann Taylor incurred an extraordinary
loss of $17,244,000 ($11,121,000, or $.51 per share, net of income tax
benefit) due to debt refinancing activities. In fiscal 1991, Ann Taylor
incurred an extraordinary loss of $25,900,000 ($16,835,000, or $.87 per
share, net of income tax benefit), in connection with the repurchase of a
portion of its then outstanding debt securities with proceeds from ATSC's
initial public stock offering.
(g) Comparable store sales are calculated by excluding the net sales of a store
for any month of one period if the store was not open during the same month
of the prior period. A store opened within the first two weeks of a month
is deemed to have been opened on the first day of that month and a store
opened later in a month is deemed to have been opened on the first day of
the next month. For example, if a store were opened on June 8, 1994, its
sales from June 8, 1994 through year-end 1994 and its sales from June 1,
1995 through year-end 1995 would be included in determining comparable
store sales for 1995, compared to 1994. In addition, in a year with 53
weeks, the extra week is not included in determining comparable store
sales. For periods prior to 1993, when a store's square footage was
increased as a result of expansion or relation in the same mall or
specialty center, the store continued to be treated as a comparable store
after the expansion. Commencing with stores expanded in fiscal 1993, any
store the square footage of which is expanded by more than 15% is treated
as a new store for the first year following the opening of the expanded
store. Comparable store sales for 1995 reflect a 52-week period.
(h) Excludes sales from leased shoe departments for periods prior to fiscal
1993.
(i) Net sales per square foot is determined by dividing net sales for the
period by the average of the gross square feet at the beginning and end of
each period. Unless otherwise indicated, references herein to square feet
are to gross square feet, rather than net selling space.
(j) Working capital turnover is determined by dividing net sales by the average
of the amount of working capital at the beginning and end of the period.
(k) Inventory turnover is determined by dividing cost of sales (excluding costs
of leased shoe departments) by the average of the cost of inventory at the
beginning and end of the period.
(l) Includes current portion of a long-term debt of $40,266,000, $0,
$8,757,000, $37,000,000 and $26,000,000 in fiscal 1995, 1994, 1993, 1992
and 1991 and $36,269,000 and $0 in the first quarter of 1996 and 1995,
respectively.
ATSC Preliminary Second Quarter and First Half 1996 Results
ATSC reported net income for the second quarter ended August 3, 1996 of
$627,000, or $.03 per share (on an average of 23.2 million shares outstanding),
compared to a net loss of $3,809,000, or $.16 per share (on an average of 23.2
million shares outstanding), in the second quarter of 1995.
ATSC net sales for the 1996 second quarter totaled $187,862,000, compared
to net sales of $183,695,000 in the 1995 second quarter. Second quarter 1996
ATSC net sales increased 2.3% and comparable store sales decreased 8.7% compared
to the second quarter of 1995.
ATSC total debt (including current portion) at August 3, 1996, was
$161,327,000, including $4,000,000 outstanding under the Company's revolving
credit facility. In addition, there was outstanding $100,625,000 (gross of
discount and transaction fees) of 8-1/2% convertible trust originated preferred
securities due 2016, issued by ATSC's special purpose finance trust.
69
<PAGE>
<TABLE>
ANN TAYLOR STORES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Six Months Ended August 3, 1996 and July 29, 1995
<CAPTION>
Quarters Ended Six Months Ended
------------------------- ------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales .............................................. $187,862 $183,695 $372,329 $352,001
Cost of sales .......................................... 107,115 114,869 208,428 206,224
-------- -------- -------- --------
Gross profit ........................................... 80,747 68,826 163,901 145,777
Selling, general and administrative expenses ........... 70,029 67,233 140,283 129,684
Amortization of goodwill ............................... 2,376 2,376 4,753 4,753
-------- -------- -------- --------
Operating income (loss) ................................ 8,342 (783) 18,865 11,340
Interest expense ....................................... 6,210 4,468 12,331 8,966
Other income, net ...................................... (293) (231) (424) (174)
-------- -------- -------- --------
Income (loss) before income taxes ...................... 2,425 (5,020) 6,958 2,548
Income tax provision (benefit) ......................... 1,798 (1,211) 4,519 2,866
-------- -------- -------- --------
Net income (loss) .................................... $ 627 $ (3,809) $ 2,439 $ (318)
======== ======== ======== ========
Net income (loss) per share ........................ $ .03 $ (.16) $ .11 $ (.01)
======== ======== ======== ========
Weighted average shares and share
equivalents outstanding .............................. 23,237 23,225 23,226 23,337
======== ======== ======== ========
Number of stores open at beginning of period ........... 307 275 306 262
Number of stores opened during period .................. 1 14 5 29
Number of stores expanded during period* ............... 1 5 1 17
Number of stores closed during period .................. 2 0 5 2
Number of stores open at end of period ................. 306 289 306 289
Total store square footage at end of period ............ 1,666,600 1,442,100
</TABLE>
- ------------
* Expanded stores are excluded from comparable store sales for the first
year following expansion.
70
<PAGE>
<TABLE>
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
August 3, 1996 and February 3, 1996
<CAPTION>
August 3, 1996 February 3, 1996
-------------- ----------------
(unaudited)
(Dollars in thousands)
ASSETS
<S> <C> <C>
Current assets
Cash ........................................................ $ 1,287 $ 1,283
Accounts receivable, net .................................... 64,112 70,395
Merchandise inventories ..................................... 99,231 102,685
Prepaid expenses and other current assets ................... 12,473 12,808
Prepaid tenancy ............................................. 9,075 8,099
Deferred income taxes ....................................... 3,400 3,400
-------- --------
Total current assets ....................................... 189,578 198,670
Property and equipment
Land and building ........................................... 8,983 8,923
Leasehold improvements ...................................... 78,055 73,677
Furniture and fixtures ...................................... 109,513 99,548
Construction in progress .................................... 3,807 14,190
-------- --------
200,358 196,338
Less accumulated depreciation and amortization ............. 53,981 42,443
-------- --------
Net property and equipment ................................. 146,377 153,895
Goodwill, net of accumulated amortization of $71,478 and
$66,725, respectively ....................................... 308,772 313,525
Investment in CAT ............................................. 6,198 5,438
Deferred financing costs, net of accumulated amortization of
$2,740 and $1,960, respectively ............................. 3,216 3,933
Other assets .................................................. 3,172 3,248
-------- --------
Total assets ............................................... $657,313 $678,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................ $ 36,112 $ 42,909
Accrued expenses ............................................ 26,323 29,018
Current portion of long-term debt ........................... 26,276 40,266
-------- --------
Total current liabilities .................................. 88,711 112,193
Long-term debt ................................................ 135,051 232,192
Deferred income taxes ......................................... 1,300 1,300
Other liabilities ............................................. 7,968 7,336
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of AnnTaylor Finance Trust
Holding Solely Convertible Debentures ....................... 96,042 --
Stockholders' equity
Common stock, $.0068 par value; 40,000,000 shares authorized;
23,139,977 and 23,127,743 shares issued, respectively ..... 157 157
Additional paid-in capital .................................. 311,563 311,284
Warrants to acquire 23,182 and 36,605 shares of
common stock, respectively ................................ 378 596
Retained earnings ........................................... 16,502 14,120
Deferred compensation on restricted stock ................... (17) (33)
-------- --------
328,583 326,124
Less treasury stock, 31,560 and 44,983 shares, respectively,
at cost ................................................... (342) (436)
-------- --------
Total stockholders' equity ................................ 328,241 325,688
-------- --------
Total liabilities and stockholders' equity ................ $657,313 $678,709
======== ========
</TABLE>
71
<PAGE>
ATSC Preliminary Pro Forma First Half 1996 Results
Based on preliminary six month results, if the Proposed Sale had been
consummated on February 4, 1996, ATSC's pro forma net sales, gross profit,
operating income, net income and net income per share for the six months ended
August 3, 1996, determined on a basis consistent with the ATSC pro forma
financial information for the fiscal year ended February 3, 1996 and the fiscal
quarter ended May 4, 1996, would have been $372.3 million, $170.9 million, $25.1
million, $4.7 million and $.18, respectively.
ATSC Pro Forma Financial Information
ANN TAYLOR STORES CORPORATION
UNAUDITED HISTORICAL AND PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following Unaudited Historical and Pro Forma Combined Financial
Statements give effect to the acquisition of the Ann Taylor Operations by Ann
Taylor under the "purchase" method of accounting. These Unaudited Historical and
Pro Forma Combined Financial Statements are presented for illustrative purposes
only, and therefore are not necessarily indicative of the operating results and
financial position that might have been achieved had the Proposed Sale occurred
as of an earlier date, nor are they necessarily indicative of operating results
and financial position that may occur in the future.
An Unaudited Historical and Pro Forma Combined Balance Sheet is provided as
of May 4, 1996, giving effect to the Proposed Sale as though it had been
consummated on that date. Unaudited Historical and Pro Forma Combined Statements
of Operations are provided for the fiscal year ended February 3, 1996 and the
fiscal quarter ending May 4, 1996, giving effect to the Proposed Sale as though
it had occurred at the beginning of the respective period.
The historical fiscal year ended February 3, 1996 information has been
derived from the audited financial statements of ATSC. The data for the fiscal
year ended February 3, 1996 for the Ann Taylor Operations have been derived from
the unaudited financial statements which, in the opinion of the management of
the Ann Taylor Operations, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited year.
The historical quarter ended May 4, 1996 information has been derived from
the unaudited financial statements of ATSC. These financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results for the unaudited quarter. The data at and
for the quarter ended May 4, 1996 for the Ann Taylor Operations have been
derived from the unaudited financial statements which, in the opinion of the
management of the Ann Taylor Operations, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the unaudited quarter.
72
<PAGE>
<TABLE>
ANN TAYLOR STORES CORPORATION AND ACQUIRED ANN TAYLOR OPERATIONS
UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
BALANCE SHEET
May 4, 1996
(In Thousands)
<CAPTION>
ASSETS
Historical Pro Forma
----------------------- -------------------------
Acquired
Ann Taylor
ATSC Operations Adjustments Combined
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ................... $ 1,296 $ 59 $ -- $ 1,355
Accounts receivable, net .................... 72,615 27,063 (26,555)(a) 73,123
Inventories ................................. 98,185 10,223 3,985 (b) 112,393
Prepaid and other current assets ............ 23,831 328 (3,438)(a) 20,721
-------- ------- --------- --------
Total current assets ...................... 195,927 37,673 (26,008) 207,592
Property and equipment, net ................... 150,203 4,179 -- 154,382
Other assets .................................. 12,541 151 (5,750)(c) 6,942
Goodwill, net ................................. 311,148 -- 36,960 (d) 348,108
-------- ------- --------- --------
Total assets .................................. $669,819 $42,003 $ 5,202 $717,024
======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ........... $ 36,269 $ 6,082 $ -- $ 42,351
Accounts payable ............................ 40,208 12,267 (22,008)(a) 30,467
Accrued expenses ............................ 31,452 2,018 1,000 (e) 34,470
-------- ------- --------- --------
Total current liabilities ................. 107,929 20,367 (21,008) 107,288
Long-term debt ................................ 142,124 546 11,300 (f) 153,970
Other liabilities ............................. 8,864 -- 8,864
Preferred Securities .......................... 83,350 -- -- 83,350
Stockholders' equity
Common stock ................................ 157 -- 12 (g) 169
Additional paid in capital .................. 311,336 -- 35,988 (g) 347,324
Retained earnings and other items ........... 16,059 21,090 (21,090)(g) 16,059
-------- ------- --------- --------
Total stockholders' equity ................ 327,552 21,090 14,910 363,552
-------- ------- --------- --------
Total liabilities and stockholders' equity..... $669,819 $42,003 $ 5,202 $717,024
======== ======= ======== ========
</TABLE>
See notes to unaudited historical and pro forma combined financial information.
73
<PAGE>
<TABLE>
ANN TAYLOR STORES CORPORATION AND ACQUIRED ANN TAYLOR OPERATIONS
UNAUDITED HISTORICAL AND PRO FORMA STATEMENTS OF OPERATIONS
Fiscal Year Ended February 3, 1996
(In Thousands, Except Per Share Amounts)
<CAPTION>
Historical Pro Forma
----------------------- --------------------------------
Acquired
Ann Taylor
ATSC Operations Adjustments Combined
-------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Net sales ...................................... $731,142 $231,385 $(231,385)(h) $731,142
Cost of sales .................................. 425,225 204,236 (214,749)(h)(i)(j) 414,712
-------- -------- --------- --------
Gross profit ................................... 305,917 27,149 (16,636) 316,430
Selling, general and administrative expenses ... 271,136 17,387 (17,387)(j) 271,136
Amortization of goodwill ....................... 9,506 -- 1,512 (k) 11,018
-------- -------- --------- --------
Operating income ............................... 25,275 9,762 (761) 34,276
Interest expense ............................... 20,956 1,088 750 (i) 22,794
Other (income) expense, net .................... 38 -- 1,646 (l) 1,684
-------- -------- --------- --------
Income before income taxes ..................... 4,281 8,674 (3,157) 9,798
Income tax provision ........................... 5,157 2,637 (329)(l)(m) 7,465
-------- -------- --------- --------
Net income (loss) .............................. $ (876) $ 6,037 $ (2,828) $ 2,333
======== ======== ========= ========
Net income (loss) per share .................... $ (0.04) $ 0.09
======== ========
ANN TAYLOR STORES CORPORATION AND ACQUIRED ANN TAYLOR OPERATIONS
UNAUDITED HISTORICAL AND PRO FORMA STATEMENTS OF OPERATIONS
Quarter Ended May 4, 1996
(In Thousands, Except Per Share Amounts)
Historical Pro Forma
----------------------- --------------------------------
Acquired
Ann Taylor
ATSC Operations Adjustments Combined
-------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Net sales ...................................... $184,467 $ 60,527 $ (60,527)(h) $184,467
Cost of sales .................................. 101,313 52,544 (56,287)(h)(i)(j) 97,570
-------- -------- --------- --------
Gross profit ................................... 83,154 7,983 (4,240) 86,897
Selling, general and administrative expenses.... 70,254 4,427 (4,427)(j) 70,254
Amortization of goodwill ....................... 2,377 -- 370 (k) 2,747
-------- -------- --------- --------
Operating income ............................... 10,523 3,556 (183) 13,896
Interest expense ............................... 6,121 183 387 (i) 6,691
Other (income) expense, net .................... (131) -- 312 (l) 181
-------- -------- --------- --------
Income before income taxes ..................... 4,533 3,373 (882) 7,024
Income tax provision ........................... 2,721 1,216 (62)(l)(m) 3,875
-------- -------- --------- --------
Net income (loss) .............................. $ 1,812 $ 2,157 $ (820) $ 3,149
======== ======== ========= ========
Net income per share ........................... $ 0.08 $ 0.13
======== ========
</TABLE>
See notes to unaudited historical and pro forma combined financial information.
74
<PAGE>
NOTES TO UNAUDITED HISTORICAL AND
PRO FORMA FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The Unaudited Historical and Pro Forma Combined Financial Statements and
notes thereto are presented for illustrative purposes only, giving effect to the
acquisition of the Ann Taylor Operations by Ann Taylor accounted for as a
"Purchase", as such term is used under generally accepted accounting principles.
The Ann Taylor Operations' information includes the acquisition by Ann Taylor of
CAT and the Division.
Certain amounts reported in the Ann Taylor Operations' historical financial
information have been reclassified to conform with Ann Taylor presentations in
the Unaudited Historical and Pro Forma Combined Financial Statements.
The Unaudited Historical and Pro Forma Financial Statements giving effect
to the acquisition of the Ann Taylor Operations by Ann Taylor have been prepared
assuming ATSC elected to treat the transaction as a stock acquisition, which
will provide no step up in basis for income tax purposes.
NOTE 2 -- ACCOUNTING PERIOD
The pro forma periods for the fiscal year ended February 3, 1996 are the
historical financial reporting periods of both ATSC and the Ann Taylor
Operations. ATSC and the Ann Taylor Operations have historically reported a 52-
or 53-week reporting period.
The pro forma periods for the quarter ended May 4, 1996 are the historical
financial reporting periods of both ATSC and the Ann Taylor Operations. ATSC and
the Ann Taylor Operations have historically reported a 13- or 14-week reporting
period.
NOTE 3 -- PURCHASE PRICE DETERMINATION
For the year ended February 3, 1996, the purchase price of $50.9 million
was computed assuming (i) the issuance of 2,117,647 shares of common stock of
ATSC at a price of $17.00 per share, (ii) cash consideration of $12.9 million,
and (iii) the assumption of the obligation to make payment to the president of
CAT of approximately $2.0 million becoming due under his existing employment
agreement with CAT as a result of the Proposed Sale. The cash portion of the
purchase price (including the obligation to the president of CAT) will be
provided by additional bank borrowings, assumed to be approximately $14.9
million at 8% per annum.
At and for the fiscal quarter ended May 4, 1996, the purchase price of
$47.3 million was computed assuming(i) the issuance of 1,800,000 shares of
common stock of the Company at a price of $20.00 per share, (ii) cash
consideration of $9.3 million, and (iii) the assumption of the obligation to
make payment to the president of CAT of approximately $2.0 million becoming due
under his existing employment agreement with CAT as a result of the Proposed
Sale. The cash portion of the purchase price (including the obligation to the
president of CAT) will be provided by additional bank borrowings, assumed to be
approximately $11.3 million at 8% per annum.
NOTE 4 -- PRO FORMA ADJUSTMENTS
The following items were recorded as adjustments to effect the combination
of ATSC and the Ann Taylor Operations.
(a) Adjustments recorded to reflect (i) the elimination of amounts due
to/from ATSC and the Ann Taylor Operations, and (ii) the elimination
of advances made to the Division.
(b) Adjustments to reduce the inventories of CAT and the Division to the
current fair value, and the elimination of advances made to the
Division.
(c) The elimination of the investment account on ATSC's books for the 40%
interest in CAT.
75
<PAGE>
NOTES TO UNAUDITED HISTORICAL AND
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Adjustment recorded to reflect the creation of goodwill representing
the excess of purchase price over net assets acquired which results in
an adjustment of $37.7 million for the fiscal year ended February 3,
1996 and $36.9 million for the fiscal quarter ended May 4, 1996, based
on management's estimate and without the performance of any due
diligence procedures. Accordingly, such estimate of goodwill is
preliminary and subject to change. At this time, ATSC has not
attributed any value to intangible assets other than goodwill.
(e) Adjustment to record a liability for an estimate of fees related to
the Proposed Sale.
(f) Adjustments to reflect a portion of the purchase price expected to be
financed through additional bank borrowings.
(g) Common stock, additional paid-in capital and retained earnings have
been adjusted to eliminate the equity balances of the Ann Taylor
Operations and reflect the common stock and additional paid-in capital
for the issuance of (i) with respect to the fiscal year ended February
3, 1996, 2,117,647 shares of Ann Taylor Common Stock at an assumed
price of $17.00 per share and (ii) with respect to the fiscal quarter
endedMay 4, 1996, 1,800,000 shares of Ann Taylor Common Stock at an
assumed price of $20.00 per share.
(h) To eliminate sales previously recorded by the Ann Taylor Operations
against the cost of sales previously recorded by ATSC. Cost of sales
is reduced by the reclassification of certain expenses discussed in
Notes 4(i) and 4(j).
(i) To reclassify interest expense from cost of sales as reported in the
Ann Taylor Operations' historical financial information to interest
expense, to conform with ATSC's presentations.
(j) Historically, the Ann Taylor Operations have classified certain
expenses as selling, general and administrative expenses. An
adjustment has been recorded to reclassify certain expenses, such as
costs of design and procurement, to cost of sales.
(k) Adjusted to reflect the charge relating to the amortization of
goodwill, which represents the excess of purchase price over net
assets acquired. Such goodwill will be amortized over a 25 year life.
(l) The elimination of the equity in earnings of 40% of the net income of
CAT by ATSC and the related income tax expense.
(m) The income tax provision represents the assumed effective tax rate for
the Ann Taylor Operations assuming (i) approximately 50% of the Ann
Taylor Operations' income is foreign source and not subject to U.S.
taxation until repatriation and (ii) amortized goodwill is not
deductible.
76
<PAGE>
Market for Ann Taylor Common Stock
The Ann Taylor Common Stock is listed and traded on the New York Stock
Exchange under the symbol ANN. The number of holders of record of Ann Taylor
Common Stock at July 1, 1996 was 796. The following table sets forth the high
and low closing sale prices for the Ann Taylor Common Stock on the New York
Stock Exchange.
Market Price
--------------------
High Low
------- -------
Fiscal Year Ended January 28, 1995
Fourth quarter .......................... $44 1/4 $31 7/8
Third quarter ........................... 44 35
Second quarter .......................... 41 1/8 31 1/2
First quarter ........................... 36 20 7/8
Fiscal Year Ended February 3, 1996
Fourth quarter .......................... $15 5/8 $ 9 1/2
Third quarter ........................... 21 7/8 10 1/4
Second quarter .......................... 25 5/8 19 1/2
First quarter ........................... 37 3/4 25 1/8
Fiscal Year Ended February 1, 1997
Third quarter (through August 27) ....... $15 5/8 $12
Second quarter .......................... $23 1/4 $12
First quarter ........................... $19 1/8 $11 1/8
On April 4, 1996, the business day prior to the announcement by Cygne and
ATSC that they had entered into a letter of intent with respect to the Proposed
Sale, the high and low sale prices of the Ann Taylor Common Stock on the New
York Stock Exchange composite tape were $17 5/8 and $16 7/8, respectively. On
August 27, 1996, the last full trading day prior to the date of this Proxy
Statement, the high and low sales prices of Ann Taylor Common Stock on the New
York Stock Exchange composite tape were $14 5/8 and $14 1/4, respectively.
ATSC has never paid dividends on the Ann Taylor Common Stock and does not
intend to pay dividends in the foreseeable future. As a holding company, the
ability of ATSC to pay dividends is dependent upon the receipt of dividends or
other payments from Ann Taylor. The payment of dividends by Ann Taylor to ATSC
is subject to certain restrictions under Ann Taylor's bank credit agreement (the
"Bank Credit Agreement"), the indenture relating to Ann Taylor's 83-3/4%
Subordinated Notes due 2000, and a Receivables Facility. In addition, under the
indenture governing notes issued by ATSC to the AT Trust in connection with the
TOPrS financing, in the event of a default by ATSC of its obligations
thereunder, ATSC would be restricted in its ability to pay dividends on the Ann
Taylor Common Stock. The payment of cash dividends on the Ann Taylor Common
Stock by ATSC is also subject to certain restrictions contained in ATSC's
guarantee of Ann Taylor's obligations under the Bank Credit Agreement. Any
determination to pay cash dividends in the future will be at the discretion of
ATSC's Board of Directors and will be dependent upon ATSC's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at that time by ATSC's Board of Directors.
Incorporation of Certain Documents by Reference
The following documents filed by ATSC (File No. 1-10738) with the SEC are
incorporated by reference in this Proxy Statement:
1. Annual Report on Form 10-K for the fiscal year ended February 3, 1996.
2. Quarterly Report on Form 10-Q for the quarter ended May 4, 1996.
3. Proxy Statement relating to the 1996 Annual Meeting of Stockholders.
4. Proxy Statement relating to the Special Meeting of Stockholders held on
August 15, 1996.
5. Current Reports on Form 8-K, dated April 8, 1996, May 2, 1996, June 10,
1996 and June 21, 1996.
77
<PAGE>
All documents filed by ATSC pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Proxy Statement and prior to
the date on which the Annual Meeting is held, shall be deemed to be incorporated
by reference in this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequent filed document which is also incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as modified or superseded, to constitute a part of
this Proxy Statement.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Proxy Statement is delivered, upon written or
oral request of such person, and by first class mail or other equally prompt
means within one business day of receipt of such request, a copy of any or all
of the information incorporated by reference herein including subsequently filed
documents, other than exhibits to such information (unless such exhibits are
specifically incorporated by reference into such documents). Requests for
information should be mailed to Corporate Secretary, Cygne Designs, Inc., 1372
Broadway, New York, New York 10018. Telephone requests may be directed to the
Company's Corporate Secretary at (212) 354-6474.
COMPARATIVE PER SHARE DATA
The following tables set forth historical per share data for Cygne and
ATSC, pro forma per share data for ATSC giving effect to the Proposed Sale as a
purchase of the Ann Taylor Operations under generally accepted accounting
principles and equivalent pro forma per share date for Cygne. Neither Cygne nor
ATSC declared or paid any cash dividends to their respective stockholders during
the periods indicated. The information presented should be read in conjunction
with the historical financial statements and related notes thereto of Cygne and
ATSC and the selected historical financial data including the notes thereto,
each incorporated in or included elsewhere in this Proxy Statement. Comparative
pro forma data have been included for comparative purposes only and do not
purport to be indicative of (i) the results of operations or financial position
which actually would have been obtained if the Proposed Sale had been completed
at the beginning of the period or as of the date indicated or (ii) the results
of operations or financial position which may be obtained in the future.
<TABLE>
<CAPTION>
Fiscal Year Fiscal Quarter Fiscal Quarter
Ended Ended Ended
February 3, 1996 May 4, 1996 August 3, 1996*
---------------- -------------- ---------------
<S> <C> <C> <C>
Income (loss) per common share:
Cygne:
Historical ...................................... $(10.04) $ 0.00 $ 0.00
Pro forma equivalent ............................ $ (8.60) $(0.15) $(0.29)
ATSC:
Historical ...................................... $ (0.04) $ 0.08 $ 0.11
Pro forma combined .............................. $ 0.09 $ 0.13 $ 0.18
As of As of As of
February 3, 1996 May 4, 1996 August 3, 1996*
---------------- -------------- ---------------
<S> <C> <C> <C>
Book value per common share:
Cygne:
Historical ...................................... $ 0.73 $ 0.73 $ 0.73
Pro forma equivalent ............................ $ 2.57 $ 2.53 $ 2.50
ATSC:
Historical ...................................... $ 14.03 $14.11 $14.13
Pro forma combined .............................. $ 14.28 $14.53 $13.97
</TABLE>
- ------------
* Based on preliminary results.
78
<PAGE>
RELATIONSHIP WITH INDEPENDENT AUDITORS
Ernst & Young LLP have been the independent auditors of the Company since
March 1993 and will serve in that capacity for the fiscal year ending February
1, 1997. A representative of Ernst & Young LLP will be present at the Annual
Meeting and will have an opportunity to make a statement if he desires to do so,
and will respond to appropriate questions from stockholders.
STOCKHOLDER PROPOSALS
All stockholder proposals which are intended to be presented at the 1997
Annual Meeting of Stockholders of the Company must be received by the Company no
later than April 30, 1997 for inclusion in the Board of Directors' proxy
statement and form of proxy relating to that meeting.
OTHER BUSINESS
The Board of Directors knows of no other business to be acted upon at the
Annual Meeting. However, if any other business properly comes before the Annual
Meeting, it is the intention of the persons named in the enclosed proxy to vote
on such matters in accordance with their best judgment.
The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
Annual Meeting, please sign the proxy and return it in the enclosed envelope.
By Order of the Board of Directors
PAUL D. BAIOCCHI
Secretary
Dated: August 28, 1996
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
WILL BE SENT WITHOUT CHARGE TO ANY STOCKHOLDER
REQUESTING IT IN WRITING FROM:
CYGNE DESIGNS, INC., 1372 BROADWAY, NEW YORK, NEW YORK 10018
ATTENTION: PAUL D. BAIOCCHI, SECRETARY
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Cygne Designs, Inc. and Subsidiaries
Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995 .................. F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended February 3, 1996 .............................................. F-4
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended February 3, 1996 ........................ F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended February 3, 1996 .................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-8
Consolidated Balance Sheets at May 4, 1996 (unaudited)
and February 3, 1996 .................................................................... F-21
Condensed Consolidated Statements of Operations for the
three months ended May 4, 1996 and April 29, 1995 (unaudited) ........................... F-22
Condensed Consolidated Statements of Stockholders' Equity
for the three months ended May 4, 1996 (unaudited) ...................................... F-23
Condensed Consolidated Statements of Cash Flows for the
three months ended May 4, 1996 and April 29, 1995 (unaudited) ........................... F-24
Notes to Condensed Consolidated Financial Statements (unaudited) ......................... F-25
CAT US Inc. and C.A.T. (Far East) Limited
and Subsidiary and the AnnTaylor Woven
Division of Cygne Designs, Inc.
Report of Independent Auditors ........................................................... F-30
Combined Balance Sheets as of February 3, 1996 and January 28, 1995....................... F-31
Combined Statements of Income for the Years ended February 3, 1996 and
January 28, 1995 ........................................................................ F-32
Combined Statements of Cash Flows for the Years ended February 3, 1996
and January 28, 1995 .................................................................... F-33
Notes to Consolidated Financial Statements ............................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Cygne Designs, Inc.
We have audited the accompanying consolidated balance sheets of Cygne
Designs, Inc. and Subsidiaries as of February 3, 1996 and January 28, 1995 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 3, 1996. These
financial statements are the responsibility of the Company's 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cygne Designs, Inc. and Subsidiaries at February 3, 1996 and January 28, 1995
and the consolidated results of their operations, changes in their stockholders'
equity and their cash flows for each of the three years in the period ended
February 3, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
April 15, 1996, except for Note 7,
as to which the date is May 15, 1996
F-2
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
----------- -----------
($ In thousands, except
per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash (includes restricted cash of $6,644 at January 28, 1995) ................... $ 5,487 $ 14,202
Trade accounts receivable, net .................................................. 35,117 64,921
Inventory ....................................................................... 29,999 57,570
Other receivables and prepaid expenses .......................................... 8,150 15,966
Assets held for sale ............................................................ 15,200 --
Deferred income taxes ........................................................... 4,066 2,602
-------- --------
Total current assets ............................................................. 98,019 155,261
Fixed assets, net ................................................................ 13,533 14,652
Other assets including intangibles ............................................... 803 6,075
Deferred income taxes ............................................................ 2,000 881
Goodwill, net .................................................................... 2,790 76,659
-------- --------
Total assets ..................................................................... $117,145 $253,528
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ........................................................... $ 1,593 $ 1,045
Bank facility ................................................................... 35,860 37,844
Trade facility .................................................................. 8,945 3,562
Accounts payable ................................................................ 32,928 42,429
Accrued expenses ................................................................ 14,083 13,440
Income taxes payable ............................................................ 5,677 7,081
Current portion of long-term debt ............................................... 2,047 1,829
-------- --------
Total current liabilities ........................................................ 101,133 107,230
Long-term debt ................................................................... 1,562 1,460
Deferred rent credits ............................................................ 1,386 635
-------- --------
Total liabilities ................................................................ 104,081 109,325
Minority interests in subsidiaries ............................................... 4,018 2,511
Stockholders' equity:
Preferred Stock, $0.01 par value; 4,000,000 shares authorized,
none issued and outstanding .................................................... -- --
Common Stock, $0.01 par value; 75,000,000 shares authorized;
12,438,038 (February 3, 1996) and 12,979,750 (January 28, 1995)
shares issued and outstanding .................................................. 124 130
Paid-in capital ................................................................. 120,918 127,716
(Accumulated deficit) retained earnings ......................................... (111,999) 14,059
Foreign currency translation adjustment ......................................... 3 (213)
-------- --------
Total stockholders' equity ....................................................... 9,046 141,692
-------- --------
Total liabilities and stockholders' equity ....................................... $117,145 $253,528
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
--------------------------------------
February January January
3, 1996 28, 1995 29, 1994
--------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales .......................................................... $ 540,063 $516,105 $220,201
Cost of goods sold ................................................. 510,761 433,700 181,326
--------- -------- --------
Gross profit ....................................................... 29,302 82,405 38,875
Selling, general and administrative expenses ....................... 72,182 54,261 23,794
Gain on sale of subsidiary ......................................... (4,742) -- --
Loss on sale of GJM business, net .................................. 31,239 -- --
Write-off of goodwill .............................................. 48,949 -- --
Amortization of intangibles ........................................ 3,425 2,505 137
--------- -------- --------
(Loss) income from operations ...................................... (121,751) 25,639 14,944
Interest expense ................................................... 8,813 7,620 4,272
--------- -------- --------
(Loss) income before income taxes and minority interests ........... (130,564) 18,019 10,672
(Benefit) provision for income taxes ............................... (6,216) 5,568 3,897
--------- -------- --------
(Loss) income before minority interests ............................ (124,348) 12,451 6,775
Income attributable to minority interests .......................... 1,710 1,642 631
--------- -------- --------
Net (loss) income .................................................. $(126,058) $ 10,809 $ 6,144
========= ======== =======
Net (loss) income per share ........................................ $ (10.04) $ 0.93 $ 0.92
========= ======== =======
Weighted average number of common and common equivalent
shares outstanding ................................................ 12,550 11,658 6,705
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common
Common Stock Stock and Foreign Retained
------------------ Paid-in Currency Earnings
Number Paid-in Capital of Translation (Accumulated
of Shares Amount Capital Affiliates Adjustment Deficit) Total
--------- ------ ------- ---------- ----------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1993 ...................... 3,025 $ 30 $ 3,738 $ 18 $ -- $ (2,894) $ 892
Exchange of Company Common Stock for common
stock of affiliates ............................ 2,075 21 (3) (18) -- -- --
Issuance of Common Stock in initial
public offering ................................ 2,760 27 24,515 -- -- -- 24,542
Issuance of Common Stock to purchase companies .. 150 2 2,923 -- -- -- 2,925
Foreign currency translation adjustment ......... -- -- -- -- (6) -- (6)
Net income for year ended January 29, 1994 ...... -- -- -- -- -- 6,144 6,144
------ --- -------- ----- ----- --------- --------
Balance at January 29, 1994 ...................... 8,010 80 31,173 -- (6) 3,250 34,497
Issuance of Common Stock for purchases
of companies ................................... 2,650 26 57,298 -- -- -- 57,324
Issuance of Common Stock in public offering ..... 2,300 23 39,113 -- -- -- 39,136
Issuance of Common Stock upon exercise
of stock options ............................... 16 1 62 -- -- -- 63
Issuance of Common Stock for services rendered .. 4 -- 70 -- -- -- 70
Foreign currency translation adjustment ......... -- -- -- -- (207) -- (207)
Net income for year ended January 28, 1995 ...... -- -- -- -- -- 10,809 10,809
------ --- -------- ----- ----- --------- --------
Balance at January 28, 1995 ...................... 12,980 130 127,716 -- (213) 14,059 141,692
Receipt and retirement of common stock
from sale of subsidiary ........................ (600) (6) (7,494) -- -- -- (7,500)
Issuance of Common Stock for purchases
of companies ................................... 53 -- 675 -- -- -- 675
Issuance of Common Stock upon exercise
of stock options ............................... 5 -- 21 -- -- -- 21
Foreign currency translation adjustment ......... -- -- -- -- 216 -- 216
Net loss for year ended February 3, 1996 ........ -- -- -- -- -- (126,058) (126,058)
Balance at February 3, 1996 ...................... 12,438 $124 $120,918 $ $ 3 $(111,999) $ 9,046
====== ==== ======== ===== ===== ========= ========
</TABLE>
F-5
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
--------------------------------------------
February January January
3, 1996 28, 1995 29, 1994
----------- ----------- ----------
(In thousands)
Operating activities
<S> <C> <C> <C>
Net (loss) income ........................................ $(126,058) $10,809 $ 6,144
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Net gain from sale of subsidiary, net .................. (4,742) -- --
Net loss from GJM business, net ........................ 31,239 -- --
Write-off of goodwill .................................. 48,949 -- --
Depreciation, amortization and write-off of
fixed assets .......................................... 7,922 5,109 745
Rent expense not currently payable ..................... 751 185 180
Bad debt expense ....................................... 2,147 -- --
Deferred income taxes .................................. (2,583) (144) 158
Income attributable to minority interests .............. 1,710 1,642 631
Changes in operating assets and liabilities:
Trade accounts receivable and due from
factor, net .......................................... 14,883 (17,802) (11,825)
Inventory ............................................. 9,589 (24,172) (3,212)
Other receivables and prepaid expenses ................ 9,580 (8,419) (2,786)
Accounts payable ...................................... 2,474 3,710 3,792
Accrued expenses ...................................... 4,579 (1,827) 905
Customer advances payable ............................. -- -- (4,007)
Due to affiliates and shareholders .................... -- -- (3,306)
Income taxes payable .................................. (1,508) 1,703 (38)
--------- ------- --------
Net cash used in operating activities .................... (1,068) (29,206) (12,619)
Investing activities
Purchase of fixed assets, net ............................ (7,915) (6,797) (3,488)
Other assets ............................................. 28 1,330 (597)
Payment for noncompete agreements ........................ -- (3,200) --
Sale of subsidiary, net .................................. (464) -- --
Purchase of businesses, net of cash acquired ............. (3,830) 5,299 (60)
--------- ------- --------
Net cash used in investing activities .................... (12,181) (3,368) (4,145)
Financing activities
Short-term borrowings, net ............................... (1,436) 5,292 --
Credit facility outstanding, net ......................... 5,383 1,619 774
Increase in long-term debt, net .......................... 315 (6,414) (5,453)
Redemption of preferred stock ............................ -- -- (1,250)
Net proceeds from issuance of common stock ............... 24 39,199 24,542
Investment by shareholder in subsidiary .................. 32 212 --
--------- ------- --------
Net cash provided by financing activities ................ 4,318 39,908 18,613
Effect of exchange rate changes on cash .................. 216 (324) (6)
--------- ------- --------
Net (decrease) increase in cash .......................... (8,715) 7,010 1,843
Cash at beginning of period .............................. 14,202 7,192 5,349
--------- ------- --------
Cash at end of period .................................... $ 5,487 $14,202 $ 7,192
========= ======= ========
</TABLE>
F-6
<PAGE>
<TABLE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<CAPTION>
Year ended
--------------------------------------------
February January January
3, 1996 28, 1995 29, 1994
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Supplemental disclosures
Income taxes paid ........................................ $ 2,335 $ 3,005 $ 3,777
Interest paid ............................................ 4,220 7,500 5,005
Equipment acquired through capital leases ................ -- -- 534
Mortgage assumed on purchase of building ................. -- -- 1,332
Issuance of Company common stock to purchase
minority interest of subsidiary companies ............... -- -- 2,925
Issuance of Company common stock for common stock
of affiliates ........................................... -- -- 21
Exchange of Company common stock for acquisitions ........ 675 57,325 --
Debt assumed on acquisition of business .................. -- 1,858 --
Issuance of Company common stock for services rendered ... -- 70 --
Unpaid deferred acquisition costs ........................ -- 259 810
Receipt of Company common stock from sale
of subsidiary ........................................... 7,500 -- --
</TABLE>
See accompanying notes.
F-7
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 3, 1996
1. Significant Accounting Policies
Principal Business Activity
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the
"Company") are engaged in private label designing, merchandising and
manufacturing of woven and knit career and casual clothing for women.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31. A
year refers to the fiscal year of the Company commencing in that calendar year
and ending on the Saturday nearest January 31 of the following year.
Organization and Principles of Combination and Consolidation
The consolidated financial statements include the accounts of Cygne and its
subsidiaries. All material intercompany balances and transactions were
eliminated in consolidation and combination. Certain prior year accounts were
reclassified to conform to current year presentation.
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.
Inventory
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Depreciation and Amortization
Depreciation of property and equipment 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.
Revenue Recognition
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales returns and allowances. Such reserves amounted to
$2,138,000 and $6,553,000 at February 3, 1996 and January 28, 1995,
respectively.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable foreign currency of the country in which it operates except for Hong
Kong for which the functional currency is the U.S. dollar. The translation from
the applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. The gains or losses, net of applicable deferred income taxes,
resulting from such translation are included in stockholders' equity.
Fair Market Value of Financial Instruments
The carrying amounts of short-term debt and long-term variable rate debt
approximate fair value.
Earnings Per Share and Supplemental Earnings Per Share
Earnings per share are based on the weighted average number of shares of
common stock outstanding during each year and, for 1994 and 1993, the common
stock equivalents outstanding during the period. For 1995, common stock
equivalents are excluded as the effect of their inclusion would be antidilutive.
F-8
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (continued)
Supplemental earnings per share for the year ended January 29, 1994 also
include approximately 1,392,000 shares deemed to be sold by the Company in
connection with its initial public offering to repay certain debts and to redeem
outstanding redeemable preferred stock as if such debts and redeemable preferred
stock had been repaid at the beginning of the year. Earnings per share for the
year ended January 29, 1994 would have been $0.86 if such shares had been issued
at the beginning of that year.
Supplemental earnings per share for the year ended January 28, 1995 also
include approximately 353,000 shares deemed to be sold by the Company in
connection with its June 1994 public offering to repay certain debt assumed in
connection with an acquisition as if such debt had been repaid at the date of
the acquisition. Earnings per share for the year ended January 28, 1995 would
have been $0.93 if such shares had been issued at the date of the acquisition.
Goodwill and Other Intangibles
Goodwill includes the excess of cost over fair value of net assets
acquired. The remaining goodwill is being amortized on a straight-line basis
over 10 years. Accumulated amortization at February 3, 1996, excluding the
write-off of $48,949,000 during 1995, and January 28, 1995 was approximately
$5,738,000 and $2,563,000, respectively.
The Company assesses the recoverability of its intangible assets by
determining whether amortization over the remaining lives can be recovered
through undiscounted future operating cash flows of the acquired operation and
other considerations. The amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
Other intangibles were being amortized over 4 and 15 years.
2. Purchases and Dispositions of Companies
CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," which began
operations in June 1992, was originally owned by the stockholders of Cygne (80%)
and AnnTaylor, Inc. (20%). Effective April 30, 1993, CAT became a 60% owned
subsidiary of Cygne with AnnTaylor, Inc. owning the remaining 40% interest. Had
such minority interests been increased at the date CAT commenced operations,
combined net income for the year ended January 29, 1994 would have been
$6,006,000, and the earnings per share would have been $0.90.
Cygne Knits Ltd. ("Knits"), which began operations in February 1993, was
originally owned by certain stockholders of Cygne. Effective April 30, 1993, it
became a wholly-owned subsidiary of Cygne. The consolidated financial statements
for the year ended January 29, 1994 include Knits from its inception.
On May 2, 1993, the Company purchased 66% of the capital stock of JMB
Internacionale S.A. ("JMB"), a company formed to supervise manufacturing of
products in Guatemala, from an affiliate of a Director of the Company. At May 2,
1993, JMB owned 50% of Modas Cisne, S.A., a manufacturing company located in
Guatemala. On October 29, 1993, JMB purchased the remaining 50% of the
outstanding stock of Modas Cisne, S.A. for future contingent payments based on
future earnings of this subsidiary. On October 18, 1995, the Company purchased
the remaining 34% of the capital stock of JMB.
During 1993, in two transactions, the Company acquired T. Wear Company
S.r.l. and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for
an aggregate of $500,000 and 150,000 shares of the Company's common stock. These
companies design, merchandise, manufacture and sell women's apparel to customers
principally in the United States. The common stock issued has been valued at the
market price of the Company's common stock on the transactions' closing date
($19.50 per share). The fair market value of the assets acquired (principally
accounts receivable and current liabilities) approximated their book value and
the excess of the purchase price over the fair value of the net assets acquired
of $3,600,000 was recorded as goodwill and is being amortized over a ten year
period.
F-9
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Purchases and Dispositions of Companies (continued)
In April 1994, the Company acquired Fenn, Wright and Manson, Incorporated
("FWM"), a designer, merchandiser and manufacturer principally of private label
women's and men's apparel primarily serving prominent specialty retail store
chains and department stores in the U.S. and the United Kingdom (the "FWM
Acquisition"). The purchase price for FWM was $44,000,000, consisting of
2,000,000 unregistered shares of the Company's common stock and $10,000 in cash.
Additional costs related to this acquisition approximated $1,400,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $47,848,000 was recorded as goodwill, and was being amortized over
a 25 year period.
On April 7, 1995, the Company sold the United Kingdom subsidiary of FWM and
certain brand name rights to Fenn Wright and Manson (Antilles) N.V. (a group led
by Colin Fenn) in exchange for 600,000 shares of Cygne common stock previously
issued. In connection with this transaction, Mr. Fenn resigned his positions as
Director and Vice Chairman of the Company, and as President of FWM. In the
quarter ended April 29, 1995, Cygne recorded a gain of $4,742,000 on the sale,
which is net of certain restructuring expenses of $2,800,000 (consisting
primarily of severance to former FWM employees and costs associated with closing
certain of FWM's facilities) pertaining to the related integration of FWM's
operations with the Company's.
During 1995, management also took various actions to reverse a decline in
FWM's remaining business. However, management determined that such actions were
not having the desired results and eliminated all of the operations of FWM. The
unamortized goodwill recorded in connection with the acquisition of FWM
($44,530,000) exceeded the undiscounted anticipated future operating cash flows
over the remaining goodwill amortization period. Therefore, the FWM goodwill was
written off.
In October 1994, Cygne acquired the business operations of G.J.M.
International Limited ("GJM"), a Hong Kong-based designer, merchandiser and
manufacturer of women's intimate apparel, from G.J.M. International Limited, a
company wholly-owned by Mr. W. Glynn Manson (the "GJM Acquisition"). The
purchase price for GJM was $15,200,000, consisting of 650,000 unregistered
shares of the Company's common stock, $10,000 in cash and the assumption of
approximately $1,900,000 of indebtedness owed by GJM International to The
Limited, Inc. Additional costs related to this acquisition approximated
$1,700,000. The excess of the purchase price over the fair value of the net
assets acquired of approximately $27,659,000 was recorded as goodwill and was
being amortized over a 25 year period.
