-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kDYvkId8cryERRA0H7SPlTtmutjhy20Twpg7zgwojj6oatkUNQeNmRl2mxYQALpO C6X3/7mWa+NuKCq3NVvR4g== 0000950112-94-000851.txt : 19940404 0000950112-94-000851.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950112-94-000851 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940129 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNTAYLOR STORES CORP CENTRAL INDEX KEY: 0000874214 STANDARD INDUSTRIAL CLASSIFICATION: 5621 IRS NUMBER: 133499319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-10738 FILM NUMBER: 94519917 BUSINESS ADDRESS: STREET 1: 142 WEST 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR STORES CORPORATION FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 (FEE REQUIRED). FOR THE FISCAL YEAR ENDED JANUARY 29, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED). COMMISSION FILE NO. 33-28522 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 X No __. The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 15, 1994 was $342,335,184. The number of shares of the registrant's Common Stock outstanding as of March 15, 1994 was 21,891,130. DOCUMENTS INCORPORATED BY REFERENCE: NONE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. As of January 29, 1994, the Company operated 231 stores in 38 states and the District of Columbia. The Company is a holding company that 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. Unless the context indicates otherwise, all references herein to the Company include the Company and its wholly owned subsidiary Ann Taylor. The first Ann Taylor store was opened in New Haven, Connecticut in 1954. Over the years, the number of stores gradually expanded and by 1981 there were 36 stores. Allied Stores Corporation ("Allied Stores") acquired the then parent of Ann Taylor in 1981 and began a rapid expansion program for the Ann Taylor stores, which continued after Allied Stores was acquired by the Campeau Corporation in 1986. Ann Taylor grew significantly after 1981, with the number of stores increasing to 119 by the end of 1988, at which time Ann Taylor was acquired by the Company (the "Acquisition"). Since the Acquisition, the number of stores has increased to 231. In May 1991, the Company completed an initial public offering (the "IPO") in which it issued and sold 6,882,395 shares of its common stock, par value $.0068 per share (the "Common Stock"), at a price of $26.00 per share, resulting in aggregate net proceeds of approximately $166,541,000 (after payment of expenses of the offering by the Company). The net proceeds from the IPO were used to repurchase certain debt securities issued by Ann Taylor in connection with financing the Acquisition. The Company's merchandising strategy focuses on achieving the "Ann Taylor look," which emphasizes classic styles, updated to reflect current fashion trends. The Company considers the Ann Taylor name a fashion brand, defining a distinctive collection of career and casual separates, weekend wear, dresses, tops, accessories and shoes, coordinated as part of a total wardrobing strategy. The Company's total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates assist customers in merchandise selection and wardrobe coordination, helping them achieve the Ann Taylor look while reflecting the customers' personal styles. The Company believes that its customer base consists primarily of relatively affluent, fashion-conscious women from the ages of 20 to 50, 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. Since becoming Chairman and Chief Executive Officer in February 1992, Sally Frame Kasaks has redirected the Company's merchandising and marketing efforts to enhance the position of Ann Taylor as a fashion brand. The Company's strategy has been broadened to include not only the opening of new stores in new and existing markets, but also the expansion of existing stores and the introduction of product line extensions and additional channels of distribution. The principal elements of the Company's strategy include: . Emphasis on product design and development to reinforce the exclusivity of Ann Taylor merchandise, by expanding the Company's fabric and merchandise design team. . Renewed focus on consistent quality and fit, by strengthening the production management team responsible for technical design and factory and merchandise quality assurance. . Development of the Company's global and direct sourcing capabilities, to reduce costs and shorten lead times. The Company increased its merchandise purchases through its direct sourcing joint venture, which acts as an agent exclusively for Ann Taylor, placing orders directly with manufacturers, from 7.3% of merchandise purchased in fiscal 1992 to 23.5% in fiscal 1993. . Development of a merchandise pricing structure that emphasizes consistent everyday value rather than promotions, adding to the credibility of the Ann Taylor brand. . Introduction of product line extensions building on the strength of the Ann Taylor brand name. In fall 1992, the Company increased its presence in casual wear by introducing its own line of denim known as ATdenim, that is now sold in all Ann Taylor stores. In fall 1993, Ann Taylor petites were tested in the career separates and dress categories in 25 stores. By fall 1994, a broader range of Ann Taylor petites will be carried in approximately 100 Ann Taylor stores. In fiscal 1994, the Company plans to test an Ann Taylor signature fragrance and related products. . Introduction of two larger store prototypes. Most new and expanded stores will be approximately 5,500 square feet, and, in certain premier markets, new and expanded stores will be approximately 10,000 to 12,000 square feet. These new store prototypes are designed to reinforce the Ann Taylor total wardrobing concept, allow the proper presentation of Ann Taylor product extensions, and improve customer service and ease of shopping. . Introduction of additional channels of distribution. In fiscal 1993, the Company introduced Ann Taylor Factory Stores which sell Ann Taylor merchandise designed or produced specifically for the factory stores, in addition to serving as a clearance vehicle for merchandise from Ann Taylor stores. In fiscal 1994, the Company intends to test free standing Ann Taylor shoe stores as an additional channel of distribution for Ann Taylor brand footwear. The Company also views its fashion catalog, which presently is used principally as an advertising vehicle, as a potential future channel of distribution. . Increased investment in more sophisticated point-of-sale and inventory management systems, including the integration of the Company's merchandise planning, store assortment planning, and merchandise allocation and replenishment systems. These enhancements are designed to enable the Company to manage its business more effectively and cost efficiently by improving customer service and providing the ability to better manage inventory levels. . Construction of a 250,000 square foot national distribution center in Louisville, Kentucky to replace, in early 1995, the Company's existing 90,000 square foot distribution facilities in Connecticut. MERCHANDISING Ann Taylor stores offer a distinctive collection of career and casual separates, dresses, tops, weekend wear, shoes and accessories, consisting primarily of exclusive Ann Taylor brand name fashions. The Company's merchandising strategy focuses on achieving the "Ann Taylor look" which emphasizes classic styles, updated to reflect current fashion trends. Ann Taylor stores offer a variety of coordinated apparel and an assortment of shoes and accessories, to enable customers to assemble complete outfits. 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 encourages sales associates to become familiar with regular customers to assist these customers in finding merchandise suited to their tastes and wardrobe needs. The Company has a liberal return policy, which it believes is comparable to those offered by better department stores and other specialty retail stores. 2 The following table sets forth the approximate percentage of net sales attributable to each merchandise group for the past three years:
PERCENTAGE OF NET SALES ------------------------------- MERCHANDISE GROUP 1993 1992 1991 - --------------------------------------------------------------- --------- --------- --------- Separates...................................................... 31.6% 31.0% 32.2% Dresses........................................................ 17.3 20.7 19.1 Tops........................................................... 27.4 22.2 20.2 Weekend wear................................................... 11.7 11.1 9.7 Shoes (a)...................................................... 6.0 7.2 8.6 Accessories.................................................... 6.0 7.8 10.2 --------- --------- --------- Total 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
- --------------- (a) Includes net sales from Ann Taylor brand footwear in 1993, 1992 and 1991 (representing 6.0%, 5.5% and 4.9% of net sales, respectively) and net sales through leased shoe departments located in Ann Taylor stores in 1992 and 1991. Leased shoe departments were phased out of Ann Taylor stores in stages from August 1990 through February 1, 1993. As of February 1, 1993, there were no leased shoe departments remaining at any Ann Taylor stores. See "Shoes" below. A principal element of the Company's business strategy is the introduction of product line extensions. For example, Ann Taylor shoes, which were sold in 99 Ann Taylor stores in 1992, were expanded to 126 stores in fiscal 1993 and are expected to be in over 155 stores by fall 1994. In fall 1992, the Company increased its presence in casual wear by introducing its own line of denim known as ATdenim, that is now sold in all Ann Taylor stores. In fall 1993, Ann Taylor petites were tested in the career separates and dress categories in 25 stores. By fall 1994, a broader range of Ann Taylor petites will be carried in approximately 100 Ann Taylor stores. In fiscal 1994, the Company also plans to test an Ann Taylor signature fragrance and related products. MERCHANDISE DESIGN AND PRODUCTION Ann Taylor merchandise is developed based upon current fashion trends and analysis of prior year sales. The Company's merchandising and product development groups determine needs for the upcoming season, design styles to fill those needs and arrange for the production of merchandise either through vendors who are private label specialists or directly with a factory. The Company is continuing to develop its capability to source its merchandise directly with manufacturers and decrease its dependence on vendors who are not themselves manufacturers. The Company believes that direct sourcing improves its competitive position by reducing costs and shortening lead times. To this end, in May 1992, the Company commenced a joint venture known as CAT U.S., Inc. ("CAT") with Cygne Designs, Inc., which was formed for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. The Company currently owns a 40% interest in CAT. Merchandise purchased by Ann Taylor through CAT represented 23.5% and 7.3% of all merchandise purchased by the Company in 1993 and 1992, respectively. The Company expects its purchases through CAT to increase to approximately 30% of all merchandise purchased in 1994. In 1993, the Company purchased merchandise from approximately 285 vendors, including five vendors who each accounted for 4% or more of the Company's merchandise purchases: CAT (23.5%), Cygne Designs, Inc. (20.0%), Parigi (5.0%), Depeche (4.6%) and Andrea Behar (4.3%). In 1993, over 95% of the Company's merchandise was purchased from domestic vendors. The Company's domestic suppliers include vendors who either manufacture merchandise or supply merchandise manufactured by others, as well as vendors that are both manufacturers and suppliers. Consistent with the retail apparel industry as a whole, most of the Company's domestic vendors import a large portion of their merchandise from abroad. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase from any supplier, although it does have an equity investment in CAT. The Company believes 3 it has a good relationship with its suppliers and that, as the number of stores increases and existing stores are expanded, there will continue to be adequate sources that will be able to produce a sufficient supply of quality goods in a timely manner and on satisfactory economic terms. The Company's production management department establishes the technical specifications for all Ann Taylor merchandise, inspects and certifies factories in which Ann Taylor merchandise is produced, conducts periodic inspections of factories while goods are in production to identify potential problems prior to shipment by vendors of merchandise, and upon receipt, inspects merchandise on a test basis for uniformity of sizes and colors, as well as for overall quality of manufacturing. In addition to Company personnel, CAT also performs in-factory quality control inspections on behalf of the Company with respect to all merchandise orders CAT places. 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 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. Each Ann Taylor store carries merchandise in all merchandise groups and sizes (except shoes and petites). 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 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, changes in customer preference or if it is determined that the inventory in stock will not sell at its currently marked price. Marked down items that are not sold after several more weeks are generally moved to the Company's factory stores where additional markdowns may be taken. Generally, inventory turns over approximately five times annually. The Company uses a centralized distribution system, under which all merchandise is received, processed and shipped to the stores through the Company's New Haven, Connecticut distribution facility virtually every business day. The Company is constructing a 250,000 square foot distribution facility in Louisville, Kentucky that will replace the Company's existing facilities by early 1995. See "Properties" and "Management's Discussion and Analysis". STORES As of January 29, 1994, the Company operated 231 stores in 38 states and the District of Columbia. The following table sets forth by state the stores that were open as of January 29, 1994: LOCATIONS BY STATE
NUMBER OF STATE STORES - --------------------------- ------------- Alabama.................... 2 Arizona.................... 3 Arkansas................... 1 California................. 38 Colorado................... 3 Connecticut................ 10 District of Columbia....... 4 Florida.................... 17 Georgia.................... 4 Hawaii..................... 1 Illinois................... 11 Indiana.................... 2 Kentucky................... 2 Louisiana.................. 4 Maryland................... 5 Massachusetts.............. 12 Michigan................... 7 Minnesota.................. 4 Mississippi................ 1 Missouri................... 5 Nebraska................... 1 Nevada..................... 1 New Hampshire.............. 2 New Jersey................. 11 New Mexico................. 1 New York................... 22 North Carolina............. 3 Ohio....................... 9 Oklahoma................... 2 Oregon..................... 1 Pennsylvania............... 12 Rhode Island............... 1 South Carolina............. 1 Tennessee.................. 5 Texas...................... 12 Utah....................... 1 Virginia................... 7 Washington................. 2 Wisconsin.................. 1
