-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LoUygA3TmqRsVV//QvS1bKfCZGCmmvhoJugb2p0nyuguNqKBFdWIk4ReprB0Yw3U FuIMJtCxdm3vupifbf7aMQ== 0000874214-97-000005.txt : 19970502 0000874214-97-000005.hdr.sgml : 19970502 ACCESSION NUMBER: 0000874214-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970501 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAYLOR ANN STORES CORP CENTRAL INDEX KEY: 0000874214 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 133499319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10738 FILM NUMBER: 97593736 BUSINESS ADDRESS: STREET 1: 142 WEST 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR STORES CORP. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 . For the fiscal year ended February 1, 1997 OR - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File No. 1-10738 ANNTAYLOR STORES CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3499319 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 142 West 57th Street, New York, NY 10019 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (212) 541-3300 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered - -------------------- ----------------------------------------- Common Stock, The New York Stock Exchange $.0068 Par Value Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No x . ---- --- The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 14, 1997 was $425,882,709. The number of shares of the registrant's Common Stock outstanding as of March 14, 1997 was 25,593,021. Documents Incorporated by Reference: Portions of the Registrant's Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders to be held on June 18, 1997 are incorporated by reference into Part III. ==================================================================== 1 PART I ITEM 1. Business -------- General - ------- AnnTaylor Stores Corporation (the "Company"), through its wholly owned subsidiary AnnTaylor, Inc. ("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. The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company'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. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles. The Company has sought to capitalize on the Ann Taylor brand through the introduction of new product lines in its Ann Taylor stores. The Company believes that product extensions support the Company's total wardrobing strategy, and provide existing and new customers with additional reasons to shop at Ann Taylor stores. Product extensions expanded or developed over the last several years include Ann Taylor shoes, ATdenim, Ann Taylor Petites, and fragrance and personal care products. As of February 1, 1997, the Company operated 309 stores in 41 states and the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store, Ann Taylor Loft and Ann Taylor Studio. Of the 259 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. The Company believes that the customer base for its Ann Taylor Stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise. In 1995, the Company began testing Ann Taylor Loft, a separate moderate-price store concept for customers who appreciate Ann Taylor style, but are more value conscious. Merchandise is designed uniquely for these stores and is sold under the Ann Taylor Loft and Shoe Loft labels. As of February 1, 1997, the Company operated 15 Ann Taylor Loft stores, all located in factory outlet centers. The Company also operates 16 stores in factory outlet centers under the name Ann Taylor Factory Store or Ann Taylor Loft, that offer both original priced Ann Taylor Loft merchandise, as well as clearance merchandise from Ann Taylor and Ann Taylor Loft stores. The Company believes that the Ann Taylor Loft concept represents an opportunity for the Company to compete in the moderately-priced women's apparel market, and management is developing a strategic plan to determine how best to maximize its potential in this market. The Company also operates 10 Ann Taylor Factory Stores that serve principally as a clearance vehicle for both Ann Taylor and Ann Taylor Loft merchandise. All of these stores are located in factory outlet centers. ===================================================================== 2 In Fall 1994, the Company 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 certain accessories also sold in Ann Taylor stores, such as hosiery, belts, handbags, and fragrance and personal care products. By Fall 1995, the Company had nine Ann Taylor Studio stores. The Company did not open any new Studio stores during Fiscal 1996. The Company has determined that the Studio stores, which have not been profitable, are not consistent with the Company's total wardrobing strategy, and in January 1997 the Company announced its plans to close all nine Studio stores during Fiscal 1997. The Company was incorporated under the laws of the state of Delaware in 1988 under the name AnnTaylor Holdings, Inc. The Company changed its name to AnnTaylor Stores Corporation in April 1991. The Company was formed at the direction of Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co"), for the purpose of acquiring Ann Taylor in a leveraged buyout transaction (the "Acquisition") in 1989. As of March 14, 1997, certain limited partnerships controlled directly or indirectly by ML Capital Partners, together with certain other affiliates of ML&Co. (collectively, the "ML Entities"), beneficially owned an aggregate of 6,155,118 shares, or approximately 24.0%, of the outstanding Common Stock of the Company. The ML Entities have two designees on the Company's Board of Directors and, therefore, are in a position to influence management of the Company. Unless the context indicates otherwise, all references herein to the Company include the Company, its wholly owned subsidiary Ann Taylor and their respective subsidiaries. Merchandise Design and Production - ---------------------------------- Ann Taylor merchandise is developed by the Company's in- house product design and development team, which designs merchandise exclusively for the Company's stores. The Company's merchandising group determines inventory needs for the upcoming season, edits the assortment developed by the design team, plans monthly merchandise flows, and arranges for the production of merchandise either through the Company's sourcing division, or with vendors who are private label specialists, or directly with manufacturers. The Company's production management and quality assurance department establishes the technical specifications for all Ann Taylor merchandise, inspects factories in which Ann Taylor merchandise is produced, including periodic inspections while goods are in production to identify potential problems prior to shipment and, upon receipt, inspects merchandise on a test basis for uniformity of size and color, as well as for overall quality of manufacturing. The Company believes that procuring merchandise directly from manufacturers improves the Company's competitive position by providing it with greater control over pre-production processes, resulting in greater consistency in merchandise quality and sizing, and by reducing merchandise costs. To this end, in May 1992, the Company commenced a joint venture, known as "CAT", with one of its private label vendors, Cygne Designs, Inc. ("Cygne"). CAT was formed for the purpose of acting as a sourcing agent exclusively for Ann Taylor, placing merchandise orders directly with manufacturers. In 1995, the Company purchased approximately 38% of its merchandise through CAT and approximately 16% of its merchandise from Cygne. Until September 1996, the Company owned a minority interest in CAT. In September 1996, the Company acquired Cygne's entire interest in CAT, which became a wholly owned subsidiary of Ann Taylor, as well as certain assets of the Ann Taylor Woven Division of Cygne that Cygne used in sourcing merchandise for Ann Taylor (the "Sourcing Acquisition"). These operations have been combined and are now known as "Ann Taylor Global Sourcing" ("ATGS"). In Fiscal 1996, prior to the consummation of the Sourcing Acquisition, the Company purchased approximately 42% and 19% of its merchandise from CAT and Cygne, respectively. Subsequent to the Sourcing Acquisition, the Company purchased approximately 57% of its merchandise through ATGS. ATGS sources merchandise from approximately 90 manufacturers and vendors. Substantially all of ================================================================== 3 the merchandise purchased through ATGS is manufactured outside the United States in over 15 different countries. The Company also purchased merchandise from approximately 50 other vendors; however, no single third-party vendor accounted for more than 5% of the Company's total purchases. Although most of the Company's third-party vendors are domestic, consistent with the retail apparel industry as a whole, many of the Company's domestic vendors import a large portion of their merchandise from abroad. The Company cannot predict whether any of the foreign countries in which its products are currently manufactured or any of the countries in which the Company may manufacture its products in the future will be subject to future or increased import restrictions by the U.S. government, including the likelihood, type or effect of any trade restriction. Trade restrictions, including increased tariffs or quotas, against apparel, footwear or other items sold by the Company could affect the importation of such merchandise generally and, in that event, could increase the cost or reduce the supply of merchandise available to the Company and adversely affect the Company's business, financial condition, results of operations and liquidity. The Company's merchandise flow may also be adversely affected by political instability in any of the countries in which its goods are manufactured, if it affects the production or export of merchandise from such countries; significant fluctuation in the value of the U.S. dollar against foreign currencies; and restrictions on the transfer of funds. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. The Company believes it has a good relationship with its suppliers and that, as the number of the Company's stores increases, there will continue to be adequate sources to produce a sufficient supply of quality goods in a timely manner and on satisfactory economic terms. Inventory Control and Merchandise Allocation - --------------------------------------------- The Company's merchandise planning and allocation department analyzes each store's size, location, demographics, sales and inventory history to determine the quantity of merchandise to be purchased for and the allocation of merchandise to the Company's stores. Upon receipt, merchandise is allocated in order to achieve an emphasis that is suited to each store's customer base. Merchandise typically is sold at its original marked price for several weeks, with the length of time varying by item. The Company reviews its inventory levels on an on-going basis in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation or changes in customer preference or if it is determined that the inventory will not sell at its currently marked price. Marked-down items remaining unsold are periodically moved to the Company's Factory Stores where additional markdowns may be taken. In Fiscal 1996, inventory turned 4.7 times (excluding inventory associated with ATGS) and in Fiscal 1995, inventory turned 4.3 times. Inventory turnover is determined by dividing net cost of goods sold by the average of the cost of inventory at the beginning and end of the period. The Company uses a centralized distribution system, under which nearly all Ann Taylor merchandise is distributed to the Company's stores through its distribution center located in Louisville, Kentucky. See "Properties". Merchandise is shipped by the distribution center to the Company's stores several times each week. ================================================================== 4 Stores - ------ As of February 1, 1997, the Company operated 309 stores which were distributed among 41 states and the District of Columbia, as shown on the following table: Locations by State - ------------------------------------------------------------------------- Number of Number of Number of State Stores State Stores State Stores - ----- -------- ----- --------- ----- --------- Alabama......... 2 Kentucky....... 2 North Carolina.... 6 Arizona......... 5 Louisiana...... 4 Ohio.............. 14 Arkansas........ 1 Maryland....... 7 Oklahoma.......... 3 California...... 54 Massachusetts.. 13 Oregon............ 2 Colorado........ 5 Michigan....... 8 Pennsylvania...... 13 Connecticut..... 9 Minnesota...... 4 Rhode Island...... 1 Delaware........ 1 Mississippi.... 1 South Carolina.... 3 District of Columbia........ 6 Missouri....... 7 Tennessee......... 6 Florida......... 23 Nebraska....... 2 Texas............. 19 Georgia......... 6 Nevada......... 3 Utah.............. 2 Hawaii.......... 2 New Hampshire.. 2 Vermont........... 1 Illinois........ 11 New Jersey..... 14 Virginia.......... 8 Indiana......... 6 New Mexico..... 2 Washington........ 3 Kansas.......... 1 New York....... 26 Wisconsin......... 1 The Company selects store locations that it believes are convenient for its customers. Store locations are determined on the basis of various factors, including geographic location, demographic studies, anchor tenants in a mall location, other specialty stores in a mall or specialty center location or in the vicinity of a village location, and the proximity to professional offices in a downtown or village location. Ann Taylor Factory Stores and Ann Taylor Loft stores are generally located in factory outlet malls in which co-tenants include a significant number of nationally recognized upscale brand name retailers. Ann Taylor Stores opened prior to January 30, 1993 averaged 3,500 square feet in size, with the exception of three stores that ranged between 10,300 square feet and 12,500 square feet. Since 1993, the average size of new Ann Taylor Stores has been approximately 5,900 square feet. Ann Taylor Stores to be opened in Fiscal 1997 are expected to average approximately 4,500 square feet. The Company believes that the increase in store size since 1993 enhances the Company's ability to merchandise its customer offerings and reinforce its total wardrobing concept, provides area necessary for the proper presentation of Ann Taylor shoes, petites and other product line extensions, and improves customer service and ease of shopping. Ann Taylor Factory Stores average 6,600 square feet and Ann Taylor Loft stores average 10,900 square feet. The Company's stores typically have approximately 19% of their total square footage allocated to stockroom and other non-selling space. In Fall 1995, the Company opened two flagship Ann Taylor Stores, each in excess of 20,000 square feet, one on Madison Avenue in New York City, and the other on Post Street in San Francisco. These two larger stores represent the fullest assortment of Ann Taylor merchandise, and include amenities unique to these stores. Expansion - --------- An important aspect of the Company's business strategy is a real estate expansion program designed to reach new customers through the opening of new stores, as well as the expansion of existing stores in order to accommodate product extensions and improve customer service. The Company adds additional stores, or expands the size of existing stores, in markets where Ann Taylor already has a presence as market conditions warrant and sites become available. The Company also opens new stores in additional markets that it believes have a sufficient concentration of its target customers. Prior to 1993, the Company's store expansion program focused primarily on adding new Ann Taylor Stores. Since 1993, the expansion of existing Ann Taylor Stores has been an integral part of the Company's expansion strategy. ================================================================= 5 The following table sets forth certain information regarding store openings, expansions and closings for Ann Taylor Stores ("ATS"), Ann Taylor Factory Stores ("ATO"), Ann Taylor Loft Stores ("ATL") and Ann Taylor Studio Stores ("ATA") since the consummation of the Acquisition in the beginning of 1989: Total Stores No. No. Open at Stores Stores Beginning No. Stores Opened Expanded Closed No. Stores Open of During Fiscal Year During During at End of Fiscal Year Fiscal Fiscal ------------------- Fiscal Fiscal -------------------------- Year Year ATS ATO ATL ATA Year(a) Year(a) ATS ATO ATL ATA Total - ------ ---- ---- --- --- --- --- ------- ----- --- --- --- ----- 1989 119 20 1 --- --- 2 1 138 1 --- --- 139 1990 139 29 3 --- --- 3 1 166 4 --- --- 170 1991 170 33 --- --- --- 3 3 196 4 --- --- 200 1992 200 20 --- --- --- 5 1 215 4 --- --- 219 1993 219 8 5 --- --- 12 1 222 9 --- --- 231 1994 231 8 12 --- 5 25 4 236 21 --- 5 262 1995 262 26 2 16 4 30 4 258 22 17 9 306 1996 306 9 1 1 --- 7 8 259 10(b) 31(b) 9 309 - -------------- (a) All stores expanded and all stores closed were Ann Taylor Stores, except that one store expanded in 1994 was an ATO store, and one store expanded in 1995 was an ATO store that was converted into an ATL store in connection with such expansion. (b) The 16 ATO and ATL stores that sell both original price Ann Taylor Loft merchandise, as well as clearance merchandise from Ann Taylor Stores and Ann Taylor Loft, are classified as ATL stores. The Company believes that its existing store base is a significant strategic asset of its business. Ann Taylor Stores are located in some of the most productive retail centers in the United States. The Company believes that it is one of the most sought after tenants by real estate developers because of its strong Ann Taylor brand franchise and its high average sales per square foot productivity ($476 per square foot in Fiscal 1996). The Company has invested approximately $127 million in its store base since 1993; approximately 60% of its stores are either new or have been completely remodeled, as a result of an expansion or relocation, in the last four years. During Fiscal 1996, the Company slowed its real estate expansion program to enable it to more effectively consolidate the growth that had occurred during recent years. In 1996, the Company opened nine Ann Taylor Stores, one Ann Taylor Loft Store and one Ann Taylor Factory Store, and expanded seven existing Ann Taylor Stores. The Company also closed eight Ann Taylor Stores, at the expiration of or in accordance with those stores' respective lease terms. This real estate expansion program resulted in a net increase in the Company's total store square footage from approximately 1,651,000 square feet to approximately 1,705,000 square feet, a net increase of approximately 54,000 square feet, or 3.3%. In Fiscal 1997, the Company intends to increase store gross square footage by approximately 128,000 square feet, or 7.5%, representing approximately 26 new Ann Taylor Stores and the expansion of 11 existing Ann Taylor Stores. Capital expenditures for the Company's Fiscal 1996 store expansion program, net of landlord construction allowances, totaled approximately $10.0 million, including expenditures for store refurbishing and store refixturing. The Company expects that capital expenditures for its Fiscal 1997 store expansion program, net of landlord construction allowances, will be approximately $23.0 million, including expenditures for store refurbishing and store refixturing. The Company's bank credit agreement provides for, among other things, an annual limitation on capital expenditures of $25.0 million in Fiscal 1996 and $32.5 million in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied. See Note 2 to the Company's Consolidated Financial Statements. ==================================================================== 6 The Company's ability to continue to increase store square footage will be dependent upon general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations and the negotiation of acceptable lease terms. See "Management's Discussion and Analysis--Liquidity and Capital Resources". Customer Credit - --------------- Customers may pay for merchandise with the Ann Taylor credit card, American Express, Visa, MasterCard, cash or check. Credit card sales were 77.8% of net sales in Fiscal 1996, 77.0% in Fiscal 1995 and 77.7% in Fiscal 1994. In Fiscal 1996, 20.8% of net sales were made with the Ann Taylor credit card, and 57.0% were made with third-party credit cards, including 0.7% on a co- branded Ann Taylor Visa card that the Company began testing in Fiscal 1996. As of February 1, 1997, the Company's Ann Taylor credit card accounts receivable totaled $54,505,000, net of allowance for doubtful accounts. Accounts written off in Fiscal 1996 were approximately $1,729,000, or 0.2% of net sales. Ann Taylor has offered customers its proprietary credit card since 1976. The Company believes that the Ann Taylor credit card enhances customer loyalty while providing the customer with additional credit. However, the percentage of the Company's total sales made with its proprietary credit card has been declining over the past few years. The Company believes the declining penetration of its Ann Taylor credit card as a percentage of sales is attributable to the gain of market share by bank cards throughout the retail industry generally, as well as to the increase in the number of the Company's Ann Taylor Factory Stores and Loft stores, which experience a significantly lower penetration of sales with the Ann Taylor card. At February 1, 1997, the Company had over 430,000 Ann Taylor credit card accounts that had been used during the past 18 months. Advertising and Promotion - ------------------------- For many years, the Company relied on its Ann Taylor catalog, mailed principally to Ann Taylor credit card holders, as its principal advertising vehicle. The Company has also occasionally run print advertisements in newspapers and national women's fashion magazines such as Elle, Vogue and Harpers Bazaar. In early 1996, the Company suspended publication of its catalog and ran very few print advertisements. Management is presently evaluating its advertising, marketing and promotional strategies and anticipates that it may increase its advertising and marketing efforts by Fall 1997 or early Fiscal 1998. Trademarks and Service Marks - ---------------------------- The trademarks and service marks for Ann Taylor either have been registered or have trademark applications pending with the United States Patent and Trademark Office and with the registries of many foreign countries. The Company's rights in the "AnnTaylor" mark are a significant part of the Company's business, as the Company believes its mark is well known in the women's retail apparel industry. Accordingly, the Company intends to maintain its "AnnTaylor" mark and related registrations and vigorously protect its trademarks against infringement. Competition - ------------ The women's retail apparel industry is highly competitive. The Company's Ann Taylor Stores compete with certain departments in national or local department stores, and with other specialty store chains and independent retail stores carrying similar lines of merchandise. The Company believes that its focused merchandise selection, exclusive Ann Taylor brand fashions, personalized service and convenience distinguish it from other specialty retailers. Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company and there is no assurance that the Company will be able to compete successfully ====================================================================== 7 with them in the future. Further, as noted above, the Company believes that the Ann Taylor Loft concept offers the Company the opportunity to compete in the moderately-priced women's apparel market. The Company does not have significant prior experience in this market, and the competitive factors described above are applicable to this market as well. Further, existing competitors in that market may have significantly greater brand recognition among this customer segment than the Company. Employees - ---------- Store management receives compensation in the form of salaries and performance-based bonuses. Sales associates are paid on an hourly basis plus performance incentives. A number of programs exist that offer incentives to both management and sales associates to increase sales and support the Company's total wardrobing strategy. As of February 1, 1997, the Company had approximately 6,400 employees, of whom 1,450 were full-time salaried employees, 1,700 were full-time hourly employees and 3,250 were part-time hourly employees working less than 30 hours per week. None of the Company's employees are represented by a labor union. The Company believes that its relationship with its employees is good. ITEM 2. Properties ----------- As of February 1, 1997, the Company operated 309 stores, all of which were leased. The store leases typically provide for initial terms of ten years, although some leases have shorter or longer initial periods, and grant the Company the right to extend the term for one or two additional five-year periods. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a certain threshold. Most of the leases also require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs. The current terms of the Company's leases, including renewal options, expire as follows: Fiscal Years Lease Number of Terms Expire Stores ------------------ --------- 1997 - 1999............... 38 2000 - 2002............... 20 2003 - 2005............... 126 2006 and later............ 125 Ann Taylor leases corporate offices at 142 West 57th Street in New York City, containing approximately 86,700 square feet, and approximately 59,000 square feet of office space at 1372 Broadway in New York City. The leases for these premises expire in 2006 and 2010, respectively. The Company also leases office space in New Haven, Connecticut, containing approximately 31,000 square feet. The lease for these premises expires in 1998. Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services, Inc. owns its 256,000 square foot distribution center located in Louisville, Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility. The parcel on which the Louisville distribution center is located comprises approximately 20 acres and could accommodate possible future expansion of the facility. ===================================================================== 8 ITEM 3. Legal Proceedings ----------------- On April 26, 1996, certain alleged stockholders of the Company filed a purported class action lawsuit in the United States District Court Southern District of New York, against the Company, Ann Taylor, certain officers and directors of the Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co. (Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint alleges causes of action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, by alleging that the Company and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of the Company's common stock during the period commencing February 3, 1994 through May 4, 1995 due to alleged false and misleading statements about the Company and Ann Taylor. The complaint seeks, among other things, certification as a class action on behalf of all purchasers of common stock during the period commencing February 3, 1994 through May 4, 1995, the awarding of compensatory damages to the plaintiffs and purported members of the class, the awarding of costs, including pre-judgment and post-judgment interest, reasonable attorneys' fees and expert witness fees to the plaintiffs and purported members of the class and equitable and/or injunctive relief. The Company believes that the complaint is without merit and intends to defend the action vigorously. The Company and other defendants have filed motions to dismiss the actions. These motions are pending, and discovery in this case has been suspended pending judicial disposition of these motions. As the case is in preliminary stages, any liability that may arise from this action cannot be predicted at this time. The Company is also a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations and liquidity of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. ================================================================== 9 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder ------------------------------------------------------------- Matters ------- The Company's common stock is listed and traded on the New York Stock Exchange under the symbol ANN. The number of holders of record of common stock at March 14, 1997 was 777. The following table sets forth the high and low closing sale prices for the common stock on the New York Stock Exchange during Fiscal 1996 and Fiscal 1995. Market Price --------------------- High Low ---------- --------- Fiscal Year 1996 Fourth quarter..................... $ 21-3/8 $15-3/8 Third quarter...................... 19-7/8 12 Second quarter..................... 23-1/4 12 First quarter...................... 19-1/8 11-1/8 Fiscal Year 1995 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 In Fiscal 1996, in connection with the Sourcing Acquisition, the Company issued an aggregate of 2,348,145 shares of common stock to Cygne (including shares issued to a wholly owned subsidiary of Cygne) in partial consideration for the sourcing operations purchased from Cygne. See "Management's Discussion and Analysis -- Sourcing Acquisition". Also in Fiscal 1996, the Company awarded to J. Patrick Spainhour, Chairman and Chief Executive Officer of the Company, 75,000 shares of restricted common stock pursuant to the terms of his employment agreement with the Company, and also awarded to Patricia DeRosa, President and Chief Operating Officer of the Company, 30,000 shares of restricted common stock, pursuant to the terms of her employment agreement with the Company. The Company believes that each of the foregoing share issuances was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, in each case as a transaction by an issuer not involving a public offering. The Company has never paid dividends on the common stock and does not intend to pay dividends in the foreseeable future. As a holding company, the ability of the Company to pay dividends is dependent upon the receipt of dividends or other payments from Ann Taylor. The payment of dividends by Ann Taylor to the Company is subject to certain restrictions under Ann Taylor's Bank Credit Agreement, the indenture relating to the 8-3/4% Notes and the Receivables Facility described below under "Management's Discussion and Analysis--Liquidity and Capital Resources". The payment of cash dividends on the common stock by the Company is also subject to certain restrictions contained in the Company's guarantee of Ann Taylor's obligations under the Bank Credit Agreement. In addition, in connection with the preferred securities issued by the Company's financing vehicle, AnnTaylor Finance Trust, the payment by the Company of cash dividends on the common stock is restricted in the event of a default by the Company of its obligations in relation to the preferred securities or in the event payment of dividends on the preferred securities is deferred. Any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by the Company's Board of Directors. =================================================================== 10 ITEM 6. Selected Financial Data ----------------------- The following selected historical financial information for the periods indicated has been derived from the audited consolidated financial statements of the Company. The Company's consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995, and consolidated balance sheets as of February 1, 1997 and February 3, 1996, as audited by Deloitte & Touche llp, independent auditors, appear elsewhere in this document. 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 the Company included elsewhere in this document. All references to years are to the fiscal year of the Company, 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 Fiscal 1995, which had 53 weeks. ==================================================================== 11 Fiscal Years Ended -------------------------------------------------- Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, 1997 1996 1995 1994 1993 --------- -------- --------- -------- ------- (dollars in thousands, except per square foot data and per share data) Operating Statement Information: Net sales (a).........$ 798,117 $ 731,142 $658,804 $501,649 $468,381 Cost of sales......... 443,443 425,225 357,783 271,749 264,301 ---------- --------- ------- ------- ------- Gross profit........ 354,674 305,917 301,021 229,900 204,080 Selling, general and administrative expenses.......... 291,027 271,136 214,224 169,371 152,072 Studio shoe stores closing expense (b)......... 3,600 --- --- --- --- Employment contract separation expense (c)......... 3,500 --- --- --- --- Distribution center restructuring charge (d).......... --- --- --- 2,000 --- Amortization of goodwill (e)........ 10,086 9,506 9,506 9,508 9,504 ---------- --------- ------- ------- ------- Operating income.... 46,461 25,275 77,291 49,021 42,504 Interest expense (f)......... 24,416 20,956 14,229 17,696 21,273 Stockholder litigation settlement (g)...... --- --- --- --- 3,905 Other (income) expense, net........ 403 38 168 (194) 259 ---------- --------- ------- ------- ------- Income before income taxes and extraordinary loss................ 21,642 4,281 62,894 31,519 17,067 Income tax provision.. 12,975 5,157 30,274 17,189 11,150 ---------- --------- ------- ------- -------- Income (loss) before extraordinary loss.. 8,667 (876) 32,620 14,330 5,917 Extraordinary loss (h)............ --- --- 868 11,121 --- --------- --------- ------- ------- ------- Net income (loss)... $ 8,667 $ (876) $ 31,752 $ 3,209 $ 5,917 ========= ========= ======= ======= ======= Income (loss) per share before extraordinary loss................ $ .36 $ (.04) $ 1.40 $ .66 $ .28 Extraordinary loss per share (h)....... --- --- (.04) (.51) --- --------- -------- ------- ------- ------- Net income (loss) per share......... $ .36 $ (.04) $ 1.36 $ .15 $ .28 ========= ========= ========= ======= ======= Weighted average shares outstanding (in thousands)...... 24,104 23,209 23,286 21,929 21,196 Operating Information: Percentage increase (decrease) in comparable store sales (i)........... 1.8% (8.9)% 13.7% 2.3% (1.0)% Net sales per gross square foot (j)......$ 476 $ 518 $ 627 $ 576 $ 600 Number of stores: Open at beginning of the period...... 306 262 231 219 200 Opened during the period............. 11 48 35 13 20 Expanded during the period............. 7 30 25 12 5 Closed during the period............. 8 4 4 1 1 Open at the end of the period......... 309 306 262 231 219 Total store square footage at end of period............ 1,705,000 1,651,000 1,173,000 929,000 814,000 Capital expenditures...$ 16,107 $ 78,378 $ 61,341 $ 25,062 $ 4,303 Depreciation and amortization, including goodwill (e).........$ 36,294 $ 28,294 $ 21,293 $ 18,013 $ 16,990 Working capital turnover (k)......... 7.8x 7.8x 8.5x 12.1x 16.8x Inventory turnover (l). 4.7x 4.3x 4.6x 4.9x 5.3x Balance Sheet Information (at end of period): Working capital (m)....$ 118,850 $ 86,477 $ 102,181 $ 53,283 $ 29,539 Goodwill, net (e)...... 341,779 313,525 323,031 332,537 342,045 Total assets........... 688,139 678,709 598,254 513,399 487,592 Total debt............. 131,192 272,458 200,000 189,000 195,474 Preferred securities... 96,158 --- --- --- --- Stockholders' equity... 370,582 325,688 326,112 259,271 245,298 (Footnotes on following page) =========================================================================== 12 (Footnotes for preceding page) (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, the Company introduced a line of Ann Taylor brand shoes. As of February 1, 1993, Joan & David no longer operated leased shoe departments in any Ann Taylor stores. In Fiscal 1992, net sales included sales from leased shoe departments of $8,207,000. (b) Relates to the planned closing of the Company's nine Studio shoe stores. The charge of $3,600,000 ($2,052,000, or $0.08 per share, net of income tax benefit) is to cover the write- off of the net book value of the nine stores and lease and other related costs for these locations. (c) In connection with the resignation in August 1996 of the former Chairperson, a one-time pre-tax charge of $3,500,000 ($1,958,000, or $0.08 per share, net of related tax benefit) was recorded relating to the estimated costs of the Company's obligations under her employment contract with the Company. (d) In connection with the relocation of the Company's distribution center, completed in late Spring 1995, a charge of $2,000,000 ($1,140,000, or $0.05 per share, net of related tax benefit) was recorded relating to severance and job training costs, as well as the write-off of the net book value of certain assets. (e) As a result of the Acquisition of Ann Taylor by the Company, which was effective as of January 29, 1989, $380,250,000, representing the excess of the allocated purchase price over the fair value of the Company's net assets, was recorded as goodwill and is being amortized on a straight-line basis over 40 years. In addition, as a result of the Sourcing Acquisition, effective September 20, 1996, the Company recorded goodwill of $38,430,000 that is being amortized on a straight-line basis over 25 years. (f) Includes non-cash interest expense of $1,574,000, $1,004,000, $978,000, $4,199,000 and $8,581,000 in Fiscal 1996, 1995, 1994, 1993 and 1992, respectively, from amortization of deferred financing costs, and in 1993, and 1992, from accretion of original issue discount and, in 1992, from the issuance of additional 10% junior subordinated exchange notes due 2004. (g) In connection with the settlement in January 1993 of a stockholder class action lawsuit that was filed against the Company and certain other defendants in October 1991, a charge of $3,905,000 ($2,265,000, or $0.11 per share, net of related tax benefit) was recorded. (h) 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 the Company. In Fiscal 1993, Ann Taylor incurred an extraordinary loss of $17,244,000 ($11,121,000, or $0.51 per share, net of income tax benefit) due to debt refinancing activities. (i) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not also open during the same month of the prior period. In a year with 53 weeks, such as Fiscal 1995, sales in the last week of that year are not included in determining comparable store sales. Commencing with stores expanded in Fiscal 1993, a store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store. Excluding sales from leased shoe departments, comparable store sales would have been 4.0% and 0.8% for Fiscal 1993 and Fiscal 1992, respectively. See footnote (a) above. (j) Net sales per square foot ("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. (k) 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. (l) 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 (excluding inventory associated with ATGS). (m) Includes current portion of long-term debt of $287,000, $40,266,000, $0, $8,757,000 and $37,000,000 in Fiscal 1996, 1995, 1994, 1993 and 1992, respectively. ========================================================================== 13 ITEM 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations ------------------------- Sales Growth - ------------ The following table sets forth certain sales and store data for the periods indicated: Fiscal Year Ended ------------------------------------ Fiscal Fiscal Fiscal 1996 1995 1994 -------- --------- --------- (52 weeks) (53 weeks) (52 weeks) Net sales ($000).............. $ 798,117 $ 731,142 $ 658,804 Total net sales growth percentage (52 week basis.............. 10.6% 9.5% 31.3% Comparable store sales increase (decrease) percentage (52 week basis).. 1.8% (8.9)% 13.7% Net sales per average square foot................. $ 476 $ 518 $ 627 Total store square footage at end of period..... 1,705,000 1,651,000 1,173,000 Number of New stores.................. 11 48 35 Expanded stores............. 7 30 25 Closed stores............... 8 4 4 Total stores open at end of period............... 309 306 262 Since 1993, Ann Taylor Stores opened by the Company average 5,900 square feet, compared to the average store size prior to 1993 of 3,500 square feet. In addition, since 1993, the Company has expanded 74 stores from an average size of 3,500 square feet to an average store size of 5,900 square feet. Ann Taylor Factory Stores average 6,600 square feet, and Ann Taylor Loft stores average 10,900 square feet. This increase in average store size has had, and is expected to continue to have, a negative effect on sales per square foot. However, the Company believes that the larger store format enhances the Company's ability to merchandise its customer offerings and reinforces its total wardrobing concept, provides area necessary for the proper presentation of Ann Taylor shoes, petites and other product line extensions, and improves customer service and ease of shopping. Ann Taylor Stores to be opened in Fiscal 1997 are expected to average approximately 4,500 square feet. The Company's net sales do not show significant seasonal variation, although net sales in the fourth quarter have historically been moderately higher than in the other quarters. As a result, the Company has not had significant overhead and other costs generally associated with large seasonal variations. Results of Operations - --------------------- The following table sets forth operating statement data expressed as a percentage of net sales for the periods indicated: Fiscal Year ------------------------ 1996 1995 1994 ---- ---- ---- Net sales....................... 100.0% 100.0% 100.0% Cost of sales................... 55.6 58.2 54.3 ----- ----- ----- Gross profit................ 44.4 41.8 45.7 Selling, general and administrative expenses....... 36.5 37.0 32.5 Studio shoe stores closing expense....................... 0.4 --- --- Employment contract separation expense............ 0.4 --- --- Amortization of goodwill........ 1.3 1.3 1.5 ----- ----- ----- Operating income............ 5.8 3.5 11.7 Interest expense................ 3.1 2.9 2.2 Other expense, net.............. --- --- --- ----- ----- ----- Income before income taxes and extraordinary loss........ 2.7 0.6 9.5 Income tax provision............ 1.6 0.7 4.6 ----- ----- ----- Income (loss) before extraordinary loss............. 1.1 (0.1) 4.9 Extraordinary loss............... --- --- 0.1 ----- ----- ----- Net income (loss)............ 1.1% (0.1)% 4.8% ===== ===== ===== ===================================================================== 14 Fiscal 1996 Compared to Fiscal 1995 - ------------------------------------ The Company's net sales increased to $798,117,000 in Fiscal 1996 (53 weeks) from $731,142,000 in Fiscal 1995 (52 weeks), an increase of $66,975,000, or 9.2%. Total sales for the fifty-two week period ended February 1, 1997 were up 10.6% compared to the fifty-two week period ended January 27, 1996. This increase in net sales was attributable to the inclusion of a full year of operating results for the 48 stores opened and 30 stores expanded during 1995, the opening of 11 new stores and the expansion of 7 stores in 1996, and to a comparable sales increase of 1.8% for the fifty-two week period ended February 1, 1997. This sales increase was partially offset by the closing of 8 stores in 1996. The Company believes that the 1.8% increase in its comparable store sales in 1996 was attributable primarily to positive customer reaction to the Company's Fall 1996 merchandise offerings. Gross profit as a percentage of net sales increased to 44.4% in 1996 from 41.8% in 1995. This increase was primarily attributable to lower markdowns associated with decreased promotional activities. Selling, general and administrative expenses as a percentage of net sales decreased to 36.5% in 1996 from 37.0% in 1995. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily the result of increased leverage on fixed expenses due to improved comparable store sales. Operating income increased to $46,461,000, or 5.8% of net sales, in 1996 from $25,275,000, or 3.5% of net sales, in 1995. Operating income in 1996 was reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of the Company's obligations under the former Chairperson's employment contract following her resignation in August 1996, and by a one-time charge of $3,600,000, or 0.4% of net sales, relating to the planned closing of the nine Ann Taylor Studio shoe stores announced in January 1997. Amortization of goodwill was $10,086,000 in 1996 compared to $9,506,000 in 1995. Operating income without giving effect to such amortization was $56,547,000, or 7.1% of net sales, in 1996 and $34,781,000, or 4.8% of net sales, in 1995. Interest expense was $24,416,000 in 1996 compared to $20,956,000 in 1995. The increase in interest expense was attributable to higher interest rates associated with the issuance of 8-1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") by the Company's financing vehicle, AnnTaylor Finance Trust, partially offset by a decrease in the Company's long-term debt. The weighted average interest rate on the Company's outstanding indebtedness at February 1, 1997 was 8.80% compared to 8.26% at February 3, 1996. The income tax provision was $12,975,000, or 60.0% of income before income taxes, in the 1996 period compared to $5,157,000, or 120.5% of income before income taxes, in 1995. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. As a result of the foregoing factors, the Company had net income of $8,667,000, or 1.1% of net sales, for 1996 compared to a net loss of $876,000, or 0.1% of net sales, for 1995. Fiscal 1995 Compared to Fiscal 1994 - ----------------------------------- The Company's net sales increased to $731,142,000 in 1995 (53 weeks) from $658,804,000 in 1994 (52 weeks), an increase of $72,338,000, or 11.0%. Total sales for the fifty-two week period ended January 27, 1996 were up 9.5% to $721,561,000 compared to 1994. The increase in net sales was attributable to the inclusion of a full year of operating results for the 35 stores opened and 25 stores expanded during 1994 and the opening of 48 new stores and the expansion of 30 stores in 1995. The sales increase was partially offset by the closing of 4 stores in 1995 and by an 8.9% decrease in comparable store sales for the fifty- two week period ended January 27, 1996. The Company believes ==================================================================== 15 that the 8.9% decrease in its comparable store sales in 1995 was attributable primarily to poor customer reaction to the Company's merchandise offerings, as well as to the generally weak economic environment for women's apparel sales that prevailed throughout most of 1995. The Company believes that its 1995 merchandise offerings were "over-assorted" and failed to achieve the cohesive, distinctive look that had defined the brand in the previous two years. Gross profit as a percentage of net sales decreased to 41.8% in 1995 from 45.7% in 1994. This decrease was primarily attributable to higher markdowns associated with increased promotional activities and, to a lesser extent, to a lower initial mark up rate associated with merchandise manufactured for Ann Taylor Factory Stores and Ann Taylor Loft stores, compared to the initial mark up on merchandise manufactured for Ann Taylor Stores. Selling, general and administrative expenses as a percentage of net sales increased to 37.0% in 1995 from 32.5% in 1994. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher tenancy, store maintenance and store selling costs as a percentage of sales as a result of both decreased comparable store sales and lower than average sales per square foot productivity of stores added in 1995 (approximately 73% of the increase), higher distribution center expense relating, in part, to start-up costs of the Company's distribution center facility in Louisville, Kentucky (approximately 8% of the increase), additional catalog expense relating to the Company's test of its catalog as a mail order vehicle (approximately 7% of the increase), higher merchandising and design expense (approximately 6% of the increase) and higher packaging and supplies expense (approximately 5% of the increase). The Company returned its catalog format to principally an advertising vehicle, rather than a mail order business, in Fall 1995 and suspended publication of its catalog entirely in early 1996. Operating income decreased to $25,275,000, or 3.5% of net sales, in 1995, from $77,291,000, or 11.7% of net sales, in 1994. Amortization of goodwill was $9,506,000 in 1995 and 1994. Operating income without giving effect to such amortization was $34,781,000, or 4.8% of net sales, in 1995, and $86,797,000, or 13.2% of net sales, in 1994. Interest expense was $20,956,000 and $14,229,000 in 1995 and 1994, respectively. The increase in interest expense was attributable to higher interest rates applicable to the Company's debt obligations throughout most of the 1995 period and an increase in the Company's long-term debt. The weighted average interest rate on the Company's outstanding indebtedness at February 3, 1996 was 8.26% compared to 8.90% at January 28, 1995. The income tax provision was $5,157,000, or 120.5% of income before income taxes in the 1995 period compared to $30,274,000, or 48.1% of income before income taxes and extraordinary loss, in 1994. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. As a result of the foregoing factors, the Company had a net loss of $876,000, or 0.1% of net sales, for 1995 compared to net income of $31,752,000, or 4.8% of net sales, for 1994. Changes in Financial Position - ----------------------------- Accounts receivable decreased to $63,605,000 at the end of 1996 from $70,395,000 at the end of 1995, a decrease of $6,790,000, or 9.7%. This decrease was primarily attributable to a decrease in construction allowances receivable, which declined $3,536,000, or 51.7%, to $3,309,000 and to a decrease in Ann Taylor credit card receivables, which declined $2,900,000, or 5.1%, to $54,505,000 in 1996. ================================================================= 16 Merchandise inventories decreased to $100,237,000 at February 1, 1997 from $102,685,000 at February 3, 1996, a decrease of $2,448,000, or 2.4%. Merchandise inventories at February 1, 1997 included approximately $13,728,000 of inventory associated with ATGS, the Company's recently acquired sourcing operation (see page 18). Total square footage increased to approximately 1,705,000 square feet at February 1, 1997 from approximately 1,651,000 square feet at February 3, 1996. Merchandise inventory on a per square foot basis, excluding inventory associated with ATGS, was approximately $51 at the end of 1996, compared to approximately $62 at the end of 1995, a decrease of approximately 19%. This decrease is a reflection of more conservative inventory management as part of the Company's strategy to increase inventory turns. Inventory turned 4.7 times in 1996, excluding inventory associated with ATGS, and the Company is planning inventory turns of at least 5.0 times in 1997. Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and end of the period (excluding inventory associated with ATGS). Accounts payable decreased to $34,341,000 at the end of 1996 from $42,909,000 at the end of 1995, a decrease of $8,568,000. The decrease in accounts payable is primarily due to decreased store inventory levels at the end of 1996. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of working capital are cash flow from operations and borrowings under the Company's revolving credit facility under the Bank Credit Agreement and the Receivables Facility described below. The following sets forth material measures of the Company's liquidity: Fiscal Year ----------------------------- 1996 1995 1994 ----------------------------- (dollars in thousands) Cash provided by operating activities............ $ 67,532 $ 7,376 $ 17,149 Working capital................... $118,850 $86,477 $102,181 Current ratio..................... 2.53:1 1.77:1 2.55:1 Debt to equity ratio.............. .35:1 .84:1 .61:1 Cash provided by operating activities, as presented on the consolidated statements of cash flows, increased in 1996 principally as a result of increases in earnings, noncash charges, accounts payable and accrued liabilities, and decreases in receivables, merchandise inventories and prepaid expenses. Working capital increased as a result of a decrease in the current portion of long-term debt of approximately $40,000,000 partially offset by a decrease in merchandise inventories and receivables. The Company's Bank Credit Agreement provides, among other things, for a $25,000,000 term loan and a $125,000,000 revolving credit facility. As described below, in January 1996 the Company prepaid a portion of the term loan and reduced the revolving credit facility to $122,000,000. The principal amount of the term loan is payable on September 29, 1998, and the maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding balance under the revolving credit facility to $50,000,000 or less for thirty consecutive days in 1996 and in each fiscal year thereafter. The maximum amount that may be borrowed under the revolving credit facility is reduced by the amount of commercial and standby letters of credit outstanding under the Bank Credit Agreement. At February 1, 1997, there were no borrowings outstanding under the revolving credit facility and the amount available under the facility was approximately $110,000,000. The Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and requirements to maintain certain financial ratios and specified levels of net worth. The Company's ability to satisfy such financial covenants will be dependent upon, among other things, the Company's sales and earnings and the amount of capital expenditures made by the Company. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $32,500,000 in 1997 and beyond, subject to increase if certain conditions are satisfied. ================================================================== 17 In April and May of 1996, the Company completed the sale of an aggregate of $100,625,000 of preferred securities issued by its financing vehicle, AnnTaylor Finance Trust. The preferred securities have a liquidation preference of $50 per security and are convertible at the option of the holders thereof into shares of common stock of the Company at a conversion rate of 2.545 shares of common stock for each preferred security. A total of 2,012,500 preferred securities were issued, and are convertible into an aggregate of 5,121,812 shares of common stock, representing approximately 17% of the Company's outstanding common stock as of February 1, 1997. The Company received net proceeds of $95,984,000 in connection with the sale of the preferred securities and applied $94,000,000 to reduce outstanding borrowings under the revolving credit facility, without a permanent reduction of the commitment thereunder. In November 1995, Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution Services, Inc., received the proceeds of a $7,000,000 seven-year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $65,000 through December 1, 1997, and thereafter in monthly installments sufficient to amortize the then remaining principal balance over a period of five years. Pursuant to the requirements of the Bank Credit Agreement, in January 1996 the Company applied one-half of the proceeds of the mortgage to reduce the amount available under the revolving credit facility, thereby reducing the revolving credit facility by $3,000,000, and prepaid a portion of the term loan. Since the fourth quarter of Fiscal 1993, Ann Taylor sells its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary of Ann Taylor. AnnTaylor Funding, Inc. uses the receivables to secure borrowings of up to $40,000,000, depending upon the eligible accounts receivable balance, under a receivables financing facility (as amended, the "Receivables Facility"). The Receivables Facility matures in May 1998. AnnTaylor Funding, Inc. had total assets of approximately $55,189,000 at February 1, 1997, all of which are subject to the security interest of the lender under the Receivables Facility. At February 1, 1997, there were no borrowings outstanding under the Receivables Facility. In connection with the Sourcing Acquisition (described below), the Hongkong and Shanghai Banking Corporation ("HKSBC") entered into an Amended and Restated Credit Agreement (the "HKSBC Agreement") with ATGS, continuing the $40,000,000 credit facility of ATGS's predecessor. The facility is available principally for the issuance of letters of credit; cash borrowings under the facility are limited to a maximum of $8,000,000. Such credit facility matures on July 29, 1997 and contains financial and other covenants. As of February 1, 1997, commercial and standby letters of credit outstanding under this facility totaled $28,189,000 and there were no borrowings outstanding under this facility. If this facility is not extended beyond its current expiration, the Company believes that it has sufficient credit available under its Bank Credit Agreement to continue to obtain letters of credit in the normal course of business. The Company's capital expenditures totaled $16,107,000, $78,378,000, and $61,341,000 in 1996, 1995 and 1994, respectively. The decrease in capital expenditures in 1996 is due primarily to the construction of fewer new and expanded stores compared to the prior year. The Company slowed its real estate expansion program in 1996 to enable it to more effectively consolidate the growth that had occurred during recent years. The Company expects its capital expenditure requirements will be approximately $27,000,000 in 1997, of which $23,000,000 will be allocated to the Company's real estate expansion program. The actual amount of the Company's capital expenditures will depend in part on the number of stores opened, expanded and refurbished and on the amount of construction allowances the Company receives from the landlords of its new or expanded stores. See "Business- - -Expansion". Dividends and distributions from Ann Taylor to the Company are restricted by the Bank Credit Agreement, the Receivables Facility and the Indenture for Ann Taylor's 8-3/4% Notes. ==================================================================== 18 In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under the Bank Credit Agreement and the HKSBC Agreement, as well as the Receivables Facility. The Company typically purchases merchandise from its third-party vendors (excluding manufacturers from whom ATGS purchases merchandise) on terms requiring payment within 30 days or less after the Company's receipt of the merchandise. If some or all of the Company's third-party vendors were to demand shorter payment terms, the Company's working capital needs would increase. The Company believes that cash flow from operations and funds available under the Bank Credit Agreement, the Receivables Facility and the HKSBC Agreement are sufficient to enable it to meet its on-going cash needs for its business, as presently conducted, for the foreseeable future. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 specifies the computation, presentation and disclosure requirements for basic and diluted earnings per share. The Company expects that this statement will have no material effect on the Company's reported earnings per share. Sourcing Acquisition - -------------------- In Fiscal 1995, the Company purchased approximately 16% of its merchandise directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its merchandise through the Company's direct sourcing joint venture with Cygne known as CAT. On September 20, 1996 (the "Effective Date"), Ann Taylor acquired the entire interest of Cygne in CAT and certain of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the "Division") that were used for sourcing merchandise for Ann Taylor. As a result of the Sourcing Acquisition, CAT became an indirect wholly owned subsidiary of the Company and now performs all of Ann Taylor's direct sourcing functions, including those previously provided by the Division, under the name AnnTaylor Global Sourcing. The results of operations of ATGS are included in the consolidated financial statements of the Company since the Effective Date. The Company believes that the Sourcing Acquisition provides Ann Taylor with greater control over pre-production processes and production management, which it expects will result in a variety of operational benefits, such as greater consistency in merchandise quality and sizing. The Company also believes that it will recognize a net reduction in the cost of merchandise purchased through the sourcing division (after taking into account the cost of operating ATGS). In consideration for Cygne's interest in CAT and the Assets, the Company paid (i) 2,348,145 shares of common stock of the Company having an aggregate value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash in payment for inventory and fixed assets and (iii) approximately $6,500,000 in cash in settlement of open accounts payable by Ann Taylor to Cygne for merchandise delivered by Cygne prior to the closing. The Company also assumed certain liabilities related to the operations of the Division. The purchase price is subject to post-closing adjustments based upon final determination of the value of certain of the assets purchased and liabilities assumed. As of February 1, 1997, certain post-closing adjustments are expected to reduce the net cash paid for inventory and fixed assets to approximately $227,000. The total purchase price has been allocated to the tangible and intangible assets and liabilities of CAT and the Division that were acquired, based on preliminary estimates of their respective fair values. The allocation of the purchase price reflected in the accompanying Consolidated Balance Sheets may be adjusted upon final determination of the purchase price adjustments, but management does not believe the subsequent changes, if any, will be significant. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 25 years. Pursuant to the terms of a Stockholders Agreement entered into at the time of the Sourcing Acquisition, the Company registered the sale of the shares of Common Stock issued to Cygne as part of the consideration for the acquisition. Cygne subsequently sold, pursuant to this registration statement, all of the shares of Common Stock issued to it by the Company. ==================================================================== 19 In connection with the Sourcing Acquisition, Ann Taylor entered into two three-year consulting agreements with Cygne for the services of Mr. Bernard Manuel, Chairman and Chief Executive Officer of Cygne, and Mr. Irving Benson, then President of Cygne. In November 1996, Mr. Benson resigned from his employment with Cygne and, in accordance with the terms of the consulting agreement relating to Mr. Benson's services, Cygne's obligations and rights under the consulting agreement were automatically assigned to Mr. Benson. Statement Regarding Forward Looking Disclosures - ----------------------------------------------- Sections of this Annual Report, including the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations, contain various forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company. These forward looking statements involve certain risks and uncertainties, and no assurance can be given that any of such matters will be realized. Actual results may differ materially from those contemplated by such forward looking statements as a result of, among other things, increased competition in the retail apparel industry; failure by the Company to accurately predict customer fashion preferences; a decline in the demand for merchandise offered by the Company; greater costs or difficulties than expected related to the assimilation of the sourcing functions and employees acquired in connection with the Sourcing Acquisition; general economic conditions that are less favorable than expected; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; a significant change in the regulatory environment applicable to the Company's business; an increase in the rate of import duties or export quotas with respect to the Company's merchandise; an adverse outcome of certain litigation described in "Legal Proceedings" that materially and adversely affects the Company's financial condition; or lack of sufficient customer acceptance of the Ann Taylor Loft concept in the moderate-priced women's apparel market. =================================================================== 20 ITEM 8. Financial Statements and Supplementary Data ------------------------------------------- The following consolidated financial statements of the Company for the years ended February 1, 1997, February 3, 1996 and January 28, 1995 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995. Consolidated Balance Sheets as of February 1, 1997 and February 3, 1996. Consolidated Statements of Stockholders' Equity for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995. Consolidated Statements of Cash Flows for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995. Notes to Consolidated Financial Statements. ITEM 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosures ------------------------- None. ========================================================================= 21 PART III ITEM 10. Directors and Executive Officers of the Registrant --------------------------------------------------- The information required by this item is incorporated herein by reference to the Section entitled "Nominees for Election as Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders. ITEM 11. Executive Compensation ---------------------- The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors", "Executive Compensation" and "Employment Contracts" in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders. ITEM 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required by this item is incorporated herein by reference to the Section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders. ITEM 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors and Related Matters" and "Compensation Committee Report on Executive Compensation--Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders. In connection with the Sourcing Acquisition, the Company issued to Cygne an aggregate of 2,348,145 shares of Common Stock. See "Management's Discussion and Analysis -- Sourcing Acquisition". =================================================================== 22 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------------------------------- (a) List of documents filed as part of this Annual Report: The following consolidated financial statements of the Company and the independent auditors' report are included on pages 27 through 46 and are filed as part of this Annual Report: Consolidated Statements of Operations for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995; Consolidated Balance Sheets as of February 1, 1997, and February 3, 1996; Consolidated Statements of Stockholders' Equity for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995; Consolidated Statements of Cash Flows for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995; Notes to Consolidated Financial Statements; Independent Auditors' Report. (b) Reports on Form 8-K None (c) Exhibits The exhibits listed below are filed as a part of this Annual Report. Exhibit Number -------------- 3.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission (the "Commission") on August 10, 1992 (Registration No. 33- 50688). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to the Form 10-Q of the Company for the Quarter ended November 2, 1991 filed on December 17, 1991 (Registration No. 33-28522). 4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993. 4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. Incorporated by reference to Exhibit 4.1.1 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.1 Form of Warrant Agreement entered into between AnnTaylor and The Connecticut Bank and Trust Company, National Association, including the form of Warrant. Incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33- 28522). 10.2 Amended and Restated Credit Agreement, dated as of September 29, 1995, among Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), and Fleet Bank, National Association, as Co- Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.2.1 First Amendment to Amended and Restated Credit Agreement, dated as of January 4, 1996, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.2.2 Second Amendment to the Amended and Restated Credit Agreement, dated as of April 9, 1996 among Ann Taylor, Bank of America and Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities Inc. as Arranger, and Bank of America as Agent. Incorporated by reference to Exhibit 10.1 on Form 10-Q of the Company for the Quarter ended August 3, 1996 filed on September 16, 1996. ==================================================================== 23 Exhibit Number - ------- 10.3 Amended and Restated Guaranty, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.4 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.5 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.6 Trademark Security Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.7 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.7.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1993. 10.8 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.8.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.8.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company filed on April 29, 1993. 10.8.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.8.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.8.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.9 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of the Company and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.10 Employment Agreement dated as of February 1, 1994 between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended October 29, 1994 filed on December 9, 1994. 10.11 Employment Agreement dated February 16, 1996 between the Company and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.11.1Amendment to the Employment Agreement, dated August 23, 1996, between the Company and J. Patrick Spainhour. 10.12 Employment Agreement dated November 25, 1996 between the Company and Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form 10-Q of AnnTaylor for the Quarter ended November 2, 1996 filed on December 17, 1996. ==================================================================== 24 Exhibit Number - ------- 10.13 Employment Agreement dated September 20, 1996 between Ann Taylor and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.14 Separation Agreement dated January 24, 1997 between Ann Taylor and Paul E. Francis. 10.15 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994 (the "1992 Option Plan"). 10.16 Amended and Restated Management Performance Compensation Plan as approved by stockholders on June 1, 1994. Incorporated by reference to Exhibit 10.22.1 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.16.1 Amendment to the AnnTaylor Stores Corporation Management Performance Compensation Plan dated as of February 24, 1995. Incorporated by reference to Exhibit 10.22.2 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.17 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of the Company for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.18 Interest Rate Swap Agreement dated as of July 22, 1993, between Ann Taylor and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.19 Stock Purchase Agreement, dated as of July 13, 1993, between Ann Taylor and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.20 Amended and Restated Receivables Financing Agreement dated October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.31.4 to the Form 10-Q of the Company for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.20.1 First Amendment to the Amended and Restated Receivables Financing Agreement, dated as of October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.5 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.21 Purchase and Sale Agreement dated as of January 27, 1994 between Ann Taylor and AnnTaylor Funding, Inc. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of the Company filed on March 31, 1994. 10.22 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.22.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the Company for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.23 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.24 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. =================================================================== 25 Exhibit Number - ------- 10.25 Amended and Restated Credit Agreement, dated as of September 20, 1996, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.25.1 Promissory Note dated September 20, 1996 from AnnTaylor Global Sourcing, Inc. to the Hongkong and Shanghai Banking Corporation Limited, New York Branch. Incorporated by reference to Exhibit 10.7 to Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.25.2 Amended and Restated Security Agreement, dated as of September 20, 1996, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.25.3 Letter of Negative Pledge, dated as of September 20, 1996 from AnnTaylor Global Sourcing, Inc. to the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.9 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.26 Stock and Asset Purchase Agreement, dated as of June 7, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 2 to the Registrants' Current Report on Form 8-K filed on June 10, 1996. 