In connection with the GJM Acquisition the Company also paid $3,200,000 to
two key executives of GJM for non-compete agreements of fifteen years and four
years, respectively, and issued options vesting over four years to certain key
personnel of GJM to purchase an aggregate of 165,000 shares of the Company's
common stock at a purchase price of $20.50 per share, which option purchase
price as to 125,000 of such shares was subsequently reduced to $2.00 per share
along with other employees of this class.
In February 1996, the Company sold substantially all of the assets of its
GJM intimate apparel and sleepwear business to Warnaco Inc. In the transaction,
Warnaco paid Cygne $12.5 million in cash and assumed certain liabilities of the
GJM business. Warnaco is also holding an additional $1.5 million in a treasury
security to secure its obligations to make post-closing payments based upon a
formula that provides, to the extent that net assets (as defined in the purchase
agreement) acquired by Warnaco exceed $8.1 million, Warnaco will pay Cygne the
$1.5 million held in a treasury security and the amount by which the net assets
exceed $8.1 million. To the extent such net assets are less than $8.1 million,
Cygne will pay Warnaco the difference first by applying up to $1.5 million being
held in a treasury security by Warnaco against the amount the net assets fall
below $8.1 million and thereafter will pay Warnaco any further difference below
$6.6 million in net assets. Warnaco has informed the Company that it believes
the net assets acquired aggregated only $1,589,000 and that the Company owes
Warnaco $6,511,000, of which $1.5 million would be satisfied through the
treasury security. The Company disagrees with Warnaco's calculations and is in
the process of reviewing them with Warnaco. The Company cannot predict the
outcome of this dispute. At the time the dispute is resolved, and depending on
the determination of the value of net assets acquired by Warnaco, the Company
may recognize an increase or a decrease in the loss of approximately $31 million
on the sale. The Company used all the proceeds from the sale to repay
outstanding senior bank indebtedness. GJM accounted for approximately 19.4% of
the Company's net sales of $540.1 million for the year ended February 3, 1996.
F-10
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Purchases and Dispositions of Companies (continued)
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the U.S.
The purchase price for TSA was approximately $3,800,000, consisting of 53,038
unregistered shares of the Company's common stock and $3,100,000 in cash (the
"TSA Acquisition"). Additional costs related to this acquisition approximated
$730,000. The excess of the purchase price over the fair value of the net assets
acquired of approximately $4,500,000 was recorded as goodwill and was amortized
over a 25 year period. Cygne also issued options to purchase an aggregate of
55,000 shares of the Company's common stock to the two former shareholders of
TSA in connection with their entering into consulting agreements with TSA. In
January 1996, the Company decided to cease operations at the end of the second
quarter of 1996 of TSA and wrote-off the balance of the goodwill.
The FWM Acquisition, the GJM Acquisition and the TSA Acquisition were
accounted for under the purchase method and, accordingly, the operating results
of FWM, GJM and TSA have been included in the consolidated operating results
since their respective dates of acquisition.
In April 1996, the Company entered into an agreement in principle with
AnnTaylor Stores Corporation ("AnnTaylor") pursuant to which AnnTaylor will
acquire the Company's 60% interest in CAT and the assets of the Company's
AnnTaylor Woven Division that are used in sourcing merchandise for AnnTaylor
(the "AnnTaylor Disposition").
The aggregate consideration to be paid to the Company in the transaction
consists of unregistered shares of AnnTaylor common stock having a market value
of $36 million (based on the average of the high and low price of AnnTaylor
common stock in the ten days prior to closing), but in no event is AnnTaylor
obligated to issue more than 2.5 million shares, and cash in an amount equal to
the tangible net book value of the inventory and fixed assets of the Company's
AnnTaylor Woven Division, less certain assumed liabilities of the division. The
closing of the transaction is subject to various conditions, including the
negotiation and execution of definitive documentation, approval by the Company's
stockholders, the Company's receipt of a fairness opinion from its financial
advisor, the consent of the Company's and AnnTaylor's lenders and the
continuation of CAT's $40 million credit facility. It is currently anticipated
that the transaction will close in July 1996, although there can be no assurance
that the transaction will be consummated in this time frame or at all. In order
to facilitate the integration of CAT and Cygne's AnnTaylor Woven Division into
AnnTaylor's operations, Cygne has agreed to make available for a three year
period the services of Mr. Bernard Manuel, the Company's Chief Executive
Officer, and Mr. Irving Benson, the Company's President. Cygne will make
available up to 30% of Messrs. Benson's and Manuel's time and will receive an
aggregate fee of $450,000 per year. AnnTaylor has agreed to register the shares
issued to Cygne for resale, although Cygne will be subject to certain
restrictions on the timing of sales and the amount of shares which can be sold
at any one time.
CAT and the AnnTaylor Woven Division accounted for approximately 53% of the
Company's estimated net sales of $435 million (excluding net sales of the
recently sold GJM Group) for the year ended February 3, 1996.
3. Pro Forma Results of Operations
The pro forma unaudited results of operations for the years ended January
28, 1995 and January 29, 1994 include the results of the operations of FWM and
GJM as if such acquisitions occurred at the beginning of the respective periods.
The shares of the Company's common stock issued in the FWM Acquisition have been
valued at $22.00 per share, based on the closing price of the Company's common
stock on April 6, 1994, the date the FWM Acquisition was consummated. The shares
of the Company's common stock issued in the GJM Acquisition have been valued at
$20.50 per share based on the closing price of the Company's common stock on
October 7, 1994, the date the GJM Acquisition was consummated. The pro forma
information does not purport to be indicative of the results that actually would
have occurred had the FWM and GJM Acquisitions been effected on the dates
indicated, nor do they project the Company's results of operations for any
future dates or periods.
F-11
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Pro Forma Results of Operations (continued)
The following selected unaudited pro forma information combines Cygne, FWM
and GJM assuming the purchases were consummated as of the beginning of the
respective periods.
1994 1993
------ -----
($ In thousands, except
per share amounts)
Net sales .......................................... $592,676 $475,299
Net income ......................................... 9,403 10,068
Income per common and common equivalent share ...... $ 0.75 $ 1.08
For the period from February 1, 1994 through the date of acquisition, FWM
had net sales of $25,457,000 and net income of $886,000.
For the period from February 1, 1994 through the date of acquisition, GJM
had net sales of $51,114,000 and a net loss of $1,243,000.
The allocation of the purchase price of FWM and GJM is summarized as
follows ($ in thousands):
Current assets .................................... $47,067
Current liabilities ............................... (56,392)
-------
Working capital ................................... (9,325)
Other assets ...................................... 1,827
Property, plant and equipment ..................... 3,558
Goodwill .......................................... 75,507
Long-term debt .................................... (7,858)
Other noncurrent liabilities ...................... (1,380)
-------
Total purchase price .............................. $62,329
=======
4. Public Offerings of the Company's Common Stock
In August 1993, the Company sold 2,760,000 shares of its common stock
through an initial public offering and realized net proceeds of approximately
$24,500,000. The net proceeds received by the Company from the offering were
used to (i) repay $6,800,000 due WHK Holdings Company Limited, an affiliate of a
Director of the Company, representing amounts due for the purchase of raw
materials and finished products (including related agency and financing fees) on
behalf of the Company; (ii) repay a $3,600,000 advance from AnnTaylor, Inc.;
(iii) repay $2,400,000 in notes and accrued interest due to stockholders (the
notes bore interest at 10% per annum); and (iv) redeem $1,250,000 of the
Company's Series A Redeemable Preferred Stock owned by an affiliate of a
Director of the Company. The balance of the proceeds was used for working
capital purposes.
In June 1994, the Company sold 2,300,000 shares of common stock to the
public and realized net proceeds of approximately $39,100,000. The net proceeds
received by the Company from the offering were used to repay a $6,000,000 note
due to Plymouth Holdings Limited, the former indirect sole stockholder of FWM.
The balance of the proceeds was used for working capital and for fixed asset
purchases.
F-12
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventory
Inventory consists of the following:
February January
3, 1996 28, 1995
-------- --------
($ In thousands)
Raw materials ......................... $21,748 $39,447
Finished goods ........................ 2,972 8,411
Finished goods-in-transit ............. 5,279 9,712
------- -------
$29,999 $57,570
======= =======
6. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and
amortization and are summarized below together with estimated useful lives used
in computing depreciation and amortization:
<TABLE>
<CAPTION>
February January Estimated
3, 1996 28, 1995 Useful Lives
-------- -------- ------------
($ In thousands)
<S> <C> <C> <C>
Land and building .......................................... $ 2,826 $ 2,905 20-30 years
Equipment, furniture, and fixtures ......................... 9,614 17,048 3-10 years
Leasehold improvements ..................................... 4,138 6,106 Term of lease
Trucks and automobile ...................................... 654 1,323 3-5 years
------- -------
17,232 27,382
Less accumulated depreciation and amortization ............. 3,699 12,730
------- -------
$13,533 $14,652
======= =======
</TABLE>
7. Credit Facilities
During the quarter ended October 28, 1995, Cygne and CAT each entered into
a Credit Agreement with the HS Bank, expiring May 31, 1996, which modified and,
in the case of Cygne, FWM and GJM, consolidated the previous credit arrangement
with the HS Bank. The modifications included (i) the consolidation of the Cygne,
FWM and GJM facilities, previously aggregating up to $76,400,000, into one
facility of up to $70,000,000, (ii) an increase in the CAT facility from up to
$28,000,000 to up to $40,000,000, (iii) a requirement under each agreement to
comply with certain financial covenants as well as various other restrictions,
(iv) an increase in the Cygne facility interest rate and (v) the elimination of
the requirement to maintain a certain certificate of deposit as additional
security for the prior separate GJM credit facility, which appeared as
restricted cash on the January 28, 1995 balance sheet. Borrowings under these
facilities, which may be terminated by the HS Bank or the Company at any time as
to future borrowings upon proper notice, are subject to certain borrowing base
limitations and the HS Bank's agreement as to amount, purpose, interest rate,
maturity and collateral. Borrowings under these facilities are due on the
earlier of demand or the maturity date specified by the HS Bank for each
borrowing. Amounts outstanding under the Cygne agreement bear interest at 1.25%
above the prime rate through January 31, 1996 and between 1% and 1.75% above the
prime rate thereafter depending upon the working capital, as defined, of the
Company, exclusive of CAT. Amounts outstanding under the CAT agreement bear
interest at 0.5% above the prime rate. Each agreement provides for additional
interest at 2% per annum on amounts not paid when due. The HS Bank facilities
are cross guaranteed by Cygne and certain of its subsidiaries and are secured by
a first lien on substantially all the assets of the Company including a pledge
of 65% of the capital stock of certain of Cygne's foreign subsidiaries, except
for C.A.T. (Far East) Limited as to which 60% of the capital stock is pledged.
At February 3, 1996, the Company is not in compliance with its credit
agreement's working capital requirements, current ratio, leverage ratio and
tangible net worth financial covenants. The HS Bank has permanently waived all
defaults under the credit agreement.
F-13
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Credit Facilities (continued)
The following table sets forth information with respect to the HS Bank
facilities ($ in thousands):
<TABLE>
<CAPTION>
At February 3, 1996
---------------------------------------
Direct Open Direct
Total Borrowings Letters of Borrowings Interest
Facility(1) Limit(2) Credit Outstanding Rate
----------- ---------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Cygne ........................ $ 70,000 $50,000 $10,896 $34,773 9.25%-10.0%
CAT (3) ...................... 40,000 8,000 27,925 1,087 8.75%
-------- ------- ------- -------
Total ........................ $110,000 $58,000 $38,821 $35,860
======== ======= ======= =======
</TABLE>
- ---------------
(1) Under the CAT facility, the total facility, less any direct borrowings
outstanding, is available for letters of credit.
(2) Consists principally of revolving loans and borrowings against
import/exports.
(3) Cygne has guaranteed 60% of the indebtedness outstanding under this
facility, and AnnTaylor has provided the HS Bank with a $4,000,000 standby
letter of credit.
(4) The Limited, Inc. has guaranteed $10,000,000 of the HS Bank facilities
through May 31, 1996.
On May 15, 1996, the Company received a commitment letter from the HS Bank
to provide the Company with a new credit facility to replace the existing
facility which expires on May 31, 1996. The commitment letter provides a
committed facility of up to $30 million until the earlier of August 31, 1996 or
the closing of the AnnTaylor Disposition; thereafter the facility reduces to
$22.5 million and further reduces to $15 million at October 31, 1996, $10
million at November 30, 1996, $5 million at December 31, 1996 and matures on
January 31, 1997. Borrowings under this facility are subject to borrowing base
limitations. The Company is obligated to pledge substantially all of its assets,
including the AnnTaylor stock to be received at the closing of the AnnTaylor
Disposition. The credit facility is subject to the completion of definitive
documentation.
Certain foreign subsidiaries have credit facilities aggregating $1,595,000
at February 3, 1996. Borrowings under these facilities, which are payable on
demand, are secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two third parties not affiliated with the
Company, but affiliated with each other, whereby these parties made available to
the Company a trade credit facility. The trade credit facility has been
suspended. At February 3, 1996, $8,945,000 of this facility was outstanding.
Outstanding amounts in 1995 bore interest at 1.5% above the prime rate. The
Company has reached an agreement in principle to restructure the amounts
outstanding under this trade credit facility.
During the year ended February 3, 1996, the Company's weighted average
interest rate for the HS Bank was approximately 9.6%.
8. Debt
The Company has existing mortgages, of $1,052,000 at February 3, 1996
relating to a foreign office and manufacturing facility which bears interest at
LIBOR plus 2% and is payable quarterly in equal payments of $52,600.
At February 3, 1996, the Company also has a $1,258,000 unsecured note
payable to The Limited, Inc., a major customer of the Company. The principal
amount outstanding, which is currently payable, bears interest at prime plus 2%
and was originally due on December 31, 1995.
At February 3, 1996, the balance outstanding on other debt was $1,299,000
of which $720,000 is long-term.
9. Stock Options
Pursuant to an employee Stock Option Plan, as amended, the Company may
grant to eligible individuals incentive stock options as defined in the Internal
Revenue Code ("IRC") and non-qualified stock options. An
F-14
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options (continued)
aggregate of 1,700,000 shares of common stock have been reserved for issuance
under the Plan. The exercise price for incentive options may not be less than
100% (110% for holders of 10% or more of the Company's outstanding shares) of
the fair market value of the shares on the date of grant, and at least par value
of the common stock with respect to the non-qualified stock options, have a
ten-year term (five years for holders of 10% or more of the Company's
outstanding shares in the case of incentive stock options) and vest at the
discretion of the Board of Directors.
Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April
15, 1993, the Company will automatically grant to eligible non-employee
directors options to purchase 10,000 shares of Common Stock upon the directors'
initial appointment to the Board of Directors and options to purchase 2,000
shares of Common Stock on each individual director's anniversary date from
initial appointment. Options granted under the Directors' Plan do not qualify as
incentive stock options under the IRC. The options have an exercise price of
100% of fair market value on the date of grant, have a ten-year term and vest,
pro-rata, over four years.
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
Employee Stock Non-Employee Other Stock Option
Option Plan Directors Plan Arrangements
---------------------- ------------------------- ------------------------- Total
Number Exercise Number Exercise Number Exercise Number
of Shares Price Range of Shares Price Range of Shares Price Range of Shares
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 30, 1994 ....... 369,000 $ 4.00-$16.88 40,000 $ 4.00-$16.88 -- 409,000
Options granted in
fiscal 1994 ............ 598,000 $13.38-$22.75 8,000 $22.50-$23.50 165,000 $13.38-$22.50 771,000
Options canceled in
fiscal 1994 ............ (13,500) $ 4.00-$13.38 -- -- (13,500)
Options exercised in
fiscal 1994 ............ (15,750) $ 4.00 -- -- (15,750)
--------- ------- ------- ---------
Options outstanding at
January 28, 1995 ....... 937,750 $ 4.00-$22.75 48,000 $ 4.00-$23.50 165,000 $13.38-$22.50 1,150,750
Options granted in
fiscal 1995 ............ 589,500 $ 2.00 6,000 $ 3.25-$10.00 67,500 $ 2.00 663,000
Options canceled in
fiscal 1995 ............ (329,500) $ 2.00-$22.75 (20,500) $ 4.00-$23.50 (2,250) $ 2.00-$23.50 (352,250)
Options exercised in
fiscal 1995 (5,250) $ 4.00 -- -- -- -- (5,250)
--------- ------- ------- ---------
Options outstanding at
February 3, 1996 1,192,500 $ 2.00-$22.75 33,500 $ 3.25-$22.50 230,250 $ 2.00-$22.50 1,456,250
========= ======= ======= =========
At February 3, 1996
options exercisable 273,750 16,500 39,375 329,625
========= ======= ======= =========
</TABLE>
On November 11, 1994, the Company repriced employee stock options to
purchase 430,000 shares of Common Stock at $13.375 (the fair market value on
that date), of which options to purchase 305,000 shares had been granted on May
31, 1994 at $18.50 a share and options to purchase 125,000 shares had been
granted on October 7, 1994 at $22.50 a share.
F-15
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options (continued)
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which provides an alternative to APB Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation issued
to employees. The Statement allows for a fair value based method of accounting
for employee stock options and similar equity instruments. However, for
companies that continue to account for stock-based compensation arrangements
under Opinion No. 25, Statement No. 123 requires disclosure of the pro forma
effect on net income and earnings per share of its fair value based accounting
for those arrangements. These disclosure requirements are effective for fiscal
years beginning after December 15, 1995, or upon initial adoption of the
Statement, if earlier. The Company determined that it would continue to account
for stock-based compensation arrangements under opinion No. 25. Accordingly,
Statement No. 123 will not have an effect on future operating results.
10. Concentrations of Risk
For the year ended February 3, 1996, two customers (AnnTaylor and The
Limited, Inc.) accounted for 43% and 34% of the Company's net sales. These
customers accounted for approximately 63% and 17% of trade accounts receivable
at February 3, 1996.
For the year ended January 28, 1995, the two customers above accounted for
37% and 38% of the Company's net sales. The customers accounted for
approximately 30% and 20%, and a third customer accounted for approximately 12%
of trade accounts receivable at January 28, 1995.
For the year ended January 29, 1994, the two customers above accounted for
55% and 39% of the Company's net sales. These customers accounted for
approximately 54% and 26% of trade accounts receivable at January 29, 1994.
In April 1996, the Company entered into an agreement in principle to sell
its 60% interest in CAT and the assets of Cygne's AnnTaylor Woven Division to
AnnTaylor. Upon the consummation of the AnnTaylor Disposition, the Company
anticipates that it will no longer have sales to AnnTaylor. The Company has been
dependent on its key customers and, with the loss of AnnTaylor as a customer,
its future success is dependent upon its ability to attract new customers. There
can be no assurance that the Company will be able to attract new customers in
1996 or that The Limited, Inc., the Company's other significant customer, will
continue to purchase merchandise from the Company at the same rate in the
future.
11. Leases, Commitments and Litigation Leases
The Company leases manufacturing and office facilities and equipment under
operating lease agreements which expire through 2010. Future minimum lease
payments under noncancellable operating leases are as follows ($ in thousands):
Year ended:
1996 ............................................ $ 2,921
1997 ............................................ 2,791
1998 ............................................ 2,791
1999 ............................................ 2,493
2000 ............................................ 2,555
Thereafter ...................................... 22,818
-------
Total future minimum lease payments ................ $36,369
=======
Certain of the leases contain provisions for additional rent based upon
increases in the operating costs of the premises, as defined. Pursuant to an
Agreement in Principle (see Note 2) certain of the aforementioned leases are to
be assumed by AnnTaylor.
Total rent expense under the operating leases for the years ended February
3, 1996, January 28, 1995 and January 29, 1994 amounted to approximately
$2,752,000, $4,988,000 and $1,651,000, respectively.
F-16
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Leases, Commitments and Litigation (continued)
For leases which contain free-rent periods and predetermined fixed
escalations of the minimum rentals, the Company recognizes the related rental
expense on a straight-line basis and includes the difference between the expense
charged to income and amounts payable under the leases on the balance sheets in
deferred rent credits.
Commitments
The Company has employment agreements with certain officers and key
employees through 2000. Future minimum aggregate annual payments under these
agreements amount to approximately $2,799,000 in 1996, $871,000 in 1997, and
$220,000 in 1998. In addition, certain of the officers and employees may receive
additional compensation based upon the income, as defined, of the Company or one
or more of its subsidiaries.
Litigation
On December 11, 1995, a class action complaint was filed against the
Company, certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class of purchasers of the Company's stock during the period
September 28, 1993 through April 28, 1995. The complaint seeks unspecified money
damages and alleges that the Company and the other defendants violated federal
securities laws in connection with various public statements made by the Company
and certain of its officers and directors during the putative class period. A
scheduling order was entered by the Court on February 9, 1996 and provides for
the filing of an amended complaint by plaintiff on March 6, 1996 and the filing
of motions to dismiss the amended complaint by all of the defendants, including
the Company and certain of its officers and directors, on April 9, 1996. The
Company believes that all of the allegations contained in the complaint are
without merit and intends to continue to defend the action vigorously. An
adverse decision in this action could have a material adverse effect on the
Company's financial condition and results of operations.
Richard Kramer, a former employee of the Company, brought an action against
the Company, Bernard Manuel and Irving Benson alleging three causes of action
(1) fraudulent inducement of Kramer to accept employment as a Vice President;
(2) breech of contract by refusing to pay Kramer approximately $168,500 upon his
termination, under a provision which states that if he were terminated without
cause he would receive consideration equal to that sum; and (3) breach of
contract for failure to deliver certain stock options to Kramer. In October
1995, the defendants moved to dismiss the action on the grounds that the
complaint failed to state a cause of action, that Kramer refused to give the
Company a release in return for payment of the $168,500, and that Kramer, who
had been employed for only two months at the time of his termination, was not
entitled to stock options under the employment letter between the parties. The
motion was denied to the extent that it sought dismissal of the fraudulent
inducement claim and the claim for $168,500, but granted insofar as the stock
options were concerned. An agreement in principle was reached with respect to
this matter for an amount that the Company does not deem material during
mandatory nonbinding mediation.
The Company is subject to various other claims and assessments which arise
in the ordinary course of its business. In the opinion of management, the
disposition of all such items will not have a material effect on the Company's
results of operations or financial position.
12. Related Party Transactions
The Company had the following related party transactions in addition to
those discussed elsewhere in these financial statements:
(i) During the year ended January 28, 1995, a company controlled by a
director began acting as the Company's agent for the collection of
claims against vendors.
(ii) During the year ended January 29, 1994, the Company was charged
consulting fees of approximately $66,000 by a stockholder.
F-17
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Related Party Transactions (continued)
(iv) The Company paid to an affiliate fees to cover, among other matters, a
buying agent commission and bank letter of credit fees. The total fees
incurred for the year ended January 29, 1994 amounted to approximately
$123,000.
The Company paid to this affiliate interest at the rate of 11% per
annum on outstanding indebtedness. Related interest expense for the
year ended January 29, 1994 amounted to approximately $199,000.
Purchases arranged by this affiliate for the year ended January 29,
1994 were approximately $3,500,000.
(v) Amounts receivable from companies affiliated with an officer of a
foreign subsidiary amounted to approximately $400,000 at January 29,
1994.
13. Income Taxes
Income taxes are provided using the liability method prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred income taxes reflect tax
carryforwards and the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial statement and income tax
purposes, as determined under enacted tax laws and rates. The financial effect
of changes in tax laws or rates is accounted for in the period of enactment.
Significant components of the Company's deferred tax assets are as follows:
February January
3, 1996 28, 1995
-------- --------
(In thousands)
Deferred tax assets:
Capitalization of expenses ...................... $ 731 $ 669
Inventory reserve ............................... 80 1,026
Accounts receivable reserve ..................... 243 639
Reserves for losses on shuttered operations ..... 2,870 --
Other ........................................... (170) 1,155
Net operating loss carryforwards ................ 18,790 556
------- ------
Subtotal ......................................... 22,544 4,045
Valuation allowance ............................. (16,478) (562)
------- ------
Total deferred tax assets ........................ $ 6,066 $3,483
======= ======
For financial reporting purposes, income before income taxes includes the
following components:
Year ended
---------------------------------------------
February January January
3, 1996 28, 1995 29, 1994
---------- -------------- ---------
(In thousands)
Pretax income:
United States .......... $(126,384) $ 2,456 $ 6,878
Foreign ................ (4,180) 15,563 3,794
--------- ------- -------
$(130,564) $18,019 $10,672
========= ======= =======
F-18
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes (continued)
Significant components of the (benefit) provision for income taxes
attributable to operations are as follows:
Year ended
--------------------------------------------
February January January
3, 1996 28, 1995 29, 1994
-------- -------- --------
(In thousands)
Current:
Federal .................... $ (3,875) $1,910 $2,592
Foreign .................... 345 3,119 940
State ...................... (103) 674 639
-------- ------ ------
Total current ............... (3,633) 5,703 4,171
Deferred:
Federal .................... (2,315) (112) (55)
Foreign .................... 4 57 (205)
State ...................... (272) (80) (14)
-------- ------ ------
Total deferred .............. (2,583) (135) (274)
-------- ------ ------
$ (6,216) $5,568 $3,897
======== ====== ======
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------------------------
February January January
3, 1996 28, 1995 29, 1994
--------------------- --------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates ................. $(44,392) (34.0)% $6,126 34.0% $3,628 34.0%
Loss, no benefit provided ................... 15,916 12.2 -- -- -- --
State income taxes, net of federal tax
benefit .................................... (248) (0.2) 392 2.2 412 3.8
Lower effective income tax rates of
foreign jurisdictions ...................... 1,770 1.4 (2,115) (11.7) (556) (5.2)
Amortization of intangibles ................. 1,080 0.8 825 4.6 -- --
Goodwill written-off ........................ 21,032 16.1 -- -- -- --
Other ....................................... (1,374) (1.1) 340 1.8 413 3.9
-------- ---- ------ ----- ------ -----
$ (6,216) (4.8)% $5,568 30.9% $3,897 36.5%
======== ==== ====== ==== ====== ====
</TABLE>
At February 3, 1996, the Company has U.S. net operating loss carryforwards
of approximately $49,000,000 for income tax purposes that expire in years 1996
through 2005. The Company has additional net operating loss carryforwards of
$1,100,000 that are subject to Internal Revenue Code Section 382 which limits
the maximum loss carryforward utilization each year to approximately $115,000.
The Company is subject to ongoing tax audits in several jurisdictions. The
Company believes any adjustments that may arise as a result of these audits will
not be material to the Company's financial position.
14. Geographic Segment Information
The Company operates primarily in one industry segment which includes the
development, manufacturing and sales of women's apparel.
F-19
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Geographic Segment Information (continued)
Net sales to unaffiliated customers and identifiable assets classified by
geographic area, which was determined by where sales originated from and where
identifiable assets were held, were as follows ($ in thousands):
<TABLE>
<CAPTION>
Total Total Intersegment
Domestic Foreign Eliminations Total
-------- -------- ------------- ---------
<S> <C> <C> <C> <C>
Year ended February 3, 1996
Net sales ............................................. $492,497 $55,349 $(7,783) $540,063
Operating loss ........................................ (120,668) (1,083) -- (121,751)
Identifiable assets ................................... 107,465 24,221 (14,541) 117,145
Year ended January 28, 1995
Net sales ............................................. 460,377 74,079 (18,351) 516,105
Operating profit ...................................... 4,662 20,977 -- 25,639
Identifiable assets ................................... 202,162 51,964 (598) 253,528
</TABLE>
- ------------
(a) Sales in the U.S. are primarily from imported goods.
(b) The intangible assets recognized in connection with acquisitions are
included in identifiable assets in the U.S.
(c) Total foreign amounts principally represent the Company's Asian operations.
15. Employee Benefit Plans
The Company does not provide any post employment or post retirement
benefits to its current or former employees. The Company also terminated all of
its 401(k) plans and its foreign defined benefit plans. Costs of these plans
charged to operations for 1995 were not material.
F-20
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 4, February 3,
1996 1996
-------- -----------
(Unaudited) (Note 1)
(In thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash ............................................................... $ 8,473 $ 5,487
Trade accounts receivable .......................................... 40,511 35,117
Inventory .......................................................... 13,441 29,999
Other receivables and prepaid expenses ............................. 9,372 8,150
Assets held for sale ............................................... -- 15,200
Deferred income taxes .............................................. 4,066 4,066
-------- --------
Total current assets ................................................ 75,863 98,019
Fixed assets, net ................................................... 13,211 13,533
Other assets ........................................................ 761 803
Deferred income taxes ............................................... 2,000 2,000
Goodwill, net ....................................................... 2,699 2,790
-------- --------
Total assets ........................................................ $ 94,534 $117,145
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................................. $ 29,178 $ 37,453
Accounts payable ................................................... 18,846 32,928
Trade credit facilities outstanding ................................ 9,110 8,945
Accrued expenses ................................................... 13,136 14,083
Income taxes payable ............................................... 5,878 5,677
Current portion of long-term debt .................................. 2,003 2,047
-------- --------
Total current liabilities ........................................... 78,151 101,133
Long-term debt ...................................................... 1,409 1,562
Deferred rent credits ............................................... 1,463 1,386
-------- --------
Total liabilities ................................................... 81,023 104,081
Minority interests in subsidiaries .................................. 4,466 4,018
Stockholders' equity:
Preferred stock, $0.01 par value; 4,000,000 shares authorized, none
issued and outstanding
Common stock, $0.01 par value;
75,000,000 shares authorized; 12,438,038 (May 4, 1996) and
(February 3, 1996) shares issued and outstanding .................. 124 124
Paid-in capital .................................................... 120,918 120,918
Accumulated deficit ................................................ (111,968) (111,999)
Foreign currency translation adjustment ............................ (29) 3
-------- --------
Total stockholders' equity .......................................... 9,045 9,046
-------- --------
Total liabilities and stockholders' equity .......................... $ 94,534 $117,145
======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
------------------------
May 4, April 29,
1996 1995
------- --------
(In thousands, except per
share amounts)
Net sales ........................................ $83,756 $128,367
Cost of goods sold ............................... 73,044 117,239
------- --------
Gross profit ..................................... 10,712 11,128
Selling, general and administrative expenses ..... 9,159 18,178
Gain from sale of subsidiary, net ................ -- (4,742)
Bad debt expense ................................. -- 1,030
Amortization of intangibles ...................... 91 956
------- --------
Income (loss) from operations .................... 1,462 (4,294)
Other income (expense) ........................... (388) --
Interest expense ................................. 935 2,111
------- --------
Income (loss) before provision for income taxes
and minority interests .......................... 915 (6,405)
Provision (benefit) for income taxes ............. 436 (2,122)
------- --------
Income (loss) before minority interests .......... 479 (4,283)
Income attributable to minority interests ........ 448 397
------- --------
Net income (loss) ................................ $ 31 $ (4,680)
======= ========
Net income (loss) per share ...................... $ 0.00 $ (0.36)
======= ========
Weighted average number of common and common
equivalent shares outstanding ................... 12,438 12,886
======= ========
See accompanying notes.
F-22
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Common Stock Foreign
-------------------- Currency
Number Paid-in Translation Accumulated
of Shares Amount Capital Adjustment Deficit Total
--------- ------ -------- ----------- ----------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 ......... 12,438 $124 $120,918 $ 3 $(111,999) $9,046
Foreign currency translation
adjustment ......................... -- -- -- (32) -- (32)
Net income for the three months
ended May 4, 1996 .................. -- -- -- -- 31 31
------ ---- -------- ---- --------- ------
Balance at May 4, 1996 .............. 12,438 $124 $120,918 $(29) $(111,968) $9,045
====== ==== ======== ==== ========= ======
</TABLE>
See accompanying notes.
F-23
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
May 4, April 29,
1996 1995
------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................... $ 31 $ (4,680)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 489 1,017
Gain from sale of subsidiary, net ................................. -- (4,742)
Bad debt expense .................................................. -- 1,030
Rent expense not currently payable ................................ 77 270
Amortization of intangibles ....................................... 91 893
Deferred income taxes ............................................. 3 35
Income attributable to minority interests ......................... 448 397
Changes in operating assets and liabilities:
Trade accounts receivable ........................................ (5,392) 11,352
Inventory ........................................................ 16,559 12,253
Other receivables and prepaid expenses ........................... 1,457 2,697
Accounts payable ................................................. (14,038) (4,221)
Accrued expenses ................................................. (967) (5,161)
Income taxes payable ............................................. 201 (2,126)
------- --------
Net cash (used in) provided by operating activities ................. (1,041) 9,014
------- --------
INVESTING ACTIVITIES
Purchase of fixed assets ............................................ (161) (3,081)
Other assets ........................................................ 36 201
Sale of business .................................................... 12,500 --
Sale of subsidiary .................................................. -- (464)
Purchase of businesses .............................................. -- (3,107)
------- --------
Net cash provided by (used in) investing activities ................. 12,375 (6,451)
------- --------
FINANCING ACTIVITIES
Short-term borrowings, net .......................................... (8,275) (3,935)
Credit facility outstanding, net .................................... 165 2,429
Repayments of long-term debt, net ................................... (206) (58)
Net proceeds from issuance of common stock .......................... -- 20
------- --------
Net cash provided by (used in) financing activities ................. (8,316) (1,544)
Effect of exchange rate changes on cash ............................. (32) (69)
------- --------
Net increase in cash ................................................ 2,986 950
Cash at beginning of period ......................................... 5,487 14,202
------- --------
Cash at end of period ............................................... $ 8,473 $15,152
======= =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid ................................................... $ 232 $ 517
Interest paid ....................................................... 672 2,055
Exchange of Company common stock for acquisitions ................... -- 675
Retirement of Company common stock from sale of subsidiary .......... -- 7,500
</TABLE>
See accompanying notes.
F-24
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
May 4, 1996 are not necessarily indicative of the results that may be expected
for the fiscal year ended February 1, 1997. 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 3, 1996. The balance sheet at
February 3, 1996 has been derived from the audited financial statements at that
date.
The Company's fiscal year ends on the Saturday nearest to January 31.
Earnings per share are based on the weighted average number of shares of
common stock outstanding. For the three months ended May 4, 1996 and April 29,
1995, common stock equivalents are excluded as the effect of their inclusion
would be antidilutive.
2. Purchases and Sales of Companies
CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," which began
operations in June 1992, was originally owned by the stockholders of Cygne (80%)
and AnnTaylor, Inc. (20%). Effective April 30, 1993, CAT became a 60% owned
subsidiary of Cygne with AnnTaylor, Inc. owning the remaining 40% interest.
On May 2, 1993, the Company purchased 66% of the capital stock of JMB
Internacionale S.A. ("JMB"), a company formed to supervise manufacturing of
products in Guatemala, from an affiliate of a Director of the Company. At May 2,
1993, JMB owned 50% of Modas Cisne, S.A., a manufacturing company located in
Guatemala. On October 29, 1993, JMB purchased the remaining 50% of the
outstanding stock of Modas Cisne, S.A. for future contingent payments based on
future earnings of this subsidiary. On October 18, 1995, the Company purchased
the remaining 34% of the capital stock of JMB.
During 1993, in two transactions, the Company acquired T. Wear Company
S.r.l. and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for
an aggregate of $500,000 and 150,000 shares of the Company's common stock. These
companies design, merchandise, manufacture and sell women's apparel to customers
principally in the United States. The fair market value of the assets acquired
approximated their book value and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
over a ten year period.
In April 1994, the Company acquired Fenn, Wright and Manson, Incorporated
("FWM"), a designer, merchandiser and manufacturer principally of private label
women's and men's apparel primarily serving prominent specialty retail store
chains and department stores in the U.S. and the United Kingdom (the "FWM
Acquisition"). The purchase price for FWM was $44,000,000, consisting of
2,000,000 unregistered shares of the Company's common stock and $10,000 in cash.
Additional costs related to this acquisition approximated $1,400,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $47,848,000 was recorded as goodwill, and was being amortized over
a twenty-five year period.
On April 7, 1995, the Company sold the United Kingdom subsidiary of FWM and
certain brand name rights to Fenn Wright and Manson (Antilles) N.V. (a group led
by Colin Fenn) in exchange for 600,000 shares of Cygne common stock previously
issued. In connection with this transaction, Mr. Fenn resigned his positions as
Director and Vice Chairman of the Company, and as President of FWM. In the
quarter ended April 29, 1995, Cygne recorded a gain of $4,742,000 on the sale,
which is net of certain restructuring expenses of $2,800,000 (consisting
primarily of severance to former FWM employees and costs associated with closing
certain of FWM's facilities) pertaining to the related integration of FWM's
operations with the Company's operations.
F-25
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
(Unaudited)
2. Purchases and Sales of Companies--(Continued)
During 1995, management also took various actions to reverse a decline in
FWM's remaining business. However, management determined that such actions were
not having the desired results and eliminated all of the operations of FWM. The
unamortized goodwill recorded in connection with the acquisition of FWM
($44,530,000) exceeded the undiscounted anticipated future operating cash flows
over the remaining goodwill amortization of period. Therefore, the FWM goodwill
was written off.
In October 1994, Cygne acquired the business operations of G.J.M.
International Limited ("GJM"), a Hong Kong-based designer, merchandiser and
manufacturer of women's intimate apparel, from G.J.M. International Limited, a
company wholly-owned by Mr. W. Glynn Manson (the "GJM Acquisition"). The
purchase price for GJM was $15,200,000, consisting of 650,000 unregistered
shares of the Company's common stock, $10,000 in cash and the assumption of
approximately $1,900,000 of indebtedness owned by GJM International to The
Limited, Inc. Additional costs related to this acquisition approximated
$1,700,000. The excess of the purchase price over the fair value of the net
assets acquired of approximately $27,659,000 was recorded as goodwill and was
being amortized over a twenty-five year period.
In connection with the GJM Acquisition the Company also paid $3,200,000 to
two key executives of GJM for non-compete agreements of fifteen years and four
years, respectively, and issued options vesting over four years to certain key
personnel of GJM to purchase an aggregate of 165,000 shares of the Company's
common stock at a purchase price of $20.50 per share, which option purchase
price as to 125,000 of such shares was subsequently reduced to $2.00 per share
along with the reduction of the option purchase price for other employees.
In February 1996, the Company sold substantially all of the assets of its
GJM intimate apparel and sleepwear business to Warnaco Inc. In the transaction,
Warnaco paid Cygne $12,500,000 in cash and assumed certain liabilities of the
GJM business. Warnaco is also holding an additional $1,500,000 in a treasury
security to secure its obligations to make post-closing payments based upon a
formula that provides, to the extent that net assets (as defined in the purchase
agreement) acquired by Warnaco exceed $8,100,000, Warnaco will pay Cygne the
$1,500,000 held in a treasury security and the amount by which the net assets
exceeds $8,100,000. To the extent such net assets are less than $8,100,000,
Cygne will pay Warnaco the difference first by applying up to $1,500,000 being
held in a treasury security by Warnaco against the amount the net assets fall
below $8,100,000 and thereafter will pay Warnaco any further difference below
$6,600,000 in net assets. Warnaco has informed the Company that it believes the
net assets acquired aggregated only $1,589,000 and that the Company owes Warnaco
$6,511,000, of which $1,500,000 would be satisfied through the treasury
security. The Company disagrees with Warnaco's calculations and is in the
process of reviewing them with Warnaco. The Company cannot predict the outcome
of this dispute. At the time the dispute is resolved, and depending on the
determination of the value of net assets acquired by Warnaco, the Company may
recognize an increase or a decrease in the loss of approximately $31,200,000 on
the sale. The Company used all the proceeds from the sale to repay outstanding
senior bank indebtedness. GJM accounted for approximately 12.0% of the Company's
net sales of $128,367,000 for the quarter ended April 29, 1995.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the U.S.
The purchase price for TSA was approximately $3,800,000, consisting of 53,038
unregistered shares of the Company's common stock and $3,100,000 in cash (the
"TSA Acquisition"). Additional costs related to this acquisition approximated
$730,000. The excess of the purchase price over the fair value of the net assets
acquired of approximately $4,500,000 was recorded as goodwill and was amortized
over a twenty-five year period. Cygne also issued options to purchase an
aggregate of 55,000 shares of the Company's common stock to the two former
shareholders of TSA in connection with their entering into consulting agreements
with TSA. In January 1996, the Company decided to cease operations of TSA by the
end of the second quarter of 1996 and wrote-off the remaining goodwill.
The FWM Acquisition, the GJM Acquisition and the TSA Acquisition were
accounted for under the purchase method and, accordingly, the operating results
of FWM, GJM and TSA have been included in the consolidated operating results
since their respective dates of acquisition.
F-26
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
(Unaudited)
2. Purchases and Sales of Companies--(Continued)
On June 7, 1996 Cygne signed a definitive agreement with AnnTaylor Stores
Corporation regarding the previously announced sale to AnnTaylor of Cygne's 60%
interest in CAT, Cygne's sourcing joint venture arrangement with AnnTaylor, and
the assets of Cygne's AnnTaylor Woven Division that are used in sourcing
merchandise for AnnTaylor (the "AnnTaylor Disposition").
The aggregate consideration to be paid to Cygne in the transaction consists
of unregistered shares of AnnTaylor common stock having a market value of $36
million (based upon the market price of the common stock for the ten trading
days prior to closing, but in no event greater than 2.5 million shares), and a
cash payment in an amount equal to the tangible net book value of the fixed
assets of Cygne's AnnTaylor Woven Division (but not to exceed $2,646,000) plus
the tangible net book value of the inventory of Cygne's AnnTaylor Woven
Division, less the amount of certain liabilities of the Division to be assumed
by AnnTaylor.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company lenders, and the continuation of CAT's $40 million credit
facility. It is currently anticipated that the transaction will close in August
1996, following approval by Cygne's stockholders. There can be no assurance,
however, that the conditions to the closing will be satisfied, that the
transaction will be consummated or, if consummated, that it will be consummated
within the currently anticipated time frame. In order to facilitate the
integration of CAT and Cygne's AnnTaylor Woven Division into AnnTaylor's
operations, Cygne has agreed to make available for a three year period the
services of Mr. Bernard Manuel, the Company's Chief Executive Officer, and Mr.
Irving Benson, the Company's President. Cygne will make available up to 30% of
Messrs. Benson's and Manuel's time and will receive an aggregate fee of $450,000
per year. AnnTaylor has agreed to register the shares issued to Cygne for
resale, although Cygne will be subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time.
CAT and the AnnTaylor Woven Division accounted for approximately 72% of the
Company's net sales of $83,756,000 for the quarter ended May 4, 1996.
3. Inventory
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Inventory consists of the following:
May 4, February 3,
1996 1996
------- ----------
(In thousands)
Raw materials ........................ $ 9,451 $21,748
Finished goods ....................... 1,228 2,972
Finished goods-in-transit ............ 2,762 5,279
------- -------
$13,441 $29,999
======= =======
F-27
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
(Unaudited)
4. Credit Facilities
During the quarter ended October 28, 1995, Cygne and CAT each entered into
a Credit Agreement with the HS Bank which modified the previous credit
arrangement with the HS Bank. The modifications included (i) the consolidation
of the Cygne, FWM and GJM facilities, previously aggregating up to $76,400,000,
into one facility of up to $70,000,000, (ii) an increase in the CAT facility
from up to $28,000,000 to up to $40,000,000, (iii) a requirement under each
agreement to comply with certain financial covenants as well as various other
restrictions, and (iv) an increase in the Cygne facility interest rate.
Borrowings under these facilities, which may be terminated by the HS Bank or the
Company at any time as to future borrowings upon proper notice, are subject to
certain borrowing base limitations and the HS Bank's agreement as to amount,
purpose, interest rate, maturity and collateral. Borrowings under these
facilities are due on the earlier of demand or the maturity date specified by
the HS Bank for each borrowing. Amounts outstanding under the Cygne agreement
bear interest at 1.25% above the prime rate through January 31, 1996 and between
1% and 1.75% above the prime rate thereafter depending upon the working capital,
as defined, of the Company, exclusive of CAT. Amounts outstanding under the CAT
agreement bear interest at 0.5% above the prime rate. Each agreement provides
for additional interest at 2% per annum on amounts not paid when due. The HS
Bank facilities are cross guaranteed by Cygne and certain of its subsidiaries
and are secured by a first lien on substantially all the assets of the Company
including a pledge of 65% of the capital stock of certain of Cygne's foreign
subsidiaries, except for C.A.T. (Far East) Limited as to which 60% of the
capital stock is pledged.
The following table sets forth information with respect to the HS Bank
facilities:
May 4, 1996
------------------------
Direct Open Direct
Total Borrowing Letters Borrowings
Facility (1) Limit (2) Of Credit Outstanding
------------ --------- --------- -----------
(In thousands)
Cygne (3) ............. $ 70,000 $50,000 $ 8,501 $21,149
CAT (4) ............... 40,000 8,000 22,193 5,600
-------- ------- ------- -------
Total ............... $110,000 $58,000 $30,694 $26,749
======== ======= ======= =======
- ------------------------
(1) The total facility, less any direct borrowings outstanding is available for
letters of credit.
(2) Consists principally of revolving loans and borrowings against
import/exports.
(3) The Limited, Inc. had guaranteed $10,000,000 of HS Bank facilities through
May 31, 1996.
(4) Cygne has guaranteed 60% of the indebtedness outstanding under this
facility and AnnTaylor, Inc., which owns 40% of CAT, has provided the HS
Bank with a $4,000,000 standby letter of credit.