4 As of January 29, 1994, 111 stores were in regional malls, 54 stores were in upscale specialty centers, 34 stores were in village locations, 23 stores were in downtown locations and 9 stores were factory stores located in factory outlet centers. The Company selects store locations that it believes are convenient for its customers and consistent with its upscale image. 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 stores opened prior to January 30, 1993 averaged 3,300 square feet in size, with the exception of three stores that ranged between 10,300 square feet and 12,500 square feet. During 1992, the Company designed two new store prototypes. The first is a store model of approximately 5,500 square feet, on which most new and expanded stores opened in 1993 and in the future will be based. The Company also designed a new larger store prototype of approximately 10,000 to 12,000 square feet, which is reserved for certain premier markets that management believes can support such a store. Both new store prototypes incorporate modified display features, fixtures and fitting rooms. The Company believes that its new store prototypes enhance the Company's ability to merchandise its customer offerings and reinforce its total wardrobing concept, provide area necessary for the proper presentation of Ann Taylor shoes and other product line extensions, and increase customer service and ease of shopping. The typical Ann Taylor store has approximately 17% of its total square footage allocated to stockroom and other non-selling space. Outlet shopping is one of the fastest growing segments of the retail apparel industry, appealing to consumers' increasing orientation to value and to manufacturers' and retailers' desire for additional channels of distribution and control over liquidation of their product. In 1993, the Company began testing factory stores as an additional channel of distribution, by converting its four then existing clearance centers to the factory store format and opening five new factory stores in outlet malls. Ann Taylor Factory Stores sell Ann Taylor merchandise manufactured specifically for the factory stores and having an average initial price generally lower than the average initial price of merchandise carried in Ann Taylor stores, as well as serve as a clearance vehicle for merchandise from Ann Taylor stores. In 1993, approximately 36% of all merchandise sold in Ann Taylor Factory Stores was manufactured specifically for these stores. EXPANSION Ann Taylor has grown significantly since the Acquisition, with the number of stores increasing from 119 at the beginning of 1989 to 231 at the end of 1993, and with net sales increasing from approximately $353,900,000 in 1989, to approximately $501,600,000 in 1993. The following table sets forth certain information regarding store openings, expansions and closings for Ann Taylor stores ("ATS") and Ann Taylor Factory Stores ("ATO"), since the consummation of the Acquisition in the beginning of the 1989 fiscal year:
NUMBER OF STORES -------------------------------------------------------------------------------------- ATS ATS OPEN AT OPEN AT OPENED EXPANDED CLOSED END FISCAL BEGINNING OF DURING DURING DURING OF FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR YEAR - ---------------------------------------- --------------- ------------- --------------- --------------- --------- ATS ATO ATS ----------- ----------- --------- 1989.................................... 119(a) 20 1(b) 2 1 138 1990.................................... 139 29 3(b) 3 1 166 1991.................................... 170 33 0 3 3 196 1992.................................... 200 20 0 5 1 215 1993.................................... 219 8 5 12 1 222 FISCAL YEAR - ---------------------------------------- ATO ----------- 1989.................................... 1 1990.................................... 4 1991.................................... 4 1992.................................... 4 1993.................................... 9
- --------------- (a) Prior to 1989, the Company did not operate any factory stores or clearance centers. (b) Prior to 1993, ATO stores served only as clearance centers. 5 An important aspect of the Company's business strategy is a real estate expansion program that is designed to reach new customers through the opening of new stores (including factory stores) and the expansion of existing stores. As market conditions warrant and as sites become available, the Company adds additional Ann Taylor stores or expands the size of existing stores, in major cities and their affluent suburbs where Ann Taylor already has a presence. The Company also opens new Ann Taylor stores in additional cities that it believes have a sufficient concentration of its target customers. Ann Taylor Factory Stores typically are located outside the shopping radius of Ann Taylor stores, in outlet malls that feature factory outlet stores of other upscale brands. Prior to 1993, the real estate expansion program focused primarily on adding new Ann Taylor stores. The Company now views the expansion of existing stores and the opening of factory stores as an integral part of the Company's expansion strategy. Once an appropriate site has been selected and a lease signed, the Company generally requires a relatively short lead time to open a new store, with store construction typically taking approximately three months. In 1993, the Company opened 13 new stores (including 5 factory stores), expanded 12 existing stores and closed one store, resulting in an increase in the Company's total store square footage from approximately 814,000 square feet to approximately 929,000 square feet, a net increase of approximately 115,000 square feet. Approximately 80% of this additional square footage was opened during the second half of 1993. The Company expects to increase store square footage by at least 200,000 square feet, or 21.5%, in 1994. The Company believes that approximately 70% of this new square footage will be represented by new stores, of which about half will be Ann Taylor stores and about half will be Ann Taylor Factory Stores. The balance of the 1994 square footage increase will result from store expansions. The Company intends to increase square footage by approximately 200,000 square feet in each of fiscal 1995 and fiscal 1996. 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" for a discussion of the restrictions on capital expenditures in the Ann Taylor Bank Credit Agreement. The average net construction cost to the Company of opening a new store, after giving effect to landlord allowances, was approximately $197,000 (or $38 per square foot) in 1993, compared to $52,000 (or $18 per square foot) in 1992 and $114,000 (or $32 per square foot) in 1991. In most cases, the Company receives allowances from landlords for the construction of new stores which reduce the Company's construction costs. The higher per store net construction costs in 1993 reflect the larger average store sizes, increased costs associated with the new store prototypes and lower average landlord construction allowances. In 1993, 12 stores were expanded at an aggregate net construction cost to the Company of $7,490,000, or $624,000 per store, after giving effect to landlord allowances. Three of the 12 stores expanded in 1993 were expanded from an average original size of approximately 3,000 square feet to the larger "premier market" prototype. Accordingly, these stores cost more to expand than a typical store expansion. The average gross construction cost per square foot to expand a store is generally comparable to the gross cost per square foot of a new store. Landlord allowances, however, are typically less for an expansion than for a new store. SHOES As of January 29, 1994, Ann Taylor shoes were sold in 126 of the Company's 231 stores. The Company intends to include an Ann Taylor shoe department in each new or expanded store, and, in 1994, plans to add shoes to approximately 20 other existing Ann Taylor stores. In addition, in 1994 the Company intends to test free standing Ann Taylor shoe stores as an additional channel of distribution for Ann Taylor brand footwear. Prior to 1990, all shoes sold in Ann Taylor stores were sold in leased shoe departments by Joan & David Helpern, Inc. ("Joan & David") pursuant to a license agreement. In 1990, the Company 6 introduced a line of Ann Taylor brand name shoes. Beginning in August 1990, Joan & David began a scheduled withdrawal of its leased shoe departments, vacating additional departments every six months through the end of fiscal 1992. As of February 1, 1993, Joan & David no longer operated leased shoe departments in any Ann Taylor stores. Sales through leased shoe departments totaled $8,207,000, or 1.7% of net sales, in 1992, and $16,056,000, or 3.7% of net sales, in 1991. There were no leased shoe department sales during fiscal 1993. Net sales in 1993, 1992 and 1991 included $29,922,000, $25,638,000, and $21,527,000, respectively, in net sales from the Ann Taylor brand name shoe line. Under the terms of an amended license agreement, entered into in 1990, the Company was entitled to a fee from Joan & David equal to 14.5% of Joan & David's annual net sales through Ann Taylor stores, which, after employee discounts, resulted in the Company retaining an amount equal to approximately 14.4% of such sales. Joan & David was responsible for the costs associated with operating its shoe departments. Persons who worked in the leased shoe departments were employees of Joan & David and received all salary, bonus and commission payments and benefits from Joan & David. INFORMATION SYSTEMS The Company is increasing its investment in computer hardware, systems applications and networks to speed customer service, to support the purchase and allocation of merchandise and to improve operating efficiencies. In fall 1993, the Company began the roll out of a new point of sale system to all Ann Taylor stores. The roll out will be completed by the summer of 1994. Upon completion, the system will allow the introduction of a number of features that will enable the Company to manage its business more effectively and cost efficiently. These features include on-line receipts and transfers of inventory, which will reduce paperwork and result in more timely inventory information; the ability to take credit card applications and account look-up in the stores, which will both improve customer service and reduce expense; and the ability to send advance ship notices to stores prior to their receipt of merchandise, allowing better labor scheduling in the stores and reducing expense. The new system will permit automated promotional tracking, providing better information to the stores on current promotions and providing the results of these promotions to the Company's headquarters on a more timely basis, allowing the Company to respond more quickly and accurately to customer preferences. During 1994, the Company will upgrade the inventory management system. This upgrade, along with the new point of sale system, will allow full price look-up in the stores and provide for more timely information on inventory levels and better analysis of sales trends. The enhanced information will also allow the Company to more fully integrate its planning and allocation system. By the end of 1995, the Company expects to have its merchandise planning system, store assortment planning system, merchandise allocation system and merchandise replenishment system completely integrated, allowing the Company to respond more quickly to individual store trends and allocate merchandise more closely aligned with an individual store's customer base. The Company is also initiating systems integration with its suppliers. In spring 1994, the Company's first electronic data interchange relationship will be implemented with a hosiery supplier, allowing quicker response to sales and maintenance of inventory levels in line with model stock levels. CUSTOMER CREDIT Customers may pay for merchandise with the Ann Taylor credit card, American Express, Visa, MasterCard, cash or check. Credit card sales were 77.9% of net sales in 1993, 77.6% in 1992, and 79.1% in 1991. In 1993, 31.5% of net sales were made with the Ann Taylor credit card and 46.4% were made with third-party credit cards. Accounts written off in 1993 were $1,390,000, or 0.3% 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 7 credit. At January 29, 1994, the Company had over 520,000 credit accounts that had been used during the past 18 months. ADVERTISING AND PROMOTION The Company's principal advertising vehicle is its fashion catalog, which it publishes four times per year and mails primarily to Ann Taylor credit card holders. In 1993, the Company ran advertisements in the following national women's fashion magazines: Elle, Vogue and Harpers Bazaar. The Company spent $6,388,000 (1.3% of net sales) on advertising in 1993, compared to $5,509,000 (1.2% of net sales) in 1992 and $8,645,000 (2.0% of net sales) in 1991. TRADEMARKS AND SERVICE MARKS The Company is the owner in the United States of the trademark and service mark "AnnTaylor". This mark is protected by several federal registrations in the United States Patent and Trademark Office, covering clothing, shoes, jewelry and certain other accessories, and clothing store services. The terms of these registrations vary from ten to twenty years (expiring in 2003 and 2007), and each is renewable indefinitely if the mark is still in use at the time of renewal. The Company's rights in the "AnnTaylor" mark are a significant part of the Company's business, as this mark is well-known in the women's retail apparel industry. Accordingly, the Company intends to maintain its mark and the related registrations. The Company is not aware of any claims of infringement or other challenges to the Company's right to use its mark in the United States. The Company owns registrations for the "AnnTaylor" mark for clothing in Japan, Canada and Taiwan, and owns or has applied for registration for the "AnnTaylor" mark for clothing and other goods in Japan and other countries as well. COMPETITION The women's retail apparel industry is highly competitive. The Company believes that the principal bases upon which it competes are fashion, quality, value and service. The Company competes with certain departments in better national department stores such as Neiman Marcus, Saks Fifth Avenue, Lord & Taylor, Nordstrom and Bloomingdale's, as well as certain departments in regional department stores, such as Macy's, Marshall Fields and Dillard's. The Company believes that it competes with these department stores by offering a focused merchandise selection, personalized service and convenience, as well as exclusive Ann Taylor fashions, which distinguish its goods from the goods carried by these department stores. Certain of the Company's product lines also compete with other specialty retailers such as Talbots, Ralph Lauren, The Limited, The Gap and Banana Republic. The Company believes that its focused merchandise selection and exclusive Ann Taylor brand name fashions 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 with them in the future. 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. For example, certain incentive programs offer individual associates cash awards for selling multiple wardrobe items and for achieving individual sales goals. Other programs provide bonuses or cash awards to all associates in a store that has achieved, for example, the highest percentage increase in sales for a given period. As of January 29, 1994, the Company had 3,741 employees, of whom 880 were full-time salaried employees, 1,628 were full-time hourly employees and 1,233 were part-time hourly employees. None of the Company's employees are represented by a labor union. The Company believes that its relationship with its employees is good. As of January 29, 1994, approximately 90% of the Company's employees were eligible to participate in the Company's health care benefits program. 8 ITEM 2. PROPERTIES As of January 29, 1994, the Company had 231 stores, all of which were leased. The leases typically provide for an initial five-to ten-year term and grant the Company the right to extend the term for one or two additional five-year periods. In most cases, the Company pays a minimum rent plus a contingent rent based on the store's net sales in excess of a specified threshold. The contingent rental payment is typically 5% of net sales in excess of the applicable threshold. Substantially all of the leases require the Company to pay insurance, utilities and repair and maintenance expenses and contain tax escalation clauses. The current terms of the Company's leases, including renewal options, expire as follows: YEARS LEASE NUMBER OF TERMS EXPIRE STORES ---------------- ------------- 1994-1996................................. 50 1997-1999................................. 20 2000-2002................................. 20 2003 and later............................ 141 Ann Taylor leases corporate offices at 142 West 57th Street, New York, containing approximately 71,000 square feet. The lease for these premises expires in 2006. Ann Taylor also leases office space in New Haven, which contains approximately 31,000 square feet. The lease for these offices expires in 1996. Ann Taylor leases its New Haven distribution center, which contains 78,790 square feet. The lease for this facility expires on March 31, 1995, with an option to extend this lease for an additional three months. In early 1994, the Company announced that it will be purchasing property in Louisville, Kentucky on which it will construct a 250,000 square foot facility that will replace the Company's existing distribution center facilities in Connecticut in early 1995. See "Management's Discussion and Analysis". ITEM 3. LEGAL PROCEEDINGS Ann Taylor 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 or results of operations 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 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 15, 1994 was 440. The following table sets forth the high and low closing sales prices for the Common Stock on the New York Stock Exchange during fiscal 1993 and fiscal 1992.