10.26.1 Amendment to Stock and Asset Purchase Agreement, dated as of August 27, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 3 to the Registrants' Current Report on Form 8-K filed on August 30, 1996. 10.26.2 Stockholders Agreement, dated as of September 20, 1996, among the Company, Cygne and Cygne Group (F.E.) Limited, a Hong Kong corporation and wholly owned subsidiary of Cygne. 10.26.3 Consulting Agreement, dated as of September 20, 1996, by and between the Company, Cygne and Mr. Bernard M. Manuel. 10.26.4 Consulting Agreement, dated as of September 20, 1996, by and between the Company, Cygne and Mr. Irving Benson. 10.27 Certificate of Trust of AnnTaylor Finance Trust. Incorporated by reference to Exhibit 4.1 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996 (Registration 333- 06605). 10.27.1 Amended and Restated Declaration of Trust of AnnTaylor Finance Trust, dated as of April 25, 1996 among the Company, as Sponsor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee and J. Patrick Spainhour, Paul E. Francis and Walter J. Parks, as Trustees. Incorporated by reference to Exhibit 4.2 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996 (Registration 333-06605). 10.27.2 Indenture, dated as of April 15, 1996, among AnnTaylor Stores Corporation and The Bank of New York, as Trustee, including form of Preferred Securities and form of Convertible Subordinated Debentures due 2016. Incorporated by reference to Exhibit 4.3 to the Registration Statement of the Company and AnnTaylor Finance Trust filed on June 21, 1996. (Registration No. 333-06605). 10.27.3 Amendment No. 1 to the Amended and Restated Declaration of Trust of AnnTaylor Finance Trust, dated as of August 27, 1996, between the Company and Bank of New York, as Trustee. Incorporated by reference to Exhibit 10.2 to Form 10-Q of Ann Taylor for the Quarter ended August 3, 1996 filed on September 16, 1996. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. =================================================================== 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANNTAYLOR STORES CORPORATION By: /s/ J. Patrick Spainhour ------------------------ J. Patrick Spainhour Chairman and Chief Executive Officer Date: May 1, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ J. Patrick Spainhour Chairman and Chief May 1, 1997 - ------------------------ Executive Officer ---------------- J. Patrick Spainhour and Director /s/ Patricia DeRosa President and Chief May 1, 1997 - ------------------------ Operating Officer ----------------- Patricia DeRosa and Director /s/ Walter J. Parks Senior Vice President- May 1, 1997 - ------------------------ Chief Financial ------------------ Walter J. Parks Officer /s/ James M. Smith Vice President and May 1, 1997 ________________________ Controller, Principal ----------------- James M. Smith Accounting Officer /s/ Gerald S. Armstrong Director May 1, 1997 - ------------------------- ------------------- Gerald S. Armstrong /s/ James J. Burke, Jr. Director May 1, 1997 - ------------------------- --------------------- James J. Burke, Jr. /s/ Robert C. Grayson Director May 1, 1997 - ------------------------- ---------------------- Robert C. Grayson /s/ Rochelle B. Lazarus Director May 1, 1997 - ------------------------- ------------------------ Rochelle B. Lazarus /s/ Hanne M. Merriman Director May 1, 1997 - ------------------------- ------------------------- Hanne M. Merriman ======================================================================= 27 ANNTAYLOR STORES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. -------- Independent Auditors' Report...................................... 28 Consolidated Financial Statements: Consolidated Statements of Operations for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995............................................ 29 Consolidated Balance Sheets as of February 1, 1997 and February 3, 1996............................................ 30 Consolidated Statements of Stockholders' Equity for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995........................................ 31 Consolidated Statements of Cash Flows for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995............................................ 32 Notes to Consolidated Financial Statements.................... 33 ========================================================================== 28 INDEPENDENT AUDITORS' REPORT To the Stockholders of ANNTAYLOR STORES CORPORATION: We have audited the accompanying consolidated financial statements of AnnTaylor Stores Corporation and its subsidiaries, listed in the accompanying index. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York March 6, 1997 =================================================================== 20 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28, 1995 Fiscal Years Ended -------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ------------ ----------- ----------- (in thousands, except per share amounts) Net sales................................ $798,117 $731,142 $658,804 Cost of sales............................ 443,443 425,225 357,783 ------- ------- ------- Gross profit 354,674 305,917 301,021 Selling, general and administrative expenses............... 291,027 271,136 214,224 Studio shoe stores closing expense....... 3,600 --- --- Employment contract separation expense... 3,500 --- --- Amortization of goodwill................. 10,086 9,506 9,506 ------- ------- ------- Operating income......................... 46,461 25,275 77,291 Interest expense......................... 24,416 20,956 14,229 Other expense, net....................... 403 38 168 ------- ------- ------- Income before income taxes and extraordinary loss.................... 21,642 4,281 62,894 Income tax provision..................... 12,975 5,157 30,274 ------- ------- ------- Income (loss) before extraordinary loss.. 8,667 (876) 32,620 Extraordinary loss (net of income tax benefit of $654,000)............... --- --- 868 ------- ------- ------- Net income (loss)..................... $ 8,667 $ (876) $ 31,752 ======= ======= ======= Net income (loss) per share of common stock: Income (loss) per share before extraordinary loss.................... $ .36 $ (.04) $ 1.40 Extraordinary loss per share............. --- --- (.04) ------- ------- ------- Net income (loss) per share........... $ .36 $ (.04) $ 1.36 ======= ======= ======= See accompanying notes to consolidated financial statements. ============================================================================= 30 ANNTAYLOR STORES CORPORATION CONSOLIDATED BALANCE SHEETS February 1, 1997 and February 3, 1996 February 1, February 3, 1997 1996 ----------- ----------- (in thousands, except per share amounts) ASSETS Current assets Cash $ 7,025 $ 1,283 Accounts receivable, net 63,605 70,395 Merchandise inventories 100,237 102,685 Prepaid expenses and other current assets 25,653 24,307 ------- ------- Total current assets 196,520 198,670 Property and equipment Land and building 8,930 8,923 Leasehold improvements 76,576 73,677 Furniture and fixtures 120,268 99,548 Construction in progress 3,307 14,190 ------- ------- 209,081 196,338 Less accumulated depreciation and amortization 65,648 42,443 ------- ------- Net property and equipment 143,433 153,895 Goodwill, net 341,779 313,525 Deferred financing costs, net 2,743 3,933 Other assets 3,664 8,686 ------- ------- Total assets $688,139 $678,709 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 34,341 $42,909 Accrued tenancy 6,827 5,675 Gift certificates redeemable 4,903 4,269 Accrued expenses 31,312 19,074 Current portion of long-term debt 287 40,266 ------- ------- Total current liabilities 77,670 112,193 Long-term debt 130,905 232,192 Deferred income taxes 4,872 1,300 Other liabilities 7,952 7,336 Commitments and contingencies Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary, AnnTaylor Finance Trust, Holding Solely Convertible Debentures 96,158 --- Stockholders' equity Common stock, $.0068 par value; 40,000,000 shares authorized; 25,598,489 and 23,127,743 shares issued, respectively 174 157 Additional paid-in capital 349,545 311,284 Warrants to acquire 2,814 and 36,605 shares of common stock, respectively 46 596 Retained earnings 22,613 14,120 Deferred compensation on restricted stock (1,590) (33) ------- ------- 370,788 326,124 Treasury stock, 11,601 and 44,983 shares, respectively, at cost (206) (436) ------- ------- Total stockholders' equity 370,582 325,688 ------- ------- Total liabilities and stockholders' equity $688,139 $678,709 ======= ======= See accompanying notes to consolidated financial statements. ====================================================================== 31 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28, 1995 (in thousands) Retained Addi- Earnings Treasury Common Stock tional Warrants Accum- Restric- Stock -------------- Paid-in _____________ ulated ted Stock_____________ Shares Amount Capital Shares Amount Deficit) Awards Shares Amount ------ ------ ------- ------ ------ -------- ------ ------ ------ Balance at January 29, 1994 21,903 $ 149 $271,810 446 $7,378 $(16,756) $(119) 451 $(3,191) Net income --- --- --- --- --- 31,752 --- --- --- Exercise of stock options and related tax benefit 191 2 4,480 --- --- --- --- 3 (118) Exercise of warrants --- --- 3,675 (388)(6,427) --- --- (388) 2,752 Issuance of common stock 1,000 6 30,414 --- --- --- --- --- --- Activity related to common stock issued as employee incentives 13 --- 335 --- --- --- (30) --- --- ------ --- ------ ---- ----- ------ --- --- ----- Balance at January 28, 1995 23,107 157 310,714 58 951 14,996 (149) 66 (557) Net loss --- --- --- --- --- (876) --- --- --- Exercise of stock options and related tax benefit 23 --- 405 --- --- --- --- --- (12) Exercise of warrants --- --- 203 (21) (355) --- --- (22) 152 Activity related to common stock issued as employee incentives (2) --- (38) --- --- --- 116 1 (19) ------ --- ------ ---- ----- ------ --- --- ---- Balance at February 3, 1996 23,128 157 311,284 37 596 14,120 (33) 45 (436) Net income --- --- --- --- --- 8,667 --- --- --- Exercise of stock options and related tax benefit 18 --- 216 --- --- --- --- --- --- Exercise of warrants --- --- 314 (34) (550) --- --- (34) 236 Issuance of stock for Sourcing Acquisition 2,348 16 35,984 --- --- --- --- --- --- Amortization of discount on preferred securities --- --- --- --- --- (174) --- --- --- Activity related to common stock issued as employee incentives 104 1 1,747 --- --- --- (1,557) 1 (6) ------ --- ------ ---- ----- ------ ------ -- ---- Balance at February 1, 1997 25,598 $ 174 $349,545 3 $46 $22,613 $(1,590) 12 $(206) ====== === ======= ==== ===== ====== ====== == ==== See accompanying notes to consolidated financial statements. ================================================================================ 32 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28, 1995 Fiscal Years Ended ---------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ---------- ---------- (in thousands) Operating activities: Net income (loss)......................... $ 8,667 $ (876) $ 31,752 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss.................... --- --- 1,522 Equity earnings in CAT................ (1,402) (1,646) (1,547) Provision for loss on accounts receivable................. 1,803 1,280 1,727 Depreciation and amortization......... 26,208 18,788 11,787 Amortization of goodwill.............. 10,086 9,506 9,506 Amortization of deferred compensation........................ 191 68 298 Non-cash interest..................... 1,574 1,004 978 Deferred income taxes................. (985) 3,150 --- Loss on disposal of property and equipment....................... 3,209 1,143 1,268 Change in assets and liabilities net of effects from purchase of AnnTaylor Global Sourcing: Decrease (increase) in receivables............... 4,987 (10,464) (13,659) Decrease (increase) in merchandise inventories...... 9,342 (8,980) (32,815) Decrease (increase) in prepaid expenses and other current assets.......... 247 (12,951) (772) Decrease in other non-current assets and liabilities, net... 738 429 567 Increase in accounts payable and accrued liabilities......... 2,867 6,925 6,537 ------- ------- ------- Net cash provided by operating activities.............................. 67,532 7,376 17,149 ------- ------- ------- Investing activities: Purchases of property and equipment... (16,107) (78,378) (61,341) Purchase of AnnTaylor Global Sourcing..... (227) --- --- ------- ------- ------- Net cash used by investing activities..... (16,334) (78,378) (61,341) ------- ------- ------- Financing activities: Borrowings (repayments) under revolving credit facility............... (101,000) 37,000 64,000 Payments of long-term debt................ --- --- (56,000) Net proceeds from issuance of preferred securities................. 95,984 --- --- Net proceeds from issuance of common stock......................... --- --- 30,420 Proceeds from term loan................... --- 24,500 --- Proceeds from (payments of) mortgage...... (266) 6,958 --- Borrowings (repayments) under receivables facility................... (40,000) 4,000 3,000 Proceeds from exercise of stock options... 210 384 4,371 Payment of financing costs................ (384) (2,108) (340) ------- ------- ------- Net cash provided by (used by) financing activities.................... (45,456) 70,734 45,451 ------- ------- ------- Net increase (decrease) in cash............. 5,742 (268) 1,259 Cash, beginning of year..................... 1,283 1,551 292 ------- ------- ------- Cash, end of year........................... $ 7,025 $ 1,283 $ 1,551 ======= ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest............................ $ 22,689 $ 19,607 $ 13,211 ======= ======= ======= Cash paid during the year for income taxes........................ $ 8,990 $ 6,886 $ 26,242 ======= ======= ======= See accompanying notes to consolidated financial statements. ============================================================================= 33 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ Ann Taylor is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold principally under the Ann Taylor brand name. Basis of Presentation - --------------------- The consolidated financial statements include the accounts of AnnTaylor Stores Corporation (the "Company") and AnnTaylor, Inc. ("Ann Taylor"). The Company has no material assets other than the common stock of Ann Taylor and the common securities of AnnTaylor Finance Trust and conducts no business other than the management of Ann Taylor. All intercompany accounts have been eliminated in consolidation. Certain Fiscal 1995 and 1994 amounts have been reclassified to conform to the Fiscal 1996 presentation. Fiscal Year - ----------- The Company follows the standard fiscal year of the retail industry, which is a 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year. The fiscal year ended February 3, 1996 included 53 weeks. The other fiscal years presented included 52 weeks. Finance Service Charge Income - ----------------------------- Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $9,024,000 for Fiscal 1996, $8,328,000 for Fiscal 1995 and $6,871,000 for Fiscal 1994. Merchandise Inventories - ----------------------- Merchandise inventories are accounted for by the retail inventory method and are stated at the lower of cost (first-in, first-out method) or market. The majority of the Company's inventory represents finished goods available for sale. Property and Equipment - ---------------------- Property and equipment are recorded at cost. The Company capitalized interest costs of approximately $1,300,000 in Fiscal 1995. Depreciation and amortization are computed on a straight- line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter. Pre-Opening Expenses - -------------------- Pre-opening store expenses are charged to selling, general and administrative expenses in the period incurred. ==================================================================== 34 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies (Continued) ------------------------------------------------------- Deferred Financing Costs - ------------------------ Deferred financing costs are being amortized using the interest method over the term of the related debt. Accumulated amortization at February 1, 1997 and February 3, 1996 was $3,534,000 and $1,960,000, respectively. Goodwill - -------- Goodwill relating to the 1989 acquisition of Ann Taylor by the Company is being amortized on a straight-line basis over 40 years. Goodwill relating to the 1996 Sourcing Acquisition (see Note 13) is being amortized on a straight-line basis over 25 years. Accumulated amortization at February 1, 1997 and February 3, 1996 was $76,811,000 and $66,725,000, respectively. On an annual basis, the Company compares the carrying value of its goodwill to an estimate of the Company's fair value to evaluate the reasonableness of the carrying value and remaining amortization period. Fair value is computed using projections of future cash flows. Income Taxes - ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized, and income or expense is recorded, for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. Impairment of Long-Lived Assets - -------------------------------- The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), in Fiscal 1996. The implementation of SFAS 121 did not have a material adverse effect on the consolidated financial statements of the Company. ================================================================== 35 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Long-Term Debt -------------- The following summarizes long-term debt outstanding at February 1, 1997 and February 3, 1996: February 1, 1997 February 3, 1996 ------------------- -------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (in thousands) Senior Debt: Revolving credit facility..... $ --- $ --- $101,000 $101,000 Term loan..................... 24,500 24,500 24,500 24,500 Mortgage...................... 6,692 6,692 6,958 6,958 8-3/4% Notes................... 100,000 97,750 100,000 83,125 Interest rate swap agreement... --- --- --- 384 Receivables facility........... --- --- 40,000 40,000 ------- ------- ------- ------- Total debt............ 131,192 128,942 272,458 255,967 Less current portion........... 287 287 40,266 40,266 ------- ------- ------- ------- Total long-term debt.. $130,905 $128,655 $232,192 $215,701 ======= ======= ======= ======= In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the Company determined the estimated fair value of its financial instruments using quoted market information, as available. As judgment is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The Company's Bank Credit Agreement provides, among other things, for a $25,000,000 term loan and a $125,000,000 revolving credit facility. As described below, in January 1996, the Company prepaid a portion of the term loan and reduced the revolving credit facility to $122,000,000. The principal amount of the term loan is payable on September 29, 1998, and the maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding loan balance under the revolving credit facility to $50,000,000 or less for thirty consecutive days during Fiscal 1996 and in each fiscal year thereafter. The maximum amount that may be borrowed under the revolving credit facility is reduced by the amount of commercial and standby letters of credit outstanding under the Bank Credit Agreement. At February 1, 1997 the amount available under the revolving credit facility was $110,000,000. The term loan bears interest at a rate equal to, at the Company's option, the Bank of America National Trust and Savings Association ("Bank of America") (1) Base Rate plus 2.50%, or (2) Eurodollar Rate plus 3.50%, and amounts outstanding under the revolving credit facility bear interest at a rate equal to, at the Company's option, the Bank of America (1) Base Rate, or (2) Eurodollar Rate plus 1.00%. In addition, Ann Taylor is required to pay the lenders a quarterly commitment fee of 0.375% per annum of the unused revolving loan commitment. At February 1, 1997, the interest rate on the $24,500,000 outstanding under the term loan was 8.938% per annum. Under the terms of the Bank Credit Agreement, Bank of America obtained a pledge of Ann Taylor's outstanding common stock held by the Company and a security interest in certain assets of Ann Taylor, excluding inventory and accounts receivable. In addition, the Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and maintaining certain financial ratios and specified levels of net worth. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $25,000,000 in Fiscal 1996 and $32,500,000 in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied. =================================================================== 36 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Long-Term Debt (Continued) -------------------------- Since the fourth quarter of Fiscal 1993, Ann Taylor sells its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary of Ann Taylor, that uses the receivables to secure borrowings of up to $40,000,000, based on its eligible accounts receivable, under a receivables financing facility (the "Receivables Facility"). The Receivables Facility matures in May 1998. As of February 1, 1997, there were no borrowings outstanding under the Receivables Facility. AnnTaylor Funding, Inc. had total assets of approximately $55,189,000 at February 1, 1997, all of which are subject to the security interest of the lender under the Receivables Facility. On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8-3/4% Subordinated Notes due 2000 ("8-3/4% Notes"). The outstanding principal amount of these notes as of February 1, 1997 was $100,000,000. In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement, which had the effect of converting the Company's interest obligations on the 8-3/4% Notes to a variable rate. Under the agreement, the Company received a fixed rate of 4.75% and paid a floating rate based on LIBOR, as determined in six month intervals. The swap agreement matured in July 1996. Net receipts or payments under the agreement were recognized as adjustments to interest expense. In November 1995, Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. received the proceeds of a $7,000,000 seven-year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $65,000 through December 1, 1997, and thereafter in monthly installments sufficient to amortize the then remaining principal balance over a period of five years. Pursuant to the requirements of the Bank Credit Agreement, in January 1996, the Company applied one-half of the proceeds of the mortgage to reduce the amount available under the revolving credit facility, thereby reducing the revolving credit facility by $3,000,000, and prepaid a portion of the term loan. The aggregate principal payments of all long-term obligations are as follows: Fiscal Year (in thousands) ---------- 1997.................................. $ 287 1998.................................. 25,748 1999.................................. 1,206 2000.................................. 101,300 2001.................................. 1,401 2002 and thereafter................... 1,250 ------- Total............................... $131,192 ======= At February 1, 1997 and February 3, 1996, Ann Taylor had outstanding commercial and standby letters of credit under the Bank Credit Agreement of $12,116,000 and $7,850,000, respectively. In connection with the Sourcing Acquisition discussed in Note 13, the Hongkong and Shanghai Banking Corporation entered into an Amended and Restated Credit Agreement with AnnTaylor Global Sourcing, Inc. ("ATGS", formerly known as CAT US Inc. ("CAT") and now a wholly owned subsidiary of Ann Taylor), continuing the $40,000,000 credit facility of ATGS's predecessor. The facility is available principally for the issuance of letters of credit; cash borrowings under the facility are limited to a maximum of $8,000,000. Such credit facility matures on July 29, 1997 and contains financial and other covenants. As of February 1, 1997, commercial and standby letters of credit outstanding under this facility totaled $28,189,000 and there were no borrowings outstanding under this facility. =================================================================== 37 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Preferred Securities --------------------- In April and May of Fiscal 1996, the Company completed the sale of an aggregate of $100,625,000 of 8-1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") issued by its financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). The preferred securities have a liquidation preference of $50 per security ($100,625,000 in the aggregate) and are convertible at the option of the holders thereof into the Company's common stock at a conversion rate of 2.545 shares of common stock for each preferred security (equivalent to $19.65 per share of common stock, which represented a 20% premium to the $16.375 closing price of the common stock on the New York Stock Exchange at the date of the execution of the purchase agreement relating to the sale of the preferred securities). The sole assets of the Trust are $103,700,000 of 8-1/2% Convertible Subordinated Debentures of the Company maturing on April 15, 2016. A total of 2,012,500 preferred securities were issued, and are convertible into an aggregate of 5,121,812 shares of common stock. The Company received net proceeds of $95,984,000 in connection with the sale of the preferred securities, of which $94,000,000 was applied to reduce outstanding borrowings under Ann Taylor's revolving credit facility, without a permanent reduction of the commitment thereunder. The carrying value and estimated fair value of the preferred securities at February 1, 1997 were $96,158,000 and $107,669,000, respectively. 