On May 15, 1996, the Company received a commitment letter from HS Bank to
provide the Company with a new credit facility to replace the existing facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the AnnTaylor Disposition;
thereafter the facility reduces to $22.5 million and further reduces to $15
million at October 31, 1996; $10 million at November 30, 1996; $5 million at
December 31, 1996; and matures on January 31, 1997. Borrowings under this
facility are subject to borrowing base limitations. The Company is obligated to
pledge substantially all of its assets, including the AnnTaylor stock to be
received at the closing of the AnnTaylor Disposition. The credit facility is
subject to the completion of definitive documentation.
Certain foreign subsidiaries have credit facilities aggregating $2,429,000
at May 4, 1996. Borrowings under these facilities, which are payable on demand,
are secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two-third parties not affiliated with the
Company, but affiliated with each other, whereby these parties made available to
the Company a trade credit facility. The trade credit facility has been
suspended. At May 4, 1996, $9,110,000 of this facility was outstanding. The
Company has reached an agreement in principle to restructure the amounts
outstanding under this trade credit facility.
F-28
<PAGE>
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
(Unaudited)
5. Debt
The Company has existing mortgages, of $999,000 at May 4, 1996 relating to
a foreign office and manufacturing facility which bears interest at LIBOR plus
2% and is payable quarterly in equal payments of $52,600.
At May 4, 1996, the Company also has a $1,258,000 unsecured note payable to
The Limited, Inc., a major customer of the Company. The principal amount
outstanding, which is currently payable, bears interest at prime plus 2% and was
originally due on December 31, 1995.
At May 4, 1996, the balance outstanding on other debt was $1,155,000 of
which $616,000 is long-term.
6. Litigation
On December 11, 1995, a class action complaint was filed against the
Company, certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class of purchasers of the Company's stock during the period
September 28, 1993 through April 28, 1995. The complaint seeks unspecified money
damages and alleges that the Company and the other defendants violated federal
securities laws in connection with various public statements made by the Company
and certain of its officers and directors during the putative class period. On
April 9, 1996, all of the defendants filed motions to dismiss the complaint.
Pursuant to a scheduling order entered by the court, the plaintiff filed
oppositions to the motions to dismiss in May 1996. Defendants are scheduled to
file their reply memoranda on June 18, 1996. The Company believes that all of
the allegations contained in the complaint are without merit and intends to
continue to defend the action vigorously. An adverse decision in this action
could have a material adverse effect on the Company's financial condition or
results of operations.
Richard Kramer, a former employee of the Company, brought an action against
the Company, Bernard Manuel and Irving Benson alleging three causes of action:
(1) fraudulent inducement of Kramer to accept employment as a Group Vice
President; (2) breach of contract by refusing to pay Kramer approximately
$168,500 upon his termination, under a provision which states that if he were
terminated without cause he would receive consideration equal to that sum; and
(3) breach of contract for failure to deliver certain stock options to Kramer.
In October 1995, the defendants moved to dismiss the action on the grounds that
the complaint failed to state a cause of action, that Kramer refused to give the
Company a release in return for payment of the $168,500, and that Kramer, who
had been employed for only two months at the time of his termination, was not
entitled to stock options under the employment letter between the parties. The
motion was denied to the extent that it sought dismissal of the fraudulent
inducement claim and the claim for $168,500, but granted insofar as to the claim
for stock options. An agreement in principle was reached with respect to this
matter for an amount that the Company does not deem material during mandatory
nonbinding mediation but a definitive settlement agreement has not yet been
entered into.
The Company is involved in various other legal proceedings that are
incidental to the conduct of its business, none of which the Company believes
could reasonably be expected to have a material adverse effect on the Company's
financial condition or results of operations.
F-29
<PAGE>
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 Ann Taylor 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 audits provide 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 the 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.
ERNST & YOUNG LLP
New York, New York
April 15, 996, except for Note 5,
as to which the date is May 15, 1996
F-30
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED
AND SUBSIDIARY AND THE ANNTAYLOR WOVEN
DIVISION OF CYGNE DESIGNS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
February January
3, 1996 28, 1995
--------- --------
(In Thousands)
<S> <C> <C>
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
======= =======
</TABLE>
See accompanying notes.
F-31
<PAGE>
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
Year Ended
-------------------------
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 25,61
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-32
<PAGE>
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
<TABLE>
<CAPTION>
Year Ended
------------------------
February January
3, 1996 28, 1995
-------- --------
(In Thousands)
<S> <C> <C>
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) (1,948)
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 --
</TABLE>
See accompanying notes.
F-33
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED AND SUBSIDIARY
AND THE ANN TAYLOR WOVEN
DIVISION OF CYGNE DESIGNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
February 3, 1996
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.
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 the
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-34
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED AND SUBSIDIARY
AND THE ANN TAYLOR 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, rst-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
=========== ===========
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.
F-35
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED AND SUBSIDIARY
AND THE ANN TAYLOR WOVEN
DIVISION OF CYGNE DESIGNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
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 C.A.T. (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.
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.
F-36
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED AND SUBSIDIARY
AND THE ANN TAYLOR WOVEN
DIVISION OF CYGNE DESIGNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes (continued)
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
========== ==========
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-37
<PAGE>
CAT US INC. AND C.A.T. (FAR EAST) LIMITED AND SUBSIDIARY
AND THE ANN TAYLOR WOVEN
DIVISION OF CYGNE DESIGNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity
Stockholders' equity consists of the following (in thousands):
<TABLE>
<CAPTION>
CAT Investment of
------------------------------------ Cygne Designs,
Additional Inc. in
Common Paid-in Retained AnnTaylor
Total Stock Capital Earnings Woven Division
------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
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
======= === == ======= =======
</TABLE>
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 has 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
CAT, as defined.
The employment agreement entered into with one of the officers provides
that, in the event of a transfer of CAT's common stock or in the event of a
transfer of all or substantially all of CAT's assets during the officer's
employment, the officer shall have the option to receive a lump-sum bonus equal
to 10% of 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-38
<PAGE>
APPENDIX I
STOCK AND ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CYGNE DESIGNS, INC.,
CYGNE GROUP (F.E.) LIMITED,
ANNTAYLOR STORES CORPORATION
AND
ANNTAYLOR, INC.
DATED AS OF JUNE 7, 1996
AS AMENDED
BY
AMENDMENT
BY AND BETWEEN
CYGNE DESIGNS, INC.,
CYGNE GROUP (F.E.) LIMITED,
ANNTAYLOR STORES CORPORATION
AND
ANNTAYLOR, INC.
DATED AS OF AUGUST 27, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
I. Transfer of Assets and Liabilities ...................................................... I-1
1.1 Assets to be Sold .......................................................... I-1
1.2 Consideration .............................................................. I-3
1.3 Closing .................................................................... I-3
1.4 Deliveries by Seller ....................................................... I-3
1.5 Deliveries by Buyer ........................................................ I-4
1.6 Post-Closing Adjustments ................................................... I-4
1.7 Allocation of Purchase Price ............................................... I-6
1.8 Assumed Liabilities ........................................................ I-6
II. Related Matters ......................................................................... I-6
2.1 Ancillary Agreements ....................................................... I-7
2.2 Receivables Settlement ..................................................... I-7
2.3 Finished Goods ............................................................. I-7
2.4 Joint Venture Agreement .................................................... I-7
2.5 Leases ..................................................................... I-7
2.6 Meyer Employment Agreement ................................................. I-7
2.7 Mail Received After Closing ................................................ I-7
2.8 Employees, Benefit Plans ................................................... I-7
III. Representations and Warranties of Seller ................................................ I-9
3.1 Organization of Seller and CAT; Authority .................................. I-9
3.2 No Violation; Consents and Approvals ....................................... I-9
3.3 Seller Financial Statements ................................................ I-10
3.4 CAT Financial Statements ................................................... I-11
3.5 Combined Entity Financial Statements ....................................... I-11
3.6 Absence of Seller Undisclosed Liabilities .................................. I-12
3.7 Absence of CAT Undisclosed Liabilities ..................................... I-12
3.8 Absence of Division Undisclosed Liabilities ................................ I-12
3.9 Absence of Certain Changes or Events ....................................... I-12
3.10 Title to CAT Shares ........................................................ I-12
3.11 Title to Assets; Leased Property ........................................... I-13
3.12 Litigation/Claims .......................................................... I-14
3.13 Employee Benefit Plans ..................................................... I-14
3.14 Certain Contracts and Arrangements ......................................... I-15
3.15 Compliance with Laws; Licenses ............................................. I-15
3.16 Insurance .................................................................. I-16
3.17 Labor Matters .............................................................. I-16
3.18 Assets of the Division Business ............................................ I-16
3.19 Disclosure ................................................................. I-16
3.20 Environmental Matters ...................................................... I-17
3.21 Opinion of Financial Advisor ............................................... I-17
3.22 Brokers .................................................................... I-17
3.23 Intellectual Property ...................................................... I-17
3.24 Absence of Violations of Quotas and Visas .................................. I-17
3.25 No Tariffs or Duties ....................................................... I-18
3.26 Compliance with U.S. Customs and Trade Laws ................................ I-18
3.27 SEC Documents .............................................................. I-18
3.28 Compliance with Laws by CAT; Licenses ...................................... I-18
3.29 CAT Taxes .................................................................. I-18
3.30 Acquisition of the ATSC Common Stock for Investment; Securities Act ........ I-19
3.31 Suppliers .................................................................. I-19
3.32 Disclaimer of Other Representations and Warranties ......................... I-19
</TABLE>
I-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
IV. Representations and Warranties of ATSC and Buyer ........................................ I-19
4.1 Organization of ATSC and Buyer; Authority .................................. I-19
4.2 No Violation; Consents and Approvals ....................................... I-20
4.3 Litigation/Claims .......................................................... I-21
4.4 SEC Documents and Other Reports ............................................ I-21
4.5 Capital Stock .............................................................. I-21
4.6 Absence of Certain Changes or Events ....................................... I-21
4.7 Information Supplied ....................................................... I-21
4.8 Brokers .................................................................... I-21
4.9 Disclaimer of Other Representations and Warranties ......................... I-21
V. Covenants of the Parties ................................................................ I-22
5.1 Conduct of the Division Business ........................................... I-22
5.2 Access to Information; Confidentiality ..................................... I-23
5.3 Financial Statements ....................................................... I-23
5.4 Reasonable Best Efforts .................................................... I-24
5.5 Consents ................................................................... I-24
5.6 Antitrust Notification ..................................................... I-24
5.7 Public Announcements ....................................................... I-24
5.8 Access to Books and Records Following the Closing .......................... I-24
5.9 Other Transactions ......................................................... I-24
5.10 Discharge of Liens ......................................................... I-24
5.11 Resignations ............................................................... I-24
5.12 Insurance .................................................................. I-25
5.13 Supplementary Disclosure ................................................... I-25
5.14 Brazil Sourcing ............................................................ I-25
5.15 Letters of Credit .......................................................... I-25
5.16 Amendment .................................................................. I-25
5.17 Proxy Statement; Stockholder Approval ...................................... I-25
5.18 Occupancy .................................................................. I-26
5.19 Transfer Taxes ............................................................. I-26
5.20 Conduct of ATSC Business ................................................... I-26
VI. Conditions to Obligations of Both Parties ............................................... I-26
6.1 Conditions ................................................................. I-26
VII. Conditions to Obligations of Seller ..................................................... I-27
7.1 Conditions ................................................................. I-27
VIII. Conditions to Obligations of Buyer ...................................................... I-27
8.1 Conditions ................................................................. I-27
IX. Termination, Amendment and Waiver ....................................................... I-28
9.1 Termination ................................................................ I-28
9.2 Procedure and Effect of Termination ........................................ I-28
9.3 Other Remedies ............................................................. I-28
X. Survival of Representations; Indemnification ............................................ I-28
10.1 Survival of Representations ................................................ I-28
10.2 Seller's Agreement to Indemnify ............................................ I-29
10.3 Seller's Limitation of Liability ........................................... I-29
10.4 Buyer's Agreement to Indemnify ............................................. I-30
10.5 Buyer's Limitation of Liability ............................................ I-30
10.6 Conditions of Indemnification .............................................. I-30
10.7 Exclusive Remedies ......................................................... I-31
10.8 Transfer Pricing ........................................................... I-31
10.9 Claims Against CAT Directors and Officers .................................. I-31
</TABLE>
I-ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
XI. Miscellaneous ........................................................................... I-31
11.1 Fees and Expenses .......................................................... I-31
11.2 Further Assurances ......................................................... I-31
11.3 Notices .................................................................... I-31
11.4 Entire Agreement ........................................................... I-32
11.5 Severability ............................................................... I-32
11.6 Binding Effect; Assignment ................................................. I-32
11.7 Amendment, Modification and Waiver ......................................... I-32
11.8 Third-Party Beneficiaries .................................................. I-32
11.9 Counterparts ............................................................... I-32
11.10 Bulk Sales ................................................................. I-32
11.11 Interpretation ............................................................. I-32
11.12 Governing Law .............................................................. I-33
ANNEXES AND EXHIBITS
ANNEX I ............................................................................. Division Fabric and Trim
ANNEX II ................................................................................... Assumed Contracts
ANNEX III ................................................................................... Net Fixed Assets
ANNEX IV ...................................................................................... Lease Deposits
EXHIBIT A ....................................................................................... Bill of Sale
EXHIBIT B ................................................................ Assignment and Assumption Agreement
EXHIBIT C ........................................................................................ Undertaking
EXHIBIT D ................................................................................. Advance Instrument
EXHIBIT E ................................................................................... Pledge Agreement
EXHIBIT F ................................................................... NY Transition Services Agreement
EXHIBIT G ................................................................ Miami Transition Services Agreement
EXHIBIT H ........................................................................ Manuel Consulting Agreement
EXHIBIT I ........................................................................ Benson Consulting Agreement
EXHIBIT J ............................................................................. Stockholders Agreement
EXHIBIT K ..................................................................................... Florence Lease
EXHIBIT L ................................................................... Legal Opinion of Buyer's Counsel
EXHIBIT M .................................................................. Legal Opinion of Seller's Counsel
</TABLE>
I-iii
<PAGE>
GLOSSARY
Page
----
Agreement ........................................................... I-1
Seller .............................................................. I-1
CGFE ................................................................ I-1
ATSC ................................................................ I-1
Buyer ............................................................... I-1
Joint Venture Agreement ............................................. I-1
CAT-US .............................................................. I-1
CAT-Far East ........................................................ I-1
CAT ................................................................. I-1
Division ............................................................ I-1
Division Business ................................................... I-1
CAT US Shares ....................................................... I-1
CAT Far East Shares ................................................. I-1
CAT Shares .......................................................... I-1
Closing ............................................................. I-1
Liens ............................................................... I-1
Inventory ........................................................... I-1
Division Fabric and Trim ............................................ I-1
Capital Leases ...................................................... I-1
Contracts ........................................................... I-1
NY Facility ......................................................... I-2
NY Lease ............................................................ I-2
FWM Lease ........................................................... I-2
CAT Sublease ........................................................ I-2
Net Fixed Assets .................................................... I-2
Intellectual Property ............................................... I-2
Books and Records ................................................... I-2
Assets .............................................................. I-2
Bill of Sale ........................................................ I-2
Subleases ........................................................... I-2
Assignment and Assumption Agreements ................................ I-2
Other Instruments ................................................... I-2
ATSC Common Stock ................................................... I-3
Stock Consideration ................................................. I-3
Average Trading Price ............................................... I-3
Inventory Consideration ............................................. I-3
Fixed Asset Consideration ........................................... I-3
Purchase Price ...................................................... I-3
Undertaking ......................................................... I-3
Accounts Payable .................................................... I-3
Advance Instrument .................................................. I-3
Advances ............................................................ I-3
Liabilities ......................................................... I-3
Closing Date ........................................................ I-4
Bank Account ........................................................ I-4
GAAP ................................................................ I-4
Estimated Amount .................................................... I-4
Net Fixed Asset Value ............................................... I-5
Initial Payment Amount .............................................. I-5
Pledged Amount ...................................................... I-5
Seller Statement .................................................... I-5
I-iv
<PAGE>
Statement of Objection .............................................. I-5
Closing Date Statement .............................................. I-5
Reviewing Accountants ............................................... I-5
Accountant Statement ................................................ I-5
Adjusted Net Book Value ............................................. I-5
Pledge Agreement .................................................... I-5
Code ................................................................ I-6
IRS ................................................................. I-6
Stockholders Agreement .............................................. I-6
Florence Facility ................................................... I-6
Florence Lease ...................................................... I-6
Ancillary Agreements ................................................ I-6
Accounts Receivable Estimate ........................................ I-7
Receivables Payment Amount .......................................... I-7
Employment Agreements ............................................... I-7
Affected Employees .................................................. I-7
CAT Employees ....................................................... I-7
Hired Employees ..................................................... I-7
Continued Employees ................................................. I-8
Prior Welfare Plans ................................................. I-8
Replacement Welfare Plans ........................................... I-8
COBRA ............................................................... I-8
Material Adverse Effect ............................................. I-9
Seller Disclosure Schedule .......................................... I-9
Seller Related Instruments .......................................... I-9
Governmental Entities ............................................... I-10
HSR Act ............................................................. I-10
Exchange Act ........................................................ I-10
1996 Balance Sheet .................................................. I-10
Audited Financial Statements ........................................ I-10
Financial Statements ................................................ I-10
CAT 1996 Balance Sheet .............................................. I-11
CAT Audited Financial Statements .................................... I-11
CAT Financial Statements ............................................ I-11
Combined Entity ..................................................... I-11
Combined Entity 1996 Balance Sheet .................................. I-11
Combined Entity Audited Financial Statements ........................ I-11
Combined Entity Unaudited Financial Statements ...................... I-11
Combined Entity Financial Statements ................................ I-11
Permitted Liens ..................................................... I-13
Miami Lease ......................................................... I-13
Leases .............................................................. I-13
Miami Facility ...................................................... I-13
Leased Properties ................................................... I-13
Plans ............................................................... I-14
ERISA Affiliate ..................................................... I-14
ERISA ............................................................... I-14
Division Contracts .................................................. I-15
Permits ............................................................. I-16
Environmental Laws .................................................. I-17
Environmental Claim ................................................. I-17
Hazardous Materials ................................................. I-17
PCBs ................................................................ I-17
SEC ................................................................. I-18
I-v
<PAGE>
Seller SEC Documents ................................................ I-18
Securities Act ...................................................... I-18
Tax ................................................................. I-19
Taxes ............................................................... I-19
Tax Return .......................................................... I-19
Buyer Related Instruments ........................................... I-19
Buyer Disclosure Schedule ........................................... I-21
ATSC SEC Documents .................................................. I-21
Confidentiality Agreements .......................................... I-23
Combined Entity 1994 Audited Financial Statements ................... I-23
Subsequent Monthly Financial Statements ............................. I-23
CAT Subsequent Monthly Financial Statements ......................... I-23
Combined Entity Subsequent Monthly Financial Statements ............. I-23
Subsequent Quarterly Financial Statements ........................... I-23
CAT Subsequent Quarterly Financial Statements ....................... I-23
Combined Entity Subsequent Quarterly Financial Statements ........... I-23
Subsequent Financial Statements ..................................... I-24
CAT Subsequent Financial Statements ................................. I-24
Combined Entity Subsequent Financial Statements ..................... I-24
Exclusivity Period .................................................. I-24
Existing Gordon Agreement ........................................... I-25
Commission .......................................................... I-25
Preliminary Proxy Materials ......................................... I-25
Annual Meeting ...................................................... I-25
Proposal ............................................................ I-25
Proxy Statement ..................................................... I-25
Transfer Taxes ...................................................... I-26
Buyer Group ......................................................... I-29
Damages ............................................................. I-29
Seller Claims ....................................................... I-29
Buyer's Deductible .................................................. I-29
Seller Group ........................................................ I-30
Buyer Claims ........................................................ I-30
Claims .............................................................. I-30
Seller's Deductible ................................................. I-30
Failure of Condition ................................................ I-30
Waiving Party ....................................................... I-31
person .............................................................. I-32
affiliate ........................................................... I-32
I-vi
<PAGE>
STOCK AND ASSET PURCHASE AGREEMENT,
AS AMENDED
STOCK AND ASSET PURCHASE AGREEMENT, dated as of June 7, 1996, as amended as
of August 27, 1996 (the "Agreement"), by and between CYGNE DESIGNS, INC., a
Delaware corporation ("Seller"), CYGNE GROUP (F.E.) LIMITED, a Hong Kong
corporation and a wholly owned subsidiary of Seller ("CGFE"), ANNTAYLOR STORES
CORPORATION, a Delaware corporation ("ATSC"), and ANNTAYLOR, INC., a Delaware
corporation and a wholly owned subsidiary of ATSC ("Buyer").
W I T N E S S E T H
WHEREAS, pursuant to that certain Agreement, dated July 13, 1993 (the
"Joint Venture Agreement"), by and among Seller, CGFE, CAT US, Inc., a Delaware
corporation ("CAT US"), C.A.T. (Far East) Limited, a Hong Kong corporation
("CAT-Far East" and, together with CAT US, "CAT"), and Buyer, Seller and Buyer
own 60% and 40%, respectively, of the outstanding capital stock of CAT, which
serves as a fully dedicated direct sourcing capability for Buyer;
WHEREAS, Seller, through its AnnTaylor Woven Division (the "Division"),
serves as a private label designer, merchandiser and manufacturer of women's
apparel for AnnTaylor (the "Division Business");
WHEREAS, Seller desires to sell to Buyer and Buyer desires to acquire from
Seller (i) all of the shares of common stock, par value $.01 per share, of CAT
US owned by Seller (the "CAT US Shares"); and (ii) certain of the assets of the
Division as more fully described herein; and
WHEREAS, CGFE desires to sell to Buyer and Buyer desires to acquire from
CGFE all the shares of common stock, par value $1 HK per share, of CAT-Far East
owned by CGFE (the "CAT-Far East Shares" and, together with the CAT US Shares,
the "CAT Shares").
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, agreements and conditions contained
herein, and intending to be legally bound hereby, the parties agree as follows:
I. TRANSFER OF ASSETS AND LIABILITIES.
1.1 Assets to be Sold.
(a) Upon the terms and subject to the conditions of this Agreement, at the
closing provided for in Section 1.3 hereof (the "Closing"), Seller shall sell,
convey, assign, transfer and deliver to Buyer, and Buyer shall purchase, acquire
and accept from Seller, the following:
(i) all right, title and interest in and to the CAT US Shares, free
and clear of all liens, encumbrances, security interests, mortgages,
pledges, claims, options or restrictions of any kind, other than
restrictions on transfer imposed under federal and state securities laws
(collectively, "Liens");
(ii) the following items of inventory (the "Inventory"): (x) fabric
and trim owned by Seller for use by the Division in the production of
merchandise for Buyer ("Division Fabric and Trim") as of February 3, 1996
and identified on ANNEX I hereto to the extent not used as of the Closing
Date in the production of merchandise for Buyer; (y) Division Fabric and
Trim purchased since February 3, 1996 pursuant to written commitments or
purchase orders issued by Buyer to the extent not used as of the Closing
Date in the production of merchandise for Buyer and (z) work-in-progress
owned by Seller for use by the Division in the production of merchandise
for Buyer pursuant to purchase orders issued by Buyer;
(iii) the capital leases and other agreements relating to equipment
located on the fifth, sixth and nineteenth floors of Seller's facility
located at 1372 Broadway, New York City, New York (the "NY Facility") and
at the Florence Facility (as hereinafter defined), to the extent they
relate to the Division Business and are listed on and marked with an
asterisk on Annex II hereto (collectively, the "Capital Leases") and other
contracts, personal property leases and other commitments to which Seller
is a party to the extent they relate to the Division Business and are
listed on ANNEX II hereto (collectively with the Capital Leases, the
"Contracts");
(iv) Seller's or its affiliate's rights as tenant in accordance with
Section 1.1(b) hereof (A) with respect to the sixth floor of the NY
Facility under the Agreement of Lease, dated August 7, 1991, between
Seller, as tenant, and Nineteen New York Properties Limited Partnership, as
landlord, as amended (as it relates to the sixth floor only,
I-1
<PAGE>
the "NY Lease"), and (B) with respect to the fifth and nineteenth floors of
the NY Facility under the Agreement of Lease, dated June 24, 1994, between
Fenn, Wright and Manson, Incorporated, as tenant, and Nineteen New York
Properties Limited Partnership, as landlord (as it relates to the fifth and
nineteenth floors only, the "FWM Lease"), as amended by that certain
sublease, dated February 28, 1995, between Fenn, Wright and Manson
Incorporated, as sublessor, and CAT US, Inc., as sublessee (the "CAT
Sublease");
(v) all leasehold improvements, furniture, fixtures and equipment that
meet all of the following conditions: (x) are owned by Seller or subject to
a Capital Lease, (y) relate to and are used exclusively or primarily in the
Division Business and (z) are located on the fifth, sixth or nineteenth
floor of the NY Facility or at the Florence Facility on the Closing Date
(the "Net Fixed Assets"), including those listed on ANNEX III hereto;
(vi) all licenses, permits, registrations, renewals thereof and
applications therefor, variances, exemptions, orders, approvals and
authorizations issued by any governmental, regulatory or administrative
agency or authority (domestic or foreign), held by Seller or any affiliate
of Seller of or relating to the Division Business, including all quota
allocations for the export of goods to the United States and elsewhere,
necessary or desirable for the lawful conduct of the Division Business, to
the extent transferable under applicable law;
(vii) all purchase orders, bills of lading, trust receipts, warehouse
receipts and other documents of title of whatever kind and description
relating to the Inventory;
(viii) all rights under insurance policies covering Inventory in
transit and all rights and claims under insurance policies for damage to
any Assets to the extent not repaired or replaced prior to the Closing;
(ix) all goodwill, intellectual property rights, patents, trademarks,
service marks, copyrights (including all copyrights in computer software
and databases), licenses and applications therefor (if any), know-how,
processes, methods, techniques, formulae, designs, drawings, patterns,
trade secrets, proprietary information, sketches, technical information,
computer software, databases and other proprietary or confidential
information of or relating to the Division Business and all rights in any
licenses to or from any third party of or for the foregoing (collectively,
the "Intellectual Property"), it being understood, however, that the rights
to the Intellectual Property shall be non-exclusive unless such
Intellectual Property relates solely to the Division Business and Seller's
rights therein are exclusive;
(x) all intangible assets of or relating to the Division Business,
including claims against third parties; and
(xi) all books and records (including all computerized records and
storage media and associated software) of CAT, and those relating solely to
the Division Business and, to the extent practicable, those portions of
Seller's other books and records that relate to the Division Business
(collectively, "Books and Records"), including, without limitation, (a) all
Books and Records relating to the employees of, and the purchase of
materials, supplies and services for, the Division Business or CAT, but not
including the tax returns, general ledger or corporate minute books and
capital stock books of Seller, and (b) the tax returns, general ledger and
corporate minute books and capital stock books of CAT US and CAT-Far East
(together with the items listed in clauses (ii)-(x) above, the "Assets").
(b) Such sale, conveyance, assignment, transfer and delivery shall be
effected by delivery by Seller to Buyer or its designees of (i) stock
certificates representing the CAT US Shares, duly endorsed or accompanied by
stock powers duly executed in blank with appropriate transfer stamps, if any,
affixed, and any other documents that are necessary to transfer title to the CAT
US Shares to Buyer, (ii) a duly executed bill of sale in substantially the form
of EXHIBIT A hereto (the "Bill of Sale"), (iii) a mutually satisfactory sublease
agreement with respect to each of the NY Lease and the FWM Lease (the
"Subleases") or, alternatively, newly negotiated leases between Buyer and the
landlord of the NY Facility relating to the premises subject to the NY Lease and
the FWM Lease, respectively, (iv) duly executed assignment and assumption
agreements in substantially the form of EXHIBIT B hereto (the "Assignment and
Assumption Agreements") with respect to each of the Contracts, and (v) such
other good and sufficient instruments of conveyance and transfer (collectively,
the "Other Instruments") as shall be reasonably necessary to vest in Buyer good
and valid title to the CAT US Shares and the Assets, free and clear of all
Liens, other than the Permitted Liens (as hereinafter defined).
(c) Upon the terms and subject to the conditions of this Agreement, at the
Closing, CGFE shall sell, convey, assign, transfer and deliver to Buyer, and
Buyer shall purchase, acquire and accept from CGFE, all right, title and
interest in and to the CAT Far East Shares, free and clear of all Liens. Such
sale, conveyance, assignment, transfer and delivery shall be effected by
delivery by CGFE to Buyer or its designees of stock certificates representing
the CAT Far
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East Shares, duly endorsed or accompanied by stock powers duly executed in blank
with appropriate transfer stamps, if any, affixed, and any other documents that
are necessary to transfer title to the CAT Far East Shares to Buyer.
1.2 Consideration.
(a) Upon the terms and subject to the conditions of this Agreement, in
consideration of the aforesaid sale, conveyance, assignment, transfer and
delivery of the CAT Shares and the Assets, Buyer shall, in accordance with the
terms of this Agreement, deliver or cause to be delivered to Seller, on its own
behalf and on behalf of CGFE, as their respective interests may appear, in full
payment for the aforesaid sale, conveyance, assignment, transfer and delivery of
the CAT Shares and the Assets:
(i) the number of validly issued, fully paid and nonassessable shares
of common stock, par value $.0068 per share, of ATSC ("ATSC Common Stock"),
rounded to the nearest whole share, equal to the quotient obtained by
dividing (a) $36.0 million by (b) the Average Trading Price of the ATSC
Common Stock (the "Stock Consideration"); provided, however, that, except
as provided in the next sentence of this Section 1.2(a)(i), the number of
shares of ATSC Common Stock to be issued shall in no event exceed 2.5
million shares (the "2.5 Million Cap"). In the event that on the Closing
Date (x) the 2.5 Million Cap is triggered and (y) the aggregate value,
based on the Average Trading Price, of 2.5 million shares of ATSC Common
Stock is less than $32.5 million, then ATSC shall issue as the Stock
Consideration the number of shares of ATSC Common Stock, rounded to the
nearest whole share, equal to the quotient obtained by dividing (A) $32.5
million by (B) the Average Trading Price of the ATSC Common Stock provided,
however, that the number of shares of ATSC Common Stock to be issued shall
in no event exceed 3 million shares. The number of shares of ATSC Common
Stock, if any, issued in excess of the 2.5 Million Cap shall be hereinafter
referred to as the "Additional Shares". Notwithstanding the foregoing, in
lieu of the issuance by ATSC of all or a portion of the Additional Shares,
if applicable, Buyer may, in its sole discretion, deliver the dollar amount
in cash (the "Additional Cash") equal to the product obtained by
multiplying (aa) the number of Additional Shares not to be issued by ATSC
by (bb) the Average Trading Price. As used in this Agreement, the term
"Stock Consideration" shall include the amount of the Additional Cash, if
any, delivered in lieu of Additional Shares. As used in this Agreement, the
"Average Trading Price" shall mean the average of the high and low sale
prices of the ATSC Common Stock on the New York Stock Exchange Composite
Tape (or as reported on any other exchange on which the ATSC Common Stock
is then listed) on each of the 10 consecutive trading days ending on the
trading day immediately prior to the Closing Date;
(ii) a dollar amount in cash equal to the Adjusted Net Book Value (as
hereinafter defined) of the Inventory determined in accordance with Section
1.6 hereof (the "Inventory Consideration");
(iii) a dollar amount in cash equal to the lesser of (x) the Net Fixed
Asset Value (as hereinafter defined) and (y) $2,646,000 (the "Fixed Asset
Consideration" and, together with the Inventory Consideration and the Stock
Consideration, the "Purchase Price");
(iv) the Subleases, if applicable;
(v) the Assignment and Assumption Agreements;
(vi) an undertaking substantially in the form of EXHIBIT C hereto (the
"Undertaking") evidencing the assumption by Buyer of accounts payable
associated with the Inventory (the "Accounts Payable"); and
(vii) an instrument, substantially in the form of EXHIBIT D hereto
(the "Advance Instrument"), evidencing the forgiveness by Buyer of
$7,985,000 of outstanding advances (the "Advances" and, collectively with
the Capital Leases and the Accounts Payable, the "Liabilities") made to
Seller by Buyer.
1.3 Closing. The Closing of the transactions contemplated by this Agreement
shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom, 919
Third Avenue, New York, New York, at 10:00 a.m., Eastern time, on the first
business day following the Annual Meeting (as hereinafter defined) or, if the
conditions to Closing set forth in Articles VI, VII and VIII hereof shall not
have been satisfied or waived by such date, as soon as practicable after such
conditions shall have been satisfied or waived, or such other place, date and
time as shall be agreed upon in writing by the parties hereto. The date on which
the Closing actually occurs is referred to herein as the "Closing Date".
1.4 Deliveries by Seller. At the Closing, Seller and CGFE, as applicable,
shall deliver or cause to be delivered to Buyer (unless delivered previously)
the following:
(a) the stock certificates representing the CAT Shares, duly endorsed
or accompanied by stock powers duly executed in blank with appropriate
transfer stamps, if any, affixed, and any other documents that are
reasonably necessary to transfer title to the CAT Shares to Buyer;
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(b) the Bill of Sale;
(c) the Subleases, if applicable;
(d) the Assignment and Assumption Agreements;
(e) the Pledge Agreement (as hereinafter defined);
(f) the resignations of certain officers and directors of CAT referred
to in Section 5.11 hereof;
(g) the compliance certificate referred to in Subsection 8.1(c)
hereof;
(h) the opinion of counsel to Seller referred to in Subsection 8.1(d)
hereof;
(i) duly executed counterparts of any consent or approval referred to
in Subsection 8.1(g) hereof;
(j) the Ancillary Agreements (as hereinafter defined); and
(k) all other documents, certificates, instruments or writings
required to be delivered by Seller at or prior to the Closing pursuant to
this Agreement or otherwise reasonably required in connection herewith.
1.5 Deliveries by Buyer. At the Closing, Buyer shall deliver or cause to be
delivered to Seller (unless delivered previously) the following:
(a) a stock certificate or stock certificates representing the shares
of ATSC Common Stock to be delivered to Seller in payment of the Stock
Consideration, free and clear of all Liens other than as set forth in, and
bearing the legend set forth in, the Stockholder's Agreement (as
hereinafter defined);
(b) a wire transfer of Federal or other immediately available funds in
an amount equal to the Initial Payment Amount (as hereinafter defined);
(c) a wire transfer of Federal or other immediately available funds in
amount equal to the Fixed Asset Consideration;
(d) a wire transfer of Federal or other immediately available funds in
an amount equal to the Receivables Payment Amount (as hereinafter defined);
(e) a wire transfer of Federal or other immediately available funds in
an amount equal to the deposits under the Leases (as hereinafter defined)
listed on ANNEX IV hereto;
(f) a wire transfer of Federal or other immediately available funds in
an amount equal to the Pledged Amount (as hereinafter defined) to a bank
account in the name of Buyer (the "Bank Account");
(g) the Pledge Agreement;
(h) the Subleases, if applicable;
(i) the Assignment and Assumption Agreements;
(j) the Undertaking;
(k) the Advance Instrument;
(l) the officer's certificate referred to in Subsection 7.1(c) hereof;
(m) the opinion of counsel to Buyer referred to in Subsection 7.1(d)
hereof;
(n) the Ancillary Agreements;
(o) evidence that Buyer has substituted letters of credit or provided
an alternative form of financial support for the letters of credit listed
on the schedule delivered pursuant to Section 5.15 hereof;
(p) all other documents, certificates, instruments or writings
reasonably required to be delivered by Buyer at or prior to the Closing
pursuant to this Agreement or otherwise required in connection herewith;
and
(q) a wire transfer of Federal or other immediately available funds in
an amount equal to the Additional Cash, if applicable.
The wire transfers pursuant to subparagraphs (b) (c) (d) (e) and (q)
above shall be made by a single wire transfer to an account designated in
writing at least two (2) business days prior to the Closing Date by Seller.
1.6 Post-Closing Adjustments.
(a) At least five (5) business days prior to the Closing Date, Seller shall
prepare and deliver to Buyer (i) a good faith estimate, prepared in accordance
with United States generally accepted accounting principles ("GAAP"),
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applied in a manner consistent with the preparation of the financial statements
referred to in Section 3.5 hereof, except as otherwise expressly provided below,
and accompanied by a certificate of the chief financial officer of Seller to
that effect, of the aggregate amount of the Adjusted Net Book Value of the
Inventory determined in accordance with clause (f) below (the "Estimated
Amount") as of the Closing Date, (ii) a statement, prepared in good faith in a
manner consistent with the preparation of the Company's books and records during
the periods reflected in the financial statements referred to in Section 3.5
hereof and accompanied by a certificate of the chief financial officer of Seller
to that effect, of the aggregate amount of the net book value of the Net Fixed
Assets as of the Closing Date (the "Net Fixed Asset Value"), and (iii) a
schedule of all open purchase orders of Seller relating to the Division.
(b) At Closing, Buyer shall (i) deliver to Seller an amount equal to 80% of
the Estimated Amount (the "Initial Payment Amount") and (ii) cause the Bank
Account to be credited with an amount equal to 20% of the Estimated Amount (the
"Pledged Amount").
(c) Beginning two (2) days prior to the Closing Date, Seller and Buyer
shall jointly conduct, or shall cause to be jointly conducted by their
respective independent public accountants, a physical count of all Inventory as
of the Closing Date. The physical count of the Inventory shall be conducted in
accordance with procedures to be mutually agreed upon by the parties' respective
independent public accountants. As promptly as practicable thereafter, but in no
event more than thirty (30) days following the Closing Date, Seller shall
prepare or cause to be prepared and shall deliver to Buyer a reasonably detailed
statement setting forth the Adjusted Net Book Value of the Inventory, determined
in accordance with clause (f) below (the "Seller Statement"). Unless within
thirty (30) days after its receipt of the Seller Statement Buyer shall deliver
to Seller a reasonably detailed statement describing its objections to the
Seller Statement (a "Statement of Objection"), the amount of the Adjusted Net
Book Value of the Inventory determined in accordance with this clause (c) shall
be final and binding on the parties hereto and the Seller Statement shall be the
final statement hereunder (the "Closing Date Statement"). Buyer may include in
its Statement of Objection one or more objections to items included by Seller in
the Inventory that, in Buyer's good faith determination, were not properly
included as Inventory pursuant to Section 1.1(a)(ii) hereof;
(d) If Buyer shall deliver to Seller a timely Statement of Objection, Buyer
and Seller and their respective independent accountants shall negotiate in good
faith and use reasonable best efforts to resolve any disputes. If a resolution
is reached, such resolution shall be final and binding on the parties and Buyer
and Seller shall set forth the Adjusted Net Book Value of the Inventory on a
mutually acceptable statement and such statement shall be the Closing Date
Statement. If a final resolution is not reached within fifteen (15) days after
Buyer has submitted its Statement of Objection, any remaining disputes shall be
resolved by a third firm of independent accountants (the "Reviewing
Accountants") selected jointly by the parties' independent accounting firms. The
Reviewing Accountants shall be instructed to resolve any matters in dispute as
promptly as practicable, but in no event more than thirty (30) days, and set
forth their resolution in a statement setting forth the Net Book Value of the
Inventory (the "Accountant Statement"). In such event, the determination of the
Reviewing Accountants shall be final and binding on the parties hereto and the
Accountant Statement shall be the Closing Date Statement.
(e) Seller and Buyer each shall pay one-half of the fees and expenses of
the Reviewing Accountants. Seller and the Buyer shall cooperate with each other
and the Reviewing Accountants in connection with the matters contemplated by
this Section 1.6, including Seller's preparation of and Buyer's review of the
Closing Date Statement, including by furnishing such information and access to
books, records (including accountants' work papers), personnel and properties as
may be reasonably requested.
(f) The "Adjusted Net Book Value" shall be equal to the tangible net book
value of the Inventory, less the amount of the Liabilities, as set forth on the
Closing Date Statement. The Closing Date Statement shall be prepared in
accordance with GAAP applied in a manner consistent with the financial
statements referred to in Section 3.5 hereof, except as otherwise expressly set
forth in this Section 1.6, and except that Inventory shall be valued at cost,
not the lower of cost or market. For purposes of this Section 1.6, the
Inventory, regardless of condition, shall be valued as follows: (i) raw
materials shall be valued at cost, including, without limitation, to the extent
actually incurred: FOB or CF purchase price, as the case may be; inspection
costs; re-dyeing and/or refinishing charges; duty; freight and brokerage
charges; fabric commission; insurance; and storage charges; provided, however,
that such valuation applies only to raw materials available to Buyer (i.e.,
excludes shrinkage); and (ii) work-in-progress shall include (A) raw material
costs as determined above; and (B) making charges to the extent such charges
have been paid by Seller. Notwithstanding the foregoing, finished goods rejected
or canceled by Buyer prior to the Closing Date shall not be included in the
Assets and such finished goods shall remain in Seller's possession.
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(g) At the Closing, Buyer shall pledge the Bank Account to Seller as
security for its interest under this Section 1.6 pursuant to a Pledge Agreement
in substantially the form of EXHIBIT E hereto (the "Pledge Agreement"). Upon
delivery of the Closing Date Statement, Seller hereby releases its right and
security interest in the Bank Account (but not in the proceeds thereof, to the
extent such proceeds are due to Seller pursuant to this Section 1.6)
automatically and without any further action required on the part of Seller.
(h) If the Adjusted Net Book Value set forth in the Closing Date Statement
exceeds the Initial Payment Amount, Buyer shall distribute to Seller in cash out
of the Pledged Amount the amount of such excess. Buyer shall retain the
remainder, if any, of the Pledged Amount. Buyer shall distribute interest earned
on the Pledged Amount in the Bank Account to Seller, or shall retain such
interest, in proportion to the amount of the Pledged Amount distributed or
retained, as the case may be, by each.
(i) If the Adjusted Net Book Value set forth in the Closing Date Statement
is less than the Initial Payment Amount, Seller shall pay the difference to
Buyer in immediately available funds, plus interest on such amount from the
Closing Date to the date of payment at the rate of 8% per annum. In such event,
Buyer shall retain the Pledged Amount and all interest earned thereon.
(j) If the Adjusted Net Book Value set forth in the Closing Date Statement
exceeds the Estimated Amount, then, in addition to distribution of the Pledged
Amount pursuant to clause (h) above, Buyer shall pay the difference to Seller in
immediately available funds, plus interest on such amount from the Closing Date
to the date of payment at the rate of 8% per annum.
1.7 Allocation of Purchase Price. Prior to the Closing, the parties shall
agree to the appropriate allocation of the Purchase Price and the Liabilities
among the CAT Shares and Assets, which allocation shall comply with Section 1060
of the Internal Revenue Code of 1986, as amended (the "Code"). The parties
hereby agree that such allocation shall be conclusive and binding on each of
them for purposes of federal and, where applicable, state and local tax returns
and that they will not voluntarily take any position inconsistent therewith. The
parties hereby agree to prepare and timely file all applicable Internal Revenue
Service ("IRS") and other governmental authority forms, to cooperate with each
other in the preparation of such forms, and to furnish each other with a copy of
such forms prepared in draft, within a reasonable period prior to the filing due
date thereof.
1.8 Assumed Liabilities. Except for liabilities and obligations expressly
assumed in this Agreement, Buyer has not agreed to pay, shall not be required to
assume and shall have no liability or obligation with respect to, and Seller
shall indemnify and hold Buyer harmless from and against, any liability or
obligation, direct or indirect, absolute or contingent, of Seller, the Division
or any of their affiliates.
II. RELATED MATTERS.
2.1 Ancillary Agreements.
(a) At the Closing, Seller and Buyer shall enter into (i) a mutually
satisfactory transition services agreement relating to the CAD-CAM work stations
located at the NY Facility with substantially the terms set forth on EXHIBIT F
hereto and (ii) a mutually acceptable transition services agreement relating to
the Miami Facility (as hereinafter defined) with substantially the terms set
forth on EXHIBIT G hereto.
(b) At the Closing, Seller and Buyer shall enter into a consulting
agreement in substantially the form of EXHIBIT H hereto, relating to the
services of Mr. Bernard M. Manuel.
(c) At the Closing, Seller and Buyer shall enter into a consulting
agreement in substantially the form of EXHIBIT I hereto, relating to the
services of Mr. Irving Benson.
(d) At the Closing, Seller and Buyer shall enter into a stockholders
agreement (the "Stockholders Agreement") relating to the shares of ATSC Common
Stock issued to Seller pursuant to Subsection 1.2(a)(i) hereof in substantially
the form of EXHIBIT J hereto.
(e) At the Closing, Seller or an affiliate of Seller and Buyer shall enter
into a mutually satisfactory lease whereby Buyer shall lease certain real
property in Florence, Italy (the "Florence Facility") from Seller or such
affiliate with substantially the terms set forth on EXHIBIT K hereto (the
"Florence Lease" and, collectively with the agreements listed in paragraphs
(a)-(d) above, the "Ancillary Agreements").