MARKET PRICE -------------------- FISCAL YEAR 1992 HIGH LOW --------- --------- First quarter....................................................... $ 23 1/8 $ 16 1/2 Second quarter...................................................... 24 5/8 18 3/4 Third quarter....................................................... 24 1/4 16 3/4 Fourth quarter...................................................... 24 3/8 19 1/4 FISCAL YEAR 1993 First quarter....................................................... $ 23 1/4 $ 17 7/8 Second quarter...................................................... 27 7/8 20 Third quarter....................................................... 29 5/8 22 7/8 Fourth quarter...................................................... 28 1/4 20 7/8
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 "Bank Credit Agreement") and the indenture relating to the $110,000,000 principal amount AnnTaylor, Inc. 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes"). 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. 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. 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. Such financial statements audited by Deloitte & Touche, independent auditors, for the fiscal years 1993, 1992 and 1991 appear elsewhere in this report. 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 report. 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, except 1989, which had 53 weeks. 10
FISCAL YEARS ENDED ---------------------------------------------------------- JAN. 29, JAN. 30, FEB. 1, FEB. 2, FEB. 3, 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT DATA AND PER SHARE DATA) OPERATING STATEMENT INFORMATION: Net sales, including leased shoe departments (a).... $ 501,649 $ 468,381 $ 437,711 $ 410,782 $ 353,912 Cost of sales....................................... 271,749 264,301 234,136 217,414 189,293 ---------- ---------- ---------- ---------- ---------- Gross profit................................... 229,900 204,080 203,575 193,368 164,619 Selling, general and administrative expenses........ 169,371 152,072 150,842 125,872 109,598 Distribution center restructuring charge (b)........ 2,000 -- -- -- -- Amortization of goodwill (c)........................ 9,508 9,504 9,506 9,484 9,711 ---------- ---------- ---------- ---------- ---------- Operating income............................... 49,021 42,504 43,227 58,012 45,310 Interest expense (d)................................ 17,696 21,273 33,958 50,081 55,858 Stockholder litigation settlement (e)............... -- 3,905 -- -- -- Other (income) expense, net......................... (194) 259 542 168 29 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary loss................................................ 31,519 17,067 8,727 7,763 (10,577) Income tax provision................................ 17,189 11,150 7,703 6,657 600 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary loss............. 14,330 5,917 1,024 1,106 (11,177) Extraordinary loss (f).............................. 11,121 -- 16,835 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss).............................. 3,209 5,917 (15,811) 1,106 (11,177) Preferred stock dividend............................ -- -- -- -- 1,000 ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common stock... $ 3,209 $ 5,917 $ (15,811) $ 1,106 $ (12,177) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) per share before extraordinary loss... $ .66 $ .28 $ .05 $ .08 $ (.91) Extraordinary loss per share (f).................... (.51) -- (.87) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share......................... $ .15 $ .28 $ (.82) $ .08 $ (.91) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding (in thousands).................................... 21,929 21,196 19,326 14,160 13,312 OPERATING INFORMATION: Percentage increase (decrease) in total comparable store sales (g)(h).................................. 2.3% (1.0)% (5.6)% 2.3% 14.3% Percentage increase (decrease) in owned comparable store sales (g)(h)(i)............................... 4.0% 0.8% (0.9)% 5.1% 16.5% Average net sales per gross square foot (g)(j)...... $ 576 $ 600 $ 642 $ 740 $ 771 Number of stores: Open at beginning of the period................ 219 200 170 139 119 Opened during the period....................... 13 20 33 32 21 Expanded during the period..................... 12 5 3 3 2 Closed during the period....................... 1 1 3 1 1 Open at the end of the period.................. 231 219 200 170 139 Capital expenditures................................ $ 25,062 $ 4,303 $ 10,004 $ 11,783 $ 6,146 Depreciation and amortization, including goodwill (c)................................................. $ 18,013 $ 16,990 $ 15,709 $ 14,177 $ 14,662 Working capital turnover (k)........................ 12.1x 16.8x 12.8x 12.4x 13.0x Inventory turnover (l).............................. 4.9x 5.3x 4.6x 4.6x 7.0x BALANCE SHEET INFORMATION (AT END OF PERIOD): Working capital..................................... $ 53,283 $ 29,539 $ 26,224 $ 42,234 $ 23,705 Goodwill, net (c)................................... 332,537 342,045 351,549 361,055 370,539 Total assets........................................ 513,399 487,592 491,747 510,724 493,160 Total debt.......................................... 189,000 195,474 211,917 380,362 365,787 Stockholders' equity................................ 259,271 245,298 229,464 47,483 57,532
(Footnotes on following page) 11 (Footnotes for preceding page) (a) The phase out of leased shoe departments was completed by February 1, 1993. (b) Relates to the relocation of the Company's distribution center, expected to be completed in early 1995, and represents a charge of $1,100,000 principally for severance and job training benefits and $900,000 for the write-off of the net book value of certain assets that are not expected to be used in the new facility. This charge reduced 1993 net earnings by $.05 per share. (c) As a result of the Acquisition, 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. (d) Includes non-cash interest expense of $4,199,000, $8,581,000, $12,243,000, $18,294,000 and $13,819,000 in the fiscal years 1993, 1992, 1991, 1990 and 1989, respectively, from accretion of original issue discount, amortization of deferred financing costs and, in 1992, 1991 and 1990, issuance of additional 10% junior subordinated exchange notes due 2004. (e) Relates to the settlement in January 1993 of a stockholder class action lawsuit that was filed against the Company and certain other defendants in October 1991. (f) In fiscal 1993, Ann Taylor incurred an extraordinary loss of $17,244,000 ($11,121,000, or $.51 per share, net of income tax benefit) due to debt refinancing activities. In fiscal 1991, Ann Taylor incurred an extraordinary loss of $25,900,000 ($16,835,000, or $.87 per share, net of income tax benefit), in connection with the repurchase of a portion of its then outstanding debt securities with proceeds from the IPO. (g) Percentage changes in comparable store sales and average net sales per gross square foot are adjusted so that all figures relate to a 52-week year. (h) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not open during the same month of the prior period. A store opened within the first two weeks of a month is deemed to have been opened on the first day of that month and a store opened thereafter in a month is deemed to have been opened on the first day of the next month. For example, if a store were opened on June 8, 1992, its sales from June 8, 1992 through year-end 1992 and its sales from June 1, 1993 through year-end 1993 would be included in determining comparable store sales for 1993, compared to 1992. In addition, in a year with 53 weeks (such as 1989), the extra week is not included in determining comparable store sales. For the periods previous to 1993, when a store's square footage has been increased as a result of expansion or relocation in the same mall or specialty center, the store continues to be treated as a comparable store. Commencing with stores expanded in fiscal 1993, any store the square footage of which is expanded by more than 15% is treated as a new store, upon the opening of the expanded store. (i) Excludes sales from leased shoe departments. (j) Average net sales per gross 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 net cost of goods sold (excluding costs of leased shoe departments) by the average of the cost of inventory at the beginning and end of the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Ann Taylor has grown significantly since the Acquisition, with the number of stores increasing from 119 at the beginning of 1989 to 231 at the end of 1993. During fiscal 1993, the Company expanded 12 stores, added 13 new stores and closed one store, resulting in a net increase in the Company's square footage of approximately 115,000 square feet. The Company expects to increase square footage by at least 200,000 square feet, or 21.5%, in fiscal 1994. Management anticipates that approximately 70% of this new square footage will be represented by new stores, of which about half will be Ann Taylor stores and about half will be Ann Taylor Factory Stores. The balance of the 1994 square footage increase will result from store expansions. The Company intends to increase square footage by approximately 200,000 square feet in each of fiscal 1995 and fiscal 1996. The Company's ability to continue to expand will be dependent upon general economic and business conditions affecting consumer spending, the 12 availability of desirable locations and the negotiation of acceptable lease terms for new locations. See "Business--Expansion". The Company's net sales do not show significant seasonal variation, although net sales in the third and fourth quarters have traditionally been higher than in the first and second quarters. The Company believes that its merchandise is purchased primarily by women who are buying for their own wardrobes rather than as gifts, and the Company typically experiences only moderate increases in net sales during the Christmas season. As a result of these factors, the Company has not had significant overhead and other costs generally associated with large seasonal variations. The following table shows the percentages of the Company's net sales and operating income (loss) per quarter for 1993, 1992 and 1991:
FISCAL 1993 FISCAL 1992 FISCAL 1991 ------------------------ ------------------------ ---------------------------- OPERATING OPERATING OPERATING NET SALES INCOME(A) NET SALES INCOME NET SALES INCOME (LOSS) ----------- ----------- ----------- ----------- ----------- --------------- First Quarter........................... 24.0% 24.3% 24.5% 26.6% 25.4% 39.7% Second Quarter.......................... 24.9 25.3 24.0 19.5 23.1 26.6 Third Quarter........................... 24.3 25.2 24.6 34.6 26.0 33.8 Fourth Quarter.......................... 26.8 25.2 26.9 19.3 25.5 (0.1) ----------- ----------- ----------- ----------- ----------- ------ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----------- ----------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ----------- ----------- ------
- --------------- (a) Excludes the $2,000,000 charge to earnings relating to the Company's announced relocation of its distribution center. COMPARABLE STORE SALES The following table sets forth for the years 1993, 1992 and 1991 certain information regarding the percentage increase (decrease) over the prior year's sales in (i) total comparable store sales and (ii) owned comparable sales (consisting of total comparable store sales less leased shoe department comparable sales, which were phased out by February 1, 1993):
FISCAL 1993 FISCAL 1992 FISCAL 1991 --------------- ------------- ------------- Comparable store sales: Owned sales.......................................... 4.0% 0.8% (0.9)% Total................................................ 2.3 (1.0) (5.6)
The Company believes that the increase in owned comparable store sales in 1993 and 1992 was primarily due to improved customer acceptance of merchandise offerings and, in 1992, to a higher degree of promotional activities than in 1993. RESULTS OF OPERATIONS The following table sets forth operating statement data expressed as a percentage of net sales for the historical periods indicated:
FISCAL FISCAL FISCAL 1993 1992 1991 --------- --------- --------- Net sales, including leased shoe departments.............................. 100.0% 100.0% 100.0% Cost of sales............................................................. 54.2 56.4 53.5 --------- --------- --------- Gross profit (a)...................................................... 45.8 43.6 46.5 Selling, general and administrative expenses.............................. 33.8 32.5 34.5 Distribution center restructuring charge.................................. 0.4 -- -- Amortization of goodwill.................................................. 1.8 2.0 2.2 --------- --------- --------- Operating income...................................................... 9.8 9.1 9.8 Interest expense.......................................................... 3.5 4.6 7.7 Stockholder litigation settlement......................................... -- 0.8 -- Other (income) expense, net............................................... -- -- 0.1 --------- --------- --------- Income before income taxes and extraordinary loss......................... 6.3 3.7 2.0 Income tax provision...................................................... 3.4 2.4 1.8 --------- --------- --------- Income before extraordinary loss.......................................... 2.9 1.3 0.2 Extraordinary loss........................................................ 2.3 -- 3.8 --------- --------- --------- Net income (loss)..................................................... 0.6% 1.3% (3.6)% --------- --------- --------- --------- --------- ---------