4. Allowance for Doubtful Accounts ------------------------------- A summary of activity in the allowance for doubtful accounts for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 is as follows: Fiscal Years Ended ----------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Balance at beginning of year......... $ 736 $ 931 $ 787 Provision for loss on accounts receivable............... 1,803 1,280 1,727 Accounts written off................. (1,728) (1,475) (1,583) ------ ------ ------ Balance at end of year............... $ 811 $ 736 $ 931 ====== ====== ====== 5. Commitments and Contingencies ----------------------------- Rental Commitments - ------------------ Ann Taylor occupies its retail stores and administrative facilities under operating leases, most of which are non- cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a certain threshold. In addition, most of the leases require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. ================================================================= 38 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Commitments and Contingencies (Continued) ----------------------------------------- Future minimum lease payments under non-cancelable operating leases at February 1, 1997 are as follows: Fiscal Year (in thousands) ------------ 1997................................ $ 60,021 1998................................ 59,242 1999................................ 56,288 2000................................ 54,164 2001................................ 51,306 2002 and thereafter................. 242,431 ------- Total $523,452 ======= Rent expense for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 was as follows: Fiscal Years Ended ---------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Minimum rent............... $55,571 $47,132 $35,382 Percentage rent............ 2,433 3,090 4,684 ------ ------ ------ Total................. $58,004 $50,222 $40,066 ====== ====== ======= Litigation - ---------- The Company has been named as a defendant in several legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. In addition, the Company, Ann Taylor, certain officers and directors of the Company and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a purported class action lawsuit filed by certain alleged stockholders alleging that the Company and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of the Company's common stock. The Company believes that the complaint is without merit and intends to defend the action vigorously. The Company and other defendants have filed motions to dismiss the action. These motions are pending, and discovery in this case has been suspended pending judicial disposition of these motions. As the case is in preliminary stages, any liability that may arise from this action cannot be predicted at this time. Other - ----- The Company is currently under tax examination by the Internal Revenue Service (the "IRS"). Such examination is not yet complete and no assertions or claims have yet been made by the IRS. Management believes that the effect of any claims which may arise as a result of the IRS audit will not have a materially adverse effect on the consolidated financial condition, operating results or liquidity of the Company. However, there can be no assurance that certain claims will not be made or that the effect of such claims will not be significant. ======================================================================= 39 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Net Income per Share --------------------- Net income per share is calculated by dividing net income by the total of the weighted average number of common shares and common share equivalents outstanding during the period, assuming the exercise of the warrants and the dilutive effect of the stock options, computed in accordance with the treasury stock method. Fully diluted income per share, assuming the conversion into common stock of the preferred securities, is not presented for the year ended February 1, 1997 due to the antidilutive effect of the assumed conversion. The number of shares used in the calculation for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 was as follows: Fiscal Years Ended ------------------------------------ February 1, February 3, January 28, 1996 1995 1994 ------------ ------------ ----------- (in thousands) Common shares............ 23,981 23,067 22,687 Warrants................. 22 44 90 Stock options............ 101 98 509 ------ ------ ------ 24,104 23,209 23,286 ====== ====== ====== The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 specifies the computation, presentation and disclosure requirements for basic and diluted earnings per share. The Company expects that this statement will have no material effect on earnings per share. 7. Common Stock Warrants --------------------- At February 1, 1997, the Company had outstanding warrants to acquire, in the aggregate, 2,814 shares of the common stock of the Company (the "Warrants"). The Warrants, when exercised, entitle the holders thereof to acquire such shares, subject to adjustment, at no additional cost. The Warrants expire on July 15, 1999 and became exercisable as a result of the initial public offering of the Company's common stock in May 1991. 8. Preferred Stock ---------------- At February 1, 1997, February 3, 1996 and January 28, 1995, there were 2,000,000 shares of preferred stock, par value $.01, authorized and unissued. 9. Stock Options Plans ------------------- In 1989 and 1992, the Company established stock option plans. 137,969 shares of common stock are reserved for issuance under the 1989 plan and 1,456,600 shares of common stock are reserved for issuance under the 1992 plan. Under the terms of both plans, the exercise price of any option may not be less than 100% of the fair market value of the common stock on the date of grant. Stock options granted prior to 1994 generally vest over a five year period, with 20% becoming exercisable immediately upon grant of the option and 20% per year for the next four years. Stock options granted since 1994 generally vest either (i) over a four year period, with 25% becoming exercisable on each of the first four anniversaries of the grant, or (ii) in nine years with accelerated vesting upon the achievement of specified earnings or stock price targets within a five year period. All stock options granted under the 1989 plan and the 1992 plan expire ten years from the date of grant. At February 1, 1997, there were 20,327 shares under the 1989 plan and 110,157 shares under the 1992 plan available for future grant. In addition, in Fiscal 1992 the Company granted its then-Chairman options to purchase an aggregate of 200,000 shares; this grant was made outside of the option plans. ================================================================== 40 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Stock Options Plans (Continued) ------------------------------- The Company accounts for the stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation costs have been recognized for stock option awards. Had compensation costs of option awards been determined under a fair value alternative method as stated in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company would have been required to prepare a fair value model for such options and record such amount in the financial statements as compensation expense. Proforma net income and net income per share for Fiscal 1996 after taking into account such expense would have been $8.2 million and $0.34, respectively, and proforma net loss and net loss per share for Fiscal 1995 would have been $1.1 million and $0.05, respectively. The Company arrived at the fair value of each stock grant at the date of grant by using the Black Scholes option pricing model with the following weighted average assumptions used for grants for the fiscal years ended February 1, 1997 and February 3, 1996: risk-free interest rate of 5.8% and 7.0%, respectively; expected life of 4.3 years and 5.0 years, respectively; and expected volatility of 44.8% and 55.2%, respectively. The following summarizes stock option transactions for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995: Weighted Number Option Prices Average Price of Shares -------------- ------------- ---------- Outstanding Options January 29, 1994..... $6.80 - $26.00 $18.95 909,312 Granted............... $25.375 - $42.75 $26.73 787,500 Exercised............. $6.80 - $28.00 $15.71 (190,771) Canceled.............. $6.80 - $28.00 $24.18 (108,035) Outstanding Options January 28, 1995..... $6.80 - $42.75 $23.03 1,398,006 Granted............... $12.50 - $44.125 $31.90 478,250 Exercised............. $6.80 - $22.75 $13.68 (22,611) Canceled.............. $6.80 - $42.75 $27.64 (299,468) Outstanding Options February 3, 1996..... $6.80 - $44.125 $28.00 1,554,177 Granted............... $11.00 - $21.625 $17.52 463,500 Exercised............. $6.80 $ 6.80 (18,234) Canceled.............. $11.50 - $42.75 $27.31 (335,358) Outstanding Options February 1, 1997..... $6.80 - $44.125 $22.69 1,664,085 At February 1, 1997, February 3, 1996 and January 28, 1995 there were exercisable 660,290 options, 586,135 options and 461,669 options, respectively, which have weighted average exercise prices of $21.03 per share, $19.78 per share and $17.77 per share, respectively. In 1994, the Company's 1992 stock option plan was amended and restated to include restricted stock and unit awards. A unit represents the right to receive the cash value of a share of common stock on the date the restrictions on the unit lapse. On February 23, 1994, 13,630 shares of restricted stock and 6,820 restricted units were awarded. The restrictions on these grants lapse with respect to one-third of the shares and units awarded on each of the first through third anniversaries of the date of the grant. In the event a grantee terminates employment with the Company, any restricted stock or restricted units remaining subject to restrictions are forfeited. As of February 1, 1997, 2,688 shares of restricted stock and 1,345 restricted units were outstanding. The resulting unearned compensation expense was charged to stockholders' equity and is being amortized over the applicable restricted period. ==================================================================== 41 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Executive Compensation ---------------------- Effective August 23, 1996, the then-Chairman and Chief Executive Officer and Director of the Company and its wholly owned subsidiary, Ann Taylor, resigned from her position. See Note 12 for a discussion of the Company's obligations under the former Chairman's employment agreement. Upon this resignation, the Company's then-President and Chief Operating Officer J. Patrick Spainhour was promoted to the position of Chairman and Chief Executive Officer. In connection with this promotion, Mr. Spainhour was granted 75,000 shares of restricted common stock. The resulting unearned compensation expense of $1,171,875, based on the market value on the date of the grant, was charged to stockholders' equity and is being amortized over the restricted period applicable to these shares. Additionally, as of December 9, 1996, the President and Chief Operating Officer of the Company received a grant of 30,000 restricted shares of common stock and 20,000 restricted units of common stock. The resulting unearned compensation expense of $592,500, based on the market value on the date of the grant, was charged to stockholders' equity and is being amortized over the restricted period applicable to these shares. For the fiscal year ended February 1, 1997, unearned compensation expense of $174,744 was amortized. 11. Extraordinary Item ------------------ On May 18, 1994, the Company completed a public offering of 1,000,000 shares of common stock (the "Offering") at a price of $32.00 per share, resulting in aggregate net proceeds of $30,420,000 to the Company (after payment of underwriting discounts and expenses of the Offering payable by the Company). As required by the Company's then-existing bank credit agreement, $30,000,000 of the net proceeds of the Offering were used to reduce the amount of a term loan outstanding under that agreement. The write-off of deferred financing costs associated with the payment on the term loan with the proceeds of the Offering and refinancing of long-term debt resulted in an extraordinary loss in Fiscal 1994 of $1,522,000 ($868,000 net of income tax benefit). Fiscal 1994 proforma income before extraordinary loss, income before extraordinary loss per share and weighted average shares outstanding, assuming the Offering had occurred at the beginning of the year, would have been $32,875,000, $1.40 and 23,536,000, respectively. The Offering was consummated concurrently with the public offering and sale of 4,075,000 shares of the Company's common stock held by certain affiliates of ML&Co. (the "Selling Stockholders"). The Company did not receive any of the proceeds of the shares sold by the Selling Stockholders. 12. Nonrecurring Charges -------------------- Studio Shoe Stores Closing - -------------------------- In connection with the planned closing of the Company's nine Ann Taylor Studio shoe stores, announced in January 1997, the Company recorded a non-cash pre-tax charge of $3,600,000. Of the total impairment loss, $2,500,000 represents impairment of long- lived assets such as properties and store fixtures and $1,100,000 pertains to lease and other related costs for these locations until the properties are sublet. =================================================================== 42 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Nonrecurring Charges (Continued) -------------------------------- Resignation of the Chairman and Chief Executive Officer - ------------------------------------------------------- Effective August 23, 1996, the then Chairman and Chief Executive Officer and Director of the Company and its wholly owned subsidiary, Ann Taylor, resigned. In connection with the resignation, a one-time pre-tax charge of $3,500,000 was recorded relating to the estimated costs of the Company's obligations under the Chairman's employment contract with the Company. 13. Certain Relationships and Related Transactions ---------------------------------------------- Transactions with Merrill Lynch and its Affiliates - -------------------------------------------------- At February 1, 1997, certain affiliates of ML&Co. held approximately 24.0% of the Company's outstanding common stock. Two of the members of the Board of Directors of the Company and Ann Taylor serve as representatives of ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a position to influence the management of the Company and Ann Taylor. In Fiscal 1996, the Company paid approximately $1,207,500 to ML&Co. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in connection with their services as placement agents for the sale of the preferred securities (see Note 3). The Company agreed to indemnify ML&Co. and Merrill Lynch, as placement agents, against certain liabilities, including certain liabilities under the federal securities law, in connection with the sale of the preferred securities. In Fiscal 1994, the Company paid underwriting commissions of approximately $1,027,000 to Merrill Lynch in connection with the Offering (see Note 11). The Company agreed to indemnify Merrill Lynch, as underwriter, against certain liabilities, including certain liabilities under the federal securities law, in connection with the Offering. Sourcing Acquisition - -------------------- In Fiscal 1995, the Company purchased approximately 16% of its merchandise directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its merchandise through the Company's direct sourcing joint venture with Cygne known as CAT. On September 20, 1996 (the "Effective Date"), pursuant to the Stock and Asset Purchase Agreement dated as of June 7, 1996, by and among the Company, Ann Taylor, Cygne and Cygne Group F.E. Limited (as amended, the "Purchase Agreement"), Ann Taylor acquired the entire interest of Cygne in CAT and certain of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the "Division") that were used for sourcing merchandise for Ann Taylor (the "Sourcing Acquisition"). As a result of the Sourcing Acquisition, CAT became an indirect wholly owned subsidiary of the Company and now performs all of Ann Taylor's direct sourcing functions, including those previously provided by the Division, under the name AnnTaylor Global Sourcing, Inc. For financial reporting purposes, the transaction has been accounted for as of the Effective Date under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations". =================================================================== 43 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Certain Relationships and Related Transactions (Continued) ----------------------------------------------------------- In consideration for Cygne's interest in CAT and the Assets, the Company paid (i) 2,348,145 shares of common stock of the Company having an aggregate value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash as payment for inventory and fixed assets and (iii) approximately $6,500,000 in cash in settlement of open accounts payable by Ann Taylor to Cygne for merchandise delivered by Cygne prior to the closing. The Company also assumed certain liabilities related to the operations of the Division. The purchase price is subject to post-closing adjustments based upon final determination of the value of certain of the assets purchased and liabilities assumed. As of February 1, 1997, certain post-closing adjustments are expected to reduce the net cash paid to approximately $227,000. The total purchase price to the Company of the Sourcing Acquisition has been allocated to the tangible and intangible assets and liabilities of CAT and the Division that were acquired, based on preliminary estimates of their respective fair values. Accordingly, the allocation of the purchase price reflected in the accompanying consolidated balance sheets may be adjusted upon final determination of the purchase price adjustments. Management does not believe the subsequent changes, if any, will be significant. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 25 years. In connection with the Sourcing Acquisition, Ann Taylor entered into two three-year consulting agreements with Cygne for the services of Mr. Bernard Manuel, Chairman and Chief Executive Officer of Cygne, and Mr. Irving Benson, the then-President of Cygne. In November 1996, Mr. Benson resigned from his employment with Cygne and, in accordance with the terms of the consulting agreement relating to Mr. Benson's services, Cygne's obligations and rights under the consulting agreement were automatically assigned to Mr. Benson. The following unaudited proforma consolidated data for the Company for the fiscal years ended February 1, 1997 and February 3, 1996 have been presented to reflect the Sourcing Acquisition as if it had occurred at the beginning of each such period: Fiscal Years Ended ----------------------------------------- February 1, 1997 February 3, 1996 ------------------ ----------------- Actual Proforma Actual Proforma ------ -------- ------ -------- (in thousands, except per share amounts) Net sales................... $798,117 $798,117 $731,142 $731,142 Net income (loss)............ 8,667 11,595 (876) 2,871 Net income (loss) per share.. 0.36 0.45 (0.04) 0.11 Weighted average shares...... 24,104 25,581 23,209 25,557 The proforma data set forth above does not purport to be indicative of the results that actually would have occurred if the Sourcing Acquisition had occurred at the beginning of the periods presented or of results which may occur in the future. A summary of the noncash activity that occurred in the fiscal year ended February 1, 1997 in conjunction with the Sourcing Acquisition is as follows: (in thousands) Fair value of assets acquired.................. $4,727 Excess of purchase price over the fair value of net assets acquired.......... 38,340 Ann Taylor's previous investment in CAT........ (6,840) Issuance of the Company's common stock......... (36,000) ------- Cash paid...................................... $ 227 ======= ==================================================================== 44 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Income Taxes ------------ The provision for income taxes for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 consists of the following: Fiscal Years Ended --------------------------- Feb. 1, Feb. 3, Jan. 28, 1997 1996 1995 ------- ------- ------- (in thousands) Federal: Current..................... $ 9,898 $ 1,400 $22,534 Deferred.................... (802) 2,249 --- ------ ------ ------ Total federal............. 9,096 3,649 22,534 ------ ------ ------ State and local: Current..................... 3,844 607 7,740 Deferred.................... (152) 901 --- ------ ------ ------ Total state and local..... 3,692 1,508 7,740 ------ ------ ------ Foreign: Current..................... 187 --- --- Deferred.................... --- --- --- ------ ------ ------ Total foreign............. 187 --- --- ------ ------ ------ Total....................... $12,975 $ 5,157 $30,274 ====== ====== ====== The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 is as follows: Fiscal Years Ended --------------------------------- Feb. 1, Feb. 3, Jan. 28, 1997 1996 1995 ------- ------- -------- (in thousands) Income before income taxes and extraordinary loss....... $21,642 $4,281 $62,894 ====== ===== ====== Federal statutory rate......... 35% 35% 35% ====== ===== ====== Provision for income taxes at federal statutory rate.... $7,575 $1,498 $22,013 State and local income taxes, net of federal income tax benefit.......... 2,273 980 5,031 Non-deductible amortization of goodwill.................. 3,429 3,327 3,327 Undistributed income of joint venture................ (382) (387) (420) Other.......................... 80 (261) 323 ------ ----- ------ Provision for income taxes.. $12,975 $5,157 $30,274 ====== ===== ====== ==================================================================== 45 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Income Taxes (Continued) ------------------------ The tax effects of significant items comprising the Company's net deferred tax assets as of February 1, 1997 and February 3, 1996 are as follows: February 1, February 3, 1997 1996 ----------- ----------- (in thousands) Current: Inventory........................ $ 2,070 $ 1,899 Accrued expenses................. 7,492 2,188 Real estate...................... (1,433) (1,139) Other............................ (172) 452 ------ ------ Total current..................... $ 7,957 $ 3,400 ====== ====== Noncurrent: Depreciation..................... $(6,528) $(3,024) Rent expense..................... 3,328 2,840 Other............................ (1,672) (1,116) ------ ------ Total noncurrent.................. $(4,872) $(1,300) ====== ====== Income taxes provided reflect the current and deferred tax consequences of events that have been recognized in the Company's financial statements or tax returns. U.S. federal income taxes are provided on unremitted foreign earnings except those that are considered permanently reinvested, which at February 1, 1997 amounted to approximately $6,000,000. However, if these earnings were not considered permanently reinvested, under current law, the incremental tax on such undistributed earnings would be approximately $1,800,000. 