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2.2 Receivables Settlement. At least five (5) business days prior to the
Closing Date, Seller shall deliver to Buyer a detailed schedule setting forth
Seller's good faith estimate (the "Accounts Receivable Estimate"), accompanied
by a certificate of the chief financial officer of Seller to that effect, of the
dollar amount of the accounts receivable of Seller from Buyer and CAT for
finished goods that have been received, quality checked and accepted. At the
Closing, Buyer shall deliver to Seller (a) a detailed statement describing its
disputes, if any, to the Accounts Receivable Estimate, and (b) a wire transfer
of immediately available funds in an amount equal to the Accounts Receivable
Estimate not so disputed (the "Receivables Payment Amount"). Buyer and Seller
agree to negotiate in good faith to resolve any dispute of the Accounts
Receivable Estimate. If any such dispute is not resolved by the parties and
their respective independent accountants within ten (10) business days after the
Closing, such dispute shall be resolved by the Reviewing Accountants as promptly
as practicable, and such resolution shall be final and binding on the parties.
The expenses of the Reviewing Accountants shall be paid one half by each of
Seller and Buyer.
2.3 Finished Goods. All finished goods other than those referred to in
Section 2.2 hereof shall be shipped and paid for in the ordinary course of
business in accordance with the relevant purchase orders; provided, however,
that Seller shall pay all costs incurred or to be incurred in delivering
finished goods to Buyer.
2.4 Joint Venture Agreement. The execution and delivery of this Agreement
by each of Seller, CGFE, ATSC and Buyer shall not be construed to defeat, impair
or limit in any way the rights, obligations, claims or remedies of Seller, CGFE
or Buyer under the Joint Venture Agreement, including, without limitation, under
Section 5 thereof. Upon consummation of the Closing, the Joint Venture Agreement
shall terminate automatically and be of no further force or effect.
2.5 Leases. In the event Buyer enters into the Subleases at the time of
Closing, (i) at Seller's election at any time within two (2) years after the
Closing Date, Buyer shall assume those obligations of Seller under the NY Lease
or the FWM Lease, as the case may be, that relate to the subleased premises, and
(ii) the Subleases shall contain the consents of the respective landlords to the
assignment described in clause (i) above.
2.6 Meyer Employment Agreement. Buyer shall (i) pay to Mr. Dwight Meyer any
amount payable to him as a result of the consummation of transactions
contemplated by this Agreement under his existing employment agreement with
CAT-US and (ii) use reasonable best efforts to cause Mr. Meyer to execute and
deliver a full release of all of Seller's, Buyer's and CAT's obligations to Mr.
Meyer in respect of his employment by CAT prior to the Closing Date.
2.7 Mail Received after Closing. On and after the Closing, Buyer may
receive and open all mail addressed to former employees of Seller who are
Continuing Employees and deal with the contents thereof in its discretion to the
extent that such mail and the contents thereof relate to the Division, the
Division Business, CAT, the Assets or any of the Liabilities. Buyer agrees to
deliver, or to cause to be delivered, promptly to Seller all other mail
received.
2.8 Employees, Benefit Plans.
(a) Hiring of Employees. Buyer shall not have any obligation to assume or
honor any employment agreement ("Employment Agreements") between Seller and any
current or former employee of Seller. As of the Closing Date, Seller shall
terminate the employment of, and Buyer shall offer employment to, employees of
Seller or its affiliates who are actively employed immediately prior to the
Closing Date, whose primary employment is with the Division and who have been
identified to Seller in writing by Buyer as employees to whom Buyer shall offer
employment ("Affected Employees"). CAT employees who are employed by CAT
immediately prior to the Closing Date shall remain employees of CAT following
the Closing Date ("CAT Employees"). All Affected Employees who accept employment
with Buyer ("Hired Employees") and CAT Employees who continue employment by CAT
immediately following the Closing Date, shall be referred to, collectively, as
"Continued Employees".
(b) Wages. Buyer shall pay or cause to be paid when due to the Hired
Employees the amount of all wages, salary, bonuses, commissions, incentive
payments and other compensation (including, without limitation, any vacation and
sick pay) or any other benefit, perquisite, cost, expense, liability or
obligation attributable to services provided on and after the Closing Date.
Seller shall pay or cause to be paid all amounts due to employees of Seller
engaged in the Division Business, including Hired Employees, for wages, salary,
bonuses, commissions, incentive payments and other compensation (including,
without limitation, any vacation and sick pay) or any other benefit, perquisite,
cost, expense, liability or obligation attributable to services provided prior
to the Closing Date. Prior to the
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Closing Date, Seller shall allow (and Seller represents and warrants to Buyer
that it has allowed) the Hired Employees the opportunity to use all accrued or
earned vacation; provided, however, that if any vacation time remains owed to
the Hired Employees as of the Closing Date, Seller shall pay any and all such
amounts to the Hired Employees.
(c) Welfare Plans. As of the Closing Date, Continued Employees shall cease
to participate in the employee welfare benefit plans (as such term is defined in
ERISA) maintained or sponsored by Seller or its affiliates (the "Prior Welfare
Plans") and shall commence to participate in welfare benefit plans of Buyer or
its affiliates (the "Replacement Welfare Plans"), in accordance with the terms
of such plans. Seller shall be responsible for any claims by Continued Employees
for benefits relating to claims incurred prior to the Closing Date (regardless
of when reported) and Buyer or CAT shall be responsible for any claims incurred
by Continued Employees on or after the Closing Date.
(d) Workmen's Compensation Liability. Any payments to be made on or after
the Closing Date relating to workmen's compensation claims of Continued
Employees pending at the time of Closing or arising from services provided prior
to Closing shall be made by Seller or its insurance carrier.
(e) COBRA Coverage. To the extent required by law, Seller shall give the
Affected Employees and their spouses notice of their rights to continuation
coverage under Section 4980B of the Code ("COBRA") in accordance with applicable
law. Seller shall continue to be responsible at all times after the Closing Date
for continuation coverage under COBRA with respect to all Affected Employees,
former CAT Employees and their present or former dependents. Seller hereby
agrees to indemnify and hold harmless Buyer against any and all losses which the
Buyer may incur in respect of any of the foregoing.
(f) Employment Law Liabilities.
(i) Seller hereby agrees to indemnify Buyer and its affiliates
against, and agrees to hold them harmless from, any and all claims, losses,
damages and expenses (including, without limitation, reasonable attorneys'
fees) and other liabilities and obligations incurred or suffered as a
result of any claim by any employee of Seller, including any Hired
Employee, that arises under federal, state or local statute (including,
without limitation, Title VII of the Civil Rights Act of 1964, the Civil
Rights Act of 1991, the Age Discrimination in Employment Act of 1990, the
Equal Pay Act, the Americans with Disabilities Act of 1990, the Employee
Retirement Income Security Act of 1974 and all other statutes regulating
the terms and conditions of employment), regulation or ordinance, under the
common law or in equity (including any claims for wrongful discharge or
otherwise), or under any policy, agreement, understanding or promise,
written or oral, formal or informal, between Seller and the employee,
arising out of actions, events or omissions that occurred (or, in the case
of omissions, failed to occur) on or prior to the Closing Date; and
(ii) Buyer hereby agrees to indemnify Seller and its affiliates
against, and agrees to hold them harmless from, any and all claims, losses,
damages and expenses (including, without limitation, reasonable attorneys'
fees) and other liabilities and obligations incurred or suffered as a
result of any claim by any Hired Employee that arises under federal, state
or local statute (including, without limitation, Title VII of the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in
Employment Act of 1990, the Equal Pay Act, the Americans with Disabilities
Act of 1990, the Employee Retirement Income Security Act of 1974 and all
other statutes regulating the terms and conditions of employment),
regulation or ordinance, under the common law or in equity (including any
claims for wrongful discharge or otherwise), or under any policy,
agreement, understanding or promise, written or oral, formal or informal,
between Buyer and such Hired Employee, arising out of actions, events or
omissions that occurred (or, in the case of omissions, failed to occur)
subsequent to the Closing Date.
(g) WARN Act Liabilities. Seller shall bear, and indemnifies and holds
harmless Buyer and its affiliates from and against, all direct and indirect
costs, claims, losses, damages, expenses and other liabilities and obligations
arising from or relating to claims made by or on behalf of the Affected
Employees relating to the termination of any such person's employment by Seller
or its affiliates prior to or on the Closing Date, including, but not limited
to, claims in respect of the Worker Adjustment and Retraining Notification Act
of 1988, severance pay, salary continuation and similar obligations. Buyer
agrees to bear, and indemnify and hold harmless Seller from and against, all
direct and indirect costs, claims, losses, damages, expenses and other
liabilities and obligations arising from or relating to claims made by or on
behalf of the Continued Employees relating to the termination of any such
person's employment by
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Buyer or CAT after the Closing Date, except for claims in respect of the Worker
Adjustment and Retraining Notification Act of 1988 which would not have arisen
but for aggregation with terminations by Seller prior to the Closing Date.
(h) No Third-Party Beneficiaries. Nothing in this Section 2.8 is intended,
or shall be construed, to confer upon any person, other than the parties hereto
and their successors and permitted assigns, any rights or remedies by reason of
this Section 2.8.
III. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants to Buyer as follows:
3.1 Organization of Seller and CAT; Authority.
(a) Each of Seller, CAT-US and CAT-Far East is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has all requisite corporate power and
authority to own, lease and operate its properties and assets and to
conduct its business as it is now being conducted, including, without
limitation, in the case of Seller, the Division. Each of Seller, CAT-US and
CAT-Far East is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
property or assets owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except in
those jurisdictions where the failure to have such power and authority or
to be so duly qualified or licensed and in good standing would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, properties, assets, results of operations
or financial condition (a "Material Adverse Effect") of the Division,
CAT-US or CAT-Far East. Except as set forth in Section 3.1 of the
Disclosure Schedule being delivered by Seller to Buyer concurrently
herewith (the "SELLER DISCLOSURE SCHEDULE"), Seller does not have any
subsidiaries or equity interests in any business entity engaged in the
Division Business.
(b) Each of Seller and CGFE has all requisite corporate power and
authority to enter into this Agreement and any instruments and agreements
contemplated herein required to be executed and delivered by it pursuant to
this Agreement (including, without limitation, as applicable, the Ancillary
Agreements, the Bill of Sale, the Assignment and Assumption Agreements, and
any Other Instruments, which are referred to collectively herein as the
"Seller Related Instruments") and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of
this Agreement and the Seller Related Instruments and the consummation of
the transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of each of Seller and CGFE,
other than approval of Seller's stockholders. This Agreement has been, and
each of the Seller Related Instruments when executed and delivered will be,
duly executed and delivered by Seller and CGFE, as applicable, and this
Agreement constitutes, and each of the Seller Related Instruments to which
it is a party will, when executed and delivered, constitute a valid and
binding obligation of Seller or CGFE, as applicable, enforceable against
Seller or CGFE, as applicable, in accordance with its terms, except that
(i) such enforcement may be subject to any bankruptcy, insolvency,
reorganization, moratorium, or other laws, now or hereafter in effect,
relating to or limiting creditors' rights generally and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. Each of Seller and CGFE shall
deliver to Buyer true, correct and complete copies of resolutions duly and
validly adopted by its board of directors, evidencing the authorization of
the execution and delivery of this Agreement and the Seller Related
Instruments, as applicable, and the consummation of the transactions
contemplated hereby and thereby.
3.2 No Violation; Consents and Approvals.
(a) Except as set forth in Section 3.2(a) of the SELLER DISCLOSURE
SCHEDULE, the execution and delivery of this Agreement and the Seller
Related Instruments do not, and the consummation of the transactions
contemplated hereby or thereby and compliance with the terms hereof or
thereof will not, (i) conflict with, or result in any violation of or
default under, (A) any provision of the charter or by-laws of Seller or
CGFE, or (B) any judgment, order or decree, or statute, law, ordinance,
rule or regulation of any Governmental Entity (as hereinafter defined)
applicable to Seller, CGFE, CAT, the Division or the Assets; or (ii)
conflict with, or result in
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any breach or violation of or constitute a default (or an event or
condition which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or cause the acceleration of any maturity of any
liability or obligation pursuant to, or result in the creation or
imposition of any Lien under, any note, bond, mortgage, indenture, license,
contract, agreement, lease or other instrument or obligation to which
Seller, CGFE or CAT is a party or by which Seller, CGFE or CAT may be bound
or affected or to which any of the Assets may be subject, except where the
conflict, violation, default, breach, termination, acceleration, creation
or imposition would not reasonably be expected to have a Material Adverse
Effect on the Division or CAT, would not prevent or delay Seller's ability,
or, to the best knowledge of Seller, Buyer's ability, to consummate the
transactions contemplated hereby, would not impair in any material respect
Buyer's ability to operate CAT or the Division Business as currently
operated or would not result in any liability, cost or expense of Seller
(other than the Liabilities or other liabilities and obligations not in
excess of $50,000 in the aggregate) being incurred by Buyer.
(b) Except as set forth in Section 3.2(b) of the SELLER DISCLOSURE
SCHEDULE, no consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission
or other governmental entity, authority or instrumentality, domestic or
foreign (collectively, "Governmental Entities"), is required to be obtained
or made by or with respect to Seller, CGFE or CAT in connection with the
execution and delivery by Seller or CGFE of this Agreement or any Seller
Related Instrument or the consummation by Seller or CGFE of the
transactions contemplated hereby or thereby, or compliance by Seller or
CGFE with the terms hereof or thereof, other than (i) compliance with and
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) compliance with and filings under Sections
13(a) and (d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and (iii) those the failure of which to obtain would not
reasonably be expected to have a Material Adverse Effect on the Division or
CAT, would not prevent or delay Seller's ability, or, to the best knowledge
of Seller, Buyer's ability, to consummate the transactions contemplated
hereby, would not impair in any material respect Buyer's ability to operate
CAT or the Division Business as currently operated or would not result in
any liability, cost or expense of Seller (other than the Liabilities or
other liabilities and obligations not in excess of $50,000 in the
aggregate) being incurred by Buyer.
(c) Except for the approval of Seller's stockholders, and as set forth
in Section 3.2(c) of the SELLER DISCLOSURE SCHEDULE, no consent, approval,
order or authorization of, notice to, or registration, declaration or
filing with, any third party is required to be obtained or made by Seller,
CGFE or CAT in connection with the execution and delivery by Seller or CGFE
of this Agreement or any Seller Related Instrument, or the consummation by
Seller or CGFE of the transactions contemplated hereby or thereby or
compliance by Seller or CGFE with the terms hereof or thereof, except where
the failure to obtain any consent, approval, order or authorization, or to
give notice, or to make any registration, declaration or filing would not
reasonably be expected to have a Material Adverse Effect on the Division or
CAT, would not prevent or delay Seller's ability, or, to the best knowledge
of Seller, Buyer's ability, to consummate the transactions contemplated
hereby, would not impair in any material respect Buyer's ability to operate
CAT or the Division Business as currently operated or would not result in
any liability, cost or expense of Seller (other than the Liabilities or
other liabilities and obligations not in excess of $50,000 in the
aggregate) being incurred by Buyer.
3.3 Seller Financial Statements.
(a) Seller has delivered to Buyer true, correct and complete copies of
the audited, consolidated balance sheets of Seller as of January 29, 1994,
January 28, 1995, and February 3, 1996 (the "1996 Balance Sheet") and the
audited, consolidated income statements and statements of cash flows of
Seller for the fiscal years ended January 29, 1994, January 28, 1995 and
February 3, 1996, accompanied, in each case, by an unqualified report of
Seller's independent public accountants, Ernst & Young, LLP (collectively,
the "Audited Financial Statements").
(b) As used in this Agreement, the term "Financial Statements" means,
collectively, the Audited Financial Statements and the Subsequent Financial
Statements (as hereinafter defined).
(c) The balance sheets included in the Audited Financial Statements
present, and the balance sheets included in the Subsequent Financial
Statements will present, fairly the financial position of Seller as of the
respective dates thereof; provided, however, that the Subsequent Financial
Statements will be subject to normal
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year-end adjustments and will lack footnotes. The statements of income and
statements of cash flows included in the Audited Financial Statements
present, and the statements of income and statements of cash flows included
in the Subsequent Financial Statements will present, fairly the results of
operations and cash flows of Seller for the respective periods indicated;
provided, however, that the Subsequent Financial Statements will be subject
to normal year-end adjustments and will lack footnotes.
(d) The Audited Financial Statements were and the Subsequent Financial
Statements will have been, based on the accounting books and records of
Seller and have been prepared or will be prepared in accordance with GAAP
applied on a consistent basis throughout the periods presented in the
Financial Statements; provided, however, that the Subsequent Financial
Statements will be subject to normal year-end adjustments and will lack
footnotes.
3.4 CAT Financial Statements.
(a) Seller has delivered to Buyer true, correct and complete copies of
the audited, combined balance sheets of CAT as of January 29, 1994, January
28, 1995 and February 3, 1996 (the "CAT 1996 Balance Sheet") and the
audited, combined income statements and statements of cash flows of CAT for
the fiscal years ended January 29, 1994, January 28, 1995 and February 3,
1996, accompanied, in each case, by an unqualified report of CAT's
independent public accountants, Ernst & Young, LLP (collectively, the "CAT
Audited Financial Statements").
(b) As used in this Agreement, the term "CAT Financial Statements"
means, collectively, the CAT Audited Financial Statements and the CAT
Subsequent Financial Statements (as hereinafter defined).
(c) The balance sheets included in the CAT Audited Financial
Statements present, and the balance sheets included in the CAT Subsequent
Financial Statements will present, fairly the financial position of CAT as
of the respective dates thereof; provided, however, that the CAT Subsequent
Financial Statements will be subject to normal year-end adjustments and
will lack footnotes. The statements of income and statements of cash flows
included in the CAT Audited Financial Statements present, and the
statements of income and statements of cash flows included in the CAT
Subsequent Financial Statements will present, fairly the results of
operations and cash flows of CAT for the respective periods indicated;
provided, however, that the CAT Subsequent Financial Statements will be
subject to normal year-end adjustments and will lack footnotes.
(d) The CAT Audited Financial Statements were, and the CAT Subsequent
Financial Statements will have been, based on the accounting books and
records of CAT and have been prepared or will have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
presented in the CAT Financial Statements; provided, however, that the CAT
Subsequent Financial Statements will be subject to normal year-end
adjustments and will lack footnotes.
3.5 Combined Entity Financial Statements.
(a) Seller has delivered to Buyer true, correct and complete copies of the
following:
(i) the audited combined balance sheets of CAT and the Division (the
"Combined Entity") as of February 3, 1996 (the "Combined Entity 1996
Balance Sheet") and the audited combined income statements and statements
of cash flows of the Combined Entity for the fiscal year ended February 3,
1996, accompanied, in each case, by an unqualified report of Seller's
independent public accountants, Ernst & Young, LLP (collectively, the
"Combined Entity Audited Financial Statements"); and
(ii) the unaudited combined balance sheets of the Combined Entity as
of January 28, 1995 and the unaudited combined income statements and
statements of cash flows of the Combined Entity for the fiscal year ended
January 28, 1995 (collectively, the "Combined Entity Unaudited Financial
Statements").
(b) As used in this Agreement, the term "Combined Entity Financial
Statements" means, collectively, the Combined Entity Audited Financial
Statements, the Combined Entity Unaudited Financial Statements and the Combined
Entity Subsequent Financial Statements (as hereinafter defined).
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(c) The balance sheets included in the Combined Entity Audited
Financial Statements and the Combined Entity Unaudited Financial Statements
present, and the balance sheets included in the Combined Entity Subsequent
Financial Statements will present, fairly the pro forma financial position
of the Combined Entity as of the respective dates thereof, based upon the
assumption set forth therein and the notes thereto; provided, however, that
the Combined Entity Unaudited Financial Statements are, and the Combined
Entity Subsequent Financial Statements (other than the Combined Entity 1994
Audited Financial Statements) will be, subject to normal year-end
adjustments and will lack footnotes. The statements of income and
statements of cash flows included in the Combined Entity Audited Financial
Statements and the Combined Entity Unaudited Financial Statements present,
and the statements of income and statements of cash flows included in the
Combined Entity Subsequent Financial Statements will present, fairly the
pro forma results of operations and cash flows of the Combined Entity for
the respective periods indicated, based on the assumptions set forth
therein and the notes thereto; provided, however, that the Combined Entity
Unaudited Financial Statements are, and the Combined Entity Subsequent
Financial Statements (other than the Combined Entity 1994 Audited Financial
Statements) will be, subject to normal year-end adjustments and will lack
footnotes.
(d) The Combined Entity Audited Financial Statements and the Combined
Entity Unaudited Financial Statements were, and the Combined Entity
Subsequent Financial Statements will have been, based on the accounting
books and records of the Combined Entity, subject to the assumptions set
forth in such financial statements and the notes thereto, and have been
prepared or will be prepared in accordance with GAAP applied on a
consistent basis throughout the periods presented in the Combined Entity
Financial Statements, subject to the assumptions set forth in such
financial statements and the notes thereto; provided, however, that the
Combined Entity Unaudited Financial Statements are, and the Combined Entity
Subsequent Financial Statements (other than the Combined Entity 1994
Audited Financial Statements) will be, subject to normal year-end
adjustments and will lack footnotes.
3.6 Absence of Seller Undisclosed Liabilities. Except for (a) liabilities
and obligations set forth in Section 3.6 of the SELLER DISCLOSURE SCHEDULE or
reflected on the 1996 Balance Sheet or (b) liabilities and obligations incurred
in the ordinary course of business consistent with past practice since the date
of the 1996 Balance Sheet, Seller has incurred no liabilities or obligations
relating to the Division in excess of $50,000 in the aggregate (whether
absolute, accrued, contingent or otherwise, and whether due or to become due).
3.7 Absence of CAT Undisclosed Liabilities. To the best knowledge of
Seller, except for (a) liabilities and obligations set forth in Section 3.7 of
the SELLER DISCLOSURE SCHEDULE or reflected on the CAT 1996 Balance Sheet or (b)
liabilities and obligations incurred in the ordinary course of business
consistent with past practice since the date of the CAT 1996 Balance Sheet, CAT
has incurred no liabilities or obligations in excess of $50,000 in the aggregate
(whether absolute, accrued, contingent or otherwise, and whether due or to
become due).
3.8 Absence of Division Undisclosed Liabilities. Except for (a) liabilities
and obligations set forth in Section 3.8 of the SELLER DISCLOSURE SCHEDULE or
reflected on the Division 1996 Balance Sheet or (b) liabilities and obligations
incurred in the ordinary course of business consistent with past practice since
the date of the Division 1996 Balance Sheet, the Division has incurred no
liabilities or obligations in excess of $50,000 in the aggregate (whether
absolute, accrued, contingent or otherwise, and whether due or to become due).
3.9 Absence Of Certain Changes Or Events. Except as set forth in Section
3.9 of the SELLER DISCLOSURE SCHEDULE, since February 3, 1996, (a) there has not
been any Material Adverse Effect on the Division Business; and (b) neither
Seller nor CAT has taken any action, no event has occurred and no condition
exists that is identified in Section 5.1 hereof.
3.10 Title to CAT Shares.
(a) Seller has good and valid title to the CAT US Shares, free and clear of
all Liens, other than (i) Liens arising under the Joint Venture Agreement and
(ii) Liens in favor of The HongKong and Shanghai Banking Corporation. Upon
delivery to Buyer at the Closing of certificates representing the CAT US Shares,
duly endorsed by Seller for transfer to Buyer or accompanied by stock powers
duly executed in blank, and upon delivery by Buyer in accordance with the terms
hereof of the consideration provided for in Section 1.2 hereof, assuming Buyer
has purchased the CAT US Shares in good faith without notice of an adverse claim
(as such term is defined in Section 8-302 of the Uniform Commercial Code as
currently in effect in the State of New York) and has not been a party to any
fraud or illegality affecting such shares, good and valid title to the CAT US
Shares will pass to Buyer, free and clear of any Liens. Other
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than under this Agreement, the Joint Venture Agreement and Seller's agreements
with The HongKong and Shanghai Banking Corporation, the CAT US Shares are not
subject to any voting trust agreement or other contract, agreement, arrangement,
commitment or understanding, including any such agreement, arrangement,
commitment or understanding restricting or otherwise relating to the voting,
dividend rights or disposition of the CAT US Shares.
(b) CGFE has good and valid title to the CAT Far East Shares, free and
clear of all Liens, other than (i) Liens arising under the Joint Venture
Agreement and (ii) Liens in favor of The HongKong and Shanghai Banking
Corporation. Upon delivery to Buyer at the Closing of certificates representing
the CAT Far East Shares, duly endorsed by CGFE for transfer to Buyer or
accompanied by stock powers duly executed in blank, and upon delivery by Buyer
in accordance with the terms hereof of the consideration provided for in Section
1.2 hereof, assuming Buyer has purchased the CAT Far East Shares in good faith
without notice of an adverse claim (as such term is defined in Section 8-302 of
the Uniform Commercial Code as currently in effect in the state of New York) and
has not been a party to any fraud or illegality affecting such shares, good and
valid title to the CAT Far East Shares will pass to Buyer, free and clear of any
Liens. Other than under this Agreement, the Joint Venture Agreement and Seller's
agreements with The HongKong and Shanghai Banking Corporation, the CAT Far East
Shares are not subject to any voting trust agreement or other contract,
agreement, arrangement, commitment or understanding, including any such
agreement, arrangement, commitment or understanding restricting or otherwise
relating to the voting, dividend rights or disposition of the CAT Far East
Shares.
3.11 Title to Assets; Leased Property.
(a) Except as set forth in Section 3.11(a) of the SELLER DISCLOSURE
SCHEDULE, Seller has (i) good and valid title to all of the Assets which are
owned by Seller as of the date hereof and valid leasehold interests in, or other
rights to use, all of the Assets which are not owned by Seller, free and clear
of all Liens other than Permitted Liens and (ii) Seller will have good and valid
title to all of the Assets which will be owned by Seller as of the Closing Date
and will have valid leasehold interests in, or other rights to use, all of the
Assets which will not be owned by Seller as of the Closing Date, excluding
Assets sold or otherwise disposed of in the ordinary course of business and
including Assets purchased, leased or licensed, as the case may be, between the
date hereof and the Closing Date. As used in this Agreement, the term "Permitted
Liens" means (i) mechanics', carriers', workmen's, repairmen's or other like
liens arising or incurred in the ordinary course of business, (ii) liens for
taxes, assessments and other governmental charges which are not due and payable
or which may hereafter be paid without penalty or which are being contested in
good faith by appropriate proceedings (for which adequate reserves have been
made in the Combined Entity Financial Statements in accordance with GAAP) and
(iii) other imperfections of title or encumbrances, if any, which imperfections
of title or other encumbrances, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Division
Business, would not prevent or delay Seller's ability, or, to the best knowledge
of Seller, Buyer's ability, to consummate the transactions contemplated hereby,
would not impair in any material respect Buyer's ability to operate the Division
Business as currently operated or would not result in any liability, cost or
expense (other than liabilities and obligations not in excess of $50,000 in the
aggregate) to Buyer or any of its affiliates, CAT or the Division.
(b) Set forth on ANNEX IV hereto is a true and correct listing of the
portions of the deposits under the NY Lease and the FWM Lease relating to
premises to be occupied by Buyer after the Closing Date. Seller has delivered to
Buyer true, correct and complete copies of the NY Lease and all amendments
thereto, the FWM Lease and all amendments thereto, including the CAT Sublease,
and the Business Lease, dated January 21, 1992, among Seller, as tenant, and
David Schaecter and Marvis Schaecter, as landlord (the "Miami Lease" and,
collectively with the NY Lease and the FWM Lease, the "Leases"), relating to
Seller's facility located at 4915 NW 159th Street, Miami Lakes, Florida (the
"Miami Facility") and all amendments thereto. For purposes of this Section 3.11,
the term Seller shall include Seller's wholly owned subsidiary Fenn, Wright and
Manson, Incorporated, as applicable. Seller or CAT, as the case may be, has a
valid and subsisting leasehold estate with respect to each of the properties
subject to a Lease (the "Leased Properties"). Except as set forth in Section
3.11(b) of the SELLER DISCLOSURE SCHEDULE, to the best knowledge of Seller, (i)
each of the Leases is in full force and effect and (ii) none of the Leases has
been modified or amended. Neither Seller nor CAT, as the case may be, has given
or received a written notice of default under any of the Leases which remains
uncured, and, to the best knowledge of Seller, there exists no event of default,
event, occurrence or act which, with the giving of notice, the lapse of time, or
both, or the happening of a further event or condition, would result in a
default under any of the Leases by Seller or CAT, as the case may be, or, to the
best knowledge of Seller, the applicable landlord under any such Leases. There
are no pending unresolved material disputes with any
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landlord under any of the Leases. All security deposits required under the
Leases have been paid to the applicable landlord under the Leases in compliance
with the applicable Lease. Except as set forth in Section 3.11(b) of the SELLER
DISCLOSURE SCHEDULE, there are no subtenants occupying any portion of the Leased
Properties other than CAT and, except for Seller, to the best knowledge of
Seller, no other person or entity has any right to occupy or possess any portion
of the Leased Properties other than affiliates of Seller claiming by, through or
under Seller who shall (except for CAT) vacate their respective premises on or
prior to the Closing Date. Except as set forth in Section 3.11(b) of the SELLER
DISCLOSURE SCHEDULE, as to the Leases, (i) none of Seller's or CAT's interests
in any of the Leases has been assigned, pledged, hypothecated or otherwise
encumbered in any manner; (ii) no written waiver, indulgence or postponement of
the applicable landlord's obligations under any of the Leases has been granted
by Seller or CAT; (iii) neither Seller nor CAT has any right or option to
purchase or otherwise acquire any of the Leased Properties or any portion
thereof; and (iv) neither Seller nor CAT has given any notices to any landlord
indicating that Seller or CAT either will or will not (A) be exercising any
extension or renewal options, or any right or option to purchase any of the
Leased Properties or any portion thereof, (B) abandon any of the Leased
Properties or any portion thereof, or (C) terminate any of the Leases.
(c) Except as set forth in Section 3.11(c) of the SELLER DISCLOSURE
SCHEDULE, (i) to the best knowledge of Seller, the building and structure at the
Florence Facility are structurally sound and are free from defects (ordinary
wear and tear excepted) and are adequate for the uses to which they are being
put, and (ii) all machinery and equipment owned, leased or used by Seller in the
conduct of the Division Business are free from defects (ordinary wear and tear
excepted) and are in good and normal operating condition and repair (ordinary
wear and tear excepted), and are adequate for the uses to which they are being
put, in each case, except for defects which, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect on the
Division Business, would not impair in any material respect Buyer's ability to
operate the Division Business as currently operated or would not result in any
liability, cost or expense to Buyer or any of its affiliates (other than the
Liabilities or other liabilities and obligations not in excess of $50,000 in the
aggregate).
(d) Except as set forth in Section 3.11(d) of the SELLER DISCLOSURE
SCHEDULE, upon Closing in accordance with the terms of this Agreement, Buyer
shall receive from Seller good and valid title to all of the Assets, free and
clear of all Liens, other than Permitted Liens.
3.12 Litigation/Claims.
(a) Section 3.12(a) of the SELLER DISCLOSURE SCHEDULE sets forth a true,
complete and correct list of any and all claims, actions, suits and proceedings
pending or, to the best knowledge of Seller, threatened, and, to the best
knowledge of Seller, any investigations or inquiries pending or threatened,
against Seller which relate to the Division or CAT.
(b) Except as set forth in Section 3.12(b) of the SELLER DISCLOSURE
SCHEDULE, there is (i) no claim, action, suit or proceeding pending or, to the
best knowledge of Seller, threatened, and (ii) to the best knowledge of Seller,
no investigation or inquiry pending or threatened, by or before any Governmental
Entity, or by or on behalf of any third party, which challenges the validity of
this Agreement or any Seller Related Instrument or which, if adversely
determined, would, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on the Division Business, prevent or delay
Seller's ability, or, to the best knowledge of Seller, Buyer's ability, to
consummate the transactions contemplated hereby, impair in any material respect
Buyer's ability to operate the Division Business as currently operated, or
result in any liability, cost or expense to Buyer or any of its affiliates
(other than the Liabilities or other liabilities and obligations not in excess
of $50,000 in the aggregate).
3.13 Employee Benefit Plans. (a) With respect to each employee benefit
plan, arrangement or agreement that is maintained, or was maintained at any time
during the five (5) calendar years preceding the date of this Agreement (the
"Plans"), by either Seller or CAT or by any trade or business, whether or not
incorporated (an "ERISA Affiliate"), which together with either Seller or CAT
would be deemed a "single employer" within the meaning of Section 4001 of the
Employment Retirement Income Security Act of 1974, as amended ("ERISA"):
(i) each of the Plans that is subject to ERISA has been maintained and
administered in all material respects in compliance with ERISA and each of
the Plans intended to be "qualified" within the meaning of Section 401(a)
of the Code is so qualified;
(ii) no Plan has an accumulated or waived funding deficiency within
the meaning of Section 412 of the Code;
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(iii) no Plan is a multiemployer plan (within the meaning of Section
4001(a)(3) of ERISA) and no Plan is a multiple employer plan as defined in
Section 413 of the Code; and
(iv) no Plan that is or was maintained by CAT is subject to Article IV
of ERISA.
(b) Neither Seller nor CAT has any obligations with respect to medical
benefits for retired employees of the Division or CAT.
(c) Neither Seller nor CAT has any obligations to the Affected Employees
with respect to any 401(k) plan or pension plan.
3.14 Certain Contracts and Arrangements.
(a) Except as set forth in Section 3.14(a) of the SELLER DISCLOSURE
SCHEDULE, there are no binding oral agreements to which Seller is a party
relating to the Division or the Assets or to which the Division or any of the
Assets is subject. Section 3.14(b) of the SELLER DISCLOSURE SCHEDULE sets forth
a true, correct and complete list of all written agreements, contracts and
commitments to which Seller is a party and to which the Division or any of the
Assets is subject (the "Division Contracts"), including, without limitation:
(i) employment agreements or severance agreements;
(ii) covenants not to compete;
(iii) agreements or contracts with any affiliate of Seller;
(iv) agreements or contracts under which Seller has borrowed or loaned
money, or any note, bond, indenture or other evidence of indebtedness or
any guarantee of indebtedness, agreements with factors or trade credit
agreements;
(v) "open purchase orders", "take-or-pay" agreements or any other
agreements with suppliers, but excluding purchase orders which relate to
specific goods made for Buyer in the ordinary course of business;
(vi) agreements or contracts with any cutting room operator;
(vii) agreements or contracts with contract manufacturers or factory
operators; (viii) all real property leases to which Seller is a party and
which relate to the Division Business; or
(ix) other agreements, contracts, leases, licenses, commitments or
instruments to which the Seller is a party, which relate, directly or
indirectly, to the Division or any Asset; provided, however, that (x)
purchase orders and written fabric commitments accepted from Buyer and the
fabric commitments related to the fabric listed on ANNEX I hereto and (y)
such agreements, contracts or commitments as may be terminated by Buyer at
any time after the Closing without liability, penalty or premium upon
notice of three months or less or which will not result in future annual
expenditures or receipts by the Division at any time of $50,000 or more
need not be and are not listed in Section 3.14 of the SELLER DISCLOSURE
SCHEDULE. Seller and, to the best knowledge of Seller, no other party to
any Division Contract is in breach thereof or in default thereunder, which
breach or default would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Division Business,
prevent or delay Seller's ability, or, to the best knowledge of Seller,
Buyer's ability, to consummate the transactions contemplated hereby, impair
in any material respect Buyer's ability to operate the Division Business as
currently operated or result in any liability, cost or expense to Buyer or
any of its affiliates (other than the Liabilities or other liabilities and
obligations not in excess of $50,000 in the aggregate). Subject to
obtaining any requisite consents of third parties, the enforceability of
the Division Contracts will not be affected in any material respect by the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby. To the best knowledge of Seller, there
have been no threatened cancellations of, or any dispute under, any
Division Contract.
(b) All amounts due and payable by Seller or an affiliate of Seller under
the Contracts as of the date hereof have been paid in full by Seller or such
affiliate, and all amounts due and payable by Seller or an affiliate of Seller
under the Contracts as of the Closing Date shall have been paid in full by
Seller or such affiliate.
3.15 Compliance with Laws; Licenses. Except as set forth in Section 3.15(a)
of the SELLER DISCLOSURE SCHEDULE, the Division has been, and is being, operated
in compliance with all applicable laws, statutes, ordinances, rules, regulations
and orders of all Governmental Entities, except for laws the violation of which,
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individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on the Division Business, would not prevent or delay
Seller's ability, or, to the best knowledge of Seller, Buyer's ability, to
consummate the transactions contemplated hereby, would not impair in any
material respect Buyer's ability to operate the Division Business as currently
operated or would not result in any liability, cost or expense to Buyer or any
of its affiliates (other than the Liabilities or other liabilities and
obligations not in excess of $50,000 in the aggregate). Section 3.15(b) of the
SELLER DISCLOSURE SCHEDULE sets forth a true, correct and complete list of all
permits, certificates, licenses, approvals and other authorizations of
Governmental Entities ("Permits") possessed by Seller or any affiliate of Seller
in connection with the operation of the Division as currently operated and
ownership of the Assets, which are all the Permits required in connection with
the operation of the Division as currently operated and ownership of the Assets
under applicable laws, statutes, ordinances, rules, regulations and orders,
except where the failure to possess such Permits, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
the Division Business, would not prevent or delay Seller's ability, or, to the
best knowledge of Seller, Buyer's ability, to consummate the transactions
contemplated hereby, would not impair in any material respect Buyer's ability to
operate the Division Business as currently operated or would not result in any
liability, cost or expense to Buyer or any of its affiliates (other than the
Liabilities or other liabilities and obligations not in excess of $50,000 in the
aggregate).
3.16 Insurance. Section 3.16 of the SELLER DISCLOSURE SCHEDULE sets forth a
true, correct and complete list of all policies of fire, medical, life,
liability, product liability, workmen's compensation, libel, health and other
forms of insurance presently in effect with respect to the Division or CAT. All
such policies are in full force and effect, all premiums due and payable with
respect thereto have been paid, and no notice of cancellation or termination has
been received with respect to any such policy. All such policies are sufficient
for compliance in all material respects with all requirements of law and the
terms of the Leases and are valid, outstanding and enforceable and will remain
in full force and effect through the Closing Date. Except as set forth in
Section 3.16 of the SELLER DISCLOSURE SCHEDULE, no risks with respect to the
Division or CAT have been designated by Seller as being self-insured. Except as
set forth in Section 3.16 of the SELLER DISCLOSURE SCHEDULE, Seller has not been
refused any insurance in connection with the Division or CAT, nor has any
coverage been limited by any insurance carrier to which Seller has applied for
such insurance or with which Seller has carried such insurance in the last three
years.
3.17 Labor Matters. Except as set forth in Section 3.17 of the SELLER
DISCLOSURE SCHEDULE, with respect to the Division, (a) Seller is in compliance
in all material respects with all applicable laws regarding employment and
employment practices, terms and conditions of employment, wages, hours of work
and occupational safety and health, (b) Seller is not a party to or bound by any
collective bargaining agreement or similar agreement with any labor
organization, and, to the best knowledge of Seller, no union claims to represent
Division employees, (c) there is no unfair labor practice charge or complaint
against Seller pending or, to the best knowledge of Seller, threatened before
the National Labor Relations Board or any similar state or foreign agency, nor
is there any grievance or any arbitration proceeding arising out of or under any
collective bargaining agreement pending or, to the best knowledge of Seller,
threatened against Seller, (d) there is no labor strike, slowdown, work stoppage
or lockout pending or, to the best knowledge of Seller, threatened against
Seller and (e) there is no charge or complaint pending or, to the best knowledge
of Seller, threatened against Seller before the Equal Employment Opportunity
Commission or any state, local or foreign agency responsible for the prevention
of unlawful employment practices. Except as set forth in Section 3.17 of the
SELLER DISCLOSURE SCHEDULE, Seller has not received written notice of the intent
of any federal, state, local or foreign agency responsible for the enforcement
of labor or employment laws to conduct an investigation of or relating to Seller
with respect to the Division, and, to the best knowledge of Seller, no such
investigation is in progress or threatened.
3.18 Assets of the Division Business. All of the Assets are used
exclusively or primarily in the conduct of the Division Business other than the
CAT Shares and certain Intellectual Property.
3.19 Disclosure. No representation or warranty by Seller contained in this
Agreement, and no statement contained in any document (including, without
limitation, the Seller Related Instruments, the Financial Statements, the CAT
Financial Statements, the Division Financial Statements and the SELLER
DISCLOSURE SCHEDULE), list, certificate or other writing furnished or to be
furnished by or on behalf of Seller to Buyer or any of its representatives
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact, or omits or will omit to state any material fact necessary, in
the light of the circumstances under which it was or will be made, in
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order to make the statements herein or therein not misleading, or necessary in
order to fully and fairly provide the information required to be provided in
any such document, list, certificate or other writing.
3.20 Environmental Matters.
(a) Except as set forth in Section 3.20(a) of the SELLER DISCLOSURE
SCHEDULE, Seller is in compliance in all material respects with all applicable
federal, state, local and foreign laws and regulations relating to pollution or
protection of human health or the environment ("Environmental Laws") with
respect to the Division (which compliance includes, but is not limited to, the
possession by Seller of all permits and other governmental authorizations
required under applicable Environmental Laws with respect to the Division, and
compliance with the terms and conditions thereof).
(b) Except as set forth in Section 3.20(b) of the SELLER DISCLOSURE
SCHEDULE, there is no Environmental Claim pending or, to the best knowledge of
Seller, threatened against Seller relating to the Division or, to the best
knowledge of Seller, against any person or entity whose liability for any
Environmental Claim the Division has or may have retained or assumed either
contractually or by operation of law which would reasonably be expected to
result in a Material Adverse Effect on the Division Business or would result in
any liability, cost or expense to Buyer or any of its affiliates (other than the
Liabilities or other liabilities and obligations not in excess of $50,000 in the
aggregate). As used herein, "Environmental Claim" means any claim, action, cause
of action, investigation or notice (written or oral) by any person or entity
alleging potential liability arising out of, based on or resulting from (i) the
presence, or release, spill, discharge, emission, leaching or migration into the
indoor or outdoor environment, of any Hazardous Materials at any location,
whether or not owned or operated by Seller, or (ii) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
(c) Except as set forth in Section 3.20(c) of the SELLER DISCLOSURE
SCHEDULE, the Seller has not and, to the best knowledge of Seller, no other
person has placed, stored, deposited, discharged, buried, dumped or disposed of
substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in
the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R.
ss. 300.5, or defined as such by, or regulated as such under, any Environmental
Law ("Hazardous Materials") or any other wastes produced by, or resulting from,
any business, commercial or industrial activities, operations or processes, on,
beneath or adjacent to any property currently or formerly owned, operated or
leased by the Seller for use in the Division, except for inventories of such
substances to be used, and wastes generated therefrom, in the ordinary course of
business of Seller (which inventories and wastes, if any, were and are stored or
disposed of in accordance in all material respects with applicable Environmental
Laws and in a manner such that there has been no Release of any such substances
into the indoor or outdoor environment in violation of Environmental Laws).
(d) Without limiting the generality of the foregoing, except as set forth
in Section 3.20(d) of the SELLER DISCLOSURE SCHEDULE, to the best knowledge of
Seller, none of the properties owned, operated or leased by Seller and used by
the Division contain any: underground storage tanks; asbestos; polychlorinated
biphenyls ("PCBs"); or septic tanks or waste disposal pits in which process
wastewater or any Hazardous Materials have been discharged or disposed.
3.21 Opinion of Financial Advisor. Seller has received an opinion from
Ladenburg, Thalmann & Co., Inc. to the effect that the consideration to be
received by Seller represents reasonable equivalent value and fair consideration
for the CAT Shares and the Assets and a copy of such opinion has been provided
to ATSC.
3.22 Brokers. No broker, finder or financial advisor or other person is
entitled to any brokerage fees, commissions, finders' fees or financial advisory
fees in connection with the transactions contemplated hereby by reason of any
action taken by Seller or any of its affiliates, employees, representatives or
agents.
3.23 Intellectual Property. Seller has no registered patents, trademarks,
copyrights, service marks, or applications therefor relating to the Division
Business. Except as set forth in Section 3.23 of the SELLER DISCLOSURE SCHEDULE,
Seller (a) owns or licenses the Intellectual Property related to or used in the
conduct of the Division Business free and clear of all Liens, (b) Seller has the
right to transfer its interest in the Intellectual Property to Buyer, (c) no
claims have been asserted or, to the best knowledge of Seller, threatened
against Seller with respect to the ownership, use or transfer by Seller of the
Intellectual Property, and (d) to the best knowledge of Seller, no third party
is in violation of any of Seller's rights in the Intellectual Property.
3.24 Absence of Violations of Quotas and Visas. Except as set forth in
Section 3.24 of the SELLER DISCLOSURE SCHEDULE, Seller, with respect to the
Division Business, is not in violation in any material respect
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of any visa or quota restrictions under any trade agreements, including, without
limitation, the Multifiber Arrangement or other arrangements under the General
Agreement on Tariffs and Trade.
3.25 No Tariffs or Duties. With respect to the Division Business, Seller's
payment of all tariffs and duties are current in all jurisdictions, and Seller
does not owe any tariffs or duties other than those incurred in the ordinary
course of business (a) under any trade agreements, including, without
limitation, The North American Free Trade Agreement, Caribbean Basin Economic
Recovery or the Jackson Vanik Amendment to the Trade Act of 1974; and (b) to the
U.S. Customs Service.
3.26 Compliance with U.S. Customs and Trade Laws. Seller, with respect to
the Division Business, is not in violation in any material respect of any U.S.
Customs or trade laws, including, without limitation, laws pertaining to
country-of-origin, marking or labeling.