- --------------- (a) Gross profit margin on net sales, excluding leased shoe departments, was 44.1% in 1992 and 47.8% in 1991. Gross profit margin on leased shoe department net sales was 14.4% in 1992 and 1991. 13 FISCAL 1993 COMPARED TO FISCAL 1992 The Company's net sales increased to $501,649,000 in 1993 from $468,381,000 in 1992, an increase of $33,268,000, or 7.1%. The increase in net sales was attributable to the inclusion of a full year of operating results for the 20 stores opened during 1992, the opening of 13 new stores and expansion of 12 stores in 1993 and the increase in comparable store sales. The 2.3% increase in total comparable stores sales was due primarily to customer acceptance of the Company's merchandise offerings in 1993. The increase was partially offset by the closing of one store in 1993. Net sales included $29,922,000 and $25,638,000 from Ann Taylor brand shoes in 1993 and 1992, respectively. Gross profit as a percentage of net sales increased to 45.8% in 1993 from 43.6% in 1992. This increase was attributable to reduced cost of goods sold resulting from lower markdowns associated with reduced promotional activities, higher initial markups and the elimination of the leased shoe department which had a substantially lower gross margin. Selling, general and administrative expenses as a percentage of net sales increased to 33.8% in 1993 from 32.5% in 1992. The increase was primarily attributable to additional store tenancy and selling expenses, severance costs, agency fees and relocation expenses, and the Company's continuing investment in such areas as design and manufacturing, marketing and information systems. Operating income increased to $49,021,000, or 9.8% of net sales, in 1993, from $42,504,000, or 9.1% of net sales, in 1992. As described below, 1993 operating income was reduced by a $2,000,000, or 0.4% of net sales, charge to earnings relating to the Company's announced relocation of its distribution center facility from New Haven, Connecticut to Louisville, Kentucky. Amortization of goodwill from the Acquisition was $9,508,000 in 1993 and $9,504,000 in 1992. Operating income without giving effect to such amortization was $58,529,000, or 11.6% of net sales, in 1993, and $52,008,000, or 11.1% of net sales, in 1992. In early 1994, the Company announced that it will be relocating its distribution center from New Haven, Connecticut to Louisville, Kentucky in early 1995. The Company will construct a 250,000 square foot distribution center at a cost of approximately $14,000,000. The relocation of the distribution center will affect approximately 105 employees. The Company recorded a $2,000,000 pre-tax restructuring charge ($1,140,000 net of income tax benefit, or $.05 per share) representing approximately $1,100,000 principally for severance and job training benefits, and approximately $900,000 for the write-off of the net book value of certain assets that are not expected to be utilized in the new facility. The Company selected Louisville, Kentucky as the site for its new distribution center facility because of Louisville's central location relative to the Company's stores, which is expected to result in reduced merchandise delivery times, the lower cost of construction in Louisville as compared to the Northeast, and economic incentives offered by the state of Kentucky. Interest expense was $17,696,000, including $4,199,000 of non-cash interest expense in 1993 and $21,273,000, including $8,581,000 of non-cash interest expense in 1992. The decrease is mostly attributable to lower interest rates resulting principally from refinancing transactions entered into in 1993. As a result of these refinancing transactions, the weighted average interest rate on the Company's outstanding indebtedness at January 29, 1994 was 6.22% compared to 9.50% at January 30, 1993. After taking into account the Company's interest rate swap agreement, all of the Company's debt obligations bear interest at variable rates. Therefore, the Company's interest expense for fiscal 1993 is not necessarily indicative of interest expense for future periods. See "Liquidity and Capital Resources". The income tax provision was $17,189,000, or 54.5% of income before income taxes and extraordinary loss in the 1993 period compared to $11,150,000, or 65.3% of income before income taxes in 1992. The effective tax rates for both periods were higher than the statutory rates, primarily because of non- deductible goodwill. During fiscal 1993, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Adoption of SFAS 109 did not have a material effect on the results of operations. 14 The refinancing transactions referred to above resulted in an extraordinary loss of $17,244,000 ($11,121,000 net of income tax benefit), attributable to premiums paid to purchase or discharge Ann Taylor's notes, and to the write-off of deferred financing costs associated with the early retirement of indebtedness. See "Liquidity and Capital Resources". As a result of the foregoing factors, the Company had net income of $3,209,000, or 0.6% of net sales, for 1993 compared to a net income of $5,917,000, or 1.3% of net sales for 1992. FISCAL 1992 COMPARED TO FISCAL 1991 The Company's net sales increased to $468,381,000 in 1992 from $437,711,000 in 1991, an increase of $30,670,000, or 7.0%. The increase in net sales was primarily attributable to the inclusion of a full year of operating results for stores opened during 1991 and the opening of 20 new stores in 1992. The Company operated 219 stores at the end of 1992 compared to 200 stores at the end of 1991. The increase was partially offset by the closing of one store in 1992. The decrease of 1.0% in comparable store sales was due to the phaseout of the leased shoe departments offset by the increase of 0.8% in owned comparable store sales (excluding leased shoe departments). The Company believes the increase in owned comparable store sales was primarily attributable to customer acceptance of the Company's fall 1992 merchandise offerings and promotional activities. As a result of the phaseout of the Joan & David leased shoe departments, aggregate net sales contributed by Joan & David declined to $8,207,000 in 1992 from $16,056,000 in 1991, a decrease of 48.9%. Net sales included $25,638,000 and $21,527,000 in net sales from the Ann Taylor brand shoe line in 1992 and 1991, respectively. Gross profit as a percentage of net sales decreased to 43.6% in 1992 from 46.5% in 1991. This decrease was attributable primarily to increased cost of goods sold resulting from lower initial mark ups and higher markdowns on goods taken in response to the competitive retail environment and, in the first quarter of 1992, poor customer acceptance of the Company's merchandise offerings. Selling, general and administrative expenses as a percentage of net sales decreased to 32.5% in 1992 from 34.5% in 1991. The decrease was due to the leveraging of central overhead expenses over a larger sales base, lower severance payments and cost savings in other areas, offset in part by higher tenancy and selling costs in new stores. Operating income decreased to $42,504,000, or 9.1% of net sales, in 1992 from $43,227,000, or 9.8% of net sales, in 1991. Amortization of goodwill from the Acquisition was $9,504,000 in 1992 and $9,506,000 in 1991. Operating income without giving effect to such amortization was $52,008,000, or 11.1% of net sales, in 1992 and $52,733,000, or 12.0% of net sales, in 1991. Interest expense was $21,273,000, including $8,581,000 of non-cash interest expense in 1992 and $33,958,000, including $12,243,000 of non-cash interest expense in 1991. The decrease in interest expense in 1992 was attributable primarily to lower outstanding indebtedness as a result of the repurchase of the debt securities of Ann Taylor with the proceeds of the IPO in 1991, and was also attributable to lower interest rates in the 1992 period. During 1992, the Company recorded an expense of $3,905,000 to provide for the settlement of a class action lawsuit that was filed in October 1991. The income tax provision was $11,150,000, or 65.3% of income before income taxes in the 1992 period compared to $7,703,000, or 88.3% of income before income taxes and extraordinary loss in 1991. The effective rates for both periods were higher than the statutory rate, primarily because of non-deductible goodwill. As a result of the foregoing factors, the Company had net income of $5,917,000, or 1.3% of net sales, for 1992 compared to a net income before extraordinary loss of $1,024,000 or 0.2% of net sales for 1991. 15 CHANGES IN RECEIVABLES AND INVENTORIES Accounts receivable increased to $49,279,000 at the end of 1993 from $43,003,000 at the end of 1992, an increase of $6,276,000, or 14.6%. This increase was partially attributable to Ann Taylor credit card receivables, which increased $2,285,000 to $41,176,661 in 1993, to third-party credit card receivables (American Express, Mastercard and Visa), which increased $1,124,000 due to the timing of payments by the third-party credit card issuers and to construction allowance receivables, which increased $1,814,000 to $3,901,000 in 1993. Ann Taylor credit card sales were 5.4% higher in the last thirteen weeks of 1993 compared to the last thirteen weeks of 1992. Merchandise inventories increased to $60,890,000 at the end of 1993 from $50,307,000 at the end of 1992, an increase of $10,583,000, or 21.0%. The higher inventory level at the end of 1993 was attributable to the purchase of inventory for new stores that were opened in 1993, the planned square footage increases in spring 1994, planned comparable store sales growth and the earlier receipt of spring goods. Accounts payable increased to $37,564,000 at the end of 1993 from $23,779,000 at the end of 1992, an increase of $13,785,000, or 57.9%. The increase in accounts payable is primarily due to the increase in inventory at the end of fiscal 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are cash flow from operations and borrowings under a $55 million revolving credit facility (the "Revolving Credit Facility") under the Bank Credit Agreement. The following sets forth material measures of the Company's liquidity:
FISCAL YEAR ------------------------------- 1993 1992 1991 --------- --------- --------- (DOLLARS IN THOUSANDS) Cash provided by operating activities..................... $ 47,322 $ 23,579 $ 40,142 Working capital........................................... $ 53,283 $ 29,539 $ 26,224 Current ratio............................................. 1.78:1 1.38:1 1.36:1 Debt to equity ratio...................................... .73:1 .80:1 .92:1
Cash provided by operating activities increased in 1993 principally as a result of an increase in income before extraordinary loss and a decrease in refundable income taxes. The increase in working capital in 1993 results from the decrease in the current portion of long-term debt from $37,000,000 in 1992 to $8,757,000 in 1993, as a result of the refinancing transactions entered into in 1993. At January 29, 1994, the Company had $54,000,000 outstanding under the term loan facility under the Bank Credit Agreement (the "Term Loan"). The Bank Credit Agreement requires the Company to make scheduled semi-annual principal payments on the Term Loan, which commenced on January 15, 1994. The Company made the semi-annual payment of $6,000,000 in January, 1994 and an additional payment of $20,000,000 in January 1994. The remaining scheduled payments on the Term Loan are $8,757,000 in fiscal years 1994 and 1995, $11,676,000 in fiscal years 1996 and 1997, and $13,134,000 in fiscal year 1998. During 1992, the principal payments made under the Company's then existing bank credit agreement totaled $26,000,000. The Bank Credit Agreement also requires the Company to make prepayments on the Term Loan if the Company sells certain assets or issues debt or equity securities. Amounts borrowed under the Revolving Credit Facility mature on January 15, 1999; however, the Company is required to reduce the outstanding balance of the Revolving Credit Facility to $20,000,000 or less for a 30-day period in fiscal 1994 and to $15,000,000 or less for a 30-day period each year thereafter. 16 During 1993, the Company and Ann Taylor entered into a series of refinancing transactions that lowered the Company's average cost of capital. The following table summarizes these transactions.