15. Retirement Plans ---------------- Savings Plan. Ann Taylor maintains a defined contribution 401(k) savings plan for substantially all full-time employees. Participants may contribute to the plan an aggregate of up to 10% of their annual earnings. Ann Taylor makes a matching contribution of 50% with respect to the first 3% of each participant's annual earnings contributed to the plan. Ann Taylor's contributions to the plan for Fiscal 1996, Fiscal 1995 and Fiscal 1994 were $390,000, $337,000 and $333,000, respectively. Pension Plan. Substantially all full-time employees of Ann Taylor are covered under a noncontributory defined benefit pension plan. The pension plan is a "cash balance pension plan". Each participant accrues a benefit based on compensation and years of service with Ann Taylor. Ann Taylor's funding policy for the plan is to contribute annually the amount necessary to provide for benefits based on accrued service and projected pay increases. Plan assets consist primarily of cash, equity and fixed income securities. The following table sets forth the funded status of the Pension Plan at February 1, 1997, February 3, 1996 and January 28, 1995, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions": ================================================================== 46 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Retirement Plans (Continued) ---------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- (dollars in thousands) Actuarial present value of benefits obligation: Accumulated benefit obligation, including vested benefits of $2,147,000, $2,064,000 and $1,500,000, respectively............. $3,413 $2,893 . $2,516 ===== ===== ===== Projected benefit obligation for service rendered to date........ $3,413 $2,893 $2,516 Plan assets at fair value.............. 4,745 2,537 2,522 ----- ----- ----- Plan assets in excess of projected benefit obligation (projected benefit obligation in excess of plan assets)...... 1,332 (356) 6 Unrecognized net gain.................. (802) (231) (136) ----- ----- ----- Prepaid (accrued) pension cost......... $ 530 $ (587) $ (130) ===== ===== ===== Net periodic pension cost for Fiscal 1996, Fiscal 1995 and Fiscal 1994 included the following components: Service cost/benefits earned during the year...................... $ 981 $ 681 $ 622 Interest cost on projected benefit obligation.................. 213 185 133 Actual loss (return) on plan assets.... (527) (104) 72 Net amortization and deferral.......... 300 (132) (285) ----- ----- ----- Net periodic pension cost.............. $ 967 $ 630 $ 542 ===== ===== ===== Assumptions used to determine the projected benefit obligation and plan assets were: Discount rate....................... 8.00% 6.75% 8.50% Rate of increase in compensation level................ 4.00% 4.00% 5.50% Expected long-term rate of return on assets............... 9.00% 9.00% 8.00% 16. Quarterly Financial Data (Unaudited) ------------------------------------ Quarter -------------------------------------- First Second Third Fourth ----- ------ ----- ------ (in thousands, except per share amount) Fiscal 1996 Net sales.................. $184,467 $187,862 $212,670 $213,118 Operating income........... 10,523 8,342 15,174 12,422 Net income................. 1,812 627 3,262 2,966 Net income per share....... $ .08 $ .03 $ .13 $ .12 Fiscal 1995 Net sales.................. $168,306 $183,695 $178,500 $200,641 Operating income (loss).... 12,123 (783) 8,687 5,248 Net income (loss).......... 3,491 (3,809) 686 (1,244) Net income (loss) per share................ $ .15 $ (.16) $ .03 $ (.05) The sum of the quarterly per share data may not equal the annual amounts due to changes in the weighted average shares and share equivalents outstanding. EX-10 2 EXHIBIT 10.11.1 EXHIBIT 10.11.1 AMENDMENT TO EMPLOYMENT AGREEMENT This AMENDMENT (this "Amendment") is entered into as of August 23, 1996 (the "Amendment Effective Date"), by and between ANNTAYLOR STORES CORPORATION (the "Company") and J. PATRICK SPAINHOUR (the "Executive"), and amends the Employment Agreement, dated as of February 16, 1996, between the Company and the Executive (the "Original Agreement"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Company and the Executive agree as follows: 1. All capitalized terms used and not defined herein shall have the meanings ascribed to them in the Original Agreement. 2. Section 2 of the Original Agreement is hereby amended by extending the end of the initial term of employment of the Executive from February 19, 1999 to August 23, 1999, unless further extended or sooner terminated as provided in the Original Agreement. 3. The first two sentences of Section 3(a) of the Original Agreement is are hereby amended to provide that, effective as of August 23, 1996, the Executive shall serve as Chairman and Chief Executive Officer of the Company, and shall report directly to the Board of Directors of the Company. The third sentence of Section 3(a) of the Original Agreement is hereby deleted in its entirety. 4. Section 5(a)(i) of the Original Agreement is hereby amended by increasing Executive's annual base salary to a rate of $650,000, effective from and as of August 23, 1996, and is hereby further amended to provide that, effective from as of January 1, 1998, Executive's annual base salary shall be increased to a rate of $725,000. Such base salary rates may be increased from time to time, in the discretion of the Board of Directors, in accordance with the Company's annual executive performance review procedures, as provided in Section 5(a) of the Original Agreement. 5. Section 5(a)(ii) of the Original Agreement is hereby amended to increase Executive's Performance Percentage under the Company's Management Performance Compensation Plan to 50% for the Fall 1996 Season. Thereafter, the Performance Percentage shall be determined as provided in the Performance Plan. The last sentence of Section 5(a)(ii) shall continue to apply. ============================================================== Amendment to Employment Agreement Page 2 6. The Executive shall be granted a performance-vesting Non-Qualified Stock Option (the "Performance Option") to acquire seventy-five thousand (75,000) shares of the Company's Common Stock under the Option Plan, with an exercise price equal to the fair market value (as defined, and determined as of the date of grant, under the Option Plan) of the Common Stock. The Performance Option shall become exercisable on the earliest to occur of the following: (i) the ninth anniversary of the date of grant (the "grant date"), (ii) the date of achievement by the Company of total earnings per share of at least $1.50 over four consecutive quarters ending after the grant date, and (iii) the first date occurring after the grant date on which the fair market value (as defined in the Option Plan) of a share of Common Stock on each of the ten consecutive trading days immediately preceding such date is equal to at least $35.00; provided -------- that, (a) in the case of each of clauses (ii) and (iii), (1) - ---- such date occurs no later than the fifth anniversary of the grant date, and (2) a portion of the Performance Option may become exercisable, based upon satisfaction of terms and conditions consistent with those set forth in the Company's standard stock option agreement applicable to performance options, if exercisability has not otherwise occurred by the fifth anniversary of the grant date; and (b) in the case of each of clauses (i) through (iii), the Executive has remained continuously employed by the Company until the applicable date. The Performance Option shall contain such other terms and conditions as are set forth in the Company's standard stock option agreements applicable to such type of option, including, but not limited to, accelerated exercisability upon the occurrence of an Acceleration Event under the Option Plan. 7. Executive shall be granted seventy-five thousand (75,000) restricted shares of common stock of the Company (the "Restricted Shares"). One-third of the Restricted Shares shall vest on, and be delivered to the Executive promptly following, each of the first three anniversaries of the Amendment Effective Date, provided the Executive has -------- remained continuously employed by the Company until the applicable date. Notwithstanding the foregoing, any outstanding unvested Restricted Shares shall become fully vested (i) upon occurrence of an Acceleration Event, as defined under the Option Plan, or (ii) if the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate his employment for Good Reason. The Company shall file with the Securities and Exchange Commission a shelf registration statement covering the Restricted Shares, pursuant to which Executive may sell vested Restricted Shares from time to time. The Company shall use its best efforts to cause the registration statement to become effective on or before August 22, 1997 and to keep such registration statement effective until all such shares have been sold by Executive (except during such times that maintaining effectiveness would require the Company to disclose a material corporate development but the Company does not believe that such disclosure would be in the best interests of the Company and its stockholders). ================================================================= Amendment to Employment Agreement Page 3 8. From and after the Amendment Effective Date, the term "Agreement", as used in the Original Agreement, shall mean the Original Agreement as amended by this Amendment, and the Original Agreement, as so amended, shall continue in full force and effect. 9. Sections 11 through 17 of the Original Agreement are hereby made a part of, and are incorporated by this reference, into this Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment this 27th day of January, 1997, intending it to be effective as of August 23, 1996. ANNTAYLOR STORES CORPORATION EXECUTIVE: By:/s/ Rochelle Lazarus /s/ J. Patrick Spainhour ______________________________ __________________________ Rochelle Lazarus, Director J. PATRICK SPAINHOUR EX-10 3 EXHIBIT 10.14 EXHIBIT 10.14 PERSONAL AND CONFIDENTIAL January 24, 1997 Mr. Paul E. Francis 535 Pelham Manor Road Pelham Manor, NY 10803 Dear Paul: This will confirm the agreement between you and AnnTaylor, Inc. (hereafter referred to as the "Company") regarding your separation from the Company. 1. We agree that your date of separation from employment with the Company will be February 14, 1997 (the "Separation Date") and, effective as of the Separation Date, you hereby resign from your positions as a director and/or officer of the Company, its parent company, and any of the Company's subsidiaries. 2. In consideration of your delivery of the Release referred to in paragraph 4 and the representations and agreements set forth in this letter agreement, including those set forth in paragraph 5 hereof, the Company agrees to pay you the severance compensation described in paragraph 3 below, subject to the terms and conditions set forth in this letter. 3. Subject to this letter agreement becoming effective and to your compliance with the terms hereof, your severance compensation shall consist of the following: (a) Cash compensation of up to $335,000.00, less all applicable federal, state and local withholding taxes ("Taxes"), payable in up to twenty-four equal semi- monthly installments of $13,958.33 (less Taxes), commencing upon the later of the Separation Date and the Effective Date of this letter agreement (as defined in paragraph 11 below), and continuing through the earlier of (i) the twelve-month anniversary of such date and (ii) such time as you procure other full time employment. You agree that if you procure other full time employment prior to the twenty-fourth payment referenced above, you will provide the Company prompt written notice thereof. ===================================================================== Mr. Paul E. Francis January 24, 1997 Page 2 (b) The Company shall permit you to continue your participation in its medical and dental insurance programs at the associate rate of contribution, from the Separation Date throughout the period during which you are receiving severance compensation pursuant to paragraph 3(a) above. At the end of that period, you shall be entitled to participate in such programs in accordance with the applicable COBRA regulations. (c) If the Separation Date occurs before the time that the Company makes incentive compensation payments to its associates under the Management Performance Compensation Plan (the "Performance Plan") for the Fall 1996 Season, the Company shall also make a payment to you, at the time that such payment is made to all associates, in an amount equal to the incentive compensation payment you would have received under the Performance Plan for the Fall 1996 Season if you had continued to be employed by the Company (less Taxes). (d) The "performance options" previously granted to you under the Company's 1992 Stock Option and Restricted Stock and Restricted Unit Award Plan (the "Option Plan") and the related stock option agreements, and listed on Schedule I hereto, shall remain outstanding through February 28, 1999 and shall continue to be eligible for vesting and exercise in accordance with the terms set forth in the applicable stock option agreements as if you had continued in the employ of the Company through such date. All such performance options that have not vested or are not exercised by the close of business on February 28, 1999 shall be canceled at such time. Certain of the "time options" previously granted to you under the Option Plan and the related stock option agreements, also listed on Schedule I hereto, that would not have vested until after April 6, 1997 shall be canceled as of the Separation Date. However, the remaining "time options" previously granted to you and listed on Schedule I shall continue to be outstanding and shall vest in accordance with the original vesting schedule applicable thereto, through and including April 6, 1997 as if you had continued in the employ of the Company through such date, and all vested time options shall be exercisable through the close of business on February 28, 1999 as if you had continued in the employ of the Company through such time. All unexercised vested time options not exercised by the close of business on February 28, 1999 shall be canceled at such time. ===================================================================== Mr. Paul E. Francis January 24, 1997 Page 3 4. In consideration of the compensation described in paragraph 3 above, on the Separation Date you shall execute and deliver to the Company a Release in the form of Schedule II hereto. 5. You represent that you have not filed against the Company or the Company's parents, subsidiaries, affiliates or any Related Persons (as defined in Schedule II), any complaints, charges or law suits arising out of your employment by the Company, or any other matter arising on or prior to the date hereof. You covenant and agree that you will not seek recovery against the Company or any of its parents, subsidiaries, affiliates or any Related Person arising out of any of the matters set forth in this paragraph or any of the matters that are the subject of the Release referred to in paragraph 4. 6. Nothing set forth in this agreement shall prevent you from enforcing the terms of this agreement, nor do you waive or lose any rights that you have to compensation for vested accrued unused 1997 vacation, or any rights that you have as a former employee under the Company's stock option plans, stock purchase plan, or retirement or insurance plans, as applicable. 7. You represent that you have returned or will immediately return to the Company all confidential information of the Company ("Company Information"), and you will not retain any copies, reproductions or excerpts thereof, including without limitation mailing lists, customer lists, reports, files, memoranda, records, credit cards, door and file keys, training manuals, and other physical or personal property which you received or prepared or helped prepare in connection with your employment by the Company, and other technical, business or financial information or trade secrets the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company or any Related Person. 8. In the course of your employment with the Company you acquired confidential Company Information. You understand and agree that such Company Information was disclosed to you in confidence and for the benefit and use of only the Company. You acknowledge that you have no ownership right or interest in any Company Information used or developed during the course of your employment. You understand and agree that (a) you will keep such Company Information confidential at all times after your employment with the Company and (b) you will not make use of Company Information on your own behalf or on behalf of any third party. ===================================================================== Mr. Paul E. Francis January 24, 1997 Page 4 9. You agree that, from the date hereof through February 28, 1999, you will not solicit, entice, persuade, induce or influence any individual who is an employee of the Company to terminate his or her employment with the Company or to become employed by any other individual or entity, and you shall not approach any such employee for any such purpose. Any breach of the terms of this paragraph shall result in your automatic forfeiture of the severance compensation set forth in paragraph 3 above. 10. The Company advises you to consult with an attorney of your choosing prior to signing this agreement. You confirm that you have the right and have been given the opportunity to review this agreement and, specifically, the release set forth in paragraph 4 and the representations and agreements set forth in paragraph 5, with an attorney of your choice. You also understand and agree that the Company is under no obligation to offer you the severance compensation set forth in paragraph 3 and that you are under no obligation to consent to the release set forth in paragraph 4 and the representations and agreements set forth in paragraph 5, and that you have entered into this agreement freely and voluntarily. 11. You may have forty-five days to consider the terms of this agreement. Furthermore, once you have signed this agreement, you will have seven additional days from the date you sign it to revoke your consent. To revoke this agreement you must clearly communicate your decision to do so to the Senior Vice President - Human Resources of the Company (212-541-3361) within the seven day period. This agreement will not become effective until seven days after the date you have signed it, as indicated on the last page hereof. Such seventh day is considered to be the "Effective Date" of this agreement. 12. You agree to keep the terms of your severance compensation and this agreement confidential, other than as necessary to consult with your legal or tax advisors. 13. The terms in this letter constitute the entire agreement between us and may not be altered or modified other than in a writing signed by you and the Company. This letter supersedes in its entirety the letter to you from the Company dated January 13, 1997. You represent that in executing this letter agreement you do not rely and have not relied upon any representation or statement not set forth herein made by the Company or any of its agents, representatives, attorneys or Related Persons with respect to the subject matter, basis or effect of this letter agreement, or otherwise. ===================================================================== Mr. Paul E. Francis January 24, 1997 Page 5 14. This agreement will be governed by the laws of the State of New York, without reference to its choice of law rules. If this letter correctly sets forth our understanding, please so signify by signing and dating the enclosed copy of this letter and returning it to the Senior Vice President - Human Resources, AnnTaylor, Inc., 142 West 57th Street, New York, New York 10019. Very truly yours, AnnTaylor, Inc. By: /s/ J. Patrick Spainhour __________________________ Chairman & CEO AGREED TO AND ACCEPTED: /s/ Paul E. Francis ___________________________ PAUL E. FRANCIS Dated: January 24, 1997 ---------------- =========================================================================== Mr. Paul E. Francis January 24, 1997 Page 6 SCHEDULE I STOCK OPTION GRANTS UNDER THE ANNTAYLOR STORES CORPORATION 1992 STOCK OPTION AND RESTRICTED STOCK AND RESTRICTED UNIT AWARD PLAN Performance Options - -------------------- :----------:-------------:--------------------: : Grant : Exercise : No. Performance : : Date : Price : Options Awarded : :----------:-------------:--------------------: : : : : : 02/23/94: $25.375 : 53,336 : :----------:-------------:--------------------: : 02/24/95: $33.000 : 20,000 : :----------:-------------:--------------------: Time Options - ------------- :----------:----------:------------:-----------:---------------:-------------: : : : : No. Time : No. Time : No. Time : : : : No. Time : Options : Options : Options : : Grant : Exercise : Options : Vested at : Canceled :Vesting in : : Date : Price : Awarded : 2/21/97 : on 2/21/97 : Future : :----------:----------:------------:-----------:---------------:-------------: : 04/06/93 : $18.125 : 30,000 : 24,000 : 0 : 6,000 : : : : : : : (4/6/97) : :----------:----------:------------:-----------:---------------:-------------: : 04/06/93 : $26.000 : 40,000 : 32,000 : 0 : 8,000 : : : : : : : (4/6/97) : :----------:----------:------------:-----------:---------------:-------------: : 02/23/94 : $25.375 : 26,664 : 13,332 : 6,666 : 6,666 : : : : : : : (2/23/97) : :----------:----------:------------:-----------:---------------:-------------: : 02/24/95 : $33.000 : 10,000 : 2,500 : 5,000 : 2,500 : : : : : : : (2/24/97) : :----------:----------:------------:-----------:---------------:-------------: ============================================================================== 7 SCHEDULE II FORM OF RELEASE TO BE DELIVERED ON THE SEPARATION DATE Reference is made to the agreement dated January 24, 1997 between the undersigned, Paul E. Francis, and AnnTaylor, Inc. (the "Company"), relating to the separation of employment of the undersigned from the Company (the "Agreement"). In consideration of the compensation described in paragraph 3 of the Agreement, I, Paul Francis, hereby voluntarily, knowingly and willingly release and forever discharge the Company, its parents, subsidiaries and affiliates, together with its and their respective officers, directors, partners, shareholders, employees, successors and assigns (collectively, the "Related Persons"), from any and all charges, complaints, claims, promises, agreements, controversies, causes of action and demands of any nature whatsoever which against any of them that I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever arising through and including the date of this Release. This release includes, but is not limited to, any rights or claims relating in any way to my employment relationship with the Company, or the termination thereof, or under any statute, including the federal Age Discrimination in Employment Act, Title VII of the Civil Rights Act, The Americans With Disabilities Act, the New York Human Rights Law, and any other federal, state or local law. The foregoing notwithstanding, this Release shall not constitute a release or waiver of any rights that the undersigned may have to indemnification from the Company or AnnTaylor Stores Corporation in connection with the action captioned Carol Novak ----------- and Robert Nieman, On behalf of Themselves and All Others - ----------------------------------------------------------------- Similarly Situated v. Sally Frame Kasas [sic], et al., No. 96 - ------------------------------------------------------- Civ. 3073 (BDP) (S.D.N.Y.). The undersigned shall cooperate with the Company in connection with the defense of this matter. I represent that I have not filed against the Company or the Company's parents, subsidiaries, affiliates or any Related Persons, any complaints, charges or law suits arising out of my employment by the Company, or any other matter arising on or prior to the date hereof, and I covenant and agree that I will not seek recovery against the Company or any of its parents, subsidiaries, affiliates or any Related Person arising out of any of the matters set forth in the second paragraph of this Release. IN WITNESS WHEREOF, I have executed and delivered this Release to the Company as of this 14th day of February, 1997. _______________________ Paul E. Francis ____________________ Witness ==================================================================== 8 RELEASE Reference is made to the agreement dated January 24, 1997 between the undersigned, Paul E. Francis, and AnnTaylor, Inc. (the "Company"), relating to the separation of employment of the undersigned from the Company (the "Agreement"). In consideration of the compensation described in paragraph 3 of the Agreement, I, Paul Francis, hereby voluntarily, knowingly and willingly release and forever discharge the Company, its parents, subsidiaries and affiliates, together with its and their respective officers, directors, partners, shareholders, employees, successors and assigns (collectively, the "Related Persons"), from any and all charges, complaints, claims, promises, agreements, controversies, causes of action and demands of any nature whatsoever which against any of them that I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever arising through and including the date of this Release. This release includes, but is not limited to, any rights or claims relating in any way to my employment relationship with the Company, or the termination thereof, or under any statute, including the federal Age Discrimination in Employment Act, Title VII of the Civil Rights Act, The Americans With Disabilities Act, the New York Human Rights Law, and any other federal, state or local law. The foregoing notwithstanding, this Release shall not constitute a release or waiver of any rights that the undersigned may have to indemnification from the Company or AnnTaylor Stores Corporation in connection with the action captioned Carol Novak ------------ and Robert Nieman, On behalf of Themselves and All Others - ----------------------------------------------------------------- Similarly Situated v. Sally Frame Kasas [sic], et al., No. 96 - ------------------------------------------------------- Civ. 3073 (BDP) (S.D.N.Y.). The undersigned shall cooperate with the Company in connection with the defense of this matter. I represent that I have not filed against the Company or the Company's parents, subsidiaries, affiliates or any Related Persons, any complaints, charges or law suits arising out of my employment by the Company, or any other matter arising on or prior to the date hereof, and I covenant and agree that I will not seek recovery against the Company or any of its parents, subsidiaries, affiliates or any Related Person arising out of any of the matters set forth in the second paragraph of this Release. IN WITNESS WHEREOF, I have executed and delivered this Release to the Company as of this 14th day of February, 1997. /s/ Paul E. Francis _______________________ Paul E. Francis /s/ Jocelyn Barandiaran ________________________ Witness EX-10 4 EXHIBIT 10.15 EXHIBIT 10.15 THE ANNTAYLOR STORES CORPORATION 1992 STOCK OPTION AND RESTRICTED STOCK AND UNIT AWARD PLAN Amended and Restated as of February 23, 1994 =============================================================== Table of Contents Section Page 1. Purpose . . . . . . . . . . . . . . . . . . . 