3.27 SEC Documents. Seller has filed all documents required to be filed by
it with the Securities and Exchange Commission (the "SEC") since January 1995
(the "Seller SEC Documents"). As of their respective dates, the Seller SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
as the case may be, and none of Seller's SEC Documents contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Seller included in the Seller SEC Documents complied as
to form in all material respects with the applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto. Since
January 28, 1995, Seller has not made any change in the accounting practices or
policies applied in the preparation of its financial statements.
3.28 Compliance with Laws by CAT; Licenses. Except as set forth in Section
3.28(a) of the SELLER DISCLOSURE SCHEDULE, CAT has been, and is being, operated
in compliance with all applicable laws, statutes, ordinances, rules, regulations
and orders of all Governmental Entities, except for laws the violation of which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on CAT, would not prevent or delay Seller's ability, or,
to the best knowledge of Seller, Buyer's ability, to consummate the transactions
contemplated hereby, would not impair in any material respect Buyer's ability to
operate CAT as currently operated, or would not result in any liability, cost or
expense of CAT being incurred by Buyer or any of its affiliates, or the
Division. Section 3.28(b) of the SELLER DISCLOSURE SCHEDULE sets forth a true,
correct and complete list of all Permits possessed by Seller or CAT in
connection with the operation of CAT as currently operated, which are all the
Permits required in connection with the operation of CAT as currently operated
under applicable laws, statutes, ordinances, rules, regulations and orders,
except where the failure to possess such Permits, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
CAT, would not prevent or delay Seller's ability, or, to the best knowledge of
Seller, Buyer's ability, to consummate the transactions contemplated hereby,
would not impair in any material respect Buyer's ability to operate CAT as
currently operated or would not result in any liability, cost or expense (other
than liabilities and obligations not in excess of $50,000 in the aggregate) of
CAT being incurred by Buyer.
3.29 CAT Taxes.
(a) CAT and any affiliated group, within the meaning of Section 1504 of the
Code (or similar provision of state law), of which CAT is or has been a member,
have, except as set forth in Section 3.29 of the SELLER DISCLOSURE SCHEDULE, (i)
duly filed with the appropriate federal, state, local and foreign taxing
authorities all Tax Returns (as hereinafter defined) required to be filed by or
with respect to CAT and such Tax Returns are true, correct and complete in all
material respects; (ii) paid in full or have made adequate provision on their
balance sheets (in accordance with GAAP) for all Taxes (as hereinafter defined)
shown to be due on such tax returns; and (iii) satisfied in full all withholding
tax requirements. There are no Liens for Taxes upon the assets of CAT except for
statutory liens for current taxes not yet due and payable or which may hereafter
be paid without penalty or which are being contested in good faith by
appropriate proceedings. Except as set forth in Section 3.29 of the SELLER
DISCLOSURE SCHEDULE, there is not in force any extension of time with respect to
the due date for the filing of any Tax Return of, or with respect to, CAT or any
waiver or agreement for any extension of time for the assessment or payment of
any Tax of, or with respect to, CAT, and CAT has not received any notice of
deficiency or assessment from any federal, state, local or foreign taxing
authority with respect to liabilities for Taxes of CAT which has not been fully
paid or finally settled.
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(b) For purposes of this Agreement, "Tax" or "Taxes" shall mean (i) any tax
of any kind, including, without limitation, all income, property, sales, use,
occupation, franchise, excise, value added, employees' income withholding and
social security taxes, and related to such taxes, charges, fees, levies,
penalties or other assessments, imposed by the United States or by any foreign
country or by any state, municipality, subdivision or instrumentality of the
United States or of any foreign country, or by any other taxing authority and
(ii) any interest thereon.
(c) For purposes of this Agreement, "Tax Return" shall mean any return,
report, information return or other document (including any related or
supporting information) with respect to Taxes.
3.30 Acquisition of the ATSC Common Stock for Investment; Securities Act.
Seller is acquiring the shares of ATSC Common Stock to be issued pursuant to
Section 1.2(a) hereof for investment purposes only and not with a view toward,
or for sale in connection with, any distribution thereof, nor with any present
intention of distributing or selling such shares in violation of federal, state
or other securities laws. Seller agrees that it will not sell, transfer, offer
for sale, pledge, hypothecate or otherwise dispose of such shares of ATSC Common
Stock in violation of any federal, state or other securities laws. Seller
acknowledges that the ATSC Common Stock is subject to market and other
conditions beyond the control of ATSC and agrees that neither ATSC nor any of
its agents, representatives, employees or affiliates has or shall have any
liability or responsibility whatsoever to Seller on any basis (including,
without limitation, in contract or tort, under federal or state securities laws,
or otherwise), except as and to the extent expressly set forth herein and
subject to the limitations and restrictions contained herein. The foregoing
shall not be deemed a waiver of or a limitation on Seller's rights as a
stockholder of ATSC with regard to circumstances or events occurring after the
Closing Date and bearing no relation to the acquisition by Seller of shares of
ATSC Common Stock pursuant to this Agreement.
3.31 Suppliers. Section 3.31 of the SELLER DISCLOSURE SCHEDULE sets forth
(i) a list of all suppliers of each of CAT and the Division to whom CAT or
Seller made payments in excess of $250,000 during the fiscal year ended February
3, 1996 and (ii) the dollar amount of payments made to each such supplier in
such fiscal year. No supplier required to be listed in Section 3.31 of the
SELLER DISCLOSURE SCHEDULE has (i) given notice to either CAT or Seller that it
intends to terminate its relationship with CAT or Seller, as the case may be, or
(ii) threatened in writing to terminate its relationship with CAT or Seller, as
the case may be. To the best knowledge of Seller, no supplier required to be
listed in Section 3.31 of the SELLER DISCLOSURE SCHEDULE is likely to pursue a
course of action having either the purpose or effect of terminating its
relationship with either CAT or the Division if the transactions contemplated by
this Agreement are consummated.
3.32 Disclaimer of Other Representations and Warranties. Except as
expressly set forth in this Article III, Seller makes no representation or
warranty, express or implied, at law or in equity, in respect of CAT, the
Assets, the Division or the Division Business, including, without limitation,
with respect to merchantability or fitness for any particular purpose or the
future performance of CAT or the Division Business, and any such other
representations or warranties are hereby expressly disclaimed.
IV. REPRESENTATIONS AND WARRANTIES OF ATSC AND BUYER.
ATSC and Buyer hereby represent and warrant to Seller as follows:
4.1 Organization of ATSC and Buyer; Authority.
(a) Each of ATSC and Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
ATSC and Buyer has all requisite corporate power and authority to own, lease and
operate its properties and assets and to conduct its business as it is now being
conducted. Each of ATSC and Buyer is duly qualified or licensed to do business
as a foreign corporation and is in good standing in each jurisdiction in which
the property or assets owned, leased or operated by it or the nature of the
business conducted by it makes such qualifications necessary, except in those
jurisdictions where the failure to have such power and authority or to be so
duly qualified or licensed and in good standing would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on ATSC
or Buyer, respectively.
(b) Each of ATSC and Buyer has all requisite corporate power and authority
to enter into this Agreement and any instruments and agreements contemplated
herein required to be executed and delivered by it pursuant to this Agreement
(including, without limitation, as applicable, the Ancillary Agreements, the
Assignment and Assumption Agreements, the Undertaking and the Advance
Instrument) (collectively, the "Buyer Related Instruments") and to
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consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and the Buyer Related Instruments to
which it is a party and the consummation of the transactions contemplated hereby
and thereby, have been duly authorized by all necessary corporate action on the
part of each of ATSC and Buyer. This Agreement has been, and each of the Buyer
Related Instruments to which it is a party, when executed and delivered will be,
duly executed and delivered by each of ATSC and Buyer and this Agreement
constitutes, and each of the Buyer Related Instruments to which it is a party
will, when executed and delivered, constitute, a valid and binding obligation of
each of ATSC and Buyer, enforceable against each of ATSC and Buyer in accordance
with its terms, except that (a) such enforcement may be subject to any
bankruptcy, insolvency, reorganization, moratorium, or other laws, now or
hereafter in effect, relating to or limiting creditors' rights generally and (b)
the remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought. Each of ATSC and Buyer
shall deliver to Seller true, correct and complete copies of resolutions duly
and validly adopted by their respective board of directors, evidencing the
authorization of the execution and delivery of this Agreement and the Buyer
Related Instruments, as applicable, to which it is a party and the consummation
of the transactions contemplated hereby and thereby.
4.2 No Violation; Consents and Approvals.
(a) Subject to the consents, approvals or filings referred to in Section
4.2(b) and Section 4.2(c) hereof, the execution and delivery of this Agreement
by each of ATSC and Buyer and the Buyer Related Instruments to which it is a
party do not, and the consummation of the transactions contemplated hereby or
thereby and compliance with the terms hereof or thereof will not, (i) conflict
with, or result in any violation of or default under, (A) any provision of the
charter or by-laws of either ATSC or Buyer or (B) any judgment, order or decree,
or statute, law, ordinance, rule or regulation of any Governmental Entity
applicable to either ATSC or Buyer, or the assets of either ATSC or Buyer; or
(ii) conflict with, or result in any breach or violation of or constitute a
default (or an event or condition which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or cause the acceleration of any
maturity of any liability or obligation pursuant to, or result in the creation
or imposition of any Lien under, any note, bond, mortgage, indenture, license,
contract, agreement, lease or other instrument or obligation to which either
ATSC or Buyer is a party or by which either may be bound or affected, except
where the conflict, violation, default, breach, termination, acceleration,
creation or imposition would not reasonably be expected to have a Material
Adverse Effect on ATSC or Buyer, would not prevent or delay ATSC's or Buyer's
ability, or, to the best knowledge of ATSC and Buyer, Seller's ability, to
consummate the transactions contemplated hereby or would not result in any
liability, cost or expense to Seller or any of its affiliates (other than
liabilities and obligations not in excess of $50,000 in the aggregate).
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made in connection with the execution and delivery by ATSC or Buyer of this
Agreement or the Buyer Related Instruments to which each is a party, or the
consummation by ATSC or Buyer of the transactions contemplated hereby or thereby
or compliance by ATSC and Buyer with the terms hereof or thereof, other than (i)
compliance with and filings under the HSR Act, (ii) compliance with and filings
under Section 13(a) of the Exchange Act and (iii) those the failure of which to
obtain would not reasonably be expected to have a Material Adverse Effect on
ATSC or Buyer, would not prevent or delay ATSC's or Buyer's ability, or, to the
best knowledge of ATSC and Buyer, Seller's ability, to consummate the
transactions contemplated hereby or would not result in any liability, cost or
expense to Seller or any of its affiliates (other than liabilities and
obligations not in excess of $50,000 in the aggregate).
(c) Except for the consent of the lenders under Buyer's existing credit
facility, no consent, approval, order or authorization of, notice to or
registration, declaration or filing with, any third party is required to be
obtained or made by or with respect to Buyer or ATSC in connection with the
execution and delivery by either ATSC or Buyer of this Agreement or any Buyer
Related Instrument, or the consummation of the transactions contemplated hereby
or thereby or compliance by ATSC or Buyer of the terms hereof or thereof, except
where the failure to obtain any consent, approval, order or authorization, or to
give notice, or to make any registration, declaration or filing would not
reasonably be expected to have a Material Adverse Effect on ATSC or Buyer, would
not prevent or delay ATSC's or Buyer's ability, or, to the best knowledge of
ATSC and Buyer, Seller's ability, to consummate the transactions contemplated
hereby or would not result in any liability, cost or expense to Seller (other
than liabilities and obligations not in excess of $50,000 in the aggregate).
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4.3 Litigation/Claims. Except as set forth in Section 4.3 of the Disclosure
Schedule being delivered by Buyer to Seller concurrently herewith (the "BUYER
DISCLOSURE SCHEDULE"), there is (i) no claim, action, suit or proceeding pending
or, to the best knowledge of ATSC or Buyer, threatened and (ii) to the best
knowledge of ATSC and Buyer, no investigations or inquiries pending or
threatened by or before any Governmental Entity, or by or on behalf of any third
party, in either case, which challenges the validity of this Agreement or any
Buyer Related Instrument or which, if adversely determined, would, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
ATSC or Buyer, or would adversely affect the ability of ATSC or Buyer to
consummate the transactions contemplated by this Agreement and the Buyer Related
Instruments or comply with the terms hereof or thereof.
4.4 SEC Documents and Other Reports. ATSC has filed all documents required
to be filed by it with the SEC since January 1995 (the "ATSC SEC Documents"). As
of their respective dates, the ATSC SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and none of the ATSC SEC Documents contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of ATSC included in the ATSC SEC Documents complied as to
form in all material respects with the applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of the unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may be indicated therein or in the notes
thereto) and fairly present the consolidated financial position of ATSC and its
consolidated subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the respective periods then ended (subject, in the case of the unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein and the absence of footnotes). Since January 28, 1995, ATSC
has not made any change in the accounting practices or policies applied in the
preparation of its financial statements.
4.5 Capital Stock.
(a) ATSC's authorized capitalization is as set forth in the ATSC SEC
Documents. All of ATSC's issued and outstanding capital stock has been duly
authorized, validly issued and is fully paid and nonassessable.
(b) The ATSC Common Stock to be issued to Seller has been duly and validly
authorized for issuance by ATSC and ATSC has the corporate power and authority
to issue, sell and deliver the ATSC Common Stock to be sold by it hereunder;
and, when the ATSC Common Stock is issued and delivered to Seller against
payment therefor as provided by this Agreement, the shares of ATSC Common Stock
issued to Seller hereunder will have been validly issued, fully paid and
nonassessable, and the issuance of such shares will not be subject to any
preemptive or similar rights.
(c) The shares of ATSC Common Stock to be issued to Seller at the Closing
will be duly approved for listing on the New York Stock Exchange or such other
securities exchange on which the ATSC Common Stock is then listed, subject to
official notice of issuance.
4.6 Absence of Certain Changes or Events. Since February 3, 1996, (a) there
has not been any Material Adverse Effect on ATSC or Buyer and (b) neither ATSC
nor Buyer has taken any action, no event has occurred and no condition exists
that would violate Section 5.20 hereof.
4.7 Information Supplied. None of the information supplied or to be
supplied by ATSC or Buyer in writing for inclusion in the Proxy Statement (as
hereinafter defined) relating to the Annual Meeting will, at the time of mailing
of the Proxy Statement to stockholders of Seller and at the time of the Annual
Meeting to be held in accordance with Section 5.17, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
4.8 Brokers. No broker, finder or financial advisor or other person is
entitled to any brokerage fees, commissions, finders' fees or financial advisory
fees in connection with the transactions contemplated hereby by reason of any
action taken by Buyer or any of its directors, officers, employees,
representatives or agents.
4.9 Disclaimer of Other Representations and Warranties. Except as expressly
set forth in this Article IV, neither ATSC nor Buyer makes any representation or
warranty, express or implied, at law or in equity, in respect of ATSC or Buyer,
including, without limitation, with respect to the future market value of the
ATSC Common Stock issued to Seller pursuant to Section 1.2(a)(i) hereof.
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V. COVENANTS OF THE PARTIES
5.1 Conduct of the Division Business. Except as expressly permitted by this
Agreement, during the period from the date of this Agreement to the Closing
Date, Seller shall conduct the Division Business, and shall cause CAT to conduct
the business of CAT, in the ordinary course consistent with past practice and
use its reasonable best efforts to preserve their respective current
relationships with suppliers, contract manufacturers, factors and others having
business dealings with them. Without limiting the generality of the foregoing,
except as set forth in Section 5.1 of the SELLER DISCLOSURE SCHEDULE, during the
period from the date of this Agreement to the Closing Date, without the prior
written consent of Buyer, Seller, with respect to the Division, shall not, and
shall cause CAT not to:
(a) cause CAT or the Division, as the case may be, to incur any
liabilities, obligations or indebtedness of any nature (whether absolute,
accrued, contingent or otherwise and whether due or to become due), except
items incurred in the ordinary course of business and consistent with past
practice, none of which shall exceed, except in connection with the
manufacture of women's apparel for Buyer pursuant to purchase orders and/or
written fabric commitments provided by Buyer (as to which there shall not
be any such dollar limitation), $50,000 (counting liabilities or
obligations arising from one transaction or a series of related
transactions, and all periodic installments or payments under any lease or
other agreement providing for periodic installments or payments, as a
single obligation or liability);
(b) permit, allow or suffer any of the Assets or any assets of CAT, as
the case may be, to be subjected to any Lien, restriction or charge of any
kind, other than Permitted Liens and Liens in favor of The HongKong and
Shanghai Banking Corporation, Mitsubishi Corporation and Mitsubishi
International Corporation existing on the date hereof;
(c) fail to maintain the properties, machinery and equipment of CAT or
the Division, as the case may be, in good operating condition and repair
(ordinary wear and tear excepted);
(d) fail to maintain all policies of insurance listed in Section 3.16
of the SELLER DISCLOSURE SCHEDULE and all policies of insurance relating to
CAT, as the case may be, in full force and effect, at least at such levels
as are in effect on the date hereof, through and including the Closing
Date; or take, or fail to take, any action that would enable the insurers
under such policies to avoid liability for claims arising out of
occurrences prior to the Closing;
(e) revise, amend or enter into any employment agreement or
arrangement or pay any bonus or increase the rate of compensation of, or
pay or agree to pay any benefit to, including, without limitation,
severance benefits, any CAT Employee or any Affected Employee, as the case
may be, except as may be required by any Plan or by applicable law;
provided, however, that Seller may implement planned annual increases in
the rates of compensation in the ordinary course of business consistent
with past practice, provided that such increases are disclosed to Buyer
prior to becoming effective;
(f) enter into, adopt or amend any Plan, except as may be required by
applicable law;
(g) sell any inventory other than to Buyer in the ordinary course of
business or inventory rejected by Buyer in the ordinary course of business,
or sell, lease, transfer or otherwise dispose of any other Asset or any
asset of CAT, as the case may be, other than in the ordinary course of
business;
(h) acquire or agree to acquire on behalf of CAT or the Division, as
the case may be, any assets which are material, individually or in the
aggregate, to CAT or the Division, as the case may be, other than fabric
and other apparel components necessary to manufacture women's apparel
pursuant to purchase orders issued by Buyer;
(i) modify, amend or terminate any Lease or any Contract required to
be listed in Section 3.14 of the SELLER DISCLOSURE SCHEDULE or to which CAT
is a party, as the case may be, or enter into any other contract, agreement
or commitment by which CAT or the Division, as the case may be, or any
Asset or any asset of CAT, as the case may be, may be bound, and, in the
case of the Division, which would have been required to be listed in
Section 3.14 of the SELLER DISCLOSURE SCHEDULE had such agreement been
entered into prior to the date of this Agreement, other than purchase and
sale orders entered into in connection with the manufacture of women's
apparel for Buyer pursuant to purchase orders issued by Buyer;
(j) fail to maintain (i) the accounts and Books and Records of the
Division and (ii) the accounts and books and records of CAT, as the case
may be, in the usual, regular and ordinary manner on a basis consistently
applied;
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(k) terminate, discontinue, close or dispose of any facility or business
operation of CAT or the Division, as the case may be;
(l) make any capital expenditure or any commitment for capital expenditures
with respect to CAT or the Division, as the case may be, for additions to
property, plant, equipment or intangible capital assets, which individually
exceeds $50,000 or, in the aggregate, exceeds $250,000;
(m) cancel any debt or waive any claim or right of substantial value with
respect to CAT or the Division, as the case may be;
(n) pay, loan or advance any amount to, or sell, transfer or lease any
property or asset (real, personal or mixed, tangible or intangible) to, any
affiliate of Seller; or enter into any contract, agreement or commitment with
any affiliate of Seller; or
(o) agree, whether in writing or otherwise, to do any of the foregoing.
5.2 Access to Information; Confidentiality.
(a) During the period from the date of this Agreement through the Closing
Date, the parties hereto shall afford each other and their respective authorized
representatives such access during regular business hours to all plants,
offices, warehouses, facilities and books and records as each party and their
respective representatives may reasonably request; provided, however, each party
shall schedule their access and visits through a designated representative of
the other party and in such a way as to avoid disrupting the normal business of
the other party.
(b) Each of ATSC, Buyer, Seller and CGFE shall hold, and shall cause its
controlled affiliates, consultants and advisors to hold, any information which
it receives in connection with the transactions contemplated by this Agreement
in confidence in accordance with and subject to the terms of (i) the letter of
confidentiality between Seller and ATSC, dated March 15, 1996, and (ii) the
letter of confidentiality between Seller and ATSC, dated April 18, 1996
(collectively, the "Confidentiality Agreements").
5.3 Financial Statements.
(a) On or before June 10, 1996, Seller shall deliver to Buyer, the audited
combined balance sheets of the Combined Entity as of January 28, 1995 and the
audited combined income statements and statements of cash flows of the Combined
Entity for the fiscal year ended January 28, 1995 accompanied, in each case, by
an unqualified report of Seller's independent public accountants, Ernst & Young,
LLP (collectively, the "Combined Entity 1994 Audited Financial Statements"); and
(b) Until the Closing, on or before the 30th day of each month beginning
with the month following the execution of this Agreement, Seller shall deliver
to Buyer unaudited balance sheets and income statements of Seller (the
"Subsequent Monthly Financial Statements"), CAT (the "CAT Subsequent Monthly
Financial Statements") and the Combined Entity (the "Combined Entity Subsequent
Monthly Financial Statements"), as at and for the monthly period ending the last
day of the preceding month, and as soon as available, but not later than 45 days
after the end of each fiscal quarter, Seller shall deliver to Buyer unaudited
balance sheets as of the end of such fiscal quarter and unaudited income
statements and statements of cash flows for the three-month and year-to-date
periods then ended, of Seller (the "Subsequent Quarterly Financial Statements"),
CAT (the "CAT Subsequent Quarterly Financial Statements") and the Combined
Entity (the "Combined Entity Subsequent Quarterly Financial Statements"). The
Subsequent Monthly Financial Statements and the Subsequent Quarterly Financial
Statements are referred to, collectively herein, as the "Subsequent Financial
Statements". The CAT Subsequent Monthly Financial Statements and the CAT
Subsequent Quarterly Financial Statements are referred to, collectively, herein
as the "CAT Subsequent Financial Statements". The Combined Entity 1995 Audited
Financial Statements, Combined Entity Subsequent Monthly Financial Statements
and the Combined Entity Subsequent Quarterly Financial Statements are referred
to, collectively, herein as the "Combined Entity Subsequent Financial
Statements". The Subsequent Financial Statements, the CAT Subsequent Financial
Statements and the Combined Entity Subsequent Financial Statements shall be
prepared in a format consistent with the Audited Financial Statements, the CAT
Financial Statements and the Combined Entity Financial Statements, respectively.
(c) Until the Closing, on or before the 30th day of each month beginning
with the month following the execution of this Agreement, ATSC shall deliver to
Seller unaudited consolidated balance sheets and income statements of ATSC, as
at and for the monthly period ending the last day of the preceding month, and as
soon as available, but not
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later than 45 days after the end of each fiscal quarter, ATSC shall deliver to
Seller unaudited consolidated balance sheets as of the end of such fiscal
quarter and unaudited income statements and statements of cash flows for the
three-month and year-to-date periods then ended of ATSC. Such financial
statements shall be prepared in a manner consistent with ATSC's financial
statements included in the ATSC SEC Documents.
5.4 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement no later than August
15, 1996. Each of the parties will use its reasonable best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the Closing conditions set forth in
Articles VI, VII and VIII hereof).
5.5 Consents. Without limiting the generality of Section 5.4 hereof, each
of the parties hereto shall use its reasonable best efforts to obtain all
licenses, permits, authorizations, consents and approvals of all third parties
and Governmental Entities necessary in connection with the consummation of the
transactions contemplated by this Agreement prior to the Closing, and shall use
reasonable best efforts to obtain estoppel certificates from the landlords under
the NY Lease and the FWM Lease. Notwithstanding the foregoing, neither Buyer nor
Seller shall have any obligation to pay any fee to any third party for the
purpose of obtaining any consent or approval or any costs and expenses of any
third party resulting from the process of obtaining such consent or approval.
Each of the parties hereto shall make or cause to be made all filings and
submissions under laws and regulations applicable to it as may be required for
the consummation of the transactions contemplated by this Agreement. Buyer and
Seller shall coordinate and cooperate with each other in exchanging such
information and assistance as any of the parties hereto may reasonably request
in connection with the foregoing.
5.6 Antitrust Notification. Buyer and Seller shall use their respective
reasonable best efforts to obtain all authorizations or waivers required under
the HSR Act to consummate the transactions contemplated hereby, including,
without limitation, making all filings required in connection therewith.
5.7 Public Announcements. Neither Seller nor Buyer shall issue any report,
statement or press release, or otherwise make any public statement, with respect
to this Agreement or the Ancillary Agreements and the transactions contemplated
hereby or thereby, without prior consultation with and approval of the other
parties, except as may be required by federal, state, local or foreign
securities laws or stock exchange rules, or as may be necessary in order to
discharge its reporting or disclosure obligations under such laws or rules;
provided, however, that Buyer may communicate with the Employees regarding its
offer of employment pursuant to Section 2.8 hereof.
5.8 Access to Books and Records Following the Closing. Following the
Closing, Buyer shall permit Seller and its authorized representatives, during
normal business hours and upon reasonable notice, to have reasonable access to,
and examine and make copies of, all books and records which relate to
transactions or events occurring prior to the Closing or transactions or events
occurring subsequent to the Closing which are related to or arise out of
transactions or events occurring prior to the Closing. Buyer shall retain all
books and records for a period of three years following the Closing.
5.9 Other Transactions. Neither Seller nor any of its affiliates, whether
acting directly or through any authorized agent, attorney or representative,
shall, from the date hereof through the Closing Date (the "Exclusivity Period"),
solicit, encourage or entertain any offers from any party other than Buyer, nor
shall they, during the Exclusivity Period, initiate or enter into any form of
preliminary discussion, negotiation for a purchase (or other acquisition),
merger, share exchange or other consolidation, sale of stock or other equity
securities or any other form or manner of transaction, howsoever described or
denominated, involving any material interest in CAT or the Division or any
option or other contractual right with respect to any of the foregoing. In the
event Seller or any of its affiliates receives any offer or proposal to enter
into any such negotiations or other communication with a party other than Buyer
during the Exclusivity Period, Seller will provide prompt notice of the same to
Buyer.
5.10 Discharge of Liens. Seller shall cause all Liens (other than Permitted
Liens) on any real or personal property owned or leased by Seller which is
included in the Assets to be terminated or otherwise discharged at or prior to
the Closing.
5.11 Resignations. At or prior to the Closing Date, each officer and
director of CAT designated by Seller shall execute and deliver to Buyer a letter
of resignation, effective at the Closing Date, as an officer or director of CAT.
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5.12 Insurance. From the date hereof through and including the Closing
Date, Seller shall, at its sole expense, maintain in full force and effect the
insurance policies listed in Section 3.16 of the SELLER DISCLOSURE SCHEDULE and
such additional insurance policies as may be necessary to comply in all material
respects with all requirements of law and the Leases. As of the Closing, Seller
hereby assigns to Buyer any and all assignable rights which Seller may have
under such insurance policies covering claims related to the Assets or the
Assumed Liabilities for the period on or prior to the Closing Date.
5.13 Supplementary Disclosure. Seller shall promptly supplement or amend
the SELLER DISCLOSURE SCHEDULE and Buyer shall promptly supplement or amend the
BUYER DISCLOSURE SCHEDULE with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or listed in the SELLER DISCLOSURE SCHEDULE or
BUYER DISCLOSURE SCHEDULE, respectively; provided, however, that for the purpose
of the rights and obligations of the parties hereunder, any such supplemental or
amended disclosure shall not affect the other party's ability to rely on the
condition set forth in Section 7.1(a) or 8.1(a), as the case may be, unless so
agreed to in writing by Buyer, as to the SELLER DISCLOSURE SCHEDULE, or Seller,
as to the BUYER DISCLOSURE SCHEDULE.
5.14 Brazil Sourcing. Buyer shall use (i) reasonable best efforts to enter
into a new consulting agreement with John Peter M. Gordon, the head of Seller's
Brazilian sourcing operations, pursuant to which Buyer shall compensate Mr.
Gordon in the amount of $240,000 per year through July 31, 1998, and (ii)
reasonable best efforts to cause Seller and its affiliates to be released from
their obligations under the Consulting Agreement, dated February 1, 1995,
between Tralee, S.A., an affiliate of Seller, and Mr. Gordon (the "Existing
Gordon Agreement"). Buyer shall not assume the Existing Gordon Agreement or any
of Seller or its affiliate's obligations thereunder.
5.15 Letters of Credit.
(a) At least ten (10) business days prior to Closing, Seller shall provide
a schedule of all letters of credit as of the Closing Date (i) for raw materials
and making charges relating to fabric and work-in-progress included in the
Assets and (ii) securing Seller's or its affiliate's obligations under the NY
Lease. At the Closing, Buyer shall substitute letters of credit or provide an
alternative form of financial support; PROVIDED, that Buyer shall replace only
that portion of the letters of credit for the NY Lease that relate to the sixth
floor of the leased premises.
(b) Seller shall reimburse Buyer for all finance charges incurred by CAT as
the result of the opening of letters of credit by CAT for the benefit of Seller
in connection with piece goods purchases, FOB garment purchases and CMT
purchases relating to certain products of the Division pursuant to Buyer
purchase orders.
5.16 Amendment. At the election of Buyer, this Agreement shall be amended
in a manner reasonably acceptable to Seller to provide for (i) the transfer and
sale of the Assets to CAT and assumption of the Liabilities by CAT prior to
Closing, and (ii) the subsequent purchase of the CAT Shares by Buyer for the
Purchase Price, provided that Seller determines in good faith that such
amendment will not have a material adverse tax or other material economic
consequences to it.
5.17 Proxy Statement; Stockholder Approval.
(a) Seller, acting through its Board of Directors, shall, subject to and in
accordance with applicable law and its Certificate of Incorporation, as amended,
and its By-Laws, (i) file with the Securities and Exchange Commission (the
"Commission") its preliminary proxy materials (the "Preliminary Proxy
Materials") relating to the Annual Meeting as soon as possible; (ii) promptly
and duly call, give notice of, convene and hold an annual meeting of
stockholders of Seller ("Annual Meeting") and shall hold such meeting as soon as
practicable after the date on which the Proxy Statement (as hereinafter defined)
is cleared with the Commission; (iii) at such Annual Meeting, introduce a
proposal (the "Proposal") to approve and adopt this Agreement and the
transactions contemplated hereby, and recommend approval and adoption of this
Agreement and the transactions contemplated hereby by the stockholders of Seller
and include in the definitive proxy statement relating to the Annual Meeting
(the "Proxy Statement") such recommendation; and (iv) take all reasonable action
to solicit and obtain such approval.
(b) Seller, as promptly as practicable, shall cause the Proxy Statement to
be mailed to its stockholders. Seller shall not take any action that would
require the Proxy Statement to be delayed or recirculated under circumstances
which would, in the reasonable judgment of Buyer, delay the occurrence of the
Closing beyond September 26, 1996.
(c) Seller shall supply ATSC with copies of (i) the Preliminary Proxy
Materials at least ten (10) business days in advance of filing with the
Commission, (ii) copies of all correspondence with the Commission relating to
the
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Preliminary Proxy Materials promptly upon receipt or delivery, as the case may
be, by Seller, and (iii) copies of the Proxy Statement at least one (1) business
day in advance of mailing to Seller's stockholders; provided, that in the cases
of each clause (i)-(iii) above, Seller shall provide ATSC and its counsel with a
reasonable opportunity for review thereof and comment thereon, such review to be
conducted and such comments to be delivered with reasonable promptness.
(d) On the date hereof, Mr. Bernard M. Manuel, Mrs. Isabelle Manuel, Mr.
Irving Benson, Mrs. Dianne Benson and Mr. Roy E. Green, as trustee of the
Bernard Manuel 1992 Irrevocable Trust for Children, are each executing and
delivering to Buyer a Proxy entitling Paul E. Francis, Walter J. Parks and
Jocelyn F.L. Barandiaran, each an officer of ATSC and Buyer to vote all shares
of capital stock of Seller over which such person or entity has voting authority
(i) for the approval and adoption of this Agreement and the transactions
contemplated hereby and any and all related agreements and (ii) against any
other transaction or proposal that could (x) prevent or delay the consummation
of the transactions contemplated by this Agreement or (y) frustrate the purposes
of this Agreement (each, a "Proxy"). On or before June 30, 1996, Seller shall
deliver to Buyer executed Proxies from each of GJM International Limited, Fenn,
Wright and Manson (Antilles) N.V., and Cleveland Investment Limited, with
respect to the shares of capital stock of Seller owned by such entities. Seller
shall use its reasonable best efforts to obtain a Proxy from Limited Direct
Associates L.P. with respect to the shares of capital stock of Seller owned by
it.
5.18 Occupancy. Certain employees of Buyer and CAT are occupying the fifth
and sixth floors of Seller's leased facility in New York City, New York.
Commencing the earlier of April 15, 1996 or the date on which such employees
began to occupy such floors, Seller shall charge Buyer and CAT, determined based
upon head-count, a pro rata portion of the cash rental, rental tax and cleaning
service costs.
5.19 Transfer Taxes. Buyer shall be responsible for the timely payment of
all transfer taxes and stamp duty taxes attributable to the transactions
effected pursuant to this Agreement which are not measured by gain or income
realized by Seller ("Transfer Taxes"). Upon Buyer's request on or after the
Closing Date, Seller shall pay to Buyer an amount equal to 50% of all Transfer
Taxes paid or to be paid by Buyer. Buyer shall prepare or cause to be prepared
and timely file or cause to be timely filed all tax returns required to be filed
in respect of Transfer Taxes (other than any notices required to be given under
any applicable bulk sales laws) and, to the extent that Buyer so requests,
Seller shall sign such tax returns and notices and fully cooperate with Buyer in
connection with such filings.
5.20 Conduct of ATSC Business. Except as expressly permitted by this
Agreement, during the period from the date of this Agreement to the Closing
Date, ATSC (a) shall conduct its business in the ordinary course consistent with
past practice and use its reasonable best efforts to preserve its current
relationships with suppliers, contract manufacturers, factors and others having
business dealings with it, (b) shall not effect a stock split or combination
with respect to, declare a stock dividend on or engage in a recapitalization of,
the ATSC Common Stock or (c) shall not, and shall not permit any of its
affiliates to, take any action which would reasonably be expected to have a
Material Adverse Effect on CAT or the Division Business.
VI. CONDITIONS TO OBLIGATIONS OF BOTH PARTIES.
6.1 Conditions. The respective obligations of each party to effect the
transactions contemplated by this Agreement shall be subject to the satisfaction
or waiver of the following conditions:
(a) the stockholders of Seller shall have approved the transactions
contemplated by this Agreement.
(b) No statute, rule, regulation, order, decree or injunction shall have
been enacted, entered, promulgated or enforced by a Governmental Entity which
prohibits the consummation of the transactions contemplated by this Agreement
and shall be in effect; provided, that the parties shall use their reasonable
best efforts to have any such injunction lifted.
(c) The waiting period under the HSR Act with respect to the transactions
contemplated by this Agreement shall have expired or been terminated.
(d) Each of Mitsubishi International Corporation, Mitsubishi Corporation
and HongKong and Shanghai Banking Corporation shall have consented to the
transactions contemplated by this Agreement and released any Liens held by them
on the Assets and the CAT Shares not later than the Closing Date. Seller and
Buyer shall use reasonable best efforts to cause the consents required by this
Subsection 6.1(d) to include an acknowledgment of
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fair value, a waiver of any fraudulent transfer claims and a waiver of any right
to participate in any recovery of fraudulent transfer claims brought by the
debtor in possession or trustee.
(e) Landlords' Consents. In the event Buyer enters into the Subleases at
the time of Closing, then Seller shall have obtained from the landlords under
the NY Lease and the FWM Lease its consent to such Subleases.
VII. CONDITIONS TO OBLIGATIONS OF SELLER.
7.1 Conditions. The obligations of Seller to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Closing of each of the following conditions (any or all of which, to the extent
permitted by law, may be waived in whole or in part by Seller):
(a) Representations and Warranties. The representations and warranties
of Buyer in this Agreement qualified as to materiality shall be true,
complete and correct in all respects, and those not so qualified shall be
true, complete and correct in all material respects, as of the date when
made and at and as of the Closing Date, as though such representations and
warranties were made at and as of the Closing Date.
(b) Performance. Buyer shall have performed and complied with, in all
material respects, all agreements, obligations, covenants and conditions
required by this Agreement to be so performed or complied with by Buyer at
or prior to the Closing.
(c) Officer's Certificate. Buyer shall have delivered to Seller a duly
executed certificate, dated as of the Closing Date, certifying the
fulfillment of the conditions specified in Subsections 7.1(a) and 7.1(b)
hereof.
(d) Opinion of Counsel. Buyer shall have delivered to Seller an
opinion of legal counsel of Buyer, dated the Closing Date, in substantially
the form of EXHIBIT L hereto.
(e) Documents. Seller shall have received the Instruments of
Assignment, the Pledge Agreement, the Undertaking and the Ancillary
Agreements, in each case, duly executed by each party thereto (other than
Seller).
(f) Release. Seller shall have been released from its obligations in
respect of CAT's credit facility with HongKong and Shanghai Banking
Corporation.
(g) Material Change. No event, occurrence, fact, condition, change or
development shall have occurred or come to exist which, individually or in
the aggregate, has had or resulted in, or would reasonably be expected to
have or result in, a Material Adverse Effect on ATSC.
VIII. CONDITIONS TO OBLIGATIONS OF BUYER.
8.1 Conditions. The obligations of Buyer to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Closing of each of the following conditions (any or all of which, to the extent
permitted by law, may be waived in whole or in part by Buyer):
(a) Representations and Warranties. The representations and warranties
of Seller in this Agreement qualified as to materiality shall be true,
complete and correct in all respects, and those not so qualified shall be
true, complete and correct in all material respects, as of the date when
made and at and as of the Closing Date, as though such representations and
warranties were made at and as of the Closing Date.
(b) Performance. Seller shall have performed and complied with, in all
material respects, all agreements, obligations, covenants and conditions
required by this Agreement to be so performed or complied with by Seller at
or prior to the Closing.
(c) Officer's Certificate. Seller shall have delivered to Buyer a duly
executed certificate, dated as of the Closing Date, certifying the
fulfillment of the conditions specified in Subsections 8.1(a) and 8.1(b)
hereof.
(d) Opinion of Counsel. Seller shall have delivered to Buyer an
opinion of legal counsel to Seller, dated as of the Closing Date, in
substantially the form of EXHIBIT M hereto.
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(e) Documents. Buyer shall have received the Instruments of
Assignment, the Pledge Agreement and the Ancillary Agreements, in each
case, duly executed by each party thereto (other than Buyer);
(f) CAT Credit Agreement. HongKong and Shanghai Banking Corporation
shall have entered into an amended and restated credit agreement with CAT
on substantially the terms set forth in (or terms no less favorable to CAT
than those set forth in) the Commitment Letter, dated April 22, 1996, the
terms of which are satisfactory to ATSC and Buyer.
(g) Lenders' Consent. Buyer shall have obtained the consent of the
lenders under Buyer's Second Amended and Restated Credit Agreement, dated
as of September 29, 1995, among Buyer and the Lenders named therein to the
transactions contemplated by this Agreement.
(h) Material Change. No event, occurrence, fact, condition, change or
development shall have occurred or come to exist which, individually or in
the aggregate, has had or resulted in, or would reasonably be expected to
have or result in, a Material Adverse Effect on the Division Business or on
CAT.
(i) Employment Agreements. CAT shall have entered into a new
employment agreement reasonably satisfactory to Buyer with Mr. Dwight
Meyer.
IX. TERMINATION, AMENDMENT AND WAIVER.
9.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Closing:
(a) by mutual written agreement of Buyer and Seller;
(b) at any time after September 30, 1996 by either Buyer or Seller, if
the Closing shall not have occurred, unless the Closing has not occurred
due to the failure of such party to perform or comply with any of the
agreements or covenants hereof to be performed or complied with by such
party prior to the Closing;
(c) by either Buyer or Seller, if (i) the stockholders of Seller fail
to approve the transactions contemplated by this Agreement at the Annual
Meeting, or (ii) any event, fact or condition shall occur or exist that
makes it impossible to satisfy a condition to such party's obligations to
consummate the transactions contemplated by this Agreement, unless the
occurrence or existence of such event, fact or condition shall be due to
the failure of such party to perform or comply with any of the agreements
or covenants hereof to be performed or complied with by such party prior to
the Closing; or
(d) by Seller, if, on the Closing Date, the value of the Stock
Consideration, including the value of any Additional Shares and Additional
Cash issuable or payable pursuant to Section 1.2(a)(i) hereof, does not
equal at least $32.5 million.
9.2 Procedure and Effect of Termination. In the event of the termination of
this Agreement and the abandonment of the transactions contemplated hereby
pursuant to Section 9.1(b), 9.1(c) or 9.1(d) hereof, written notice thereof
shall forthwith be given by the party so terminating to the other party, and
this Agreement shall terminate, and the transactions contemplated hereby shall
be abandoned, without further action by Seller or Buyer. If this Agreement is
terminated pursuant to Section 9.1 hereof:
(a) All confidential information received by the parties shall be
treated in accordance with Section 5.2 hereof and the Confidentiality
Agreements referred to in such Section;
(b) all filings, applications and other submissions made pursuant to
Sections 5.4, 5.5 and 5.6 hereof shall, to the extent practicable, be
withdrawn from the agency or other person to which made; and
(c) the obligations provided for in this Section 9.2, Article X,
Sections 11.1 and 11.12 hereof, the confidentiality provision contained in
Section 5.2 hereof and the Confidentiality Agreements referred to in such
Section shall survive any termination of this Agreement.
9.3 Other Remedies. In no event shall termination of this Agreement limit
or restrict the rights and remedies of any party hereto against any other party
which has willfully breached the terms of this Agreement prior to termination
hereof.
X. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.
10.1 Survival of Representations. The representations and warranties in
this Agreement and in any other document delivered in connection herewith shall
survive the Closing hereunder regardless of any investigation made by or on
behalf of any party hereto; provided, however, that all representations and
warranties in this Agreement and in
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any other document delivered herewith relating to CAT (other than Section 3.10
relating to title to the CAT Shares) shall not survive the Closing.
10.2 Seller's Agreement to Indemnify. Upon the terms and subject to the
conditions of this Article X, Seller shall indemnify, defend and hold harmless
Buyer and its affiliates, and its and their directors, officers, employees and
agents (collectively, the "Buyer Group"), at any time after the Closing, from
and against all demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable fees and expenses of attorneys and other
professionals (collectively, "Damages"), asserted against, resulting to, imposed
upon or incurred by the Buyer Group or any member thereof, directly or
indirectly, by reason of or resulting from: (a) liabilities, obligations or
claims of or against Seller or any affiliate of Seller other than CAT (whether
absolute, accrued, contingent or otherwise) existing as of the Closing Date or
arising out of facts, conditions or circumstances occurring at or prior thereto
(excluding the Liabilities), whether or not such liabilities, obligations or
claims were known at the time of Closing; (b) a breach of any representation,
warranty, covenant or agreement of Seller contained in or made pursuant to this
Agreement or any Seller Related Instrument or any facts or circumstances
constituting such a breach; (c) each item listed in Section 3.20 of the SELLER
DISCLOSURE SCHEDULE; (d) the violation of any Environmental Law prior to the
Closing Date (or allegation of same), by Seller or the Division, or any other
Damages arising under Environmental Laws; (e) any tax or related claim asserted
against the Buyer Group or any member thereof relating to the operations or
properties of the Division with respect to any period ending on or prior to or
including the Closing Date; (f) any failure to comply with any "bulk sales" laws
applicable to the transactions contemplated hereby; and (g) all Damages arising
out of or relating to any Plans or CAT Plans, including, without limitation, all
benefits accrued by any employees under the Plans and CAT Plans and any
liability arising under Section 4980B of the Code (collectively, "Seller
Claims").
10.3 Seller's Limitation of Liability.
(a) Anything in this Agreement to the contrary notwithstanding, the
liability of Seller to indemnify the Buyer Group pursuant to Section 10.2(b)
hereof against any Damages sustained by reason of any Seller Claim thereunder
for a breach of any representation and warranty of Seller shall be limited to
Seller Claims as to which any member of the Buyer Group has given Seller written
notice on or prior to April 30, 1997, whether or not any Damages have then
actually been sustained; provided, however, that, notwithstanding the foregoing,
the liability of Seller to indemnify the Buyer Group against any Damages
sustained by reason of any Seller Claim for a breach of any of the
representations and warranties set forth in Section 3.10 and the first sentence
of Section 3.11 hereof shall not be so limited.
(b) Other than with respect to the representations and warranties set forth
in Section 3.10 and the first sentence of Section 3.11 hereof, the provisions in
Section 10.2(b) hereof for indemnity by Seller of the Buyer Group against
Damages sustained by reason of any Seller Claim thereunder for a breach of any
representation or warranty of Seller shall be effective only after the aggregate
amount of all such Seller Claims for which Seller is liable exceeds $500,000,
and then only to the extent of such excess (the "Buyer's Deductible"). With
respect to any breach by Seller of the representation and warranty set forth in
the first sentence of Section 3.11 hereof, if such breach relates to Seller's
title to any of the Inventory or the Net Fixed Assets, Seller's indemnity
obligations hereunder shall be limited to the amount of the Inventory
Consideration or the Fixed Asset Consideration, respectively. Notwithstanding
the foregoing, in no event shall Seller's indemnity obligations under this
Agreement exceed $3.6 million.