BALANCE AT BALANCE AT JANUARY 30, JANUARY 29, 1993 ADDITIONS REDUCTIONS 1994 ----------- ----------- ------------ ----------- (IN THOUSANDS) Previous term loan......................................... $ 96,969 -- $ (96,969) -- 14 3/8% discount notes..................................... 44,069 -- (44,069) -- 13 3/4% subordinated notes................................. 34,295 -- (34,295) -- 10% exchange notes......................................... 14,641 -- (14,641) -- 8 3/4% notes............................................... -- $ 110,000 (10,000) $ 100,000 Term loan.................................................. -- 80,000 (26,000) 54,000 Receivables facility....................................... -- 33,000 -- 33,000 Revolving credit loan...................................... 5,500 -- (3,500) 2,000 ----------- ----------- ------------ ----------- $ 195,474 $ 223,000 $ (229,474) $ 189,000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement. Under the agreement the Company receives a fixed rate of 4.75% and pays a floating rate based on LIBOR, as determined in six month intervals. This agreement lowered the effective interest rate on the 8 3/4% Notes by 125 basis points for the first semi-annual period ended January 1994. The swap agreement matures in July 1996. During the fourth quarter of fiscal 1993, Ann Taylor entered into a receivables financing agreement secured by Ann Taylor credit card receivables. Initial borrowings under the receivables facility (the "Receivables Facility") were $33,000,000. The Company's capital expenditures totaled $25,062,000, $4,303,000, and $10,004,000 in 1993, 1992 and 1991, respectively. Capital expenditures in 1992 were lower than in 1991 and 1993, in part because the Company slowed its new store expansion program while it developed the new store prototypes. In addition, the average construction allowance per store received in 1992 was higher than amounts received in 1991 and 1993. Capital expenditures in 1993 reflect increased average net construction costs for the opening of new stores, costs associated with the expansion of a greater number of existing stores, lower average landlord construction allowances and costs associated with new management information systems. The Company expects its capital expenditure requirements to be approximately $31,000,000 in 1994, plus $14,000,000 for the new distribution center and material handling equipment. The Bank Credit Agreement imposes limits on the Company's ability to make capital expenditures and, for 1994, the limit is $31,000,000, exclusive of amounts spent for the distribution center. The actual amount of the Company's capital expenditures will depend in part on the number of stores opened, refurbished, and expanded 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 both the Bank Credit Agreement and the indenture for the 8 3/4% Notes. The payment by the Company of cash dividends on its Common Stock is also restricted by the Company's guarantee of obligations under the Bank Credit Agreement. See "Market for Registrant's Common Equity and Related Stockholder Matters". In order to finance its operations and capital requirements, including its debt service payments, the Company expects to use internally generated funds and funds available to it under the Revolving Credit Facility and may seek project financing for the distribution center construction and material handling equipment costs. The Company believes that cash flow from operations and funds available under the 17 Revolving Credit Facility will be sufficient to enable it to meet its ongoing cash needs for the foreseeable future. ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company for the years ended January 29, 1994, January 30, 1993 and February 1, 1992 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992. Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993. Consolidated Statements of Stockholders' Equity for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992. Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company as of January 29, 1994:
NAME AGE POSITION AND OFFICES - ----------------------------------- ----------- ---------------------------------------------------------------------- Sally Frame Kasaks................. 49 Chairman, Chief Executive Officer and Director of the Company and Ann Taylor Paul E. Francis.................... 39 Executive Vice President--Finance and Administration and Director of the Company and Ann Taylor Bert A. Tieben (1)................. 42 Senior Vice President--Finance and Treasurer of the Company and Ann Taylor Joseph R. Gromek................... 47 Senior Vice President--General Merchandise Manager of the Company and Ann Taylor Andrea M. Weiss.................... 38 Senior Vice President, Director of Stores of the Company and Ann Taylor Jocelyn F.L. Barandiaran........... 33 Vice President, General Counsel and Corporate Secretary of the Company and Ann Taylor Gerald S. Armstrong................ 50 Director of the Company and Ann Taylor James J. Burke, Jr................. 42 Director of the Company and Ann Taylor Robert C. Grayson.................. 49 Director of the Company and Ann Taylor Rochelle B. Lazarus................ 46 Director of the Company and Ann Taylor Hanne M. Merriman.................. 52 Director of the Company and Ann Taylor
- --------------- (1) Mr. Tieben resigned from this position effective February 4, 1994. Each member of the Board of Directors of the Company and Ann Taylor holds office for a three-year term and until his or her successor is elected and qualified. Mr. Grayson and Ms. Lazarus serve as members of the audit committee and Mr. Burke, Mr. Armstrong, Ms. Lazarus and Ms. Merriman serve as members of the compensation committee. Directors who are employees of the Company or Merrill Lynch Capital Partners, Inc. (the "ML Capital Partners") do not receive any compensation for serving on either Board of Directors. Directors who are not affiliates of ML Capital Partners or employees of the Company receive $20,000 in compensation plus $750 for each meeting attended. Messrs. Burke and Armstrong are employees of ML Capital Partners, a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), and serve on the Board of Directors of the Company and Ann Taylor as representatives of two indirect wholly owned subsidiaries of ML&Co. and certain limited partnerships controlled directly or indirectly by ML Capital Partners or ML&Co. and certain affiliates of ML&Co. (the "ML Entities"). SALLY FRAME KASAKS. Ms. Kasaks has been Chairman, Chief Executive Officer and a Director of the Company and Ann Taylor since February 1992. From February 1989 to January 1992, she was president and chief executive officer of Abercrombie & Fitch, a specialty retailer and a division of The Limited, Inc., a specialty retailer. From 1985 to 1988, she was president of Talbots, a specialty women's apparel retailer. For the six years prior to 1985, Ms. Kasaks served in various capacities at Ann Taylor, the last two of those years as president. PAUL E. FRANCIS. Mr. Francis has been Executive Vice President--Finance and Administration of the Company and Ann Taylor since April 1993, and has been a Director of the Company and Ann Taylor since consummation of the Acquisition in February 1989. He was a vice president of ML Capital Partners from July 1987 to April 1993 and a managing director of the Investment Banking Division of ML&Co. from January 1993 to April 1993. From January 1990 to January 1993, he was a director of the Investment Banking Division of ML&Co. BERT A. TIEBEN. Mr. Tieben was Senior Vice President--Finance of the Company and Ann Taylor from April 1993 through February 4, 1994 and had been Treasurer of the Company and Ann Taylor 19 since February 1989. Mr. Tieben was Executive Vice President and Chief Financial Officer of Ann Taylor from April 1988 to April 1993, and of the Company from February 1989 to April 1993. JOSEPH R. GROMEK. Mr. Gromek has been Senior Vice President--General Merchandise Manager of the Company and Ann Taylor since April 1993. From January 1991 to April 1993, Mr. Gromek was vice president--ready to wear at The Limited stores, a specialty women's apparel retailer and a division of The Limited, Inc., a specialty retailer. From September 1987 to December 1990, he was senior vice president/general merchandise manager--men's and shoes for Saks Fifth Avenue, a department store. ANDREA M. WEISS. Ms. Weiss has been Senior Vice President, Director of Stores of the Company and Ann Taylor since July 1992. From April 1990 to July 1992, she was director of retail operations for the Walt Disney World Resort, a division of the Walt Disney Company. From November 1987 to April 1990, she was senior vice president--operations for the Naragansett Clothing Company, a specialty women's apparel retailer. JOCELYN F.L. BARANDIARAN. Ms. Barandiaran has been Vice President, General Counsel and Corporate Secretary of the Company and Ann Taylor since May 1992. From June 1985 to April 1992, she was a corporate mergers and acquisitions associate with the law firm of Skadden, Arps, Slate, Meagher & Flom. GERALD S. ARMSTRONG. Mr. Armstrong has been a Director of the Company and Ann Taylor since consummation of the Acquisition in February 1989. He joined ML Capital Partners as an executive vice president in November 1988. He has been a partner in ML Capital Partners since May 1993 and a managing director of the Investment Banking Division of ML&Co. since November 1988. Mr. Armstrong is also a director of First USA, Inc., London Fog Corporation, Simmons Company, Beatrice Foods Inc., Blue Bird Corporation, World Color Press, Inc. and Wherehouse Entertainment, Inc. JAMES J. BURKE, JR. Mr. Burke has been a Director of the Company and Ann Taylor since the Acquisition. He joined ML Capital Partners as president and chief executive officer in January 1987. He has been managing partner of ML Capital Partners since May 1993, a first vice president of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since July 1988, and a managing director of the Investment Banking Division of ML&Co. since April 1985. Mr. Burke is also a director of Amstar Corporation, Borg-Warner Security Corporation, London Fog Corporation, Supermarkets General Holdings Corporation, Pathmark Stores, Inc., United Artists Theater Circuit, Inc., Wherehouse Entertainment, Inc. and World Color Press, Inc. ROBERT C. GRAYSON. Mr. Grayson has been a Director of the Company and Ann Taylor since April 1992. Mr. Grayson has been president of Robert C. Grayson & Associates, Inc., a retail marketing consulting firm, since February 1992. From June 1985 to February 1992, Mr. Grayson was the president and chief executive officer of Lerner New York, a specialty women's apparel retailer and a division of The Limited, Inc., a specialty retailer. ROCHELLE B. LAZARUS. Ms. Lazarus has been a Director of the Company and Ann Taylor since April 1992. She has been President of Ogilvy & Mather New York since June 1991. She was employed by Ogilvy & Mather Direct from 1987 to 1991, serving as President for the last two of those years. HANNE M. MERRIMAN. Ms. Merriman has been a Director of the Company and Ann Taylor since December 1993. She has been the Principal in Hanne Merriman Associates, retail business consultants, since January 1992, and from February 1990 to December 1990. From January 1991 to June 1992, Ms. Merriman was president and chief operating officer of Nan Duskin, Inc., a specialty women's apparel retailer, and from December 1988 to January 1990 was president and chief executive officer of Honeybee, Inc. a women's apparel retail catalog business and a division of Spiegel, Inc. Previously, Ms. Merriman served in various capacities at Garfinckel's, a department store chain and a division of Allied Stores Corporation, including as president of Garfinckel's from June 1981 to August 1987. Ms. Merriman was a member of the board of directors of the Federal Reserve Bank of Richmond, Virginia from 1984 to 1990, and served as its chairman from December 1989 to December 1990. Ms. Merriman is also a director of USAir Group, Inc., CIPSCO, Inc., Central Illinois Public Service Company, State Farm Mutual Automobile Insurance Company and The Rouse Company. She is a member of the National Women's Forum and a trustee of the American-Scandinavian Foundation. 20 ITEM 11. EXECUTIVE COMPENSATION The following summary compensation table sets forth information regarding the annual and long-term compensation awarded or paid for each of the last three fiscal years to these persons who were, at January 29, 1994, the Chief Executive Officer and the four other most highly compensated executive officers of the Company and Ann Taylor and to one former executive officer who separated from the Company during fiscal year 1993 (collectively, the "named executives"). Neither Ms. Kasaks nor Ms. Weiss was employed by the Company in fiscal year 1991, and neither Mr. Francis nor Mr. Gromek was employed by the Company in fiscal years 1991 or 1992; accordingly, no information is set forth in the table with respect to these officers for those years. TABLE I SUMMARY OF COMPENSATION TO CERTAIN EXECUTIVE OFFICERS