1 2. Definitions . . . . . . . . . . . . . . . . 1 3. Administration . . . . . . . . . . . . . . . 3 4. Eligibility . . . . . . . . . . . . . . . . . 4 5. Stock . . . . . . . . . . . . . . . . . . . . 5 6. Terms and Conditions of Options . . . . . . . 5 7. Terms and Conditions of Restricted Stock Awards and Restricted Unit Awards . . . . . 10 8. Agreement of Grantee Regarding Withholding Taxes . . . . . . . . . . . . . . . . . . . 12 9. Term of Plan . . . . . . . . . . . . . . . . 13 10. Amendment and Termination of the Plan . . . . 13 11 Approval of Stockholders . . . . . . . . . . 13 12 Miscellaneous . . . . . . . . . . . . . . . . 14 (ii) ============================================================= List of Defined Terms Term Section Acceleration Event . . . . . . . . . . . . 6(i)(2) Board . . . . . . . . . . . . . . . . . . . 3 Cause . . . . . . . . . . . . . . . . . . . 2 Code . . . . . . . . . . . . . . . . . . . 1 Committee . . . . . . . . . . . . . . . . . 3 Common Stock . . . . . . . . . . . . . . . 2 Corporation . . . . . . . . . . . . . . . . 1 Disability . . . . . . . . . . . . . . . . 2 Exchange Act . . . . . . . . . . . . . . . 3 Executive Officers. . . . . . . . . . . . . 3 Fair Market Value . . . . . . . . . . . . . 2 Grantee. . . . . . . . . . . . . . . . . . 2 Grants. . . . . . . . . . . . . . . . . . . 3 Incentive Stock Option . . . . . . . . . . 1 Maximum Liability. . . . . . . . . . . . . 8 Nonqualified Stock Options . . . . . . . . 1 Option Agreements . . . . . . . . . . . . . 3 Option Price. . . . . . . . . . . . . . . . 3 Optionee . . . . . . . . . . . . . . . . . 4 Option . . . . . . . . . . . . . . . . . . 2 Plan . . . . . . . . . . . . . . . . . . . 1 Restricted Award Agreement . . . . . . . . 3 Restricted Period . . . . . . . . . . . . . 7(b) Restricted Share . . . . . . . . . . . . . 2 Restricted Stock Award . . . . . . . . . . 3 Restricted Unit . . . . . . . . . . . . . . 2 Restricted Unit Award . . . . . . . . . . . 3 Rule 16b-3 . . . . . . . . . . . . . . . . 3 Subsidiary Corporation . . . . . . . . . . 2 (iii) ============================================================= THE ANNTAYLOR STORES CORPORATION 1992 STOCK OPTION AND RESTRICTED STOCK AND UNIT AWARD PLAN Amended and Restated as of February 23, 1994 1. Purpose. -------- This 1992 Stock Option and Restricted Stock and Unit Award Plan, as amended and restated as of February 23, 1994 (the "Plan"), is intended to encourage stock ownership by employees of AnnTaylor Stores Corporation (the "Corporation"), its divisions and Subsidiary Corporations, so that they may acquire or increase their proprietary interest in the Corporation, and to encourage such employees to remain in the employ of the Corporation, its divisions and Subsidiary Corporations, and to put forth maximum efforts for the success of the business. It is further intended that no Option granted pursuant to this Plan shall constitute an "incentive stock option" ("Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), and all Options so granted shall constitute "nonqualified stock options" ("Nonqualified Stock Options"). 2. Definitions. ------------ As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "CAUSE" used in connection with the termination of employment of a Grantee shall mean a termination of employment of the Grantee by the Corporation or a division or Subsidiary Corporation due to (i) the failure to render services to the employer corporation in accordance with the terms of such Grantee's employment, which failure amounts to a material neglect of such Grantee's duties to the employer corporation, (ii) the commission by the Grantee of an act of fraud, misappropriation (including the unauthorized disclosure of confidential or proprietary information) or embezzlement, or (iii) a conviction of or guilty plea or confession to any felony. (b) "COMMON STOCK" shall mean shares of the Corporation's Common Stock, par value $.0068 per share. (c) "DISABILITY" shall mean a Grantee's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months. ================================================================ (d) "FAIR MARKET VALUE" per share as of a particular date shall mean (i) the closing sales price per share of Common Stock as reported on the New York Stock Exchange (or if the shares of Common Stock are not then traded on such exchange, on the principal national securities exchange on which they are then traded) for the last preceding date on which there was a sale of such Common Stock on such exchange, or (ii) if the shares of Common Stock are not then traded on a national securities exchange but are traded on an over-the-counter market, the average of the closing bid and asked prices for the shares of Common Stock in such over- the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, or (iii) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee in its discretion may determine. (e) "GRANTEE" shall mean a person to whom an Option, Restricted Stock Award or Restricted Unit Award has been granted. (f) "OPTION" shall mean the right, granted to a Grantee pursuant to Section 3, to purchase a specified number of shares of Common Stock, on the terms and subject to the restrictions set forth in this Plan and by the Committee upon the grant of the Option to the Grantee. (g) "RESTRICTED SHARE" shall mean a share of Common Stock, awarded to a Grantee pursuant to Section 3, that is subject to the terms and restrictions set forth in this Plan and by the Committee upon the award of the Restricted Share to the Grantee. (h) "RESTRICTED UNIT" shall mean the right, awarded to a Grantee pursuant to Section 3, to receive an amount in cash equal to the Fair Market Value of one share of Common Stock, on the terms and subject to the restrictions set forth in this Plan and by the Committee upon the award of the Restricted Unit to the Grantee. (i) "SUBSIDIARY CORPORATION" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of granting an Option, Restricted Stock Award or Restricted Unit Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. -2- ======================================================================= 3. Administration. -------------- The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Corporation (the "Board"). The Committee shall consist of two or more persons, each member of the Committee shall be a member of the Board, and at least two members of the Committee shall be both "outside directors" within the meaning of section 162(m) of the Code and "disinterested persons" within the meaning of Rule 16b-3, as from time to time amended ("Rule 16b-3"), promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options and make awards of Restricted Shares and Restricted Units ("Restricted Stock Awards" and "Restricted Unit Awards", respectively, and sometimes collectively with the grant of Options, "Grants"); to determine the purchase price of the shares of Common Stock covered by each Option (the "Option Price"); to determine the persons to whom, and the time or times at which, Options, Restricted Stock Awards and Restricted Unit Awards shall be granted; to determine the number of shares to be covered by each Option, and to determine the number of Restricted Shares and Restricted Units to be covered by each Restricted Stock Award and Restricted Unit Award; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the agreements (which need not be identical) entered into in connection with grants of Options ("Option Agreements") and Restricted Stock Awards and Restricted Unit Awards ("Restricted Award Agreements"); and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determinations of the Committee shall be binding and conclusive on all parties. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. -3- ================================================================= The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members and substitute others. One member of the Committee shall be selected by the Board as chairman. The Committee shall hold its meetings at such times and places as it shall deem advisable. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at any meeting or by written consent, except that, with respect to Grantees who are executive officers of the Corporation within the meaning of Rule 3-b7 promulgated under Section 3 of the Exchange Act ("Executive Officers"), all action of the Committee shall be taken solely by those members of the Committee who are "outside directors" and "disinterested persons" as defined above, even if less than a majority of the Committee. The Committee may appoint a secretary and make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Grant made hereunder. 4. Eligibility. ------------ Options, Restricted Stock Awards and Restricted Unit Awards may be granted to employees (including, without limitation, officers who are employees) of the Corporation or its present or future divisions and Subsidiary Corporations. In determining the persons to whom Options, Restricted Stock Awards and Restricted Unit Awards shall be granted and the number of shares to be covered by each Option, and the number of Restricted Shares and Restricted Units to be covered by each Restricted Stock Award and Restricted Unit Award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Corporation and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. A person to whom an Option has been granted hereunder is sometimes referred to herein as an "Optionee". A Grantee shall be eligible to receive more than one Grant during the term of the Plan, but only on the terms and subject to the restrictions hereinafter set forth. -4- =============================================================== 5. Stock. ----- The shares of Common Stock subject to Options and Restricted Stock Awards hereunder may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Corporation. The aggregate number of shares of Common Stock as to which Options may be granted from time to time under this Plan shall not exceed 1,600,000, and the number of shares of Common Stock as to which Restricted Stock Awards may be granted from time to time hereunder shall not exceed 67,000. The aggregate number of Restricted Units that may be awarded from time to time under the Plan shall not exceed 33,000. The limitations established by the preceding sentences shall be subject to adjustment as provided in Section 6(i) hereof. Effective as of January 1, 1994, no more than 50% of the Options granted in any fiscal year hereunder may be granted to any single Executive Officer. If any shares subject to an Option Grant or Restricted Stock Award are forfeited, canceled, exchanged or surrendered or if a Grant otherwise terminates or expires without a distribution of shares to the Grantee, the shares of Common Stock with respect to such Grant shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Grants under the Plan; provided, however, that, to the extent required for the Plan to comply with Rule 16b-3, in the case of forfeiture, cancellation, exchange or surrender of Restricted Shares subject to a Restricted Stock Award, the number of shares with respect to such Award shall not be available for Grants hereunder unless any dividends paid on such shares are also forfeited, canceled, exchanged or surrendered. If any Restricted Units are forfeited, canceled, exchanged or surrendered or if a Restricted Unit Award otherwise terminates or expires without any payment being required to be made with respect to any of the Restricted Units subject thereto, then such Restricted Units shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Grants under the Plan. 6. Terms and Conditions of Options. ------------------------------- Each Option granted pursuant to the Plan shall be evidenced by a written Option Agreement between the Corporation and the Optionee, which agreement shall comply with and be subject to the following terms and conditions (and with such other terms and conditions not inconsistent with the terms of this Plan as the Committee, in its discretion, shall establish): (a) NUMBER OF SHARES. Each Option Agreement shall state the number of shares of Common Stock to which the Option relates. -5- ======================================================================== (b) TYPE OF OPTION. Each Option Agreement shall specifically state that no portion of the Option constitutes an Incentive Stock Option and the entire Option constitutes a Nonqualified Stock Option. (c) OPTION PRICE. Each Option Agreement shall state the Option Price, which shall be not less than one hundred percent (100%) of the Fair Market Value of the shares of Common Stock of the Corporation on the date of grant of the Option. The Option Price shall be subject to adjustment as provided in Section 6(i) hereof. The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted, unless such resolution expressly provides for a specific later date. (d) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at the time of exercise, (i) in cash, (ii) in shares of Common Stock having a Fair Market Value equal to such Option Price, or (iii) in a combination of cash and shares or (iv) in the sole discretion of the Committee, through a cashless exercise procedure involving a broker; provided, however, that such method and time for payment shall be permitted by and be in compliance with applicable law. (e) TERM AND EXERCISE OF OPTIONS. Except as provided in Section 6(i) hereof or unless otherwise determined by the Committee, the shares covered by an Option shall become exercisable over such period, in cumulative installments or otherwise, or upon the satisfaction of such performance goals or other conditions, as the Committee shall determine; provided, however, that the Committee shall have the authority to accelerate the exercisability of all or any portion of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate, and provided further, however, that such exercise period shall not exceed ten (10) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in Sections 6(f) and 6(g) hereof. An Option may be exercised, as to any or all full shares of Common Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee; provided, however, that an Option may not be exercised at any one time as to fewer than 100 shares (or such number of shares as to which the Option is then exercisable if such number of shares is less than 100). (f) TERMINATION. Except as provided in this Section 6(f) and in Section 6(g) hereof, an Option may not be exercised unless the Optionee is then in the employ of the Corporation or one of its divisions or Subsidiary Corporations, and unless the Optionee has remained continuously so employed since the date of grant of the Option. In the event that the employment of an Optionee shall terminate (other than by reason of death or Disability), all Options of such Optionee that are exercisable at the time of such termination may, unless earlier terminated in accordance with their terms, be exercised within three (3) months after -6- ================================================================ such termination, or at such later time as the Committee may in its discretion determine, but not beyond the date on which the Option would otherwise expire pursuant to paragraph (e) of this Section 6; provided, however, that if the employment of an Optionee shall terminate for Cause, all Options theretofore granted to such Optionee shall, to the extent not theretofore exercised, terminate forthwith. Nothing in the Plan or in any Option granted pursuant hereto shall confer upon an individual any right to continue in the employ of the Corporation or any of its divisions or Subsidiary Corporations or interfere in any way with the right of the Corporation or any such division or Subsidiary Corporation to terminate such employment. (g) DEATH OR DISABILITY OF OPTIONEE. If an Optionee shall die while employed by the Corporation or a Subsidiary Corporation or within three (3) months after the termination of such Optionee's employment, other than for Cause, or if the Optionee's employment shall terminate by reason of Disability, all Options theretofore granted to such Optionee (to the extent otherwise exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Optionee or by the Optionee's estate or by a person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of the death or Disability of the Optionee, at any time within one year after the date of death or termination by reason of Disability or at such later time as the Committee may in its discretion determine, but not beyond the date on which the Option would otherwise expire pursuant to paragraph (e) of this Section 6. (h) NONTRANSFERABILITY OF OPTIONS. Options granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and Options may be exercised, during the lifetime of the Optionee, only by the Optionee or by his guardian or legal representative. (i) EFFECT OF CERTAIN CHANGES. (1) If there is any change in the shares of Common Stock through the declaration of stock dividends, distributions made with respect to shares of Common Stock, recapitalizations, restructurings, stock splits, or combinations or exchanges of such shares, or the like, then the number of shares of Common Stock or other securities available for Options, the kind and amount of shares and other securities covered by outstanding Options, and/or the Option Price, as appropriate, shall be adjusted as necessary to reflect equitably such change in the shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. -7- ================================================================ (2) If while unexercised Options remain outstanding under the Plan-- (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Corporation, Merrill Lynch Capital Partners and affiliates, any person who on the date hereof is a director or officer of the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities; (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (A) or (C) of this Section 7(i)(2)) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (C) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other entity other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets (each, an "Acceleration Event"), then all Options not theretofore exercisable by their terms shall become exercisable in full. Following the Acceleration Event, except with respect to Options held for less than six months prior to such event by Optionees who are Executive Officers, the Committee shall provide for the cancellation of all Options then outstanding; provided, however, that, for purposes of -8- ===================================================================== such cancellation, the Committee may limit the definition of Acceleration Event as necessary to comply with the conditions and requirements of Rule 16b-3. Upon such cancellation, the Corporation shall make, in exchange therefor, a cash payment for any such Option in an amount per share equal to the difference between the per share exercise price of such Option and the Fair Market Value of a share of Common Stock on the date during the prior sixty-day period that produces the highest Fair Market Value. (3) In the event of a change in the Common Stock of the Corporation as presently constituted which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. (4) The foregoing adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. (5) Except as hereinbefore expressly provided in this Section 6(i), the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation; and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. (j) RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 6(i) hereof. (k) OTHER PROVISIONS. The Option Agreements authorized under the Plan shall contain such other provisions, including without limitation the imposition of restrictions upon the exercise of an Option, as the Committee shall deem advisable. -9- =============================================================== 7. Terms and Conditions of Restricted Stock Awards and ------------------------------------------------------- Restricted Unit Awards. - ---------------------- Each Restricted Stock Award and Restricted Unit Award granted under the Plan shall be evidenced by a written Restricted Award Agreement between the Corporation and the Grantee, which agreement shall comply with, and be subject to, the following terms and conditions (and with such other terms and conditions not inconsistent with the terms of this Plan as the Committee, in its discretion, shall establish): (a) NUMBER OF SHARES AND UNITS. The Committee shall determine the number of Restricted Shares to be awarded to a Grantee pursuant to the Restricted Stock Award and the number of Restricted Units to be awarded to a Grantee pursuant to a Restricted Unit Award. (b) NONTRANSFERABILITY. Except as set forth in subsections (f) and (g) of this Section 7, a Grantee may not sell, assign, transfer, pledge, hypothecate or otherwise dispose of any Restricted Shares or Restricted Units awarded to said Grantee under this Plan, or any interest therein, except by will or the laws of descent and distribution, for a period of five years, or such shorter period as the Committee shall determine, from the date on which the award is granted. The Committee may also in its discretion impose such other restrictions and conditions on Restricted Shares and Units awarded as it deems appropriate. In determining the Restricted Period of an award, the Committee may provide that