(c) The liability of Seller to indemnify the Buyer Group against any
Damages sustained by reason of any Seller Claim for a breach of any covenant or
agreement shall not be limited in any manner and shall not be subject to the
Buyer's Deductible, provided, however, that Seller shall not be liable for
breach of any covenant or agreement contained in Section 5.1 hereof if the
transactions contemplated hereby are consummated unless such breach also
constitutes a breach of a representation or warranty for which Buyer would
otherwise be entitled to indemnification hereunder.
(d) Seller may satisfy its indemnification obligations hereunder either by
the payment of cash or by delivering shares of ATSC Common Stock having a fair
market value equal to the amount of the claim. For purposes of this Section
10.3(d), fair market value shall mean the average high and low sale price of the
ATSC Common Stock on the New York Stock Exchange Composite Tape (or as reported
on any other exchange on which the ATSC Common Stock is then listed) on each of
the ten (10) consecutive trading days ending on the trading day immediately
preceding the payment date.
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10.4 Buyer's Agreement to Indemnify. Upon the terms and subject to the
conditions of this Article X, Buyer shall indemnify, defend and hold harmless
the Seller and its affiliates, and its and their directors, officers, employees
and agents (collectively, the "Seller Group"), at any time after the Closing,
from and against all Damages asserted against, resulting to, imposed upon or
incurred by the Seller Group or any member thereof, directly or indirectly, by
reason of or resulting from: (a) a breach of any representation, warranty,
covenant or agreement of Buyer contained in or made pursuant to this Agreement
or any Buyer Related Instrument or any facts or circumstances constituting such
a breach; or (b) the Liabilities ("Buyer Claims" and, collectively with Seller
Claims, "Claims").
10.5 Buyer's Limitation of Liability.
(a) Anything in this Agreement to the contrary notwithstanding, the
liability of Buyer to indemnify the Seller Group pursuant to Section 10.4(a)
hereof against any Damages sustained by reason of any Buyer Claim thereunder for
a breach of any representation and warranty of Buyer shall be limited to Buyer
Claims as to which any member of the Seller Group has given Buyer written notice
on or prior to April 30, 1997, whether or not any Damages have then actually
been sustained; provided, however, that notwithstanding the foregoing, the
liability of Buyer to indemnify the Seller Group against any Damages sustained
by reason of any Buyer Claim for a breach of any of the representations and
warranties set forth in Section 4.5(b) hereof shall not be so limited.
(b) Other than with respect to the representations and warranties set forth
in Section 4.5(b), the provisions in Section 10.4(a) for indemnity by Buyer of
the Seller Group against Damages sustained by reason of any Buyer Claim
thereunder for a breach of any representation and warranty of Buyer shall be
effective only after the aggregate amount of all such Buyer Claims for which
Seller is liable exceeds $500,000, and then only to the extent of such excess
(the "Seller's Deductible"). Notwithstanding the foregoing, in no event shall
Buyer's indemnity obligations under this Agreement exceed $3.6 million.
(c) The liability of Buyer to indemnify the Seller Group against any
Damages sustained by reason of any Buyer Claim for a breach of any covenant or
agreement shall not be limited in any manner and shall not be subject to
Seller's Deductible, provided, however, that Buyer shall not be liable for
breach of any covenant or agreement contained in Section 5.20 hereof if the
transactions contemplated hereby are consummated unless such breach also
constitutes a breach of a representation or warranty for which Seller would
otherwise be entitled to indemnification hereunder.
10.6 Conditions of Indemnification. The obligations and liabilities of the
Seller Group and Buyer Group with respect to Claims made by third parties shall
be subject to the following terms and conditions:
(a) The indemnified party will give the indemnifying party prompt
notice of any such Claim, and the indemnifying party shall have the right
to undertake the defense thereof by representatives chosen by it;
(b) If the indemnifying party undertakes the defense of any such
Claim, the indemnified party shall, to the best of its ability, assist the
indemnifying party, at the expense of the indemnifying party, in the
defense of such Claim, and shall promptly send to the indemnifying party,
at the expense of the indemnifying party, copies of any documents received
by the indemnified party which relate to such Claim; provided, however,
that the indemnified party shall have no such obligation if and to the
extent that such third-party Claim arises out of or relates to facts,
events or circumstances which may also give rise to a separate Claim by the
indemnified party against the indemnifying party;
(c) If the indemnifying party, within a reasonable time after notice
of any such Claim, fails to defend the indemnified party against which such
Claim has been asserted, the indemnified party shall (upon further notice
to the indemnifying party) have the right to undertake the defense,
compromise or settlement of such Claim on behalf of and for the account and
risk of the indemnifying party, subject to the right of the indemnifying
party to assume the defense of such Claim at any time prior to settlement,
compromise or final determination thereof; and
(d) Anything in this Article X to the contrary notwithstanding, (i) if
there is a reasonable probability that a Claim may materially and adversely
affect the indemnified party other than as a result of money damages or
other money payments, the indemnified party shall have the right, at its
own cost and expense, to defend, compromise or settle such Claim; and (ii)
the indemnifying party shall not, without the written consent of the
indemnified party, settle or compromise any Claim or consent to the entry
of any judgment which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff to the indemnified party a release
from all liability with respect to such Claim.
(e) Notwithstanding anything to the contrary contained herein, if the
conditions of Subsection 7.1(a) or (b) or Subsection 8.1(a) or (b) are not
satisfied as of the Closing Date (a "Failure of Condition"), and the party
for
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<PAGE>
whose benefit such condition exists (the "Waiving Party") elects to proceed
with the Closing notwithstanding such Failure of Condition, then such
condition shall be deemed to be satisfied and the Waiving Party shall not
bring any Claim for indemnity hereunder or any other Claim arising out of
the facts or circumstances causing such Failure of Condition.
10.7 Exclusive Remedies. The remedies provided herein shall be the
exclusive remedies of each of the parties hereto with respect to any Claims or
Damages arising out of the transactions contemplated by this Agreement,
including, without limitation, any Claim in tort or under any federal or state
securities laws; provided, however, that the parties hereto shall be entitled to
an injunction or other equitable relief to prevent breaches of this Agreement,
to enforce specifically the terms and provisions of this Agreement or seek any
other remedy to which they are entitled in equity in any court of the United
States located in the State of New York or in New York State court.
10.8 Transfer Pricing. Seller and Buyer acknowledge and agree that the
buying agent fees and other pricing arrangements between CAT-US and CAT-Far East
were established in good faith and in accordance with industry standards.
10.9 Claims Against Cat Directors and Officers. Buyer hereby agrees that it
will not, and will not permit any of its affiliates, including CAT, to, bring
any claim against any of Messrs. Bernard Manuel, Irving Benson or Roy Green for
any action taken or failed to be taken by such person in his capacity as an
officer or director of CAT, other than any such claim for fraud or intentional
misconduct.
XI. MISCELLANEOUS.
11.1 Fees and Expenses. Whether or not the transactions contemplated hereby
or by the Ancillary Agreements are consummated pursuant hereto or thereto, each
of Seller and Buyer shall pay all fees and expenses incurred by it or on its
behalf in connection with or in anticipation of this Agreement and such related
instruments and the consummation of the transactions contemplated hereby and
thereby.
11.2 Further Assurances. From time to time after the Closing Date, at the
request of any party hereto and at the expense of the party so requesting, Buyer
and Seller shall execute and deliver to such requesting party such documents and
take such other action as such requesting party may reasonably request in order
to consummate more effectively the transactions contemplated hereby, including,
without limitation, such documents or actions as Buyer may require for the
purpose of enabling the recordation of any Instrument of Assignment.
11.3 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered by hand, by
mail (certified or registered mail, return receipt requested), by reputable
overnight courier or by facsimile transmission (receipt of which is confirmed):
(a) If to Buyer or ATSC, to:
AnnTaylor Stores Corporation
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq.
Facsimile: (302) 651-3001
(b) If to Seller, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
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<PAGE>
with a copy to:
Fulbright and Jaworski, L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 11.3, to the other parties
hereto. All such notices, requests, demands, waivers and communications shall be
deemed to have been given on the date on which so hand-delivered, on the third
business day following the date on which so mailed, on the next business day
following the date on which delivered to such overnight courier and on the date
of such facsimile transmission and confirmation, except for a notice of change
of person or address, which shall be effective only upon receipt thereof.
11.4 Entire Agreement. This Agreement, the SELLER DISCLOSURE SCHEDULE, the
BUYER DISCLOSURE SCHEDULE, and the ANNEXES, EXHIBITS and other documents
referred to herein which form a part hereof (including, without limitation, the
Confidentiality Agreements referred to in Section 5.2 hereof) contain the entire
understanding of the parties hereto with respect to the subject matter hereof.
This Agreement supersedes all prior agreements and understandings, oral and
written, with respect to its subject matter.
11.5 Severability. Should any provision of this Agreement, or any part
thereof, for any reason be declared invalid or unenforceable, such declaration
shall not affect the validity or enforceability of any other provision of this
Agreement, or any other part thereof, all of which other provisions, and parts,
shall remain in full force and effect, and the application of such invalid or
unenforceable provision, or such part thereof, to persons or circumstances other
than those as to which it is held invalid or unenforceable shall be valid and be
enforced to the fullest extent permitted by law.
11.6 Binding Effect; Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, executors, successors and permitted assigns, but except
as contemplated herein, neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, directly or indirectly, by Buyer or
Seller without the prior written consent of the other parties hereto; provided,
however, that ATSC or Buyer may assign any or all of its rights, interests or
obligations hereunder to any one or more direct or indirect wholly owned
subsidiaries of ATSC or Buyer, provided, however, that no such assignment by
ATSC or Buyer shall limit or affect ATSC or Buyer's obligations hereunder.
11.7 Amendment, Modification and Waiver. This Agreement may be amended,
modified or supplemented at any time by written agreement of the parties hereto.
Any failure by Seller, on the one hand, or ATSC or Buyer, on the other hand, to
comply with any term or provision of this Agreement may be waived by ATSC or
Buyer or Seller, respectively, at any time by an instrument in writing signed by
or on behalf of ATSC, Buyer or Seller, but such waiver or failure to insist upon
strict compliance with such term or provision shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure to comply.
11.8 Third-party Beneficiaries. Except as otherwise expressly provided
herein, this Agreement is not intended, and shall not be deemed, to confer upon
or give any person except the parties hereto and their respective successors and
permitted assigns, any remedy, claim, liability, reimbursement, cause of action
or other right under or by reason of this Agreement.
11.9 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
11.10 Bulk Sales. Without limiting Seller's obligations under Section
10.2(f) hereof, each of Buyer and Seller hereby waive compliance by the other
with the "bulk sales" provisions of Article 6 of the Uniform Commercial Code as
may be in effect in the jurisdictions where the Assets are located and any other
similar provision of applicable law as may be in effect in any such
jurisdiction.
11.11 Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this Agreement, the term "person" shall mean and
include an individual, a partnership, a
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<PAGE>
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof. As used in this Agreement, the
term "affiliate" shall have the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended.
11.12 Governing Law. This Agreement shall be governed by the laws of the
State of New York, without regard to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Stock and Asset
Purchase Agreement as of the day and year first above written.
CYGNE DESIGNS, INC.
By
-------------------------------------
Bernard M. Manuel
Chairman
CYGNE GROUP (F.E.) LIMITED.
By
-------------------------------------
Bernard M. Manuel
Director
ANNTAYLOR STORES CORPORATION
By
--------------------------------------
J. Patrick Spainhour
President
ANNTAYLOR, INC.
By
---------------------------------------
J. Patrick Spainhour
President
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<PAGE>
EXHIBIT A
BILL OF SALE
THIS BILL OF SALE (the "Bill of Sale") is executed as of ____________, 1996
by CYGNE DESIGNS, INC., a Delaware corporation ("Seller"), in favor of
ANNTAYLOR, INC., a Delaware corporation ("Buyer"), in connection with the
transactions contemplated by the Stock and Asset Purchase Agreement dated as of
____________, 1996 (the "Purchase Agreement") by and between Seller, Buyer,
ANNTAYLOR STORES CORPORATION, a Delaware corporation and holder of all of the
outstanding capital stock of Buyer ("ATSC"), and CYGNE GROUP (F.E.) LIMITED, a
Hong Kong corporation and a wholly owned subsidiary of Seller. Capitalized terms
used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Purchase Agreement.
INTENDING TO BE LEGALLY BOUND, and for good and valuable consideration,
sufficiency and receipt of which are hereby acknowledged, Seller hereby sells,
transfers, conveys, assigns and delivers unto Buyer, its successors and assigns,
forever, all of Seller's right, title and interest in and to the assets of the
Division listed and described on ANNEX I hereto (collectively, the "Assets").
Notwithstanding the foregoing, nothing herein is intended to, nor shall
this Bill of Sale, constitute or evidence the sale, transfer, conveyance,
assignment or delivery to Buyer of any assets not listed or described on ANNEX I
hereto.
Seller hereby authorizes Buyer to take any appropriate action to protect
the right, title and interest in the Assets hereby sold, conveyed, assigned,
transferred and delivered to Buyer, in the name of Seller or Buyer or any other
name (for the benefit of Buyer and its successors and assigns) against each and
every person or persons whomsoever claiming or asserting any claim against any
or all of the same.
Seller hereby covenants and agrees, pursuant to Section 1.1(b) of the
Purchase Agreement, to execute and deliver all such Other Instruments and all
such other notices, releases, acquittances, consents and powers of attorney as
may be necessary more fully to sell, transfer, convey and assign to Buyer, or
its successors or permitted assigns, all of Seller's right, title and interest
in and to the Assets therein and hereby sold, transferred, conveyed and assigned
to Buyer; and in case of conflict, such specific instrument shall control with
respect to the Assets sold, transferred, conveyed or assigned thereby.
Seller hereby further covenants and agrees that in the event Buyer shall
acquire title to any of the Assets subject to any Lien, other than those
expressly permitted by the Purchase Agreement, Seller shall promptly cause such
Lien to be terminated, released or otherwise discharged.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed as
of the date first above written.
CYGNE DESIGNS, INC.
By: _______________________________
Name:
Title:
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<PAGE>
ANNEX I TO
BILL OF SALE
THE ASSETS
The following property and assets of Seller comprise the Assets to be
purchased by Buyer:
(a) the following items of inventory (the "Inventory"): (x) fabric and
trim owned by Seller for use by the Division in the production of
merchandise for Buyer (the "Division Fabric and Trim") as of February 3,
1996 and identified on Attachment A hereto to the extent not used as of the
Closing Date in the production of merchandise for Buyer; (y) Division
Fabric and Trim purchased since February 3, 1996 pursuant to written
commitments or purchase orders issued by Buyer to the extent not used as of
the Closing Date in the production of merchandise for Buyer and (z)
work-in-progress owned by Seller for use by the Division in the production
of merchandise for Buyer pursuant to purchase orders issued by Buyer;
(b) all leasehold improvements, furniture, fixtures and equipment that
(x) are owned by Seller or subject to a Capital Lease (y) relate to and are
used exclusively or primarily in the Division Business and (z) are located
on the fifth, sixth or nineteenth floor of the NY Facility or at the
Florence Facility on the Closing Date, including those listed on ATTACHMENT
B to this ANNEX I;
(c) all licenses, permits, registrations, renewals thereof and
applications therefor, variances, exemptions, orders, approvals and
authorizations issued by any governmental, regulatory or administrative
agency or authority (domestic or foreign), held by Seller or any affiliate
of Seller of or relating to the Division Business, including all quota
allocations for the export of goods to the United States and elsewhere,
necessary or desirable for the lawful conduct of the Division Business to
the extent transferrable under applicable law;
(d) all purchase orders, bills of lading, trust receipts, warehouse
receipts and other documents of title of whatever kind and description
relating to the Inventory;
(e) all rights under insurance policies covering Inventory in transit
and all rights and claims under insurance policies for damage to any Assets
to the extent not repaired or replaced prior to the Closing;
(f) all goodwill, intellectual property rights, patents, trademarks,
service marks, copyrights (including all copyrights in computer software
and databases), licenses and applications therefor (if any), know-how,
processes, methods, techniques, formulae, designs, drawings, patterns,
trade secrets, proprietary information, sketches, technical information,
computer software, databases and other proprietary or confidential
information of or relating to the Division Business and all rights in any
licenses to or from any third party of or for the foregoing, it being
understood, however, that the rights to the Intellectual Property shall be
non-exclusive unless such Intellectual Property relates solely to the
Division Business and Seller's rights therein are exclusive;
(g) all intangible assets of or relating to the Division Business,
including claims against third parties; and
(h) all books and records (including all computerized records and
storage media and associated software) of CAT, and those relating solely to
the Division Business and, to the extent practicable, those portions of
Seller's other books and records that relate to the Division Business,
including, without limitation, (a) all Books and Records relating to the
employees of and the purchase of materials, supplies and services for the
Division Business or CAT, but not including the tax returns, general ledger
or corporate minute books and capital stock books of Seller, and (b) the
tax returns, general ledger and corporate minute books and capital stock
books of CAT-US and CAT-Far East.
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EXHIBIT B
ASSIGNMENT AND ASSUMPTION AGREEMENT
(Contracts)
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment Agreement"),
dated as of ____________, 1996, is made by and between Cygne Designs, Inc., a
Delaware corporation ("Assignor"), and AnnTaylor, Inc., a Delaware corporation
("Assignee").
W I T N E S S E T H
WHEREAS, Assignor is a party to certain contracts and obligations and all
amendments and supplements thereto identified on SCHEDULE I attached hereto and
incorporated by reference herein (the "Contracts").
WHEREAS, Assignor and Assignee are parties to the Stock and Asset Purchase
Agreement, dated as of June 7, 1996 (the "Purchase Agreement") by and between
Assignor, Assignee, AnnTaylor Stores Corporation, a Delaware corporation and
holder of all of the outstanding capital stock of Assignee, and Cygne Group
(F.E.) Limited, a Hong Kong Corporation and a wholly owned subsidiary of
Assignor, pursuant to which Assignor agreed to sell and Assignee agreed to
purchase, among other things, certain assets of Assignor, all in accordance with
the terms and conditions set forth in the Purchase Agreement. Capitalized terms
used and not otherwise defined herein shall have the respective meanings
ascribed to such terms in the Purchase Agreement.
WHEREAS, in connection with the transactions contemplated by the Purchase
Agreement, and pursuant thereto, among other things, Assignor has agreed to
enter into this Assignment Agreement to assign all of Assignor's right, title,
interest, duties and obligations in and to the Contracts to Assignee and, in
partial consideration therefor, among other things, Assignee has agreed to
accept such assignment of the Contracts and assume the duties and obligations of
Assignor under the Contracts arising from and after the date hereof. Seller
shall be responsible for and retains all liabilities for duties and obligations
incurred under the Contracts prior to the date hereof.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Purchase Agreement, the
parties hereto agree as follows:
1. Assignment. Assignor does hereby sell, transfer, convey, assign and
deliver to Assignee all of Assignor's right, title, interest, duties and
obligation in and to the Contracts.
2. Acceptance and Assumption. (a) Assignee does hereby irrevocably
accept such sale, transfer, conveyance, assignment and delivery of all of
Assignor's right, title, interest, duties and obligations in and to the
Contracts, and does hereby assume all duties and obligations of Assignor
under the Contracts arising from and after the date hereof. Seller shall be
responsible for and retains all liabilities for all duties and obligations
incurred prior to the date hereof.
(b) Assignee covenants and agrees to pay, perform, discharge and
satisfy when due all of Assignor's covenants, agreements and obligations
under the Contracts arising from and after the date hereof pursuant to, and
in accordance with, the terms and conditions of the respective Contracts.
3. Effective Time. The assignment of the Contracts by Assignor, and
the acceptance of such assignment and the assumption of the duties and
obligations of Assignor under the Contracts by Assignee, all pursuant to
this Assignment Agreement, shall be effective as of the date hereof.
4. Amendment, Modification and Waiver. This Assignment Agreement may
be amended, modified or supplemented at any time by written agreement of
the parties hereto. Any failure by Assignor, on the one hand, or Assignee,
on the other hand, to comply with any term or provision of this Assignment
Agreement may be waived by Assignee or Assignor, respectively, at any time
by an instrument in writing signed by or on behalf of Assignee or Assignor,
but such waiver or failure to insist upon strict compliance with such term
or provision shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure to comply.
5. Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Assignment
Agreement shall be in writing and shall be deemed to have been duly given
if
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<PAGE>
delivered personally, by mail (certified or registered mail, return receipt
requested), by reputable overnight courier or by facsimile transmission
(receipt of which is confirmed):
(a) If to Assignee, to:
AnnTaylor Stores Corporation
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq.
Facsimile: (302) 651-3001
(b) If to Assignor, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
with a copy to:
Fulbright and Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 5, to the other parties
hereto. All such notices, requests, demands, waivers and communications
shall be deemed to have been given on the date on which so hand-delivered,
on the third business day following the date on which so mailed, on the
next business day following the date on which delivered to such overnight
courier and on the date of such facsimile transmission and confirmation,
except for a notice of change of person or address, which shall be
effective only upon receipt thereof.
6. Third-Party Beneficiaries. Except as otherwise expressly provided
herein, this Assignment Agreement is not intended, and shall not be deemed,
to confer upon or give any person except the parties hereto and their
respective successors and permitted assigns, any remedy, claim, liability,
reimbursement, cause of action or other right under or by reason of this
Assignment Agreement.
7. Governing Law. This Assignment Agreement shall be governed by the
laws of the State of New York, without regard to the principles of
conflicts of law thereof.
8. Counterparts. This Assignment Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Interpretation. The section headings contained in this Assignment
Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Assignment Agreement. As used in this Assignment
Agreement, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
10. Binding Effect; Assignment. This Assignment Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, successors and
permitted assigns, but except as contemplated herein, neither this
Assignment Agreement nor any of the rights,
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<PAGE>
interests or obligations hereunder shall be assigned, directly or
indirectly, by Assignee or Assignor without the prior written consent of
the other party hereto; provided, however, that Assignee may assign any or
all of its rights, interests or obligations hereunder to any one or more
wholly owned subsidiary of AnnTaylor Stores Corporation, provided, however,
that no such assignment by Assignee shall limit or affect Assignee's
obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be duly executed as of the day and year first set forth above.
ASSIGNOR:
CYGNE DESIGNS, INC.
By: _____________________________
Name:
Title:
ASSIGNEE:
ANNTAYLOR, INC.
By: _____________________________
Name:
Title:
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<PAGE>
EXHIBIT C
UNDERTAKING
THIS UNDERTAKING ("Undertaking"), is executed and delivered on this ______
day of ____________, 1996, by AnnTaylor, Inc., a Delaware corporation ("Buyer"),
in favor of Cygne Designs, Inc., a Delaware corporation ("Seller").
W I T N E S S E T H:
WHEREAS, pursuant to the Stock and Asset Purchase Agreement dated as of
June 7, 1996 (the "Purchase Agreement") by and between Buyer, Seller, AnnTaylor
Stores Corporation, a Delaware corporation and holder of all of the outstanding
capital stock of Buyer, and Cygne Group (F.E.) Limited, a Hong Kong corporation
and wholly owned subsidiary of Seller, Seller has, among other things,
concurrently herewith sold, conveyed, assigned, transferred and delivered to
Buyer all of Seller's rights, title and interest in and to certain of the assets
of Seller.
WHEREAS, in partial consideration therefor, the Purchase Agreement requires
that Buyer undertake to assume and to agree to perform, pay or discharge or
cause to be performed, paid or discharged certain liabilities and obligations of
Seller.
NOW, THEREFORE, in consideration of these premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Buyer agrees as follows (capitalized terms used but not otherwise
defined herein having the respective meanings ascribed to them in the Purchase
Agreement):
1. Buyer hereby undertakes, assumes and agrees to pay or discharge in
accordance with their terms, to the extent not heretofore paid or
discharged and subject to the limitations contained in this Undertaking and
to the terms of the Purchase Agreement, the Accounts Payable of Seller
which are listed or described in ANNEX I hereto.
2. The assumption by Buyer of the liabilities and obligations set
forth in this Undertaking shall not be construed to defeat, impair or limit
in any way the rights, claims or remedies of Buyer under the Purchase
Agreement.
3. Other than as expressly set forth in this Undertaking, the Purchase
Agreement or any Instruments of Assignment, Buyer assumes no liability or
obligation of any kind, character or description of Seller or any other
person.
4. This Undertaking shall be enforceable against the successors and
assigns of Buyer and shall inure to the benefit of the successors and
assigns of Seller.
IN WITNESS WHEREOF, this Undertaking has been duly executed and delivered
by the duly authorized officers of AnnTaylor, Inc. on the date first above
written.
ANNTAYLOR, INC.
By: ____________________________
Name:
Title:
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<PAGE>
EXHIBIT D
ADVANCE INSTRUMENT
THIS ADVANCE INSTRUMENT (the "Advance Instrument"), dated as of
____________, 1996, is executed and delivered by AnnTaylor, Inc. ("Ann Taylor")
in favor of Cygne Designs, Inc., a Delaware corporation ("Cygne").
W I T N E S S E T H
WHEREAS, Ann Taylor and Cygne are parties to a Letter Agreement, dated as
of February 10, 1995, pursuant to which Ann Taylor made cash advances to Cygne
in the amount of $5,000,000 (the "Advance").
WHEREAS, Ann Taylor made certain additional cash advances to Cygne in the
amount of $2,985,000 (the "Additional Advances").
WHEREAS, Cygne is party to a Stock and Asset Purchase Agreement, dated as
of June 7, 1996 (the "Purchase Agreement") by and among Cygne, Cygne Group
(F.E.) Limited, a Hong Kong corporation and wholly owned subsidiary of Cygne,
AnnTaylor Stores Corporation, a Delaware corporation and holder of all of the
outstanding capital stock of Ann Taylor ("ATSC"), and Ann Taylor, pursuant to
which Buyer is purchasing from Seller and Seller is selling to Buyer certain
assets of Seller.
WHEREAS, in connection with the transactions contemplated by the Purchase
Agreement, and pursuant thereto, among other things, ATSC has agreed to cause
Ann Taylor to enter into this Advance Instrument to forgive, release and
discharge the Advance and the Additional Advances.
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Release and Discharge. Ann Taylor, for itself and its successors
and assigns, does hereby forgive, release and discharge Cygne from any and
all of Cygne's obligations for the repayment of the Advance and the
Additional Advances and from any and all manner of actions and causes of
action, claims and demands, suits, damages, costs, legal fees, expenses,
debts, dues, accounts, bonds, covenants, contracts, agreements and
compensation whatsoever, in law or in equity, whether the same are known or
unknown, accrued or unaccrued, fixed or contingent ("Claims") which Ann
Taylor now has or may hereafter have against Cygne in as much as such
Claims relate to repayment of the Advance or the Additional Advances.
2. Amendment, Modification and Waiver. This Advance Instrument may be
amended, modified or supplemented at any time by written agreement of the
parties hereto. Any failure by Cygne, on the one hand, or AnnTaylor, on the
other hand, to comply with any term or provision of this Advance Instrument
may be waived by AnnTaylor or Cygne, respectively, at any time by an
instrument in writing signed by or on behalf of AnnTaylor or Cygne, but
such waiver or failure to insist upon strict compliance with such term or
provision shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure to comply.
3. Notices. All notices, requests, demands, waivers and other
communications given under this Advance Instrument shall be in writing and
shall be deemed to have been duly given if delivered personally, by mail
(certified or registered mail, return receipt requested), by reputable
overnight courier or by facsimile transmission (receipt of which is
confirmed):
(a) If to Ann Taylor, to
AnnTaylor, Inc.
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
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<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq.
Facsimile: (302) 651-3001
(b) If to Cygne, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
with a copy to:
Fulbright and Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 3, to the other parties
hereto. All such notices, requests, demands, waivers and communications
shall be deemed to have been given on the date on which so hand-delivered,
on the third business day following the date on which so mailed, on the
next business day following the date on which delivered to such overnight
courier and on the date of such facsimile transmission and confirmation,
except for a notice of change of person or address, which shall be
effective only upon receipt thereof.
4. Third-Party Beneficiaries. Except as otherwise expressly provided
herein, this Advance Instrument is not intended, and shall not be deemed,
to confer upon or give any person except the parties hereto and their
respective successors and permitted assigns, any remedy, claim, liability,
reimbursement, cause of action or other right under or by reason of this
Advance Instrument.
5. Governing Law. This Advance Instrument shall be governed by the
laws of the State of New York, without regard to the principles of
conflicts of law thereof.
6. Counterparts. This Advance Instrument may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7. Interpretation. The section headings contained in this Advance
Instrument are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Advance Instrument. As used in this Advance
Instrument, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
8. Binding Effect; Assignment. This Advance Instrument and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, successors and
permitted assigns, but except as contemplated herein, neither this Advance
Instrument nor any of the rights, interests or obligations hereunder shall
be assigned, directly or indirectly, by Ann Taylor or Cygne without the
prior written consent of the other party hereto; provided, however, that
Ann Taylor may assign any or all of its rights, interests or obligations
hereunder to any one or more wholly owned subsidiary of ATSC, provided,
however, that no such assignment by Ann Taylor shall limit or affect Ann
Taylor's obligations hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Advance Instrument to be
duly executed as of the day and year first above written.
ANNTAYLOR, INC.
By: _____________________________
Name:
Title:
CYGNE DESIGNS, INC.
By: _____________________________
Name:
Title:
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<PAGE>
EXHIBIT E
Pledge Agreement
This PLEDGE AGREEMENT (the "Pledge Agreement"), dated ____________, 1996,
is made by and between Cygne Designs, Inc. ("Seller") and AnnTaylor, Inc., a
Delaware corporation ("Buyer") (the "Pledge Agreement"). Capitalized terms used
and not otherwise defined herein shall have the respective meanings set forth in
the Stock and Asset Purchase Agreement, dated ____________, 1996, by and among
the parties hereto and AnnTaylor Stores Corporation, a Delaware corporation and
holder of all of the outstanding capital stock of Buyer, and Cygne Group (F.E.)
Limited ("CGFE"), a Hong Kong corporation and a wholly owned subsidiary of
Seller (the "Purchase Agreement").
W I T N E S S E T H
WHEREAS, the parties hereto have entered into the Purchase Agreement
providing for, among other things, the sale by Seller to Buyer of the Assets and
the sale by Seller and CGFE to Buyer of the CAT Shares owned by it, for the
Purchase Price specified in the Purchase Agreement;
WHEREAS, under the terms of the Purchase Agreement, a portion of the
estimated Cash Consideration is to be deposited by Buyer in an account in the
name of Buyer, subject to the security interest of Seller, at [Bank] pending
final resolution of the amount of the Cash Consideration, which account and
security shall be pledged upon consummation of the Closing by Buyer to Seller,
pursuant to this Pledge Agreement;
WHEREAS, Buyer has caused to be opened Account No. __________ (the "Bank
Account") with [Bank] at its office at [Address], in the name of Buyer, as
pledgor, subject to the security interest of Seller, as pledgee, and has caused
such account to be credited with [$__________ amount equal to 20% of the
Estimated Amount] in immediately available funds (the "Pledged Amount"); and
WHEREAS, Buyer wishes to pledge and to grant a security interest in the
Bank Account and the Pledged Amount to Seller as herein provided;
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
Section 1. Pledge. Buyer hereby pledges and grants to Seller a security
interest in the following collateral (the "Collateral"):
(a) the Bank Account and all certificates and instruments, if any,
from time to time representing or evidencing the Bank Account;
(b) the Pledged Amount and all certificates and instruments, if any,
from time to time representing or evidencing the Pledged Amount;
(c) all interest, cash, instruments and other property from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the then existing Collateral or otherwise
credited to the Bank Account; and
(d) all proceeds of any and all of the foregoing Collateral.
Section 2. Security for Obligations. This Pledge Agreement and the security
interest in and pledge of the Collateral hereunder secures the payment to Seller
of all obligations of Buyer owed to Seller now or hereafter existing under the
Purchase Agreement and any fees and expenses (including attorney's fees)
incurred in connection with the successful exercise by the secured party of any
of its remedies hereunder (all such obligations of Buyer being referred to
hereinafter as the "Obligations").
Section 3. Maintaining the Account. Title to the Bank Account and the
Pledged Amount shall remain and reside in Buyer but subject to the rights of
Seller hereunder, until the proceeds of the Pledged Amount are distributed to
the parties, as their interests may appear, pursuant to the terms of the
Purchase Agreement. So long as any Obligations of Buyer are outstanding, it
shall be a term and condition of the Bank Account, except as otherwise provided
by the provisions of Section 8 of this Pledge Agreement, that no amount
(including interest on the Bank
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<PAGE>
Account) shall be paid or released to or for the account of or withdrawn by or
for the account of Buyer or any other person or entity from the Bank Account.
Section 4. Investing of Amounts in the Account. Buyer may from time to time
(i) invest amounts on deposit in the Bank Account in such notes, certificates of
deposit and other debt instruments as Buyer may select and Seller may approve
("Permitted Investments") and (ii) invest interest paid on the Permitted
Investments referred to in clause (i) above, and reinvest other proceeds of any
such Permitted Investments which may mature or be sold, in each case in such
Permitted Investments as Buyer may select and Seller may approve. Seller hereby
approves any U.S. Treasury security having a remaining maturity of 30 days or
less. Interest and proceeds that are not invested or reinvested in Permitted
Investments as provided above shall be deposited and held in the Bank Account.
Section 5. Representations and Warranties.
(a) Buyer represents that it is the legal and beneficial owner of the
Collateral free and clear of any lien, security interest, option or other charge
or encumbrance except for the security interest created by this Pledge
Agreement.
(b) Buyer represents that the pledge of the Collateral pursuant to this
Pledge Agreement creates a valid and perfected first priority security interest
in the Collateral, securing the payment of the Obligations.
(c) Buyer represents that no consent of any other person or entity and no
authorization, approval, or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required (i) for the pledge by
Buyer of the Collateral pursuant to this Pledge Agreement or for the execution,
delivery or performance of this Pledge Agreement by Buyer, (ii) for the
perfection or maintenance of the security interest created hereby (including the
first priority nature of such security interest) or (iii) for the exercise by
Seller of its rights and remedies hereunder.
(d) Buyer and Seller represent that there are no conditions precedent to
the effectiveness of this Pledge Agreement that have not been satisfied or
waived.
Section 6. Further Assurances. Seller and Buyer agree that at any time and
from time to time, at the expense of Seller and Buyer, Seller and Buyer will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be necessary or desirable, or that Seller may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable Seller to exercise and
enforce its rights and remedies hereunder with respect to any Collateral.
Section 7. Transfers and Other Liens. Buyer agrees that it will not (i)
sell, assign (by operation of law or otherwise) or otherwise dispose of, or
grant any option with respect to, any of the Collateral or (ii) create or permit
to exist any lien, security interest option or other charge or encumbrance upon
or with respect to any of the Collateral except for the security interest under
this Pledge Agreement.
Section 8. Withdrawals Upon Final Determination of the Purchase Price
Adjustment. Upon the final determination of the Purchase Price pursuant to
Section 1.6 of the Purchase Agreement, (i) Seller hereby releases its right and
security interest in the Pledged Amount (but not in the proceeds thereof, to the
extent such proceeds are due to Seller pursuant to said Section 1.6) without any
further action required on the part of Seller, (ii) Buyer shall retain any
amounts to which it is entitled under Section 1.6 of the Purchase Agreement and
(iii) Buyer shall deliver to Seller the remaining amount in the Pledged Amount,
if any.
Section 9. Remedies. Seller shall have all rights and remedies available to
a secured creditor under the New York Uniform Commercial Code (the "Code").
Section 10. Expenses. Notwithstanding anything in this Pledge Agreement to
the contrary, whether or not the transactions contemplated by this Pledge
Agreement shall be consummated, each party hereto shall pay its own expenses
incident to preparing for, entering into and carrying out this Pledge Agreement,
except to the extent provided in Section 2 hereof.
Section 11. Amendments, Etc. No amendment or waiver of any provision of
this Pledge Agreement, and no consent to any departure by Buyer herefrom shall
in any event be effective unless the same shall be in writing and signed by
Seller, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
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<PAGE>
Section 12. Addresses For Notices. All notices and other communications
provided for hereunder shall be in writing and shall be deemed given upon
receipt by the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(a) if to Buyer, to:
AnnTaylor, Inc.
142 West 57th Street
New York, New York 10016
Attention: Paul E. Francis
Telecopy: (212) 541-3299
with a copy to:
AnnTaylor, Inc.
142 West 57th Street
New York, New York 10016
Attention: Jocelyn F.L. Barandiaran
Telecopy: (212) 541-3299
and a further copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
7th Floor
Wilmington, DE 19801
Attention: Patricia Moran Chuff
Telecopy: 302-651-3001
and
(b) if to Seller, to
Cygne Designs, Inc.
1372 Broadway
New York, New York
Attention: Bernard M. Manuel
Telecopy: (212) 921-8318
with a copy to:
Cygne Designs, Inc.
1372 Broadway
New York, New York
Attention: Paul D. Baiocchi
Telecopy: (212) 921-8318
and a further copy to:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman
Telecopy: (212) 752-5958
Section 13. Continual Security Interest; Termination. This Pledge Agreement
shall create a continuing security interest in the Collateral and shall (i)
remain in full force and effect until the payment in full of the Obligations and
all other amounts payable under this Pledge Agreement, (ii) be binding upon
Buyer, its successors and assigns, and (iii) inure to the benefit of, and be
enforceable by, Seller and its respective successors, transferees and assigns.
Section 14. Governing Law; Terms. This Pledge Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to any applicable principles of conflicts of law.
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<PAGE>
Unless otherwise defined herein or in the Purchase Agreement, terms defined in
Article 9 of the Code are used herein as therein defined.
IN WITNESS WHEREOF, Buyer and Seller have caused this Pledge Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
ANNTAYLOR, INC.
By: _____________________________
Name:
Title:
CYGNE DESIGNS, INC.
By: _____________________________
Name:
Title:
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<PAGE>
EXHIBIT F
TERM SHEET
NY Transition Services Agreement
ACCESS TO CAM-CAD EQUIPMENT Buyer shall allow up to two (2) of Seller's
employees access to the CAM-CAD marking and
grading work stations free of charge from
the date of the Closing through the end of
fiscal 1996.
OPTION TO PURCHASE Seller shall have the option to purchase the
CAM-CAD equipment at the end of fiscal 1996
at its net book value.
ACCESS TO SAMPLE ROOM AND Buyer shall allow up to three (3)
EQUIPMENT patternmakers and up to six (6) sewersto use
the sample room and related equipment free
of charge from the date of the Closing
through the sixty (60)-day period following
the date of the Closing.
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EXHIBIT G
TERM SHEET
Miami Transition Services Agreement
WAREHOUSE RENTAL PAYMENT Buyer shall pay to Seller $40,000 per year
(representing 50% of the amount of the rent
paid by Seller under the Miami Lease
applicable to the portion of the Miami
Facility relating to the trim and
consolidation warehouse) for a period of two
(2) years from the Closing Date.
WAREHOUSE LABOR PAYMENTS Seller shall provide to Buyer trim and
consolidation services of five (5) employees
of Seller at the Miami Facility and Buyer
shall pay to Seller an amount equal to 50%
of the labor costs associated with such
employees for a period of two (2) years from
the Closing Date, subject to earlier
termination by Buyer upon ninety (90) days'
notice to Seller.
EXPIRATION OF MIAMI LEASE Upon expiration of the current rent term of
the Miami Lease on January 20, 1997: (i) in
the event that Seller does not renew the
Miami Lease and ceases its Miami trim and
consolidation operations, then the Miami
Transition Services Agreement shall
terminate; and (ii) in the event that Seller
does not renew the Miami Lease but relocates
and continues the Miami trim and
consolidation operations in another
facility, then the Miami Transition Services
Agreement shall apply to the new facility.
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EXHIBIT H
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made and entered into as of the _____ day of
August, 1996, by and between AnnTaylor Stores Corporation, a Delaware
corporation ("ATSC"), AnnTaylor, Inc., a Delaware corporation and wholly owned
subsidiary of ATSC ("ATI" and, together with ATSC, "Ann Taylor"), Cygne Designs,
Inc., a Delaware corporation ("Cygne"), and Mr. Bernard M. Manuel
("Consultant").
W I T N E S S E T H :
WHEREAS, pursuant to that certain Stock and Asset Purchase Agreement, dated
as of June 7, 1996, among ATSC, ATSI, Cygne and Cygne Group (F.E.) Limited, a
Hong Kong corporation and wholly owned subsidiary of Cygne ("CGFE"), ATI
acquired from Cygne (i) all of the shares of common stock, par value $.01 per
share, of CAT US, Inc., a Delaware corporation ("CAT-US"), owned by Cygne; and
(ii) certain of the assets of Cygne's AnnTaylor Woven Division (the "Division");
WHEREAS, pursuant to the Purchase Agreement, ATI acquired from CGFE all of
the shares of common stock, par value $1 HK per share, of C.A.T. (Far East)
Limited, a Hong Kong corporation ("CAT-Far East" and, together with CAT-US,
"CAT"), owned by CGFE;
WHEREAS, CAT serves as a fully dedicated sourcing capability for ATI;
WHEREAS, prior to the date hereof, Cygne, through the Division, served as a
private label designer, merchandiser and manufacturer of women's apparel for
ATI;
WHEREAS, Consultant is the Chairman and Chief Executive Officer of Cygne
with particular expertise regarding sourcing of fabric and materials,
particularly with respect to suppliers and factories in Hong Kong and Asia; and
WHEREAS, Ann Taylor, as partial consideration for the transactions
contemplated by the Purchase Agreement, desires to obtain, and Cygne and
Consultant desire that Consultant provide, information, consultation, advice and
other services in aid of Ann Taylor's business, all subject to the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, agreements and conditions contained
herein, Ann Taylor, Cygne and Consultant, intending to be legally bound, agree
as follows:
1. Engagement of Consultant.
(a) Cygne hereby covenants and agrees to make make Consultant available to
provide services to Ann Taylor upon the terms and conditions set forth herein.
Consultant hereby agrees to act as a consultant to and on behalf of Ann Taylor
in accordance with the terms and conditions set forth herein. Cygne, Consultant
and Ann Taylor agree that Consultant will provide services to Ann Taylor not in
excess of thirty percent (30%) of his business time and that Consultant will
continue his duties as Chairman and Chief Executive Officer of Cygne. Cygne
agrees to allow Consultant reasonable time to perform his duties as a consultant
to Ann Taylor on a timely basis, provided, however, that the performance of such
duties shall be at mutually agreeable times that do not unreasonably interfere
with Consultant's continuing obligations to Cygne.
(b) Cygne shall cause Consultant to, at the request of the President of Ann
Taylor, provide Ann Taylor information, consultation and advice on fabric and
material sourcing, particularly with respect to suppliers and factories in Hong
Kong and Asia.
(c) Cygne shall cause Consultant, and Consultant hereby agrees, to
diligently and faithfully serve Ann Taylor and to devote his reasonable best
efforts, his highest talents and skills, and all necessary time and attention in
providing the information, consultation and advice requested pursuant to
paragraph (b) of this Section 1; provided that Consultant shall not, without the
consent of Cygne and Consultant, be required to travel outside HongKong. Cygne
hereby consents to the allocation of up to thirty percent (30%) of Consultant's
business time to perform services under this Agreement.
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2. Term of Agreement. Unless terminated at an earlier date in accordance
with Section 4 of this Agreement, the term of this Agreement shall commence on
the date of this Agreement and shall end on the third anniversary thereof (the
"Expiration Date").
3. Payment for Services.
(a) Consultant's Fee. In consideration of Cygne causing Consultant to
perform the services provided for in this Agreement, Ann Taylor shall pay to
Cygne, at such time and in the manner as set forth in Section 3(b) hereof, a fee
of $225,000 per year (the "Consultant's Fee"). Ann Taylor shall not provide
Consultant with any compensation or benefits, including, but not limited to,
medical or pension benefits, bonuses or vacation, holiday or sick pay.
(b) Time Of Payment. The Consultant's Fee shall be due and payable to Cygne
by Ann Taylor in quarterly installments commencing on the date hereof; provided,
however, that the first installment shall be prorated to reflect the remaining
days of the current fiscal quarter.
(c) Reimbursement Of Expenses. Ann Taylor shall reimburse Cygne or
Consultant, as the case may be, for all reasonable out-of-pocket expenses
incurred by Cygne or Consultant in connection with the performance of
Consultant's services hereunder in accordance with AnnTaylor's travel policies.
4. Termination.
(a) Death. This Agreement shall terminate upon the Consultant's death.