LONG TERM COMPENSATION ANNUAL COMPENSATION --------------------------------------------- -------------------------------------- AWARDS OF AWARDS OF NAME AND BONUS($) OTHER ANNUAL RESTRICTED STOCK ALL OTHER PRINCIPAL POSITION FISCAL YEAR SALARY($) (A) COMPENSATION($) STOCK($) OPTIONS COMPENSATION($) (B) - -------------------------- ----------- --------- ----------- -------------- ----------- ----------- ------------------- Sally Frame Kasaks,....... 1993 $ 650,000 $ 243,750 -- -- 30,000 $ 7,755 Chairman & Chief Executive 1992 $ 600,000 $ 150,000 -- $ 1,327,500(c) 200,000 $ 3,077 Officer 1991 -- -- -- -- -- -- Paul E. Francis,.......... 1993 $ 262,292 $ 80,167 -- -- 70,000 -- Executive Vice 1992 -- -- -- -- -- -- President--Finance & 1991 -- -- -- -- -- -- Administration Joseph J. Gromek,......... 1993 $ 282,468 $ 64,750 $ 1,826(d) -- 30,000 $ 1,188 Senior Vice President, 1992 -- -- -- -- -- -- General Merchandise 1991 -- -- -- -- -- -- Manager Andrea M. Weiss,.......... 1993 $ 234,600 $ 50,625 -- -- 15,000 $ 1,318 Senior Vice President, 1992 $ 120,569 $ 35,000 $ 15,576(e) -- 25,000 $ 180 Director of Stores 1991 -- -- -- -- -- -- Bert A. Tieben,........... 1993 $ 279,000 $ 52,313 $ 873,000(g) -- 10,000 $ 4,293 Senior Vice 1992 $ 279,000 -- -- -- 15,000 $ 2,486 President--Finance (f) 1991 $ 274,000 -- -- -- -- $ 2,408 Joseph J. Schumm,......... 1993 $ 309,000 $ 61,800 $ 39,375(g) -- 15,000 $ 966 President (h) 1992 $ 309,000 $ 75,000 -- -- 25,000 $ 3,499 1991 $ 209,000 -- -- -- 1,470 $ 2,599
- --------------- (a) Bonus awards indicated for 1993 were paid pursuant to the Company's Management Performance Compensation Plan. Bonus amounts indicated for 1992 were guaranteed bonus amounts paid to Ms. Kasaks pursuant to her Employment Agreement (see "Employment Agreements" below); to Ms. Weiss in accordance with the terms of her compensation arrangement upon hire by the Company, and to Mr. Schumm at the discretion of the Board of Directors. (b) Represents the amount of contributions made by the Company to its 401(k) Savings Plan (for Ms. Kasaks, $4,350 in 1993; for Ms. Weiss, $875 in 1993; for Mr. Schumm, $966 in 1993, $1,817 in 1992 and $1,490 in 1991; and for Mr. Tieben, $3,538 in 1993, $1,732 in 1992 and $1,667 in 1991) and the cost of group term life insurance paid by the Company on behalf of qualifying executive officers during the years shown. (c) Pursuant to the terms of her Employment Agreement, Ms. Kasaks was awarded 60,000 shares of restricted stock, of which 15,000 vested upon hiring, 15,000 shares vested at the end of each of fiscal years 1992 and 1993, and 15,000 shares vest at the end of fiscal year 1994, provided that Ms. Kasaks continues in the employ of the Company, and provided further that if the Company is sold, all restricted shares will become vested. For purposes of the above table, the 60,000 restricted shares have been valued at $22.125 per share, which was the closing market price of the Company's Common Stock on the New York Stock Exchange on the effective date of the grant. Ms. Kasaks would be entitled to receive dividends on these shares proportionately with the other holders of the Company's Common Stock, if dividends are paid. Ms. Kasaks has received no other awards of restricted stock from the Company. (d) Represents reimbursement of moving expenses. (e) Represents $11,627 for living expenses and $3,949 reimbursement for the payment of taxes. (f) Mr. Tieben resigned from this position effective February 4, 1994 and is presently serving as a consultant to the Company (see "Employment Agreements" below). (g) Represents compensation deemed to have been received upon the exercise of in-the-money stock options in 1993. (h) Mr. Schumm resigned from this position effective April 6, 1993 and is presently serving as a consultant to the Company (see "Employment Agreements" below). Mr. Schumm served as President and Chief Operating Officer of the Company and Ann Taylor from February 1992 to April 1993. During fiscal year 1991, Mr. Schumm served as Executive Vice President-Administration, General Counsel and Secretary of the Company and Ann Taylor. 21 The following table sets forth certain information with respect to stock options awarded during fiscal year 1993 to the executive officers named in Table I above. These grants are also reflected in Table I. In accordance with Securities and Exchange Commission (the "Commission") rules, the hypothetical realizable values for each option grant are shown based on compound annual rates of stock price appreciation of 5% and 10% from the grant date to the expiration date. The assumed rates of appreciation are prescribed by the Commission and are for illustration purposes only; they are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance and prospects. TABLE II STOCK OPTIONS GRANTED IN FISCAL YEAR 1993
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES % OF TOTAL # OF STOCK PRICE OF OPTIONS APPRECIATION GRANTED TO EXERCISE FOR OPTION TERM (B) OPTIONS (A) EMPLOYEES IN PRICE EXPIRATION ------------------------ GRANTED FISCAL 1993 ($/SHARE) DATE 5% ($) 10% ($) ----------- ------------- --------- ---------- ----------- ----------- Sally Frame Kasaks............. 30,000 10.75% $ 20.00 2/26/03 $ 377,400 $ 956,100 Paul E. Francis................ 30,000 10.75% $ 18.125 4/06/03 $ 341,850 $ 866,550 40,000 14.34% $ 26.00 4/06/03 $ 140,800 $ 840,400 Joseph R. Gromek............... 30,000 10.75% $ 18.125 4/06/03 $ 341,850 $ 866,550 Andrea M. Weiss................ 15,000 5.38% $ 20.00 2/26/03 $ 188,700 $ 478,050 Bert A. Tieben................. 10,000 3.58% $ 20.00 2/26/03(c) $ 125,800 $ 318,700 Joseph J. Schumm............... 15,000 5.38% $ 20.00 2/26/03(c) $ 188,700 $ 478,050
- --------------- (a) Options vest and are exercisable 20% upon grant and 20% on each anniversary of the grant, provided that the executive continues in the employ of the Company, and provided further that in the event of the occurrence of certain change in control "Acceleration Events" (as defined under the Company's 1992 Stock Option Plan), all such options will become vested. Pursuant to the respective agreement entered into in connection with the resignation of each of Mr. Tieben and Mr. Schumm from the Company, Mr. Tieben's options became 100% vested on February 4, 1994 and Mr. Schumm's options became 100% vested on April 6, 1993. See "Employment Agreements" below. (b) These columns show the hypothetical realizable value of the options granted for the ten-year term of the options, assuming that the market price of the Common Stock subject to the options appreciates in value at the annual rate indicated in the table, from the date of grant to the end of the option term. (c) Expiration date shown is the original expiration date of these options. As a result of Mr. Tieben's and Mr. Schumm's resignations from the Company on February 4, 1994 and April 6, 1993, respectively, the options shown for Mr. Tieben will expire on May 4, 1994 and the options shown for Mr. Schumm expired on July 6, 1993. In February 1994, the Compensation Committee of the Board of Directors made additional stock option grants to certain executives of the Company, including certain executive officers named in Table I. The total number of options granted to executives on such date was 677,500. These option grants were made subject to stockholder approval of an increase in the maximum number of shares available for grant under the Company's 1992 Stock Option Plan. Two-thirds of the options granted to each executive are "performance-vesting" options, and one-third of the options granted to each executive are "time-vesting" options. The performance-vesting options become fully exercisable upon the earliest to occur of: (i) the ninth anniversary of the date of grant, (ii) the date on which the trading price of the Common Stock is at least $50.75 (representing a doubling of the stock price on the date of the grant) for the immediately preceding ten consecutive trading days, provided that this occurs before the fifth anniversary of the grant, and (iii) the date on which the Company's aggregate consolidated net income before extraordinary items for four consecutive quarters after fiscal 1993 equals at least $2.13 per share (representing a tripling of fiscal year 1993 22 net income before extraordinary items), provided that this occurs before the fifth anniversary of the grant. If the Company achieves 80% of either of the performance measures described in (ii) or (iii) above by the fifth anniversary of the grant, then a portion of the options becomes exercisable, equal to 25% of the grant plus 3 3/4% for every percentage point by which performance exceeds 80% of the measure. The time-vesting options become exercisable 25% per year on each of the first through fourth anniversaries of the date of grant. The following table shows the number and value of stock options exercised by each of the executive officers named in Table I during fiscal year 1993, the number of all vested (exercisable) and unvested (not yet exercisable) stock options held by each such officer at the end of fiscal year 1993, and the value of all such options that were "in the money" (i.e., the market price of the Common Stock was greater than the exercise price of the options) at the end of fiscal year 1993. TABLE III AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1993 AND FISCAL YEAR END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY # OF OPTIONS OPTIONS SHARES $ AT END OF FISCAL AT END OF FISCAL ACQUIRED VALUE 1993 EXERCISABLE/ 1993 EXERCISABLE/ ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(A) ----------- ----------- ------------------ ----------------------- Sally Frame Kasaks................. -- -- 156,000/74,000 $ 11,250/$45,000 Paul E. Francis.................... -- -- 14,000/56,000 $ 22,500/$90,000 Joseph R. Gromek................... -- -- 6,000/24,000 $ 22,500/$90,000 Andrea M. Weiss.................... -- -- 13,000/27,000 $ 5,625/$22,500 Bert A. Tieben..................... 40,000 $ 873,000 19,469/17,000 $ 176,645/$15,000 Joseph J. Schumm................... 15,000 $ 39,375 70,586/ -- $1,041,939/ --
- --------------- (a) Calculated based on the closing market price of the Common Stock of $21.875 on January 28, 1994, the last trading day in fiscal year 1993, less the amount required to be paid upon exercise of the option. 1989 PENSION PLAN. Ann Taylor adopted, as of July 1, 1989, a defined benefit retirement plan for the benefit of the employees of Ann Taylor (the "Pension Plan"). The Pension Plan is a "cash balance pension plan" intended to qualify under Section 401(a) of the Code. An account balance is established for each participant which is credited with a benefit equal to 3% of compensation during each of the participant's first ten years of service, 4% of compensation during each of the participant's next five years of service and 5% of compensation during each of the participant's years of service in excess of fifteen. The Code limits the compensation that may be taken into account under the Pension Plan for any participant. Participants' accounts are credited with interest quarterly at a rate equal to the average one-year Treasury bill rate. Retirement benefits are determined by dividing the amount of a participant's account by a specified actuarial factor, subject, however, to the limitation imposed by the Code. Participants are fully vested in their accounts after completion of five years of service. Participants receive credit for service with Ann Taylor prior to July 11, 1989 (including service with Allied Stores Corporation prior to the closing date of the Acquisition of Ann Taylor by the Company) for purposes of vesting and determining the percentage of compensation that will be credited to their accounts. As of January 29, 1994, the credited years of service under the Pension Plan for Ms. Kasaks was .75 years, Ms. Weiss was .25 years, Mr. Tieben was 4.5 years and Mr. Schumm (as of the date of his resignation) was 3.0 years. Neither Mr. Francis nor Mr. Gromek were plan participants during fiscal year 1993. The estimated monthly retirement benefit, payable as a single life annuity, that would be payable to each of the executives named in Table I above who were participants in the plan during fiscal year 1993, assuming retirement as of December 31, 1993, the commencement of payments at age 65 and annual interest at the rate of 7.0%, is as follows: Ms. Kasaks, $70; Ms. Weiss, $52; and Mr. Tieben, 23 $1,565. These benefits would not be subject to any deduction for social security benefits or other offset amounts. As Mr. Schumm was not vested as of his separation date, he is not entitled to retirement benefits under the Pension Plan. EMPLOYMENT AGREEMENTS. Effective February 3, 1992, the Company and Ms. Sally Frame Kasaks entered into an employment agreement (the "Employment Agreement"), providing for Ms. Kasaks' employment as the Chairman of the Board and Chief Executive Officer of the Company for a term of three years. Under the terms of the Employment Agreement, Ms. Kasaks receives an annual base salary of $600,000 as well as certain other benefits. The Employment Agreement provides for an annual bonus of up to 50% of her annual salary based upon performance awards to be established annually, with a minimum bonus of $150,000 in 1992 and $75,000 in 1993. Pursuant to the Employment Agreement, on February 3, 1992, the Company issued to Ms. Kasaks 60,000 shares of restricted common stock, of which 15,000 shares vested upon grant, 15,000 shares vested at the end of each of fiscal 1992 and 1993, and 15,000 shares vest at the end of fiscal 1994. The Employment Agreement also provides for the issuance to Ms. Kasaks of options to purchase 100,000 shares of Common Stock at an exercise price per share of $22.125 (the fair market value as of the effective date of the Employment Agreement) and options to purchase 100,000 shares of Common Stock at an exercise price per share of $26. One-quarter of each set of options vested at issuance, an additional 25% vested at the end of each of fiscal 1992 and 1993, and an additional 25% vest at the end of fiscal 1994. The Employment Agreement provides that if the Company is sold, Ms. Kasaks will be entitled to severance benefits of a lump sum payment equal to 24 months salary. In addition, if the Company is sold, all of the shares of restricted Common Stock and options to purchase Common Stock granted under the Employment Agreement will become vested. If Ms. Kasaks is terminated without cause, she will be entitled to severance benefits of a lump sum payment equal to the lesser of 24 months salary or the salary payable for the remaining term of the Employment Agreement. In connection with Mr. Joseph J. Schumm's resignation on April 6, 1993, the Company, Ann Taylor and Mr. Schumm entered into a Consulting and Severance Agreement, pursuant to which Mr. Schumm is serving as a consultant to the Company and Ann Taylor for one year. Pursuant to the agreement, Mr. Schumm received one year of severance compensation, at his base salary in effect at the time of resignation, plus the amount he would have been entitled to under the Company's Management Performance Compensation Plan for the spring 1993 season as if he had continued as an executive officer of the Company. In addition, all stock options held by Mr. Schumm under the Company's 1989 and 1992 Stock Option Plans became fully vested, and the expiration of all options held by him under the Company's 1989 Stock Option Plan was extended to the tenth anniversary of the respective date of grant of those options, in accordance with the original term of those options. In connection with Mr. Bert A. Tieben's resignation on February 4, 1994, the Company and Mr. Tieben entered into a Consulting and Severance Agreement, pursuant to which Mr. Tieben is serving as a consultant to the Company and Ann Taylor for up to one year. Pursuant to the agreement, Mr. Tieben will receive up to one year of severance compensation, at his base salary in effect at the time of resignation, plus the amount he would have been entitled to under the Company's Management Performance Compensation Plan for the fall 1993 season as if he had continued as an executive officer of the Company. In addition, all stock options held by Mr. Tieben under the Company's 1989 and 1992 Stock Option Plans became fully vested on February 4, 1994. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As of March 15, 1994, the ML Entities and certain affiliates held approximately 52.3% of the outstanding Common Stock and as a result, have the voting power to determine the composition of the Boards of Directors of Ann Taylor and the Company and otherwise control the business and affairs of the Company. Messrs. Armstrong and Burke, who are members of the Board of Directors of the Company and Ann Taylor, are employees of ML Capital Partners and serve as representatives of the ML Entities and such affiliates. Mr. Francis, who became an executive officer of the Company and Ann 24 Taylor in April 1993 and who is a Director of the Company and Ann Taylor, was an employee of ML Capital Partners and served as a representative of the ML Entities and affiliates until April 1993. Messrs. Armstrong and Burke are also members of the Compensation Committee of the Board of Directors of the Company and Ann Taylor. The Company intends to file a registration statement on or about March 31, 1994 relating to the proposed sale in a public offering, by the Company of 1,000,000 shares Common Stock, and by certain ML Entities and their affiliates of up to 4,000,000 shares of Common Stock. If the proposed public offering is consummated, the ML Entities and their affiliates would continue to control approximately 32.6% of the Common Stock (approximately 29.3% of the over-allotment option granted to the underwriters of such offering is exercised in full) and will continue to be in a position to influence the management of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS As of March 15, 1994, the Common Stock was held of record by 440 stockholders. The following table sets forth certain information concerning the beneficial ownership of Common Stock by each stockholder who is known by the Company to own beneficially in excess of 5% of the outstanding Common Stock, by each director, by the executive officers named in Table I above, and by all executive officers and directors as a group, as of March 15, 1994. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock (including shares issuable upon the exercise of Warrants), except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of Common Stock.
NUMBER OF PERCENT OF SHARES OF COMMON NAME OF BENEFICIAL OWNER COMMON STOCK STOCK - --------------------------------------------------------------------------- -------------- ----------- Merrill Lynch Capital Partners (a)(b)...................................... 8,933,013 40.7% ML IBK Positions, Inc. (a)(c).............................................. 1,583,867 7.2% Merchant Banking L.P. No. III (a)(c)....................................... 631,480 2.9% KECALP Inc. (a)(d)......................................................... 324,941 1.5% Neuberger & Berman (e)..................................................... 1,287,352 5.9% James J. Burke, Jr. (f).................................................... 35,000 * Gerald S. Armstrong (f)(g)................................................. 3,000 * Rochelle B. Lazarus (h).................................................... 300 * Robert C. Grayson.......................................................... 15,000 * Hanne M. Merriman.......................................................... 200 * Sally Frame Kasaks (i)..................................................... 222,000 1.0% Paul E. Francis (f)(i)..................................................... 36,405 * Joseph R. Gromek........................................................... 12,000 * Andrea M. Weiss (i)........................................................ 16,129 * Joseph J. Schumm (i)(j).................................................... 73,644 * Bert A. Tieben (i)(j)...................................................... -- * All executive officers and directors as a group (12 persons) (h)........... 425,678 1.9%
- --------------- * Less than 1% (a) Each of the ML Entities is an affiliate of Merrill Lynch. The ML Entities beneficially own an aggregate of 11,473,301 shares of Common Stock or approximately 52.3% of the outstanding Common Stock. The ML Entities shown are deemed to have shared voting and investment power with other ML&Co. affiliates with respect to the shares of Common Stock shown to be beneficially owned by them.
(Footnotes continued on following page) 25 (Footnotes continued from preceding page) (b) Shares of Common Stock beneficially owned by ML Capital Partners are owned of record as follows: 5,598,309 by Merrill Lynch Capital Appreciation Partnership No. B-II, L.P., 3,279,220 by ML Offshore LBO Partnership No. B-II, and 55,484 by MLCP Associates L.P. No. I. ML Capital Partners is the indirect managing general partner of Merrill Lynch Capital Appreciation Partnership No. B-II, L.P., is the indirect investment general partner of ML Offshore LBO Partnership No. B-II, and is the general partner of MLCP Associates L.P. No. I. The address for ML Capital Partners and each of the aforementioned recordholders is 767 Fifth Avenue, New York, New York 10153. (c) The address for each of ML IBK Positions, Inc., and Merchant Banking L.P. No. III is 250 Vesey Street,World Financial Center, North Tower, New York, New York 10281. (d) Shares of Common Stock beneficially owned by KECALP Inc. are owned of record as follows: 310,235 by Merrill Lynch KECALP L.P. 1989, and 14,706 by Merrill Lynch KECALP L.P. 1987. KECALP Inc. is the general partner of each of these two entities. The address for KECALP Inc. and each of the aforementioned recordholders is 250 Vesey Street, World Financial Center, North Tower, New York, New York 10281. (e) Pursuant to a Schedule 13-G dated January 31, 1994 and filed with the Commission by Neuberger & Berman, Neuberger & Berman has sole voting power with respect to 601,880 shares, shared voting power with respect to 525,000 shares, and shared dispositive power with respect to 1,287,352 shares. Partners of Neuberger & Berman own 1,500 shares in their personal accounts and Neuberger & Berman disclaims beneficial ownership of those shares. The address for Neuberger & Berman is 605 Third Avenue, New York, New York 10158. (f) James J. Burke, Jr., Gerald S. Armstrong and Paul E. Francis are directors of the Company and Ann Taylor. Messrs. Burke and Armstrong are officers, and until April 1993 Mr. Francis was an officer, of ML Capital Partners and ML&Co. Messrs. Burke, Armstrong and Francis each disclaims beneficial ownership of shares beneficially owned by the ML Entities. (g) Shares are held by Mr. Armstrong's wife, as custodian for their children. Mr. Armstrong disclaims beneficial ownership of these shares. (h) Shares are held in a pension fund of which Ms. Lazarus' husband is the sole beneficiary. Ms. Lazarus has no voting or investment power with respect to these shares. (i) The shares listed include shares subject to options exercisable within 60 days as follows: Ms. Kasaks, 162,000 shares; Mr. Francis, 28,000 shares; Mr. Gromek, 12,000 shares; Ms. Weiss, 16,000 shares; and Mr. Schumm, 70,586 shares; and all executive officers and directors as a group (12 persons), 303,644 shares. (j) Mr. Schumm and Mr. Tieben resigned from their positions with the Company effective April 6, 1993 and February 4, 1994, respectively.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS TRANSACTIONS WITH ML ENTITIES The Company paid an underwriting commission to Merrill Lynch in connection with the IPO in fiscal 1991 and in connection with the Company's issuance and sale of the 8 3/4% Notes in 1993. The Company also paid commissions to Merrill Lynch in 1991 and 1993 in connection with the repurchase of indebtedness of Ann Taylor. The Company agreed to indemnify Merrill Lynch, as underwriter, against certain liabilities, including certain liabilities under the federal securities laws, in connection with the IPO and the note issuance. In January 1993, in connection with the settlement, for $4.8 million, of the class action lawsuit known as In Re AnnTaylor Stores Securities Litigation (No. 91 Civ. 7145 (CBM)), and consistent with the Company's indemnification obligations referred to above, the Company, Merrill Lynch and ML&Co., among others, entered into an agreement pursuant to which, after contribution to the settlement by ML&Co. and the application of insurance proceeds, the Company paid to or for the benefit of the plaintiffs $2.8 million of the above referenced settlement amount on behalf of itself and certain other defendants, including Merrill Lynch. The settlement was approved by the Court on May 26 25, 1993. The Company also reimbursed Merrill Lynch $128,281 for certain costs incurred by it in connection with the class action in fiscal 1992, pursuant to the Company's indemnification obligations. TRANSACTION WITH DIRECTOR Robert C. Grayson & Associates, Inc. ("RCG Associates"), a company wholly-owned by Mr. Grayson, has been engaged as a consultant to Ann Taylor with respect to certain real estate and other matters since August 1992. The term of the engagement runs through July 1994 and requires payment by Ann Taylor to RCG Associates of $8,000 per month through January 1994, and $4,000 per month for the period February 1994 to July 1994. For fiscal 1993, RCG Associates received aggregate fees of $96,000 pursuant to this engagement. TAX SHARING AGREEMENT Pursuant to a tax sharing agreement, the Company and Ann Taylor have agreed to elect to file consolidated income tax returns for federal income tax purposes and may elect to file such returns in states and other relevant jurisdictions that permit such an election for income tax purposes. With respect to such consolidated income tax returns, the tax sharing agreement generally requires Ann Taylor to pay to the Company the entire tax shown to be due on such consolidated returns, provided that the amount paid by Ann Taylor may not exceed the amount of taxes that would have been owed by Ann Taylor on a stand-alone basis. 27 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 33 through 49 and are filed as part of this Annual Report: Consolidated Statements of Operations for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992; Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993; Consolidated Statements of Stockholders' Equity for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992; Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992; Notes to Consolidated Financial Statements; Independent Auditors' Report. (b) Reports on Form 8-K None. (c) Exhibits The exhibits listed in the following exhibit index are filed as a part of this Annual Report.
EXHIBIT NUMBER - --------------- 3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit No. 3.1 to Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 of AnnTaylor, Inc. filed on May 29, 1991 (Registration No. 33-28522). 3.1.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit No. 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 No. 3.2 to the Quarterly Report on Form 10-Q of the Company 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. 4.2 Irrevocable Trust Agreement dated as of July 29, 1993, between Ann Taylor and State Street Bank and Trust Company, as trustee under Indenture dated as of July 15, 1989, with respect to the Discount Notes. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Ann Taylor on Form 10-Q for the Quarter Ended July 31, 1993 filed on September 2, 1993. 4.3 Irrevocable Trust Agreement dated as of July 29, 1993 between Ann Taylor and United States Trust Company of New York, as trustee under Indenture dated as of July 15, 1989 with respect to the Notes. Incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter Ended July 31, 1993 filed on September 2, 1993. 10.1 Form of U.S. Purchase Agreement among Merrill Lynch, Robertson, Stephens & Company, the other U.S. Underwriters, the Selling Warrantholders and the Company, including the form of Price Determination Agreement. Incorporated by reference to Exhibit No. 1.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905).