the restrictions shall lapse with respect to specified percentages of the awarded shares or units on successive anniversaries of the date of such award or upon the satisfaction of such other conditions as the Committee may impose. In no event shall the Restricted Period end with respect to a Restricted Stock Award or Restricted Unit Award prior to the satisfaction by the Grantee of any liability arising under Section 8 hereof. Any attempt to dispose of any Restricted Shares in contravention of any such restrictions shall be null and void and without effect. The period during which such restrictions on transfer, and such other restrictions as the Committee may impose, are in effect is referred to as the "Restricted Period". (c) CERTIFICATES REPRESENTING RESTRICTED SHARES. The Corporation shall not be required to issue stock certificates representing Restricted Shares awarded to a Grantee until the Restricted Period related to such shares has lapsed. If any stock certificates representing Restricted Shares awarded pursuant to a Restricted Stock Award are issued prior to the lapse of the Restricted Period, such stock certificate shall bear an appropriate legend referring to such restrictions. Such certificates may be retained by the Corporation during the Restricted Period. -10- =============================================================== (d) TERMINATION. If the Grantee's continuous employment with the Corporation or any of its divisions or Subsidiary Corporations shall terminate for any reason prior to the expiration of the Restricted Period applicable to any Restricted Shares or Restricted Units granted to such Grantee, or prior to the satisfaction of any other conditions established by the Committee applicable to such Grant, any such Restricted Shares or Restricted Units then remaining subject to restrictions (after taking into account the provisions of subsections (f) and (g) of this Section 7) shall thereupon be forfeited by the Grantee and any such Restricted Shares shall be transferred to, and reacquired by, the Corporation or its Subsidiary Corporation at no cost to the Corporation or the Subsidiary Corporation. In such event, the Grantee, or in the event of his death, his personal representative, shall, with respect to any such shares, forthwith deliver to the Secretary of the Corporation any stock certificates in the possession of the Grantee or the Grantee's representative representing the Restricted Shares remaining subject to such restrictions, accompanied by such instruments of transfer, if any, as may reasonably be required by the Secretary of the Corporation. (e) RIGHTS AS A STOCKHOLDER. Upon receipt by a Grantee of a Restricted Stock Award, the Grantee shall possess all incidents of ownership of the Restricted Shares (subject to subsection (b) of this Section 7), including the right to receive or reinvest dividends with respect to such shares and to vote such shares. (f) EFFECT OF CERTAIN CHANGES. The number of Restricted Shares or Restricted Units subject to a Grant shall be appropriately adjusted by the Committee in the event of any change in the shares of Common Stock set forth in Section 6(i)(1). Upon the occurrence of an Acceleration Event, as defined in Section 6(i)(2), all restrictions then outstanding with respect to a Restricted Stock Award and Restricted Unit Award shall automatically expire and be of no further force and effect. (g) OTHER PROVISIONS. The Committee shall have the authority (and the Restricted Award Agreement may so provide) to cancel all or any portion of any outstanding restrictions and conditions prior to the expiration of the Restricted Period with respect to all or part of a Restricted Stock Award or Restricted Unit Award on such terms and conditions as the Committee may deem appropriate. The Restricted Award Agreements authorized under this Plan shall contain such other provisions not inconsistent with the terms hereof as the Committee shall deem advisable. -11- ================================================================= 8. Agreement by Grantee Regarding Withholding Taxes. ------------------------------------------------ When a Grantee or other person becomes entitled to receive shares of Common Stock pursuant to the exercise of an Option or upon the lapse of restrictions relating to a Restricted Stock Award, or to receive a cash payment with respect to a Restricted Unit Award upon the lapse of restrictions relating thereto, the Corporation shall have the right to require the Grantee or such other person to pay to the Corporation, or to withhold from any cash payment required to be made with respect to a Restricted Unit Award, the amount of any taxes that the Corporation may be required to withhold before delivery to such Grantee or other person of a certificate or certificates representing such shares, or the delivery to such Grantee of a payment with respect to Restricted Units. Unless otherwise prohibited by the Committee or by applicable law, a Grantee may satisfy any such withholding tax obligation by any of the following methods, or by a combination of such methods: (a) tendering a cash payment; (b) authorizing the Corporation to withhold from the shares of Common Stock otherwise issuable to such Grantee (or, in the case of a Restricted Stock Award, from the shares with respect to which the restrictions shall have lapsed) shares having an aggregate Fair Market Value, determined as of the date the withholding tax obligation arises, less than or equal to the amount of the total withholding tax obligation or, at the discretion of the Committee, up to the total tax liability of the Grantee or other person calculated at the maximum combined marginal federal, state and local tax rates applicable to the Grantee or other person (the "Maximum Liability"); (c) delivering to the Corporation previously acquired shares of Common Stock (none of which shares may be subject to any claim, lien, security interest, community property right or other right of spouses or present or former family members, pledge, option, voting agreement or other restriction or encumbrance of any nature whatsoever) having an aggregate Fair Market Value, determined as of the date the withholding tax obligation arises, less than or equal to the amount of the total withholding tax obligation or, at the discretion of the Committee, up to the Maximum Liability; or (d) authorizing the Committee to withhold from the payment of a Restricted Stock Unit with respect to which the Restricted Period has lapsed an amount less than or equal to the amount of the total withholding tax obligation or, at the discretion of the Committee, up to the Maximum Liability. A Grantee's election to pay his or her withholding tax obligation or all or part of the Maximum Liability (in whole or in part) by the method described in clause (b) hereof is irrevocable once it is made, may be disapproved by the Committee and, if made by any Executive Officer, must be made (x) only during the period beginning on the third business day following the date of release of the Corporation's quarterly or annual summary statement of sales and earnings and ending on the twelfth business day following the date of such release or (y) not less than six months prior to the date such Grantee's withholding tax obligation arises. -12- ==================================================================== 9. Term of Plan. ------------- The term of this Plan is ten (10) years from the date the Plan was originally adopted by the Board, or the date the Plan is approved by the stockholders of the Corporation, whichever is earlier. No Option, Restricted Stock Award or Restricted Unit Award shall be granted pursuant to this Plan later than January 31, 2002, but Options and Restricted Stock and Unit Awards theretofore granted may extend beyond that date in accordance with their terms. 10. Amendment and Termination of the Plan. ------------------------------------- The Board may, at any time and from time to time, suspend, terminate, modify or amend the Plan; provided, however, that any amendment that would materially increase the aggregate number of shares of Common Stock as to which Options or Restricted Stock Awards may be granted under the Plan, materially increase the benefits accruing to participants under the Plan, or materially modify the requirements as to eligibility for participation in the Plan, each within the meaning of Rule 16b-3, and, in the sole discretion of the Committee, any amendment that requires shareholder approval in order for the Plan to comply with Section 162(m) of the Code, shall be subject to the approval of the holders of a majority of the Common Stock present and entitled to vote at a duly held meeting of the shareholders of the Corporation, except that any such increase or modification that may result from adjustments authorized by Section 6(i) hereof shall not require such approval. Except as provided in Section 6 hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any Grant previously made, unless the written consent of the Grantee is obtained. 11. Approval of Stockholders. ------------------------ The Plan shall take effect upon its adoption by the Board of Directors but shall be subject to the approval of the holders of a majority of the issued and outstanding shares of Common Stock of the Corporation, which approval must occur within twelve months after the date the Plan is adopted by the Board. -13- ================================================================= 12. Miscellaneous. -------------- (a) Effect of Headings. The section and -------------------- subsection headings contained herein are for convenience only and shall not affect the construction hereof. (b) Compliance with Legal Requirements. The Plan ----------------------------------- and the other obligations of the Corporation under the Plan and any agreement shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Corporation, in its discretion, may postpone the issuance or delivery of Common Stock under any Grant as the Corporation may consider appropriate, and may require any Grantee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Common Stock in compliance with applicable laws, rules and regulations. (c) No Right To Continued Employment. Nothing in --------------------------------- the Plan or in any agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of the Corporation or any of its divisions or Subsidiary Corporations, to be entitled to any remuneration or benefits not set forth in the Plan or such agreement or to interfere with or limit in any way the right of the Corporation or such division or Subsidiary Corporation to terminate such Grantee's employment. (d) Grantee Rights. No Grantee shall have any --------------- claim to be made any Grant under the Plan, and there is no obligation for uniformity of treatment for Grantees. Except as provided specifically herein, a Grantee or a transferee of a Grant shall have no rights as a stockholder with respect to any shares covered by any Grant until the date of the issuance of a stock certificate for such shares. (e) Beneficiary. A Grantee may file with the ----------- Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Grantee, the executor or administrator of the Grantee's estate shall be deemed to be the Grantee's beneficiary. (f) Interpretation. The Plan is designed and --------------- intended to comply with Rule 16b-3 promulgated under the Exchange Act and, to the extent applicable, with Section 162(m) of the Code, and all provisions hereof shall be construed in a manner to so comply. -14- EX-10 5 EXHIBIT 10.26.2 EXHIBIT 10.26.2 STOCKHOLDERS AGREEMENT ---------------------- STOCKHOLDERS AGREEMENT, dated as of September 20, 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 7, 1996 (the "Purchase Agreement"), as amended as of August 27, 1996, 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 2,348,145 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: ================================================================== Page 2 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. ================================================================== Page 3 The term "Exchange Act" shall mean the Securities ------------ Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. 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 Ex --- change 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 =============================================================== Page 4 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 ==================================================================== Page 5 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). 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. =================================================================== Page 6 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 ================================================================== Page 7 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 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 ============================================================= Page 8 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 ================================================================== Page 9 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; (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 ===================================================================== Page 10 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 under writer, 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 ================================================================= Page 11 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 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 ================================================================ Page 12 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 ==================================================================== Page 13 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 indemni- fication 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 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, ============================================================== Page 14 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. =============================================================== Page 15 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), 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 =============================================================== Page 16 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 ==================================================================== Page 17 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 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. ================================================================ Page 18 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 SEPTEMBER 20, 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. =============================================================== Page 19 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 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 ===================================================================== Page 20 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 as signed, 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. =================================================================== Page 21 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 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 ============================================================= Page 22 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: /s/ Walter J. Parks ------------------------- _ Name: Walter J. Parks Title: Senior Vice President - Finance CYGNE DESIGNS, INC. By: /s/ Bernard M. Manuel --------------------------- Name: Bernard M. Manuel Title: Chairman and Chief Executive Officer CYGNE GROUP (F.E.) LIMITED By: /s/ Bernard M. Manuel ----------------------------- Name: Bernard M. Manuel Title: Director EX-10 6 EXHIBIT 10.26.3 EXHIBIT 10.26.3 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT is made and entered into as of the 20th day of September, 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, as amended as of August 27, 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, =============================================================== Consulting Agreement Bernard Manuel Page 2 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 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 ==================================================================== Consulting Agreement Bernard Manuel Page 3 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"). 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 in curred 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 ==================================================================== Consulting Agreement Bernard Manuel Page 4 (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. ============================================================================ Consulting Agreement Bernard Manuel Page 5 (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. (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, ===================================================================== Consulting Agreement Bernard Manuel Page 6 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, di- rectly or indirectly, induce or solicit (or authorize or assist in the taking of any such actions by any third ===================================================================== Consulting Agreement Bernard Manual Page 7 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. ===================================================================== Consulting Agreement Bernard Manuel Page 8 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 ===================================================================== Consulting Agreement Bernard Manuel Page 9 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 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 ==================================================================== Consulting Agreement Bernard Manuel Page 10 (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 as signs, 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, -------- ------- ===================================================================== Consulting Agreement Bernard Manuel Page 11 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 here under; 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. 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 interpre- tation of this Agreement. As used in this Agreement, the ================================================================ Consulting Agreement Bernard Manuel Page 12 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. ================================================================== Consulting Agreement Bernard Manuel Page 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date and year first above written. ANNTAYLOR STORES CORPORATION By: /s/ Walter J. Parks ---------------------------- Name: Walter J. Parks Title: Senior Vice President - Finance ANNTAYLOR, INC. By: /s/ Walter J. Parks --------------------------- Name: Walter J. Parks Title: Senior Vice President - Finance CYGNE DESIGNS, INC. By: /s/ Paul D. Baiocchi ------------------------------ Name: Paul D. Baiocchi Title: Vice President CONSULTANT /s/ Bernard M. Manuel ----------------------------------- Bernard M. Manuel Consultant EX-10 7 EXHIBIT 10.26.4 EXHIBIT 10.26.4 CONSULTING AGREEMENT --------------------- THIS CONSULTING AGREEMENT is made and entered into as of the 20th day of September, 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, as amended as of August 27, 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 ====================================================================== Consulting Agreement Irving Benson Page 2 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 ==================================================================== Consulting Agreement Irving Benson Page 3 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"). 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 in curred 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 ================================================================ Consulting Agreement Irving Benson Page 4 (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 in solvency 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. ========================================================================= Consulting Agreement Irving Benson Page 5 (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. (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, =================================================================== Consulting Agreement Irving Benson Page 6 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, di- rectly or indirectly, induce or solicit (or authorize or assist in the taking of any such actions by any third ===================================================================== Consulting Agreement Irving Benson Page 7 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. =================================================================== Consulting Agreement Irving Benson Page 8 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 ======================================================================== Consulting Agreement Irving Benson Page 9 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 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 =================================================================== Consulting Agreement Irving Benson Page 10 (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 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 as signs, 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, -------- ------- ===================================================================== Consulting Agreement Irving Benson Page 11 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. 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 ===================================================================== Consulting Agreement Irving Benson Page 12 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. ======================================================================= Consulting Agreement Irving Benson Page 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date and year first above written. ANNTAYLOR STORES CORPORATION By: /s/ Walter J. Parks -------------------------- Name: Walter J. Parks Title: Senior Vice President - Finance ANNTAYLOR, INC. By: /s/ Walter J. Parks ---------------------------- Name: Walter J. Parks Title: Senior Vice President - Finance CYGNE DESIGNS, INC. By: /s/ Paul D. Baiocchi ------------------------------ Name: Paul D. Baiocchi Title: Vice President CONSULTANT /s/ Irving Benson -------------------------------------- Irving Benson Consultant EX-21 8 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF ANNTAYLOR STORES CORPORATION ANNTAYLOR FINANCE TRUST, a statutory business trust formed under Delaware law sponsored by AnnTaylor Stores Corporation ANNTAYLOR, INC., a Delaware corporation ANNTAYLOR TRAVEL, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR FUNDING, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR DISTRIBUTION SERVICES, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR LOFT, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR GLOBAL SOURCING, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR SOURCING FAR EAST LIMITED, an entity organized under the laws of Hong Kong and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR SOURCING ITALY Srl, an entity organized under the laws of Italy and wholly owned subsidiary of AnnTaylor Sourcing Far East Limited EX-23 9 AUDITORS CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT AnnTaylor Stores Corporation: We consent to the incorporation by reference in AnnTaylor Stores Corporation's Registration Statements No. 33-31505 on Form S-8, No. 33-50688 on Form S-8, No. 33-52389 on Form S-8 and No. 33-55629 on Form S-8 of our report dated March 6, 1997 appearing in the Annual Report on Form 10-K of AnnTaylor Stores Corporation for the year ended February 1, 1997. NEW YORK, NEW YORK APRIL 28, 1997 EX-27 10 FDS
5 This schedule contains summary of financial information extracted from the condensed consolidated statements of operations and condensed consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 0000874214 ANN TAYLOR STORES CORP. 1,000 12-MOS FEB-01-1997 FEB-01-1997 7,025 0 64,416 811 100,237 196,520 209,081 65,648 688,139 77,670 100,000 0 0 174 370,408 688,139 798,117 798,117 443,443 443,443 308,616 0 24,416 21,642 12,975 0 0 0 0 8,667 .36 .36
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