(b) Termination by Default. Each of the following shall constitute, without
limitation or restriction, an event of default under this Agreement, in which
case, the non-defaulting party may give the other notice that this Agreement
shall terminate on the date selected by the non-defaulting party and set forth
in such notice (the "Termination Date"), unless cured as specified below:
(i) If either Ann Taylor or Cygne shall, whether by action or
inaction, breach in any material respect any obligation under this
Agreement, including a material failure by Consultant to perform his duties
and responsibilities hereunder, and such breach is not remedied within
thirty (30) days after written notice thereof from the non-defaulting
party;
(ii) If, for any reason, Consultant shall be convicted of a felony; or
if Consultant shall be convicted of any other crime as a result of which
his ability to perform the services described in Section 1 hereof is
materially impaired;
(iii) If there has been fraud, bad faith or willful misconduct on the
part of Cygne or Consultant in connection with the performance of
Consultant's duties and responsibilities hereunder;
(iv) If Ann Taylor institutes proceedings relief under the United
States Bankruptcy Code or any similar law, or consents to entry of an order
for relief against it in any bankruptcy or insolvency proceeding or similar
proceeding, or files a petition or answer or consent for reorganization or
other relief under any bankruptcy act or similar law, or consents to the
filing against it, of any petition for the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
it, or of any substantial part of its property, or makes an assignment for
the benefit of creditors, or admits in writing its inability to pay its
debts as they become due, or fails to pay its debts as they become due or
takes any action in furtherance of the foregoing; or
(v) If Cygne or Consultant breaches in any manner Section 5 hereof.
(c) Effect of Termination. Upon termination of this Agreement, Cygne's
obligation to cause Consultant to provide services to Ann Taylor hereunder, and
Ann Taylor's obligation to make payment to Cygne under Section 3 hereof, shall
terminate, except that AnnTaylor shall be obligated to reimburse all expenses
incurred through the termination date in accordance with Section 3(b) hereof.
5. Confidentiality.
(a) Proprietary Information. Each of Cygne and Consultant acknowledges and
agrees that during the course of the provision of Consultant's services to Ann
Taylor, Consultant may be exposed to sensitive data and information concerning
the business and affairs of Ann Taylor, including, without limitation, fabric,
product and merchandise designs, and that all of such data and information,
financial plans, financial results, quantity or assortment of merchandise orders
or plans and inventory levels (collectively, the "Proprietary Information") are
vital, sensitive, confidential and proprietary to Ann Taylor.
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(b) Consultant's Agreement. In consideration of the Purchase Price (as
defined in the Purchase Agreement) to be paid by Ann Taylor to Cygne in
connection with the transactions contemplated by the Purchase Agreement,
Consultant agrees to the covenants and restrictions set forth in this Section 5.
(c) Cygne's Agreement. In consideration of the Purchase Price to be paid by
Ann Taylor to Cygne in connection with the transactions contemplated by the
Purchase Agreement, Cygne agrees to the covenants and restrictions set forth in
this Section 5.
(d) Trade Secret Status. Each of Cygne and Consultant expressly
acknowledges the trade secret status of the Proprietary Information and
acknowledges that the Proprietary Information constitutes a protectable business
interest of Ann Taylor, and covenants and agrees that during the term of the
engagement hereunder and at all times after the expiration or termination of
such engagement, neither Cygne nor Consultant shall, directly or indirectly,
whether, in the case of Consultant, individually, as a director, stockholder,
owner, partner, employee, principal or agent of or consultant to any business,
or in any other capacity, make known, disclose, furnish, make available or
utilize any of the Proprietary Information, other than in the proper performance
of the duties contemplated herein during the term of the engagement hereunder.
Cygne's and Consultant's obligations under this Section 5(d) with respect to
particular Proprietary Information shall terminate only at such time (if any) as
the Proprietary Information in question becomes generally known to the public
other than through a breach of either Cygne's or Consultant's obligations
hereunder.
(e) Return of Proprietary Information. Each of Cygne and Consultant
acknowledges and agrees that all records or documents containing Proprietary
Information prepared by Consultant or coming into his possession by virtue of
the engagement are and shall remain the property of Ann Taylor and that, upon
termination or expiration of this engagement, Consultant shall return
immediately to Ann Taylor all such items in his possession, together with all
copies and extracts, and will destroy all summaries thereof and any such
information stored electronically on tapes, computer disks or in any other
manner.
(f) Consultant Non-solicitation. Consultant agrees that during the term of
this Agreement and for a period of one (1) year thereafter he shall not,
directly or indirectly, induce or solicit (or authorize or assist in the taking
of any such actions by any third party) any employee or consultant of Ann Taylor
to leave his or her business association with Ann Taylor.
(g) Cygne Non-Solicitation. Cygne agrees that during the term of this
Agreement and for a period of one (1) year thereafter it shall not, directly or
indirectly, induce or solicit (or authorize or assist in the taking of any such
actions by any third party) any employee or consultant of Ann Taylor to leave
his or her business association with Ann Taylor.
(h) Ann Taylor Non-Solicitation. Ann Taylor agrees that during the term of
this Agreement and for a period of one (1) year thereafter it shall not,
directly or indirectly, induce or solicit (or authorize or assist in the taking
of any such actions by any third party) any employee or consultant of Cygne to
leave his or her business association with Cygne.
(i) Acknowledgment. Consultant and Cygne acknowledge and agree that the
covenants set forth in this Section 5 and each subsection hereof are reasonable
and necessary for the protection of Ann Taylor's business interests, that
irreparable injury will result to Ann Taylor if Consultant or Cygne breaches any
of the terms of said covenants, and that in the event of Consultant's or Cygne's
actual or threatened breach of any such covenants, Ann Taylor will have no
adequate remedy at law. Cygne and Consultant accordingly agree that in the event
of any actual or threatened breach by Consultant of any of said covenants, Ann
Taylor shall be entitled to immediate injunctive and other equitable relief
without bond and without the necessity of showing actual monetary damages. Cygne
accordingly agrees that in the event of any actual or threatened breach by Cygne
of any of said covenants, Ann Taylor shall be entitled to immediate injunctive
and other equitable relief without bond and without the necessity of showing
actual monetary damages. Notwithstanding the provisions of Section 9 hereof,
such equitable relief may be sought in any court of competent jurisdiction.
Nothing contained herein shall be construed as prohibiting Ann Taylor from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of any damages which it is able to prove.
(j) The provisions of this Section 5 shall survive the expiration or
termination of this Agreement, and any of the arrangements contained herein, and
shall be binding upon Consultant's, Cygne's and Ann Taylor's corporate or
personal successors and assigns.
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6. Representations and Warranties of Consultant. Consultant represents and
warrants to Cygne and Ann Taylor that he has full legal power and authority to
enter into this Agreement, perform all of his obligations hereunder and to
consummate the transactions contemplated hereby.
7. Consultant's Independence and Discretion.
(a) Nothing herein contained shall be construed to constitute the parties
hereto as partners or as joint venturers, or as agent of the others, or, as
between Ann Taylor and Consultant, as employer and employee. By virtue of the
relationship described herein, Consultant's relationship to Ann Taylor during
the term of this Agreement shall only be that of an independent contractor and
the Consultant shall perform all services pursuant to this Agreement as an
independent contractor. The Consultant shall not provide any services under Ann
Taylor's business name and shall not present himself as an agent or employee of
Ann Taylor and shall have no authority to enter into any binding obligation on
behalf of Ann Taylor.
(b) Subject to the terms of this Agreement, the manner, means, details or
methods by which the Consultant performs his obligations under this Agreement
shall be determined by Cygne, subject to the reasonable satisfaction of Ann
Taylor.
(c) Each of Cygne and Consultant acknowledges and agrees that Ann Taylor
shall not provide to Consultant any unemployment, disability, workers'
compensation or medical insurance or any other employee benefits. Payments to
Cygne under Section 3 hereof shall not be subject to withholding taxes or other
employment taxes.
8. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration before three
(3) arbitrators selected in accordance with the Commercial Arbitration Rules of
the American Arbitration Association in the City of New York. Arbitration as
provided herein shall be the exclusive means for determination of all matters as
above provided, and any decision and award of the arbitrators shall be final,
binding and conclusive upon the parties and such decision and award may be
entered as a final judgment in any court of competent jurisdiction. Except as
provided in Section 5(j) hereof, none of the parties shall institute any action
or proceeding in any court of law or equity, state or federal, other than as may
be necessary for purposes of enforcement of the arbitrators' decision and award
hereunder.
9. Consultant's Employment. Cygne and Consultant hereby acknowledge that
Consultant's execution of this Agreement is a condition to Consultant's
continued employment with Cygne.
10. Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally,
by mail (certified or registered mail, return receipt requested), by reputable
overnight courier or by facsimile transmission (receipt of which is confirmed):
(a) If to ATSC or ATI, to:
AnnTaylor Stores Corporation
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq.
Facsimile: (302) 651-3001
(b) If to Cygne, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
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with a copy to:
Fulbright and Jaworski, L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
(c) If to Consultant, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: Bernard M. Manuel
Facsimile: (212) 536-4174
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 10 to the other parties hereto.
All such notices, requests, demands, waivers and communications shall be deemed
to have been given on the date on which so hand-delivered, on the third business
day following the date on which so mailed, on the next business day following
the date on which delivered to such overnight courier and on the date of such
facsimile transmission and confirmation, except for a notice of change of person
or address, which shall be effective only upon receipt thereof.
11. Entire Agreement. This Agreement contains the entire understanding of
the parties hereto with respect to the subject matter hereof. This Agreement
supersedes all prior agreements and understandings, oral and written, with
respect to its subject matter.
12. Severability. Should any provision of this Agreement, or any part
thereof, for any reason be declared invalid or unenforceable, such declaration
shall not affect the validity or enforceability of any other provision of this
Agreement, or any other part thereof, all of which other provisions, and parts,
shall remain in full force and effect, and the application of such invalid or
unenforceable provision, or such part thereof, to persons or circumstances other
than those as to which it is held invalid or unenforceable shall be valid and be
enforced to the fullest extent permitted by law.
13. Binding Effect; Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, executors, successors and permitted assigns, but, except
as contemplated herein, neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, directly or indirectly, by ATSC,
ATI, Cygne or Consultant without the prior written consent of the other parties
hereto; provided, however, that ATSC or ATI may assign any or all of its rights,
interests or obligations hereunder to any one or more, direct or indirect,
wholly owned subsidiaries of ATSC or ATI, provided, however, that no such
assignment by ATSC or ATI shall limit or affect ATSC's or ATI's obligations
hereunder; provided, further, however, that this Agreement shall automatically
be assigned to and assumed by Consultant in the event that (i) Consultant's
employment with Cygne is terminated; or (ii) Cygne is liquidated or dissolved,
whether through Chapter 7 of the U.S. Bankruptcy Laws or otherwise; provided,
however, that Consultant hereby agrees, in the event of any such assignment by
Cygne and assumption by Consultant, to assume and perform all of Cygne's
obligations hereunder, to the extent applicable.
14. Amendment, Modification And Waiver. This Agreement may be amended,
modified or supplemented at any time by written agreement of the parties hereto.
Any failure by Cygne or Consultant, on the one hand, or ATSC or ATI, on the
other hand, to comply with any term or provision of this Agreement may be waived
by ATSC, ATI, Cygne or Consultant, respectively, at any time by an instrument in
writing signed by or on behalf of ATSC, ATI, Cygne or Consultant, but such
waiver or failure to insist upon strict compliance with such term or provision
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure to comply.
15. Third-Party Beneficiaries. Except as otherwise expressly provided
herein, this Agreement is not intended, and shall not be deemed, to confer upon
or give any person except the parties hereto and their respective successors and
permitted assigns, any remedy, claim, liability, reimbursement, cause of action
or other right under or by reason of this Agreement.
16. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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17. Interpretation. The section headings contained in this Agreement are
solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement. As used in this Agreement, the term "person" shall mean and include
an individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
18. Governing Law. This Agreement shall be governed by the laws of the
State of New York, without regard to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date and year first above written.
ANNTAYLOR STORES CORPORATION
By ___________________________________
Name:
Title:
ANNTAYLOR, INC.
By ___________________________________
Name:
Title:
CYGNE DESIGNS, INC.
By ___________________________________
Name:
Title:
CONSULTANT
By ___________________________________
Bernard M. Manuel
Consultant
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EXHIBIT I
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made and entered into as of the ___ day of
August, 1996, by and between AnnTaylor Stores Corporation, a Delaware
corporation ("ATSC"), AnnTaylor, Inc., a Delaware corporation and wholly owned
subsidiary of ATSC ("ATI" and, together with ATSC, "Ann Taylor"), Cygne Designs,
Inc., a Delaware corporation ("Cygne"), and Mr. Irving Benson ("Consultant").
W I T N E S S E T H :
WHEREAS, pursuant to that certain Stock and Asset Purchase Agreement, dated
as of June 7, 1996, among ATSC, ATSI, Cygne and Cygne Group (F.E.) Limited, a
Hong Kong corporation and wholly owned subsidiary of Cygne ("CGFE"), ATI
acquired from Cygne (i) all of the shares of common stock, par value $.01 per
share, of CAT US, Inc., a Delaware corporation ("CAT-US"), owned by Cygne; and
(ii) certain of the assets of Cygne's AnnTaylor Woven Division (the "Division");
WHEREAS, pursuant to the Purchase Agreement, ATI acquired from CGFE all of
the shares of common stock, par value $1 HK per share, of C.A.T. (Far East)
Limited, a Hong Kong corporation ("CAT-Far East" and, together with CAT-US,
"CAT"), owned by CGFE;
WHEREAS, CAT serves as a fully dedicated sourcing capability for ATI;
WHEREAS, prior to the date hereof, Cygne, through the Division, served as a
private label designer, merchandiser and manufacturer of women's apparel for
ATI;
WHEREAS, Consultant is the President and Vice Chairman of Cygne with
particular expertise regarding design, merchandising and product development;
and
WHEREAS, Ann Taylor, as partial consideration for the transactions
contemplated by the Purchase Agreement, desires to obtain, and Cygne and
Consultant desire that Consultant provide, information, consultation, advice and
other services in aid of Ann Taylor's business, all subject to the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, agreements and conditions contained
herein, Ann Taylor, Cygne and Consultant, intending to be legally bound, agree
as follows:
1. Engagement of Consultant.
(a) Cygne hereby covenants and agrees to make Consultant available to
provide services to Ann Taylor upon the terms and conditions set forth
herein. Consultant hereby agrees to act as a consultant to and on behalf of
Ann Taylor in accordance with the terms and conditions set forth herein.
Cygne, Consultant and Ann Taylor agree that Consultant will provide
services to Ann Taylor not in excess of thirty percent (30%) of his
business time and that Consultant will continue his duties as President and
Vice Chairman of Cygne. Cygne agrees to allow Consultant reasonable time to
perform his duties as a consultant to Ann Taylor on a timely basis,
PROVIDED, HOWEVER, that the performance of such duties shall be at mutually
agreeable times that do not unreasonably interfere with Consultant's
continuing obligations to Cygne.
(b) Cygne shall cause Consultant to, at the request of the President
of Ann Taylor, provide Ann Taylor information, consultation and advice on
design, merchandising and product development.
(c) Cygne shall cause Consultant, and Consultant hereby agrees, to
diligently and faithfully serve Ann Taylor and to devote his reasonable
best efforts, his highest talents and skills, and all necessary time and
attention in providing the information, consultation and advice requested
pursuant to paragraph (b) of this Section 1; provided that Consultant shall
not, without the consent of Cygne and Consultant, be required to travel
outside New York. Cygne hereby consents to the allocation of up to thirty
percent (30%) of Consultant's business time to perform services under this
Agreement.
2. Term of Agreement. Unless terminated at an earlier date in accordance
with Section 4 of this Agreement, the term of this Agreement shall commence on
the date of this Agreement and shall end on the third anniversary thereof (the
"Expiration Date").
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3. Payment for Services.
(a) Consultant's Fee. In consideration of Cygne causing Consultant to
perform the services provided for in this Agreement, Ann Taylor shall pay
to Cygne, at such time and in the manner as set forth in Section 3(b)
hereof, a fee of $225,000 per year (the "Consultant's Fee"). Ann Taylor
shall not provide Consultant with any compensation or benefits, including,
but not limited to, medical or pension benefits, bonuses or vacation,
holiday or sick pay.
(b) Time of Payment. The Consultant's Fee shall be due and payable to
Cygne by Ann Taylor in quarterly installments commencing on the date
hereof; provided, however, that the first installment shall be prorated to
reflect the remaining days of the current fiscal quarter.
(c) Reimbursement of Expenses. Ann Taylor shall reimburse Cygne or
Consultant, as the case may be, for all reasonable out-of-pocket expenses
incurred by Cygne or Consultant in connection with the performance of
Consultant's services hereunder in accordance with AnnTaylor's travel
policies.
4. Termination.
(a) Death. This Agreement shall terminate upon the Consultant's death.
(b) Termination by Default. Each of the following shall constitute,
without limitation or restriction, an event of default under this
Agreement, in which case, the non-defaulting party may give the other
notice that this Agreement shall terminate on the date selected by the
non-defaulting party and set forth in such notice (the "Termination Date"),
unless cured as specified below:
(i) If either Ann Taylor or Cygne shall, whether by action or
inaction, breach in any material respect any obligation under this
Agreement, including a material failure by Consultant to perform his
duties and responsibilities hereunder, and such breach is not remedied
within thirty (30) days after written notice thereof from the
non-defaulting party;
(ii) If, for any reason, Consultant shall be convicted of a
felony; or if Consultant shall be convicted of any other crime as a
result of which his ability to perform the services described in
Section 1 hereof is materially impaired;
(iii) If there has been fraud, bad faith or willful misconduct on
the part of Cygne or Consultant in connection with the performance of
Consultant's duties and responsibilities hereunder;
(iv) If Ann Taylor institutes proceedings relief under the United
States Bankruptcy Code or any similar law, or consents to entry of an
order for relief against it in any bankruptcy or insolvency proceeding
or similar proceeding, or files a petition or answer or consent for
reorganization or other relief under any bankruptcy act or similar
law, or consents to the filing against it, of any petition for the
appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of it, or of any substantial part of its
property, or makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts as they become due,
or fails to pay its debts as they become due or takes any action in
furtherance of the foregoing; or
(v) If Cygne or Consultant breaches in any manner Section 5
hereof.
(c) Effect of Termination. Upon termination of this Agreement, Cygne's
obligation to cause Consultant to provide services to Ann Taylor hereunder,
and Ann Taylor's obligation to make payment to Cygne under Section 3
hereof, shall terminate, except that AnnTaylor shall be obligated to
reimburse all expenses incurred through the termination date in accordance
with Section 3(b) hereof.
5. Confidentiality.
(a) Proprietary Information. Each of Cygne and Consultant acknowledges
and agrees that during the course of the provision of Consultant's services
to Ann Taylor, Consultant may be exposed to sensitive data and information
concerning the business and affairs of Ann Taylor, including, without
limitation, fabric, product and merchandise designs, and that all of such
data and information, financial plans, financial results, quantity or
assortment of merchandise orders or plans and inventory levels
(collectively, the "Proprietary Information") are vital, sensitive,
confidential and proprietary to Ann Taylor.
(b) Consultant's Agreement. In consideration of the Purchase Price (as
defined in the Purchase Agreement) to be paid by Ann Taylor to Cygne in
connection with the transactions contemplated by the Purchase Agreement,
Consultant agrees to the covenants and restrictions set forth in this
Section 5.
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(c) Cygne's Agreement. In consideration of the Purchase Price to be
paid by Ann Taylor to Cygne in connection with the transactions
contemplated by the Purchase Agreement, Cygne agrees to the covenants and
restrictions set forth in this Section 5.
(d) Trade Secret Status. Each of Cygne and Consultant expressly
acknowledges the trade secret status of the Proprietary Information and
acknowledges that the Proprietary Information constitutes a protectable
business interest of Ann Taylor, and covenants and agrees that during the
term of the engagement hereunder and at all times after the expiration or
termination of such engagement, neither Cygne nor Consultant shall,
directly or indirectly, whether, in the case of Consultant, individually,
as a director, stockholder, owner, partner, employee, principal or agent of
or consultant to any business, or in any other capacity, make known,
disclose, furnish, make available or utilize any of the Proprietary
Information, other than in the proper performance of the duties
contemplated herein during the term of the engagement hereunder. Cygne's
and Consultant's obligations under this Section 5(d) with respect to
particular Proprietary Information shall terminate only at such time (if
any) as the Proprietary Information in question becomes generally known to
the public other than through a breach of either Cygne's or Consultant's
obligations hereunder.
(e) Return of Proprietary Information. Each of Cygne and Consultant
acknowledges and agrees that all records or documents containing
Proprietary Information prepared by Consultant or coming into his
possession by virtue of the engagement are and shall remain the property of
Ann Taylor and that, upon termination or expiration of this engagement,
Consultant shall return immediately to Ann Taylor all such items in his
possession, together with all copies and extracts, and will destroy all
summaries thereof and any such information stored electronically on tapes,
computer disks or in any other manner.
(f) Consultant Non-Solicitation. Consultant agrees that during the
term of this Agreement and for a period of one (1) year thereafter he shall
not, directly or indirectly, induce or solicit (or authorize or assist in
the taking of any such actions by any third party) any employee or
consultant of Ann Taylor to leave his or her business association with Ann
Taylor.
(g) Cygne Non-Solicitation. Cygne agrees that during the term of this
Agreement and for a period of one (1) year thereafter it shall not,
directly or indirectly, induce or solicit (or authorize or assist in the
taking of any such actions by any third party) any employee or consultant
of Ann Taylor to leave his or her business association with Ann Taylor.
(h) Ann Taylor Non-Solicitation. Ann Taylor agrees that during the
term of this Agreement and for a period of one (1) year thereafter it shall
not, directly or indirectly, induce or solicit (or authorize or assist in
the taking of any such actions by any third party) any employee or
consultant of Cygne to leave his or her business association with Cygne.
(i) Acknowledgment. Consultant and Cygne acknowledge and agree that
the covenants set forth in this Section 5 and each subsection hereof are
reasonable and necessary for the protection of Ann Taylor's business
interests, that irreparable injury will result to Ann Taylor if Consultant
or Cygne breaches any of the terms of said covenants, and that in the event
of Consultant's or Cygne's actual or threatened breach of any such
covenants, Ann Taylor will have no adequate remedy at law. Cygne and
Consultant accordingly agree that in the event of any actual or threatened
breach by Consultant of any of said covenants, Ann Taylor shall be entitled
to immediate injunctive and other equitable relief without bond and without
the necessity of showing actual monetary damages. Cygne accordingly agrees
that in the event of any actual or threatened breach by Cygne of any of
said covenants, Ann Taylor shall be entitled to immediate injunctive and
other equitable relief without bond and without the necessity of showing
actual monetary damages. Notwithstanding the provisions of Section 9
hereof, such equitable relief may be sought in any court of competent
jurisdiction. Nothing contained herein shall be construed as prohibiting
Ann Taylor from pursuing any other remedies available to it for such breach
or threatened breach, including the recovery of any damages which it is
able to prove.
(j) The provisions of this Section 5 shall survive the expiration or
termination of this Agreement, and any of the arrangements contained
herein, and shall be binding upon Consultant's, Cygne's and Ann Taylor's
corporate or personal successors and assigns.
6. Representations and Warranties of Consultant. Consultant represents and
warrants to Cygne and Ann Taylor that he has full legal power and authority to
enter into this Agreement, perform all of his obligations hereunder and to
consummate the transactions contemplated hereby.
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7. Consultant's Independence and Discretion.
(a) Nothing herein contained shall be construed to constitute the
parties hereto as partners or as joint venturers, or as agent of the
others, or, as between Ann Taylor and Consultant, as employer and employee.
By virtue of the relationship described herein, Consultant's relationship
to Ann Taylor during the term of this Agreement shall only be that of an
independent contractor and the Consultant shall perform all services
pursuant to this Agreement as an independent contractor. The Consultant
shall not provide any services under Ann Taylor's business name and shall
not present himself as an agent or employee of Ann Taylor and shall have no
authority to enter into any binding obligation on behalf of Ann Taylor.
(b) Subject to the terms of this Agreement, the manner, means, details
or methods by which the Consultant performs his obligations under this
Agreement shall be determined by Cygne, subject to the reasonable
satisfaction of Ann Taylor.
(c) Each of Cygne and Consultant acknowledges and agrees that Ann
Taylor shall not provide to Consultant any unemployment, disability,
workers' compensation or medical insurance or any other employee benefits.
Payments to Cygne under Section 3 hereof shall not be subject to
withholding taxes or other employment taxes.
8. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration before three
(3) arbitrators selected in accordance with the Commercial Arbitration Rules of
the American Arbitration Association in the City of New York. Arbitration as
provided herein shall be the exclusive means for determination of all matters as
above provided, and any decision and award of the arbitrators shall be final,
binding and conclusive upon the parties and such decision and award may be
entered as a final judgment in any court of competent jurisdiction. Except as
provided in Section 5(j) hereof, none of the parties shall institute any action
or proceeding in any court of law or equity, state or federal, other than as may
be necessary for purposes of enforcement of the arbitrators' decision and award
hereunder.
9. Consultant's Employment. Cygne and Consultant hereby acknowledge that
Consultant's execution of this Agreement is a condition to Consultant's
continued employment with Cygne.
10. Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally,
by mail (certified or registered mail, return receipt requested), by reputable
overnight courier or by facsimile transmission (receipt of which is confirmed):
(a) If to ATSC or ATI, to:
AnnTaylor Stores Corporation
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq.
Facsimile: (302) 651-3001
(b) If to Cygne, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
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with a copy to:
Fulbright and Jaworski, L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
(c) If to Consultant, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: Irving Benson
Facsimile: (212) 536-4174
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 10 to the other parties hereto.
All such notices, requests, demands, waivers and communications shall be
deemed to have been given on the date on which so hand-delivered, on the third
business day following the date on which so mailed, on the next business day
following the date on which delivered to such overnight courier and on the
date of such facsimile transmission and confirmation, except for a notice of
change of person or address, which shall be effective only upon receipt
thereof.
11. Entire Agreement. This Agreement contains the entire understanding of
the parties hereto with respect to the subject matter hereof. This Agreement
supersedes all prior agreements and understandings, oral and written, with
respect to its subject matter.
12. Severability. Should any provision of this Agreement, or any part
thereof, for any reason be declared invalid or unenforceable, such declaration
shall not affect the validity or enforceability of any other provision of this
Agreement, or any other part thereof, all of which other provisions, and parts,
shall remain in full force and effect, and the application of such invalid or
unenforceable provision, or such part thereof, to persons or circumstances other
than those as to which it is held invalid or unenforceable shall be valid and be
enforced to the fullest extent permittedby law.
13. Binding Effect; Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, executors, successors and permitted assigns, but, except
as contemplated herein, neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, directly or indirectly, by ATSC,
ATI, Cygne or Consultant without the prior written consent of the other parties
hereto; provided, however, that ATSC or ATI may assign any or all of its rights,
interests or obligations hereunder to any one or more, direct or indirect,
wholly owned subsidiaries of ATSC or ATI, provided, however, that no such
assignment by ATSC or ATI shall limit or affect ATSC's or ATI's obligations
hereunder; provided, further, however, that this Agreement shall automatically
be assigned to and assumed by Consultant in the event that (i) Consultant's
employment with Cygne is terminated; or (ii) Cygne is liquidated or dissolved,
whether through Chapter 7 of the U.S. Bankruptcy Laws or otherwise; provided,
however, that Consultant hereby agrees, in the event of any such assignment by
Cygne and assumption by Consultant, to assume and perform all of Cygne's
obligations hereunder, to the extent applicable.
14. Amendment, Modification and Waiver. This Agreement may be amended,
modified or supplemented at any time by written agreement of the parties hereto.
Any failure by Cygne or Consultant, on the one hand, or ATSC or ATI, on the
other hand, to comply with any term or provision of this Agreement may be waived
by ATSC, ATI, Cygne or Consultant, respectively, at any time by an instrument in
writing signed by or on behalf of ATSC, ATI, Cygne or Consultant, but such
waiver or failure to insist upon strict compliance with such term or provision
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure to comply.
15. Third-Party Beneficiaries. Except as otherwise expressly provided
herein, this Agreement is not intended, and shall not be deemed, to confer upon
or give any person except the parties hereto and their respective successors and
permitted assigns, any remedy, claim, liability, reimbursement, cause of action
or other right under or by reason of this Agreement.
16. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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17. Interpretation. The section headings contained in this Agreement are
solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement. As used in this Agreement, the term "person" shall mean and include
an individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
18. Governing Law. This Agreement shall be governed by the laws of the
State of New York, without regard to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date and year first above written.
ANNTAYLOR STORES CORPORATION
By __________________________________
Name:
Title:
ANNTAYLOR, INC.
By __________________________________
Name:
Title:
CYGNE DESIGNS, INC.
By __________________________________
Name:
Title:
CONSULTANT
By __________________________________
Irving Benson
Consultant
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EXHIBIT J
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of August __, 1996 (the "Agreement"),
among AnnTaylor Stores Corporation, a Delaware corporation (the "Company"),
Cygne Designs, Inc., a Delaware corporation ("Cygne"), and Cygne Group (F.E.)
Limited, a Hong Kong corporation and wholly owned subsidiary of Cygne ("CGFE"
and, together with Cygne, "Holder").
WHEREAS, pursuant to that certain Stock and Asset Purchase Agreement, dated
as of June ___, 1996 (the "Purchase Agreement"), the Company has acquired (the
"Acquisition") from Holder (i) all of the shares of common stock, par value $.01
per share, of CAT US, Inc., a Delaware corporation, and all of the HK $1
ordinary shares of C.A.T. (Far East) Limited, a Hong Kong corporation, owned by
Holder and (ii) certain of the assets of Cygne's AnnTaylor Woven Division;
WHEREAS, in consideration for the Acquisition, the Company has, among other
things, issued to Holder ______ shares of common stock, par value $.0068 per
share (the "Common Stock"), of the Company (the shares of Common Stock issued to
Holder in consideration for the Acquisition are hereinafter referred to as the
"Acquisition Shares"); and
WHEREAS, the Company and Holder have determined that it is in their best
interests that certain aspects of their relationship be regulated according to
the terms and provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
The term "ACQUISITION" shall have the meaning ascribed to it in the
second paragraph of the preamble.
The term "ACQUISITION SHARES" shall have the meaning ascribed to it in
the third paragraph of the preamble.
The term "AFFILIATE" shall have the meaning ascribed to it in Rule
12b-2 of the General Rules and Regulations under the Exchange Act.
The term "AGREEMENT" shall have the meaning ascribed to it in the
first paragraph of the preamble.
The term "COMMON STOCK" shall have the meaning ascribed to it in the
third paragraph of the preamble.
The term "COMPANY" shall have the meaning ascribed to it in the first
paragraph of the preamble.
The term "COMPANY OFFERING" shall mean the sale of equity securities
of the Company, or securities convertible into or exchangeable or
exercisable for equity securities of the Company, pursuant to a
registration statement filed by the Company under the Securities Act (other
than (i) a registration statement filed on Form S-4 or any successor form
or (ii) a registration statement filed on Form S-8 or any successor form)
respecting an underwritten offering, whether primary or secondary, that is
declared effective by the SEC.
The term "COMPANY SUBSIDIARY" shall mean any Person the majority of
the outstanding voting securities or interests of which are owned by the
Company, and shall include AnnTaylor Stores Corporation Finance Trust.
The term "EFFECTIVE DATE" shall have the meaning ascribed to it in
Section 2.02.
The term "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations of the SEC promulgated
thereunder.
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The term "HOLDER" shall have the meaning ascribed to it in the first
paragraph of the preamble.
The term "LOSSES" shall have the meaning ascribed to it in Section
2.06(a).
The term "PERSON" shall mean an individual, trustee, corporation,
partnership, business trust, limited liability company, limited liability
partnership, joint stock company, trust, unincorporated association, union,
business association, firm or other entity.
The term "PURCHASE AGREEMENT" shall have the meaning ascribed to it in
the second paragraph of the preamble.
The term "REGISTRATION EXPENSES" shall have the meaning ascribed to it
in Section 2.05.
The term "RULE 144" shall mean Rule 144 promulgated under the
Securities Act (or any successor rule).
The term "RULE 415 OFFERING" shall have the meaning ascribed to it in
Section 2.01(a).
The term "SEC" shall mean the Securities and Exchange Commission.
The term "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC promulgated thereunder.
The term "SHELF REGISTRATION STATEMENT" shall have the meaning
ascribed to it in Section 2.01(a).
The term "TRANSFER" shall mean any attempt to, directly or indirectly,
offer, sell, assign, transfer, grant a participation in, pledge or
otherwise dispose of any of the Acquisition Shares, or the consummation of
any such transactions, or the soliciting of any offers to purchase or
otherwise acquire, or take a pledge of any of the Acquisition Shares.
ARTICLE II
REQUIRED REGISTRATION
Section 2.01 Required Registration.
(a) Form S-3. As promptly as practicable, but in no event later than
fifteen (15) business days after the date on which the Acquisition closes, the
Company shall use reasonable best efforts to prepare and file with the SEC a
registration statement (the "Shelf Registration Statement") on Form S-3 or
another appropriate form permitting registration of the Acquisition Shares so as
to permit promptly the resale of the Acquisition Shares by Holder pursuant to an
offering on a delayed or continuous basis pursuant to Rule 415 (or any successor
rule) under the Securities Act (a "Rule 415 Offering") and shall use reasonable
best efforts to cause the Shelf Registration Statement to be declared effective
by the SEC as promptly as practicable.
(b) Effectiveness. The Company shall use reasonable best efforts to keep
the Shelf Registration Statement continuously effective under the Securities Act
until the date that is the earliest to occur of (i) the date that all
Acquisition Shares covered by the Shelf Registration Statement have been sold,
(ii) the third anniversary of the date hereof and (iii) when, in the written
opinion of counsel to the Company, all outstanding Acquisition Shares held by
persons which are not Affiliates of the Company may be resold without
registration under the Securities Act pursuant to Rule 144(k) under the Act or
any successor provision thereto.
(c) Amendments/Supplements. The Company shall amend and supplement the
Shelf Registration Statement and the prospectus contained therein if required by
the rules, regulations or instructions applicable to the registration form used
by the Company for such Shelf Registration Statement or if required by the
Securities Act; provided, however, that the Company may delay the filing of any
such amendment or supplement for up to 90 days if the Company in good faith has
a valid business reason for such delay.
(d) Offerings. At any time after the effective date of the Shelf
Registration Statement, Holder, subject to the restrictions and conditions
contained herein, and to compliance which all applicable state and federal
securities laws, shall have the right to dispose of all or any portion of the
Acquisition Shares from time to time in negotiated or market transactions (which
may include delivery to class action plaintiffs or a distribution to Holder's
stockholders).
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Section 2.02 Holdback Agreement.
From and after the first anniversary of the date on which the Shelf
Registration Statement is declared effective by the SEC (the "Effective Date"),
upon the request of the Company, Holder shall not effect any public sale or
distribution (including sales pursuant to Rule 144) of Acquisition Shares,
during the ten (10)-day period prior to the date on which the Company has
notified Holder that the Company intends to commence a Company Offering through
the filing of a registration statement with the Securities and Exchange
Commission, through the one hundred twenty (120)-day period immediately
following the closing date of such Company Offering; provided, however, that
Holder shall not be obligated to comply with this Section 2.02 on more than one
(1) occasion in any twelve (12)-month period.
Section 2.03 Blackout Provisions.
The Company shall be deemed not to have used its reasonable best efforts to
keep the Shelf Registration Statement effective during the requisite period if
the Company voluntarily takes any action that would result in Holder not being
able to offer and sell any Acquisition Shares during that period, unless (i)
such action is required by applicable law, (ii) upon the occurrence of any event
contemplated by Section 2.04(a)(8) below, such action is taken by the Company in
good faith and for valid business reasons or (iii) the continued effectiveness
of the Shelf Registration Statement would require the Company to disclose a
material financing, acquisition or other corporate development, and the proper
officers of the Company shall have determined in good faith that such disclosure
is not in the best interests of the Company and its stockholders, and, in the
case of clause (ii) above, the Company thereafter promptly comply with the
requirements of Section 2.04(a)(8) below; provided that the Company takes the
same action in respect of the Shelf Registration Statement filed pursuant to
that certain Registration Rights Agreement, dated as of April 25, 1996, between
the Company and the Initial Purchasers named therein.
Section 2.04 Registration Procedures.
(a) Procedures. In connection with the registration of the Acquisition
Shares pursuant to this Agreement, the Company shall use reasonable best efforts
to effect the registration and sale of the Acquisition Shares in accordance with
Holder's intended method of disposition thereof and, in connection therewith,
the Company shall as expeditiously as practicable:
(1) prepare and file with the SEC the Shelf Registration Statement and
use reasonable best efforts to cause the Shelf Registration Statement to
become and remain effective in accordance with Section 2.01(a) and (b)
above;
(2) prepare and file with the SEC amendments and supplements to the
Shelf Registration Statement and the prospectuses used in connection
therewith in accordance with Section 2.01(c) above;
(3) before filing with the SEC the Shelf Registration Statement or
prospectus or any amendments or supplements thereto, the Company shall
furnish to one counsel selected by Holder and one counsel for the
underwriter or sales or placement agent, if any, in connection therewith,
drafts of all such documents proposed to be filed and provide such counsel
with a reasonable opportunity for review thereof and comment thereon, such
review to be conducted and such comments to be delivered with reasonable
promptness;
(4) promptly (i) notify Holder of each of (x) the filing and
effectiveness of the Shelf Registration Statement and each prospectus and
any amendments or supplements thereto, (y) the receipt of any comments from
the SEC or any state securities law authorities or any other governmental
authorities with respect to any such Shelf Registration Statement or
prospectus or any amendments or supplements thereto, and (z) any oral or
written stop order with respect to such registration, any suspension of the
registration or qualification of the sale of the Acquisition Shares in any
jurisdiction or any initiation or threatening of any proceedings with
respect to any of the foregoing and (ii) use reasonable best efforts to
obtain the withdrawal of any order suspending the registration or
qualification (or the effectiveness thereof) or suspending or preventing
the use of any related prospectus in any jurisdiction with respect thereto;
(5) furnish to Holder, the underwriters or the sales or placement
agent, if any, and one counsel for each of the foregoing, a conformed copy
of the Shelf Registration Statement and each amendment and supplement
thereto (in each case, including all exhibits thereto) and such additional
number of copies of such Shelf
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Registration Statement, each amendment and supplement thereto (in such
case, without such exhibits), the prospectus (including each preliminary
prospectus) included in such Shelf Registration Statement and prospectus
supplements and all exhibits thereto and such other documents as Holder,
underwriter, agent or such counsel may reasonably request in order to
facilitate the disposition of the Acquisition Shares by Holder;
(6) if requested by Holder or the managing underwriter or underwriters
of a Rule 415 Offering, subject to approval of counsel to the Company in
its reasonable judgment, promptly incorporate in a prospectus, supplement
or post-effective amendment to the Shelf Registration Statement such
information concerning underwriters and the plan of distribution of the
Acquisition Shares as such managing underwriter or underwriters or Holder
reasonably shall furnish to the Company in writing and request be included
therein, including, without limitation, information with respect to the
number of Acquisition Shares being sold by Holder to such underwriter or
underwriters, the purchase price being paid therefor by such underwriter or
underwriters and with respect to any other terms of the underwritten
offering of the Acquisition Shares to be sold in such offering; and make
all required filings of such prospectus, supplement or post-effective
amendment as soon as reasonably practicable after being notified of the
matters to be incorporated in such prospectus, supplement or post-effective
amendment;
(7) use reasonable best efforts to register or qualify the Acquisition
Shares under such securities or "blue sky" laws of such jurisdictions as
Holder reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable Holder to consummate the
disposition in such jurisdictions in which the Acquisition Shares are to be
sold and keep such registration or qualification in effect for so long as
the Shelf Registration Statement remains effective under the Securities Act
(provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required
to qualify but for this paragraph, (ii) subject itself to taxation in any
such jurisdiction where it would not otherwise be subject to taxation but
for this paragraph or (iii) consent to the general service of process in
any jurisdiction where it would not otherwise be subject to general service
of process but for this paragraph);
(8) notify Holder, at any time when a prospectus relating to the Shelf
Registration Statement is required to be delivered under the Securities
Act, upon the discovery that, or of the happening of any event as a result
of which, the Shelf Registration Statement, as then in effect, contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or any fact necessary to make the statements
therein not misleading, and, subject to Section 2.03 above, promptly
prepare and furnish to the Holder a supplement or amendment to the
prospectus contained in the Shelf Registration Statement so that the Shelf
Registration Statement shall not, and such prospectus as thereafter
delivered to the purchasers of such Acquisition Shares shall not, contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or any fact necessary to make the statements
therein not misleading;
(9) cause all of the Acquisition Shares to be listed on each national
securities exchange and included in each established over-the-counter
market on which or through which the Common Stock is then listed or traded;
(10) make available for inspection by Holder, any underwriter
participating in any disposition pursuant to the Shelf Registration
Statement, and any attorney, accountant or other agent retained by Holder
or underwriter, all reasonably requested financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors, employees, attorneys and independent
accountants to supply all information reasonably requested by Holder,
underwriters, attorneys, accountants or agents in connection with the Shelf
Registration Statement; information which the Company determines, in good
faith, to be confidential shall not be disclosed by such persons unless,
subject to Section 2.03 above, (i) the disclosure of such information is
required by applicable federal securities laws or is necessary to avoid or
correct a misstatement or omission in such Shelf Registration Statement or
(ii) the release of such information is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction; Holder agrees, on its
own behalf and on behalf of all of its underwriters, accountants, attorneys
and agents, that the information obtained by any of them as a result of
such inspections shall be deemed confidential unless and until such is made
generally available to the public; Holder further agrees, on its own behalf
and on behalf of all of its underwriters, accountants, attorneys and
agents, that it will, upon learning that disclosure of such information is
sought in a court of competent jurisdiction, give notice to the Company and
allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of the information deemed confidential; nothing
contained herein shall require the Company to waive any attorney-client
privilege or disclose attorney work product;
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(11) use reasonable best efforts to comply with all applicable laws
related to the Shelf Registration Statement and offering and sale of
securities and all applicable rules and regulations of governmental
authorities in connection therewith (including, without limitation, the
Securities Act and the Exchange Act, and the rules and regulations
promulgated by the Commission) and make generally available to its security
holders as soon as practicable (but in any event not later than fifteen
(15) months after the effectiveness of the Shelf Registration Statement) an
earnings statement of the Company and the Company Subsidiaries complying
with Section 11(a) of the Securities Act;
(12) use reasonable best efforts to furnish to Holder a signed
counterpart of (x) an opinion of counsel for the Company and (y) a
"comfort" letter signed by the independent public accountants who have
certified the Company's financial statements included or incorporated by
reference in such registration statement, covering such matters with
respect to such registration statement and, in the case of the accountants'
comfort letter, with respect to events subsequent to the date of such
financial statements as are customarily covered in opinions of issuer's
counsel and in accountants' comfort letters delivered to the underwriters
in underwritten public offerings of securities for the account of, or on
behalf of, a holder of common stock, such opinion and comfort letters to be
dated the date that such opinion and comfort letters are customarily dated
in such transactions; and
(13) take other actions as Holder or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of
the Acquisition Shares.
(b) Further Agreements. Without limiting any of the foregoing, in the event
that the sale of Acquisition Shares is to be made by or through an underwriter,
the Company shall enter into an underwriting agreement with a managing
underwriter or underwriters selected by Holder containing representations,
warranties, indemnities and agreements customarily included (but not
inconsistent with the agreements contained herein) by an issuer of common stock
in underwriting agreements with respect to offerings of common stock for the
account of, or on behalf of, holders of common stock; provided, however, that
the Holder shall not utilize the Shelf Registration Statement for more than one
underwritten offering during the term of this Agreement. In connection with the
sale of Acquisition Shares hereunder, Holder may, at its option, require that
any and all representations and warranties by, and the other agreements of, the
Company to or for the benefit of such underwriter or underwriters (or which
would be made to or for the benefit of such an underwriter or underwriter if
such sale of Acquisition Shares were pursuant to a customary underwritten
offering) be made to and for the benefit of Holder and that any or all of the
conditions precedent to the obligations of such underwriter or underwriters (or
which would be so for the benefit of such underwriter or underwriters under a
customary underwriting agreement) be conditions precedent to the obligations of
Holder in connection with the disposition of its securities pursuant to the
terms hereof. In connection with any offering of Acquisition Shares registered
pursuant to this Agreement, the Company shall, upon receipt of duly endorsed
certificates representing the Acquisition Shares, (x) furnish to the
underwriter, if any (or, if no underwriter, Holder), unlegended certificates
representing ownership of Acquisition Shares being sold, in such denominations
as requested, and (y) instruct any transfer agent and registrar of the
Acquisition Shares to release any stop transfer order with respect thereto.
Holder agrees that upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (8) of Section
2.04(a), Holder shall forthwith discontinue its disposition of Acquisition
Shares pursuant to the Shelf Registration Statement and prospectus relating
thereto until its receipt of the copies of the supplemented or amended
prospectus contemplated by paragraph (8) of Section 2.04(a) and, if so directed
by the Company, deliver to the Company all copies, other than permanent file
copies, then in Holder's possession of the prospectus current at the time of
receipt of such notice relating to the Acquisition Shares.
Section 2.05 Registration Expenses.
All expenses incidental to the Company's performance of, or compliance
with, its obligations under this Agreement including, without limitation, all
registration and filing fees, all fees and expenses of compliance with
securities and "blue sky" laws (including, without limitation, the fees and
expenses of counsel for underwriters or placement or sales agents in connection
with "blue sky" law compliance), all printing and copying expenses, all
messenger and delivery expenses, all reasonable out-of-pocket expenses of
underwriters and sales and placement agents in connection therewith (excluding
discounts and commissions and the fees and expenses of counsel therefor), all
fees and expenses of the Company's independent certified public accountants and
counsel (including, without limitation, with respect to "comfort" letters and
opinions) and other Persons retained by the Company in connection therewith
(collectively, the "Registration Expenses"), shall be borne by the Company. The
Company shall not be
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responsible for and shall not pay the fees and expenses of legal counsel,
accountants, agents or experts retained by Holder in connection with the sale of
the Acquisition Shares. The Company will pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties, the expense of any annual audit and the
expense of any liability insurance) and the expenses and fees for listing the
Acquisition Shares on the New York Stock Exchange.
Section 2.06 Indemnification.
(a) By the Company. The Company agrees to indemnify Holder, its officers,
directors, employees and agents and each Person who controls (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act) Holder or
such other indemnified Person against all losses, claims, damages, liabilities
and expenses (collectively, the "Losses") caused by, resulting from or relating
to any untrue or alleged untrue statement of material fact contained in the
Shelf Registration Statement, any prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same are caused by or contained
in, or alleged to be omitted from, any information furnished in writing to the
Company by Holder or its underwriter or other agent expressly for use therein or
by Holder's failure to deliver, or its underwriter's or other agent's failure to
deliver, a copy of the Shelf Registration Statement or prospectus or any
amendments or supplements thereto after the Company has furnished Holder with
the requested number of copies of the same. In connection with an underwritten
offering and without limiting any of the Company's other obligations under this
Agreement, the Company shall indemnify such underwriters, their officers,
directors, employees and agents and each Person who controls (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act) such
underwriters or such other indemnified Person to the same extent as provided
above with respect to the indemnification of Holder.
(b) By Holder. In connection with the Shelf Registration Statement, Holder
shall furnish to the Company in writing information regarding Holder's ownership
of Acquisition Shares and its intended method of distribution thereof and shall
indemnify the Company, its directors, officers, employees and agents and each
Person who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) the Company or such other indemnified Person
against all Losses caused by, resulting from or relating to any untrue or
alleged untrue statement of material fact contained in the Shelf Registration
Statement, any prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission or
alleged untrue statement or omission (i) is caused by, results from or relates
to, or is alleged to be omitted from, such information so furnished in writing
by Holder or (ii) arises out of or results from Holder's failure to deliver, or
its underwriter's or other agent's failure to deliver, a copy of the Shelf
Registration Statement or prospectus or any amendments or supplements thereto
after the Company has furnished Holder with the requested number of copies of
the same; provided, however, that Holder shall not be liable for any claims
hereunder in excess of the amount of net proceeds received by Holder from the
sale of Acquisition Shares pursuant to the Shelf Registration Statement. In
connection with an underwritten offering and without limiting any of Holder's
other obligations under this Agreement, (i) Holder shall indemnify such
underwriters, their officers, directors, employees and agents and each Person
who controls (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) such underwriters or such other indemnified Person to
the same extent as provided above with respect to the indemnification of the
Company and (ii) Holder shall cause each underwriter of an underwritten offering
to indemnify the Company, its directors, officers, employees and agents and each
Person who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) the Company or such indemnified Person against
all Losses caused by, resulting from or relating to any untrue or alleged untrue
statement of material fact contained in the Shelf Registration Statement, any
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only to the extent that such untrue statement or omission or alleged untrue
statement or omission (x) is caused by, results from or relates to, or is
alleged to be omitted from, such information furnished in writing by such
underwriter or (y) arises out of or results from such underwriter's failure to
delivery a copy of the Shelf Registration Statement or prospectus or any
amendments or supplements thereto after the Company has furnished such
underwriter with the requested number of copies of the same.
(c) Notice. Any Person entitled to indemnification hereunder shall give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification; provided, however, the failure to give
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such notice shall not release the indemnifying party from its obligation,
except to the extent that the indemnifying party has been prejudiced by such
failure to provide such notice.
(d) Defense of Actions. In any case in which any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not (so long as it shall
continue to have the right to defend, contest, litigate and settle the matter in
question in accordance with this paragraph) be liable to such indemnified party
hereunder for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, supervision and monitoring (unless such indemnified
party reasonably objects to such assumption on the grounds that there may be
defenses available to it which are different from or in addition to the defenses
available to such indemnifying party, in which event the indemnified party shall
be reimbursed by the indemnifying party for the reasonable expenses incurred in
connection with retaining one separate legal counsel). An indemnifying party
shall not be liable for any settlement of an action or claim effected without
its consent. The indemnifying party shall lose its right to defend, contest,
litigate and settle a matter if it shall fail to diligently contest such matter
(except to the extent settled in accordance with the next following sentence).
No matter shall be settled by an indemnifying party without the consent of the
indemnified party unless such settlement contains a full and unconditional
release of the indemnified party.
(e) Survival. The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified Person and will survive the transfer of the
Registrable Securities.
(f) Contribution. If recovery is not available under the foregoing
indemnification provisions for any reason or reasons other than as specified
therein, any Person who otherwise would be entitled to indemnification by the
terms thereof shall nevertheless be entitled to contribution with respect to any
Losses with respect to which such Person would be entitled to such
indemnification but for such reason or reasons. In determining the amount of
contribution to which the respective Persons are entitled, there shall be
considered the Persons' relative knowledge and access to information concerning
the matter with respect to which the claim was asserted, the opportunity to
correct and prevent any statement or omission, and other equitable
considerations appropriate under the circumstances. It is hereby agreed that it
would not necessarily be equitable if the amount of such contribution were
determined by pro rata or per capita allocation. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not found guilty of
such fraudulent misrepresentation.
Section 2.07 Transferability of Registration Rights.
The rights and obligations of Holder under this ARTICLE II may not be
transferred or assigned without the prior written consent of the Company;
provided, however, that such rights and obligations may be assigned by Holder in
connection with a pledge of the Acquisition Shares in a bona fide transaction to
secure indebtedness of Cygne for borrowed money to a lender that agrees in a
writing reasonably satisfactory to the Company to be subject to the terms of
this Agreement.
ARTICLE III
STANDSTILL PROVISIONS
Section 3.01 Certain Prohibited Actions.
During the term of this Agreement, without the prior written consent of the
Company, neither Cygne nor CGFE shall, and each shall cause each of its
Affiliates not to, singly or as part of a "group", directly or indirectly,
through one or more intermediaries or otherwise (i) make, or in any way
participate, directly or indirectly, in, any "solicitation" of "proxies" (as
such terms are defined or used in Regulation 14A under the Exchange Act) with
respect to the Common Stock or any securities of the Company Subsidiaries
(including by the execution of actions by written consent),
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become a "participant" in any "election contest" (as such terms are defined
or used in Rule 14a-11 under the Exchange Act) with respect to the Company or
seek to advise or influence any person or entity with respect to the voting of
any shares of Common Stock or any securities of the Company Subsidiaries; (ii)
initiate, propose, or participate in the solicitation of stockholders for the
approval of one or more stockholder proposals with respect to the Company, as
described in Rule 14a-8 under the Exchange Act, or induce or encourage any other
individual or entity to initiate any stockholder proposal relating to the
Company; (iii) form, join, influence or participate in a "group", or act in
concert with any other person or entity, for the purpose of acquiring, holding,
voting or disposing of any securities of the Company or the Company Subsidiaries
or taking any other actions prohibited under this Section 3.01; (iv) hold any
discussions with another Person regarding, make any proposal to or any public
announcement relating to a tender or exchange offer for any securities of the
Company or the Company Subsidiaries, or a merger, business combination, sale of
assets, liquidation, restructuring, recapitalization or other extraordinary
corporate transaction relating to the Company or any of the Company Subsidiaries
or its or their material assets or take any action which might require the
Company to make a public announcement regarding any of the foregoing; (v) cause
the merger of Cygne or CGFE with or into, the consolidation of the Cygne or CGFE
with, or the sale of the business or assets of Cygne or CGFE substantially as an
entirety to, any other Person unless (A) Cygne or CGFE, as the case may be, is
the surviving Person or the surviving Person agrees in writing to be bound by
this Agreement and (B) within 120 days after consummation of the transaction,
the surviving Person disposes of all shares of Common Stock owned by it (in
excess of those owned by Cygne or CGFE, as the case may be, prior to
consummation of the transaction); (vi) act, alone or in concert with others
(including by providing financing for another party), to seek or offer to
control the Company; (vii) deposit any Acquisition Shares in a voting trust or
subject any Acquisition Shares to any arrangement or agreement with respect to
the voting thereof (except pursuant to Section 3.03 below); (viii) execute any
written consents; (ix) enter into any discussions, negotiations, arrangements or
understandings with or provide any information to any third party with respect
to any of the foregoing; (x) disclose any intention, plan or arrangement
inconsistent with the foregoing prohibitions or advise or assist any other
Person in connection with any activity included in the foregoing prohibitions;
or (xi) seek, request, or propose any waiver, modification, amendment or
termination of any provision of this Section 3.01 (other than any request or
proposal made or solicited by the Company).
Section 3.02 Transferability of Acquisition Shares.
(a) Lock-up Period. Except pursuant to a pledge in a bona fide transaction
to secure indebtedness of Cygne for borrowed money to a lender that agrees in a
writing reasonably acceptable to the Company to be subject to the terms of this
Agreement, Holder may not Transfer any of the Acquisition Shares prior to the
Effective Date.
(b) Permitted Transfers. From and after the Effective Date, Holder may not
Transfer the Acquisition Shares except in the following circumstances:
(i) to the Company or with the Company's prior written consent;
(ii) pursuant to a pledge in a bona fide transaction to secure
indebtedness of Cygne for borrowed money to a lender that agrees in a
writing reasonably acceptable to the Company to be subject to the terms of
this Agreement;
(iii) to an Affiliate that agrees in a writing reasonably acceptable
to the Company to be bound by the terms of this Agreement;
(iv) pursuant to a tender offer made by a person with respect to which
the Company does not recommend rejection;
(v) pursuant to a settlement with the plaintiffs in the class action
VERONICA ZUCKER V. SASAKI, ET AL.;
(vi) pursuant to a pro rata dividend or other pro rata distribution to
all of Cygne's stockholders, upon liquidation of Cygne or otherwise; or
(vii) pursuant to Rule 144 or otherwise pursuant to the Shelf
Registration Statement;
provided, however, that, other than pursuant to clauses (iv)-(vi) above or
pursuant to an underwritten public offering, no Transfers of more than two
percent (2%) of the Company's then outstanding shares of Common Stock may be
made in any two (2)-week period; and provided, further, that any underwriter of
a public offering or any placement
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agent, broker or other agent shall be instructed that (x) no Transfers of
any Acquisition Shares may knowingly be made to any person who beneficially owns
in excess of five percent (5%) of the then outstanding shares of Common Stock,
and (y) no Transfer of more than two percent (2%) of the Company's then
outstanding Common Stock may knowingly be made to a single purchaser (or group
of related purchasers).
Section 3.03 Voting.
During the term of this Agreement, the Holder (i) shall be present in
person or represented by proxy at all stockholder meetings of the Company so
that all Acquisition Shares then beneficially owned by Holder shall be counted
for the purpose of determining the presence of a quorum at such meetings, and
(ii) shall vote, or act by consent with respect to, all Acquisition Shares then
beneficially owned by Holder pro rata in the same proportion as the votes cast
by all other stockholders of the Company.
ARTICLE IV
MISCELLANEOUS
Section 4.01 Effectiveness of Agreement.
The provisions of this Agreement shall be effective as of the date hereof.
Section 4.02 Restrictive Legends.
Holder hereby acknowledges and agrees that, during the term of this
Agreement, each of the certificates representing Acquisition Shares shall be
subject to stop transfer instructions and shall include the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED
WHETHER BY SALE, ASSIGNMENT, PLEDGE, ENCUMBRANCE, GIFT, BEQUEST,
APPOINTMENT OR OTHERWISE, AND ANNTAYLOR STORES CORPORATION (THE "COMPANY")
WILL NOT REGISTER THE TRANSFER OF SUCH SHARES, EXCEPT PURSUANT AND SUBJECT
TO THAT CERTAIN STOCKHOLDERS AGREEMENT DATED AUGUST __, 1996, AS MAY BE
AMENDED FROM TIME TO TIME, BETWEEN ATSC AND CYGNE DESIGNS, INC. A COPY OF
SUCH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY."
Section 4.03 Recapitalization.
In the event that any capital stock or other securities are issued as a
dividend or distribution on, in respect of, in exchange for, or in substitution
of, any Acquisition Shares, such securities shall be deemed to be Acquisition
Shares for all purposes under this Agreement.
Section 4.04 Notices.
All notices, requests, demands, waivers and other communications required
or permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given if delivered personally, by mail (certified or
registered mail, return receipt requested), by reputable overnight courier or by
facsimile transmission (receipt of which is confirmed):
(a) If to the Company, to:
AnnTaylor Stores Corporation
142 West 57th Street
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 541-3299
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with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
Wilmington, Delaware 19801
Attention: Patricia Moran Chuff, Esq,
Facsimile: (302) 651-3001
(b) If to Holder, to:
Cygne Designs, Inc.
1372 Broadway
New York, New York 10018
Attention: General Counsel
Facsimile: (212) 536-4174
with a copy to:
Fulbright and Jaworski, L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Roy L. Goldman, Esq.
Facsimile: (212) 752-5958
or to such other person or address as any party shall specify by notice in
writing, given in accordance with this Section 4.04, to the other parties
hereto. All such notices, requests, demands, waivers and communications shall
be deemed to have been given on the date on which so hand-delivered, on the
third business day following the date on which so mailed, on the next business
day following the date on which delivered to such overnight courier and on the
date of such facsimile transmission and confirmation, except for a notice of
change of person or address, which shall be effective only upon receipt
thereof.
Section 4.05 Entire Agreement.
This Agreement contains the entire understanding of the parties hereto with
respect to the subject matter hereof. This Agreement supersedes all prior
agreements and understandings, oral and written, with respect to its subject
matter.
Section 4.06 Severability.
Should any provision of this Agreement, or any part thereof, for any reason
be declared invalid or unenforceable, such declaration shall not affect the
validity or enforceability of any other provision of this Agreement, or any
other part thereof, all of which other provisions, and parts, shall remain in
full force and effect, and the application of such invalid or unenforceable
provision, or such part thereof, to persons or circumstances other than those as
to which it is held invalid or unenforceable shall be valid and be enforced to
the fullest extent permitted by law.
Section 4.07 Binding Effect; Assignment.
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
executors, successors and permitted assigns, but, except as expressly
contemplated herein, neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, directly or indirectly, by the Company
or Holder without the prior written consent of the other. Upon any such
assignment, this Agreement shall be amended to substitute the assignee as a
party hereto in a writing reasonably acceptable to the other party.
Section 4.08 Amendment, Modification and Waiver.
This Agreement may be amended, modified or supplemented at any time by
written agreement of the parties hereto. Any failure by Holder, on the one hand,
or the Company, on the other hand, to comply with any term or provision of this
Agreement may be waived by the Company or Holder, respectively, at any time by
an instrument in
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writing signed by or on behalf of the Company and Holder, but such waiver
or failure to insist upon strict compliance with such term or provision shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure to comply.
Section 4.09 Third-Party Beneficiaries.
This Agreement is not intended, and shall not be deemed, to confer upon or
give any person except the parties hereto and their respective successors and
permitted assigns, any remedy, claim, liability, reimbursement, cause of action
or other right under or by reason of this Agreement.
Section 4.10 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
Section 4.11 Interpretation.
The article and section headings contained in this Agreement are solely for
the purpose of reference, are not part of the agreement of the parties and shall
not in any way affect the meaning or interpretation of this Agreement.
Section 4.12 Governing Law.
This Agreement shall be governed by the laws of the State of New York,
without regard to the principles of conflicts of law thereof.
Section 4.13 Termination; Restrictive Legend.
This Agreement shall terminate on the third anniversary of the date hereof;
provided, however, that the provisions of Section 2.06 hereof shall survive
termination of this Agreement. It is understood and agreed that any restrictive
legends set forth on any Acquisition Shares shall be removed by delivery of
substitute certificates without such legends and such Acquisition Shares shall
no longer be subject to the terms of this Agreement, upon the resale of such
Acquisition Shares in accordance with the terms of this Agreement (other than
pursuant to Section 3.02(b) (i), (ii) or (iii)) or, if not theretofore removed,
on the third anniversary of the date hereof.
IN WITNESS WHEREOF, the undersigned hereby agree to be bound by the terms
and provisions of this Stockholders Agreement as of the date first above
written.
ANNTAYLOR STORES CORPORATION
By: _________________________
Name:
Title:
CYGNE DESIGNS, INC.
By: _________________________
Name:
Title:
CYGNE GROUP (F.E.) LIMITED
By: _________________________
Name:
Title:
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EXHIBIT K
TERM SHEET
Florence Lease
LEASE Seller shall lease to Buyer the second floor of the Florence Facility.
TERM Five (5) years, subject to cancellation at any time by either
party upon six (6) months' notice of termination. In the event of
termination by Seller, Seller shall purchase the leasehold
improvements from Buyer at their then net book value.
RENT $6,666.67 per month (which Seller represents is equivalent to the
current intercompany charge for rent of the Florence Facility from
an affiliate of Seller).
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EXHIBIT L
Skadden, Arps, Slate, Meagher & Flom, special counsel to Buyer and ATSC,
shall render its opinion to the following effect in a form reasonably acceptable
to Buyer (capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Stock and Asset Purchase Agreement):
1. Each of Buyer and ATSC are corporations validly existing and in good
standing under the laws of the State of Delaware. Each of Buyer and ATSC is
qualified to do business and is in good standing as a foreign corporation under
the laws of the State of New York.
2. Buyer has all requisite corporate power and authority to execute,
deliver and perform all of its obligations under (i) the Agreement, (ii) the
Assignment and Assumption Agreement, (iii) the Undertaking, (iv) the Manuel
Consulting Agreement, (v) the Benson Consulting Agreement, (vi) [the Subleases],
(vii) the Pledge Agreement and (viii) the Florence Lease. (The agreements listed
in clauses (ii)-(viii) are hereinafter collectively referred to as the "Buyer
Transaction Documents.") The execution and delivery of each of the Agreement and
the Buyer Transaction Documents, and the consummation by Buyer of the
transactions contemplated thereby, have been duly authorized by all requisite
corporate action on the part of Buyer.
3. ATSC has all requisite corporate power and authority to execute, deliver
and perform all of its obligations under (i) the Agreement and (ii) the
Stockholders Agreement. The execution and delivery of the Agreement and the
Stockholders Agreement, and the consummation of the transactions contemplated
thereby, have been duly authorized by all requisite corporate action on the part
of ATSC.
4. Each of the Agreement and the Buyer Transaction Documents have been duly
and validly executed and delivered by Buyer and (assuming each of the Agreement
and the Buyer Transaction Documents is a valid and binding obligation of each of
the other parties thereto) each constitutes the valid and binding obligation of
Buyer enforceable against Buyer in accordance with its terms, except that the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, fraudulent transfer, equity of redemption, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally,
and (ii) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
5. Each of the Agreement and the Stockholders Agreement has been duly and
validly executed and delivered by ATSC and (assuming each of the Agreement and
the Stockholders Agreement is a valid and binding obligation of each of the
other parties thereto) each constitutes the valid and binding obligation of ATSC
enforceable against ATSC in accordance with its terms, except that the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, fraudulent transfer, equity of redemption, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally,
and (ii) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
6. The execution and delivery by Buyer of each of the Agreement and the
Buyer Transaction Documents and the performance of its obligations under each of
the Agreement and the Buyer Transaction Documents, each in accordance with its
terms, do not (i) conflict with the Certificate of Incorporation or By-laws of
Buyer, (ii) constitute a violation of, or a default under, any Applicable
Contract (as hereinafter defined) or (iii) cause the creation of any security
interest or lien upon any property of Buyer pursuant to any Applicable Contract.
As used in such counsel's opinion, "Applicable Contracts" shall mean those
agreements or instruments set forth on a Schedule to such opinion and which have
been identified to such counsel as all the agreements and instruments which are
material to the business or financial condition of ATSC and its subsidiaries,
taken as a whole.
7. The execution and delivery by ATSC of each of the Agreement and the
Stockholders Agreement and the performance of its obligations under each of the
Agreement and the Stockholders Agreement, each in accordance with its terms, do
not (i) conflict with the Certificate of Incorporation or By-laws of ATSC, (ii)
constitute a violation of, or a default under, any Applicable Contract or (iii)
cause the creation of any security interest or lien upon any property of ATSC
pursuant to any Applicable Contract.
8. The shares of ATSC Common Stock to be delivered to Seller in payment of
the Stock Consideration have been duly authorized and, upon issuance of
certificates therefor conforming to the specimen examined by such counsel,
against delivery of the CAT shares and the Assets for such ATSC Common Stock in
accordance with the terms of the Agreement, will be validly issued, fully paid
and non-assessable shares of common stock of ATSC.
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9. No Governmental Approval (as hereinafter defined), which has not been
obtained or taken and is not in full force and effect, is required to authorize
or is required in connection with the execution, delivery or performance of the
Agreement or the Buyer Transaction Documents by Buyer.
10. No Governmental Approval, which has not been obtained or taken and is
not in full force and affect, is required to authorize or is required in
connection with the execution, delivery or performance of the Agreement or the
Stockholders Agreement by ATSC.
11. Neither the execution, delivery or performance by Buyer of the
Agreement and the Buyer Transaction Documents nor the compliance by Buyer with
the terms and provisions thereof will contravene any provision of any Applicable
Law.
12. Neither the execution, delivery or performance by ATSC of the Agreement
and the Stockholders Agreement nor the compliance by ATSC with the terms and
provisions thereof will contravene any provision of any Applicable Law.
As used in such counsel's opinion, (i) "Governmental Approval" shall mean
any consent, approval, license, authorization or validation of, or filing,
recording or registration with, any Governmental Authority pursuant to any
Applicable Law, (ii) "Governmental Authority" shall mean any Delaware, New York
or federal executive, legislative, judicial, administrative or regulatory body
under any Applicable Law, and (iii) "Applicable Law" shall mean any law of the
State of New York, the General Corporation Law of the State of Delaware or any
law of the United States, which, in such counsel's experience, are normally
applicable to transactions of the type contemplated by the Agreement, the Buyer
Transaction Documents and the Stockholders Agreement.
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EXHIBIT M
Fulbright & Jaworski, special counsel to Seller and CGFE, shall render its
opinion to the following effect in a form reasonably acceptable to Buyer
(capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Stock and Asset Purchase Agreement):
1. Each of Seller, CGFE, CAT-US and CAT-Far East is a corporation validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Seller and CAT-US is qualified to do business and is in
good standing as a foreign corporation under the laws of the State of New York,
and, in the case of Seller, the laws of the State of Florida.
2. Seller has all requisite corporate power and authority to execute,
deliver and perform all of its obligations under (i) the Agreement, (ii) the
Assignment and Assumption Agreement, (iii) the Bill of Sale, (iv) the Manuel
Consulting Agreement, (v) the Benson Consulting Agreement, (vi) the [Subleases],
(vii) the Pledge Agreement, (viii) the Florence Lease and (ix) the Stockholders
Agreement. (The agreements listed in clauses (ii)-(ix) are hereinafter
collectively referred to as the "Seller Transaction Documents".) The execution
and delivery of each of the Agreement and the Seller Transaction Documents, and
the consummation by Seller of the transactions contemplated thereby, have been
duly authorized by all requisite corporate action on the part of Seller.
3. CGFE has all requisite corporate power and authority to execute, deliver
and consummate the transactions contemplated by the Agreement and the
Stockholders Agreement. The execution and delivery of the Agreement and the
Stockholders Agreement, and the consummation of the transactions contemplated
thereby, have been duly authorized by all requisite corporate action on the part
of CGFE.
4. Each of the Agreement and the Seller Transaction Documents has been duly
and validly executed and delivered by Seller, and (assuming each of the
Agreement and the Seller Transaction Documents is a valid and binding obligation
of each of the other parties thereto) each constitutes the valid and binding
obligation of Seller enforceable against Seller in accordance with its terms,
except that the enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, fraudulent transfer, equity of redemption,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally, and (ii) general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or at law).
5. Each of the Agreement and the Stockholders Agreement has been duly and
validly executed and delivered by CGFE and (assuming each of the Agreement and
the Stockholders Agreement is a valid and binding obligation of each of the
other parties thereto) each constitutes the valid and binding obligation of CGFE
enforceable against CGFE in accordance with its terms, except that the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, fraudulent transfer, equity of redemption, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally,
and (ii) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
6. The certificates representing the CAT US Shares are listed on Schedule I
hereto. Assuming that Buyer acquired its interest in the CAT US Shares in good
faith and without notice of any adverse claims (within the meaning of Section
8-302 of the New York Uniform Commercial Code) and has not been a party to any
fraud or illegality affecting such shares, upon delivery to Buyer at the Closing
in the State of New York of the CAT US Shares, duly endorsed to Buyer or
accompanied by stock powers duly executed in blank, Buyer will acquire all of
Seller's rights in the CAT US Shares free of any adverse claims (within the
meaning of Section 8-302 of the New York Uniform Commercial Code).
7. The certificates representing the CAT-Far East Shares are listed on
Schedule II hereto. Assuming that Buyer acquired its interest in the CAT-Far
East Shares in good faith and without notice of any adverse claims (within the
meaning of Section 8-302 of the New York Uniform Commercial Code) and has not
been a party to any fraud or illegality affecting such shares, upon delivery to
Buyer at the Closing in the State of New York of the CAT-Far East Shares, duly
endorsed to Buyer or accompanied by stock powers duly executed in blank, Buyer
will acquire all of CGFE's rights in the CAT-Far East Shares free of any adverse
claims (within the meaning of Section 8-302 of the New York Uniform Commercial
Code).
8. No Governmental Approval (as hereinafter defined), which has not been
obtained or taken and is not in full force and effect, is required to authorize
or is required in connection with the execution, delivery or performance of the
Agreement or the Seller Transaction Documents by Seller.
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9. No Foreign Governmental Approval (as hereinafter defined), which has not
been obtained or taken and is not in full force and effect, is required to
authorize or is required in connection with the execution, delivery or
performance of the Agreement or the Stockholders Agreement by CGFE. As used in
such counsel's opinion, "Foreign Governmental Approval" shall mean any consent,
approval, license, authorization or validation of, or filing, recording or
registration with, any governmental authority pursuant to the laws of Hong Kong
to the extent specifically referred to herein.
10. The execution and delivery by Seller of each of the Agreement and the
Seller Transaction Documents and the performance by Seller of its obligations
under each of the Agreement and the Seller Transaction Documents, each in
accordance with its terms, do not (i) violate the Certificate of Incorporation
or By-laws of Seller, (ii) constitute a violation of or a default under any
Applicable Contract or (iii) cause the creation of any security interest or lien
upon any of the property of Seller pursuant to any Applicable Contract. As used
in such counsel's opinion, "Applicable Contracts" shall mean those agreements or
instruments set forth on a Schedule to such opinion and which have been
identified to such counsel as all the agreements and instruments which are
material to the business or financial condition of Seller and its subsidiaries
taken as a whole.
11. The execution and delivery by CGFE of each of the Agreement and the
Stockholders Agreement and the performance by CGFE of its obligations under each
of the Agreement and the Stockholders Agreement, each in accordance with its
terms, do not (i) violate the organizational documents of CGFE, (ii) constitute
a violation of or a default under any Applicable Contract or (iii) cause the
creation of any security interest or lien upon any of the property of CGFE
pursuant to any Applicable Contract.
12. Neither the execution, delivery or performance by Seller of the
Agreement and the Seller Transaction Documents nor the compliance by Seller with
the terms and provisions thereof will contravene any Applicable Law.
13. Neither the execution, delivery or performance by CGFE of the Agreement
and the Stockholders Agreement nor the compliance by CGFE with the terms and
provisions thereof will contravene any provision of any Applicable Law.
As used in such counsel's opinion, (i) "Governmental Approval" shall mean
any consent, approval, license, authorization or validation of, or filing,
recording or registration with, any Governmental Authority pursuant to any
Applicable Law, (ii) "Governmental Authority" shall mean any Delaware, New York
or federal executive, legislative, judicial, administrative or regulatory body
under any Applicable Law, and (iii) "Applicable Law" shall mean any law of the
State of New York, the General Corporation Law of the State of Delaware or any
law of the United States, which, in such counsel's experience, are normally
applicable to transactions of the type contemplated by the Agreement and the
Seller Transaction Documents.
Grunfeld, Desiderio, Lebowitz & Silverman LLP, customs counsel to Seller
and CGFE, shall render its opinion to the following effect in a form reasonably
acceptable to Buyer (capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Stock and Asset Purchase Agreement):
1. Seller has all licenses, permits, consents, orders, approvals and other
authorizations necessary under the customs and trade laws of the United States
of America, including, without limitation, bilateral trade agreements
(collectively, "Customs Laws"), to carry on the Division Business as currently
being conducted, except where the failure to have such licenses, permits,
consents, orders, approvals or other authorizations would not have a Material
Adverse Effect on Seller, CAT or the Division.
2. The execution and delivery by Seller of the Agreement and the Seller
Transaction Documents do not, and the consummation by Seller of the transactions
contemplated thereby will not, (a) result in any violation of or default under,
or to our knowledge the creation of any Lien, charge or encumbrance upon any of
the Assets of Seller related to the Division Business under, any law or any rule
or regulation known to us, or any judgment, decree or order of any Governmental
Authority known to us, in each case under the Customs Laws, to which Seller is a
party or to which any property or asset related to the Division Business is
subject; or (b) result in any suspension, revocation, impairment, forfeiture or
nonrenewal of any license under the Customs Laws.
I-76
<PAGE>
APPENDIX II
[LOGO] Ladenburg, Thalmann & Co. Inc. 540 Madison Avenue
New York NY 10022
212.940.0100
August 27, 1996
The Board of Directors
Cygne Designs, Inc.
1372 Broadway
New York, NY 10018
Attention: Bernard M. Manuel
Gentlemen:
You have engaged us pursuant to the engagement letter, dated as of April
11, 1996, between Cygne Designs, Inc. ("Cygne" or the "Company") and Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"). Specifically, you have requested our opinion
as to whether or not the consideration to be received by Cygne in connection
with the sale of (a) all the shares of common stock of CAT US, Inc. owned by
Cygne and all of the shares of C.A.T. (Far East) Limited (together with CAT US,
Inc., "CAT") owned indirectly by Cygne, and (b) substantially all of the assets
of Cygne's AnnTaylor Woven Division (the "ATW Division," and the sale thereof
together with the sale of CAT, the "Transaction"), pursuant to the Stock and
Asset Purchase Agreement (the "Sale Agreement") by and among Cygne and AnnTaylor
Stores Corporation and certain of its subsidiaries ("AnnTaylor"), is fair, from
a financial point of view, to the stockholders of Cygne. All capitalized terms
shall have the same meaning as defined in the Sale Agreement.
The Sale Agreement provides that at the closing of the Transaction,
AnnTaylor will pay to Cygne (i) the number of validly issued, fully paid and non
assessable shares of common stock, par value $0.0068 per share, of AnnTaylor
(the "AT Common Stock"), rounded to the nearest whole share, equal to the
quotient obtained by dividing (a) $36.0 million by (b) the average of the high
and low trading price of the AT Common Stock for the ten trading days ending on
the trading day immediately prior to the closing date (the "Average Trading
Price"), provided that the number of shares of AT Common Stock to be issued
shall not exceed 2.5 million shares; however, in the event that the 2.5 million
share cap is triggered and the aggregate value of the shares is less than $32.5
million, the number of AT Common Stock shares to be issued shall be equal to the
quotient obtained by dividing (c) $32.5 million by (d) the Average Trading
Price, provided that the number of shares of AT Common Stock to be issued shall
in no event exceed 3.0 million shares (such shares of AT Common Stock issued, if
any, in excess of the 2.5 million share cap referred to as the "Additional
Shares"), provided the value of the Additional Shares may be paid in cash by
AnnTaylor, at its sole discretion, in
Members of all principal exchanges
Member S.I.P.C.
II-1
<PAGE>
[LOGO] Ladenburg, Thalmann & Co. Inc.
The Board of Directors
Cygne Designs, Inc.
August 27, 1996
Page 2
lieu of all or a portion of the Additional Shares, in an amount equal to the
product obtained by multiplying (aa) the number of Additional Shares not to be
issued by AnnTaylor by (bb) the Average Trading Price; and (ii) a dollar amount
in cash equal to the Adjusted Net Book Value of the Inventory and Net Fixed
Assets of the ATW Division. In addition, AnnTaylor will (i) pay all accounts
receivable for finished goods previously delivered to and accepted by AnnTaylor;
(ii) assume accounts payable associated with the Inventory; and (iii) forgive
$7,985,000 of outstanding advances previously made by AnnTaylor.
In connection with rendering this opinion, we have reviewed such
information as we have deemed necessary or appropriate for the purpose of
stating the opinions expressed herein. We have reviewed the Agreement in
Principle governing the sale of CAT and the ATW Division by Cygne to AnnTaylor
dated April 8, 1996 and the Sale Agreement dated June 7, 1996 and the Amendment
thereto dated August 27, 1996.
For CAT, we reviewed information including, but not limited to, the
following: (i) detailed internal financial statements, (ii) audited financial
statements for the two fiscal years ended January 28, 1995, and February 3,
1996, (iii) unaudited financial statements for the fiscal quarter ended May 4,
1996, (iv) preliminary internal financial statements for the fiscal quarter
ended August 3, 1996, (v) a detailed analysis of historical Selling, General &
Administrative expenses, (vi) management's four-year projected financial
statements, (vii) the CAT Joint Venture Agreement by and among Cygne and
AnnTaylor dated July 13, 1993, (viii) Dwight F. Meyer's Employment Agreement
with CAT, and the Waiver and Amendment Agreement thereto, and (ix) publicly
available market information regarding the industry, CAT and its competitors. In
addition, we met with management of CAT at its offices in New York to discuss
the historical and prospective industry environment and operating results for
CAT.
For the ATW Division, we reviewed information including, but not limited
to, the following: (i) detailed internal financial statements for the two fiscal
years ended January 28, 1995, and February 3, 1996 and for the fiscal quarter
ended May 4, 1996 and preliminary internal financial statements for the fiscal
quarter ended August 3, 1996, (ii) a detailed analysis of historical Selling,
General & Administrative expenses, (iii) management's four-year projected
financial statements assuming the ATW Division continued to operate under its
current conditions, (iv) management's three-year projected financial statements
assuming that Cygne had sold CAT and retained the ATW Division, and (v) publicly
available
II-2
<PAGE>
[LOGO] Ladenburg, Thalmann & Co. Inc.
The Board of Directors
Cygne Designs, Inc.
August 27, 1996
Page 3
market information regarding the industry, the ATW Division and its competitors.
We met with management of the ATW Division to discuss the historical and
prospective industry environment and operating results for the ATW Division.
Additionally, we reviewed combined audited financial statements for CAT and the
ATW Division for the fiscal year ended February 3, 1996 and unaudited financial
statements for the fiscal quarter ended May 4, 1996 and preliminary results for
the fiscal quarter ended August 3, 1996.
For AnnTaylor, we reviewed information including, but not limited to, the
following: (i) audited financial statements for the three fiscal years ended
January 29, 1994, January 28, 1995 and February 3, 1996, (ii) unaudited
financial statements for the fiscal quarter ended May 4, 1996, (iii) internal
financial statements for the fiscal quarter ended August 3, 1996, (iv) pro forma
financial statements giving effect to the Transaction and the completion of the
$87.5 million 8.5% Convertible Trust Originated Preferred Securities (the
"TOPrS") financing, (v) a detailed analysis of historical Selling, General &
Administrative expenses, (vi) a breakdown of AnnTaylor's purchases by supplier
for fiscal 1995, (vii) management's five-year projected financial statements,
(viii) the Offering Memorandum for the TOPrS, (ix) AnnTaylor's common stock
price and volume trading history, and (x) publicly available market information
regarding the industry, AnnTaylor and its competitors. We met with the
management of AnnTaylor to discuss the historical and prospective industry
environment and operating results for AnnTaylor. Additionally, on August 26,
1996, we discussed with management of AnnTaylor the resignation of Sally Frame
Kasaks, AnnTaylor's Chairman and Chief Executive Officer, and the appointment of
J. Patrick Spainhour as Chairman and Chief Executive Officer on August 23, 1996.
In addition, we reviewed certain information for Cygne, but did not perform
any analyses of this information. The information we reviewed for Cygne
included, but was not limited to, the following: (i) detailed internal financial
statements, (ii) audited financial statements for the two fiscal years ended
January 28, 1995, and February 3, 1996, (iii) unaudited financial statements for
the fiscal quarter ended May 4, 1996, (iv) preliminary internal financial
statements for the fiscal quarter ended August 3, 1996, (v) a detailed analysis
of historical Selling, General & Administrative expenses, (vi) historical
financial statements pro forma for the Transaction, (vii) management's
three-year projected financial statements, and (viii) publicly available market
information regarding the industry, Cygne and its
II-3
<PAGE>
[LOGO] Ladenburg, Thalmann & Co. Inc.
The Board of Directors
Cygne Designs, Inc.
August 27, 1996
Page 4
competitors. We met with management of Cygne to discuss the Transaction, the
historical and prospective industry environment and operating results for Cygne,
CAT, the ATW Division and AnnTaylor.
In conducting our analysis, we have assumed and relied upon the accuracy
and completeness of all financial and other material furnished to us by the
Company, CAT, the ATW Division and AnnTaylor regarding the Company, CAT, the ATW
Division, AnnTaylor, the Transaction, the industry in which the companies
operate and their respective competition. Ladenburg has not attempted to
independently verify the information provided to it by the Company, CAT, the ATW
Division or AnnTaylor. We have not made or been provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company, CAT, the ATW Division or AnnTaylor. We were not authorized to,
and did not, solicit third party indications of interest in acquiring all or
part of CAT or the ATW Division, and we were not asked to consider, and our
opinion does not address, the consideration the Company might receive from a
third-party purchaser, the relative merits of the Transaction as compared to any
alternative business strategies that might exist for CAT or the ATW Division or
the effect of any other transaction in which CAT or the ATW Division might
engage. This opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
In evaluating the fairness, from a financial point of view, of the
consideration to be received by Cygne in the Transaction, we evaluated the
Transaction on a combined basis, as if both CAT and the ATW Division were
purchased together, as contemplated by the Transaction. Since a portion of the
consideration in the Transaction consists of shares of AnnTaylor, we also
evaluated AnnTaylor to determine the value of this portion of the consideration.
Cygne's interest in CAT is subject to a Buy-Sell Right which gives each of
Cygne and AnnTaylor the right to offer to buy the other party's ownership of
CAT. Upon receiving such offer, the offeree must agree to sell its shares of CAT
or agree to purchase the shares of CAT owned by the offeror for the same price.
Under the Buy-Sell Right, it is possible that AnnTaylor could buy CAT, but not
the ATW Division. In addition, Cygne is restricted from selling its interest in
CAT to a third party without AnnTaylor's consent. This restriction essentially
provides AnnTaylor with the ability to prevent Cygne from selling its shares of
II-4
<PAGE>
[LOGO] Ladenburg, Thalmann & Co. Inc.
The Board of Directors
Cygne Designs, Inc.
August 27, 1996
Page 5
CAT to a third party. These restrictions, combined with CAT's dependence upon
AnnTaylor for financing support and a stand-by letter of credit, render Cygne's
shares of CAT virtually unmarketable to a third party.
If Cygne were to sell CAT, but retain the ATW Division, it is likely that
AnnTaylor would leverage the sourcing and contracting expertise of CAT and begin
over time to source in-house those products currently being supplied by the ATW
Division. This scenario is consistent with AnnTaylor's announced business
strategy to bring its sourcing functions in-house. Should AnnTaylor's strategy
be implemented in this manner, the ATW Division would experience a significant
deterioration of its sales.
For our evaluations, we calculated a range of values for the entity being
valued using five separate approaches: (i) a Market Multiples Analysis based
upon comparable publicly traded-companies, (ii) an Acquisition Multiples
Analysis based upon acquisitions of comparable companies over the previous three
years, (iii) a Discounted Cash Flow Analysis, (iv) a Debt Capacity Analysis,
and, for CAT and the ATW Division, (v) a Net Book Value Analysis. For AnnTaylor,
we also reviewed the historical trading price and volume of the common stock. In
examining all the approaches thoroughly, we reached the conclusion that certain
approaches were more relevant, represented more direct comparability or provided
a higher degree of certainty than others. Accordingly, we weighted certain
analyses more heavily than others. In determining the proper application of
certain valuation multiples and discount rates, we considered the qualitative
aspects of the entity being valued, including its access to capital, customer
and product concentration, ownership structure, management team, nature of
customer relationship, market position and intensity of competition.
Although we reviewed Cygne's three-year projected financial results for its
businesses remaining after the Transaction, Ladenburg expresses no opinion on,
nor were we asked to opine as to, the viability, value or solvency of Cygne
prior to or after giving effect to the consummation of the Transaction.
Ladenburg did not consider the effects of the Transaction on the future
performance of the remaining assets of Cygne, nor does Ladenburg express an
opinion as to Cygne's planned use of proceeds arising from the Transaction, in
reaching its conclusion as to whether or not the consideration to be received by
Cygne in the Transaction is fair, from a financial point of view. Ladenburg is
not opining upon the Transaction or the form of the purchase agreement or the
terms contained therein. Ladenburg is only opining
II-5
<PAGE>
[LOGO] Ladenburg, Thalmann & Co. Inc.
The Board of Directors
Cygne Designs, Inc.
August 27, 1996
Page 6
herein as to whether or not the consideration to be received by Cygne in the
Transaction is fair, from a financial point of view.
Ladenburg has been engaged to render this opinion in connection with the
Transaction and we will receive a fee for our services in connection therewith.
In the ordinary course of our business, we may actively trade the securities of
Cygne or AnnTaylor for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is strictly for the private use of the Board of Directors of
the Company and may not be relied upon by any other party including, but not
limited to, AnnTaylor or any other such potential purchaser of CAT or the ATW
Division, The Hongkong and Shanghai Banking Corporation Limited, Mitsubishi
Corporation and Mitsubishi International Corp. Neither this opinion nor copies
thereof or excerpts therefrom may be publicly distributed or disclosed to any
third person, firm or corporation, except as required by law, without the
express written consent of Ladenburg, which permission will not be unreasonably
withheld, unless the Company has advised Ladenburg in writing prior to entering
into this Agreement that this opinion may or will be embodied in a disclosure
document. Ladenburg hereby consents to the disclosure and publication of this
opinion in a proxy statement, and all amendments thereto, to be filed by the
Company with the Securities and Exchange Commission in connection with the
Transaction.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the consideration to be received
by Cygne in the Transaction is fair, from a financial point of view, to the
stockholders of Cygne.
Very truly yours,
/s/ LADENBURG, THALMANN & CO. INC.
----------------------------------
Ladenburg, Thalmann & Co. Inc.
II-6
<PAGE>
CYGNE DESIGNS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 19, 1996
Irving Benson, Roy E. Green and Bernard M. Manuel, and each of them, as the
true and lawful attorneys, agents and proxies of the undersigned, with full
power of substitution, are hereby authorized to represent and to vote all shares
of Common Stock of Cygne Designs, Inc. held of record by the undersigned on
August 21, 1996, at the Annual Meeting of Stockholders to be held at 9:30 A.M.
on Thursday, September 19, 1996, at The University Club, One West 54th Street,
New York, New York, and at any adjournment thereof. Any and all proxies
heretofore given are hereby revoked.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED FOR PROPOSAL
NOS. 1 and 2.
(Continued and to be signed on reverse side)
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
[X] Please mark your
votes as in this
example.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN FOR WITHHOLD
<S> <C> <C> <C> <C> <C> <C> <C>
PROPOSAL 1--Proposal to approve [ ] [ ] [ ] PROPOSAL 2-- [ ] [ ] Nominees are:
the proposed sale to AnnTaylor, Election Irving Benson, James G. Groninger,
Inc., a Delaware corporation of Directors Stuart B. Katz, Bernard M. Manuel
("Ann Taylor"), of Cygne's merchandising and sourcing and Trevor J. Wright.
capabilities used for product sales to Ann Taylor,
which consists of (a) the Company's 60% interest
in each of CAT US, Inc., a Delaware corporation
("CAT US"), and C.A.T. Far East Limited, a Hong Kong
corporation ("CAT Far East" and, together with CAT US, FOR all listed nominees (except
"CAT"), the Company's joint venture arrangement with do not vote for the nominee(s)
Ann Taylor, which owns the remaining 40% interest in whose name(s) appear(s) below):
CAT, and (b) the assets of Cygne's Ann Taylor Woven
Division pursuant to a Stock and Asset Purchase
Agreement dated as of June 7, 1996, as amended, by and _________________________________________________
between the Company, Cygne Group (F.E.) Limited, a
Hong Kong corporation and wholly-owned subsidiary of Discretionary authority is hereby granted with
the Company ("CGFE"), AnnTaylor Stores Corporation, a respect to such other matters as may properly
Delaware corporation and parent corporation of Ann come before the meeting.
Taylor, and Ann Taylor.
Signature ____________________________ Signature if held jointly ____________________________ DATED _______________, 1996
</TABLE>
IMPORTANT: Please sign exactly as name appears above. Each joint owner shall
sign. Executors, administrators, trustees, etc. should give full
title as such. If signer is a corporation, please give full corporate
name by duly authorized officer. If a partnership, please sign in
partnership name by authorized person. The above-signed acknowledges
receipt of the Notice of Annual Meeting of Stockholders and the Proxy
Statement furnished therewith. PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