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EXHIBIT NUMBER - --------------- 10.2 Form of International Purchase Agreement among Merrill Lynch International Limited, Robertson, Stephens & Company, the other International Underwriters and the Company, including the form of Price Determination Agreement. Incorporated by reference to Exhibit No. 1.2 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.3 Form of Indenture entered into between Ann Taylor and United States Trust Company of New York, as Trustee, including the form of Subordinated Note due 1999. Incorporated by reference to Exhibit No. 4.1 to Amendment No. 1 to the Registration Statement of the Company and AnnTaylor filed on June 21, 1989 (Registration No. 33-28522). 10.4 Form of Indenture entered into between Ann Taylor and State Street Bank and Trust Company of Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National Association, as Trustee, including the form of Senior Subordinated Discount Note due 1999. Incorporated by reference to Exhibit No. 4.2 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522). 10.5 Form of Warrant Agreement entered into between Ann Taylor and The Connecticut Bank and Trust Company, National Association, including the form of Warrant. Incorporated by reference to Exhibit No. 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). 10.6 Credit Agreement, dated as of June 28, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, 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 July 7, 1993. 10.6.1 Amendment No. 1 to Credit Agreement, dated as of August 10, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.6.2 Amendment No. 2 to Credit Agreement dated as of October 6, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q of AnnTaylor, Inc. for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.6.3 Amendment No. 3 to Credit Agreement dated as of December 23, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. 10.6.4 Amendment No. 4 to Credit Agreement dated as of January 24, 1994, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. 10.7 Guaranty, dated as of June 28, 1993, 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 July 7, 1993. 10.8 Security and Pledge Agreement, dated as of June 28, 1993, 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 July 7, 1993. 10.9 License Agreement, dated as of April 30, 1984, between Ann Taylor and Joan & David. Incorporated by reference to Exhibit No. 10.14 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
29
EXHIBIT NUMBER - --------------- 10.10 Agreement, dated March 22, 1990, between Ann Taylor and Chapel Street Shoes, Inc. Incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of the Company filed on April 30, 1990. 10.11 Form of Investor Stock Subscription Agreement, dated February 8, 1989, between the Company and each of the ML Entities. Incorporated by reference to Exhibit No. 10.15 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.12 1989 Stock Option Plan. Incorporated by reference to Exhibit No. 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.12.1 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. 10.13 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit No. 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.13.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit No. 10.17.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.13.2 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. 10.13.3 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 Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.14 Lease, dated December 1, 1985, between Hamilton Realty Co. and Ann Taylor concerning the New Haven distribution center. Incorporated by reference to Exhibit No. 10.22 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.14.1 Agreement, dated March 22, 1993, between Hamilton Realty Co. and Ann Taylor amending the New Haven distribution center lease. Incorporated by reference to Exhibit No. 10.14.1 to the Annual Report on Form 10-K of Ann Taylor filed on April 30, 1993. 10.15 Lease, dated October 1, 1988, between Dixson Associates and Ann Taylor concerning Ann Taylor's 3 East 57th Street offices and store, as amended. Incorporated by reference to Exhibit No. 10.23 to the Registration Statement of the Company and Ann Taylor dated May 3, 1989 (Registration No. 33-28522). 10.15.1 Agreement, dated April 12, 1993, between Dixson Associates and Ann Taylor amending the 3 East 57th Street lease. Incorporated by reference to Exhibit No. 10.15.1 to the Annual Report on Form 10-K of Ann Taylor filed on April 30, 1993. 10.16 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit No. 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). 10.17 Employment Agreement, effective as of February 3, 1992, between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K of the Company filed on April 28, 1992. 10.18 The AnnTaylor Stores Corporation 1992 Stock Option Plan. Incorporated by reference to Exhibit No. 4.3 to the Company's Registration Statement on Form S-8 filed with the Commission on August 10, 1992 (Registration No. 33-50688).
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EXHIBIT NUMBER - --------------- 10.19 Management Performance Compensation Plan. Incorporated by reference to Exhibit 10.30 to the Quarterly Report on Form 10-Q filed on December 15, 1992. 10.20 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Quarterly Report on Form 10-Q filed on December 15, 1992. 10.21 Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated Action. Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.22 Agreement among Defendants to the Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated Action. Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.23 Opinion Re Settlement Plan of Allocation and Application for Attorney's Fees and Expenses dated May 25, 1993, In Re AnnTaylor Stores Securities Litigation. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 1, 1993 filed on May 28, 1993. 10.24 Consulting and Severance Agreement dated April 6, 1993 between the Company and Joseph J. Schumm. Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.25 Interest Rate Swap Agreement dated as of July 22, 1993, between AnnTaylor, Inc. and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.26 Stock Purchase Agreement, dated as of July 13, 1993, between AnnTaylor, Inc. and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.27 Agreement, dated July 13, 1993, among Cygne Designs, Inc., Cygne Designs F.E. Limited, CAT US, Inc., C.A.T. Far East Limited and AnnTaylor, Inc. Incorporated by reference to Exhibit 10.8 on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. (Confidential treatment has been granted with respect to certain portions of this Exhibit.) 10.28 Receivables Financing Agreement dated January 27, 1994, among AnnTaylor Funding, Inc., Ann Taylor, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank National Association. 10.29 Purchase and Sale Agreement dated as of January 27, 1994 between AnnTaylor, Inc. and AnnTaylor Funding, Inc. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche.
31 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/ PAUL E. FRANCIS .................................. Paul E. Francis Executive Vice President-- Finance and Administration-- Chief Financial Officer By: /s/ WALTER J. PARKS .................................. Walter J. Parks Vice President Financial Reporting-- Principal Accounting Officer Date: March 31, 1994 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.
SIGNATURE TITLE DATE - ----------------------------------------------------- -------------------------------------- ------------------- /s/ SALLY FRAME KASAKS Chairman, Chief Executive Officer and March 31, 1994 ..................................................... Director Sally Frame Kasaks /s/ PAUL E. FRANCIS Executive Vice President-- Finance and March 31, 1994 ..................................................... Administration and Director Paul E. Francis /s/ JAMES J. BURKE, JR. Director March 31, 1994 ..................................................... James J. Burke, Jr. /s/ GERALD S. ARMSTRONG Director March 31, 1994 ..................................................... Gerald S. Armstrong /s/ ROCHELLE B. LAZARUS Director March 31, 1994 ..................................................... Rochelle B. Lazarus /s/ ROBERT C. GRAYSON Director March 31, 1994 ..................................................... Robert C. Grayson /s/ HANNE M. MERRIMAN Director March 31, 1994 ..................................................... Hanne M. Merriman
32 ANNTAYLOR STORES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Independent Auditors' Report........................................................................... 34 Consolidated Financial Statements: Consolidated Statements of Operations for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992.............................................................................. 35 Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993............................. 36 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992..................................................................... 37 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992.............................................................................. 38 Notes to Consolidated Financial Statements.......................................................... 39
33 INDEPENDENT AUDITORS' REPORT To the Stockholders of ANNTAYLOR STORES CORPORATION: We have audited the accompanying consolidated financial statements of AnnTaylor Stores Corporation and its subsidiary, 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 subsidiary at January 29, 1994 and January 30, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE New Haven, Connecticut March 25, 1994 34 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992
FISCAL YEARS ENDED ------------------------------------------------------ JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992 ---------------- ------------------ ---------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net sales, including leased shoe departments............ $ 501,649 $ 468,381 $ 437,711 Cost of sales........................................... 271,749 264,301 234,136 ---------------- ------------------ ---------------- Gross profit............................................ 229,900 204,080 203,575 Selling, general and administrative expenses............ 169,371 152,072 150,842 Distribution center restructuring charge................ 2,000 -- -- Amortization of goodwill................................ 9,508 9,504 9,506 ---------------- ------------------ ---------------- Operating income........................................ 49,021 42,504 43,227 Interest expense........................................ 17,696 21,273 33,958 Stockholder litigation settlement....................... -- 3,905 -- Other (income) expense, net............................. (194) 259 542 ---------------- ------------------ ---------------- Income before income taxes and extraordinary loss....... 31,519 17,067 8,727 Income tax provision.................................... 17,189 11,150 7,703 ---------------- ------------------ ---------------- Income before extraordinary loss........................ 14,330 5,917 1,024 Extraordinary loss (net of income tax benefit of $6,123,000 and $9,065,000, respectively)................ 11,121 -- 16,835 ---------------- ------------------ ---------------- Net income (loss)............................. $ 3,209 $ 5,917 $ (15,811) ---------------- ------------------ ---------------- ---------------- ------------------ ---------------- Net income (loss) per share of common stock: Income per share before extraordinary loss.............. $ .66 $ .28 $ .05 Extraordinary loss per share............................ (.51) -- (.87) ---------------- ------------------ ---------------- Net income (loss) per share................... $ .15 $ .28 $ (.82) ---------------- ------------------ ---------------- ---------------- ------------------ ---------------- Weighted average shares and share equivalents outstanding............................................. 21,929 21,196 19,326
See accompanying notes to consolidated financial statements. 35 ANNTAYLOR STORES CORPORATION CONSOLIDATED BALANCE SHEETS JANUARY 29, 1994 AND JANUARY 30, 1993
JANUARY 29, JANUARY 30, 1994 1993 ----------- ----------- (IN THOUSANDS) ASSETS Current assets Cash................................................................................. $ 292 $ 226 Accounts receivable, net of allowances of $787,000 and $1,006,000, respectively...... 49,279 43,003 Merchandise inventories.............................................................. 60,890 50,307 Prepaid expenses and other current assets............................................ 7,184 5,904 Refundable income taxes.............................................................. -- 5,097 Deferred income taxes................................................................ 3,750 3,500 ----------- ----------- Total current assets......................................................... 121,395 108,037 Property and equipment Leasehold improvements............................................................... 30,539 25,070 Furniture and fixtures............................................................... 37,596 28,508 Improvements in progress............................................................. 8,621 624 ----------- ----------- 76,756 54,202 Less accumulated depreciation and amortization....................................... 28,703 22,394 ----------- ----------- Net property and equipment................................................... 48,053 31,808 Deferred financing costs, net of accumulated amortization of $643,000 and $11,917,000, respectively........................................................................... 4,990 3,969 Goodwill, net of accumulated amortization of $47,713,000 and $38,205,000, respectively........................................................................... 332,537 342,045 Deferred income taxes.................................................................. 1,500 -- Investment in CAT...................................................................... 2,245 88 Other assets........................................................................... 2,679 1,645 ----------- ----------- Total assets................................................................. $ 513,399 $ 487,592 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable..................................................................... $ 37,564 $ 23,779 Accrued expenses..................................................................... 21,791 17,719 Current portion of long-term debt.................................................... 8,757 37,000 ----------- ----------- Total current liabilities.................................................... 68,112 78,498 Long-term debt......................................................................... 180,243 158,474 Other liabilities...................................................................... 5,773 5,322 Commitments and contingencies Stockholders' equity Common stock, $.0068 par value; 40,000,000 shares authorized; 21,902,811 and 21,158,468 shares issued, respectively................................................. 149 144 Additional paid-in capital........................................................... 271,810 261,820 Warrants to acquire 446,249 and 511,922 shares of common stock, respectively......... 7,378 8,341 Accumulated deficit.................................................................. (16,756) (19,965) Note due from stockholder............................................................ -- (999) Deferred compensation on restricted stock............................................ (119) (398) ----------- ----------- 262,462 248,943 Less: Treasury stock, 450,817 and 522,521 shares, respectively, at cost...................................................................... (3,191) (3,645) ----------- ----------- Total stockholders' equity................................................... 259,271 245,298 ----------- ----------- Total liabilities and stockholders' equity................................... $ 513,399 $ 487,592 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 36 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
TREASURY ADDITIONAL NOTE RESTRICTED STOCK COMMON STOCK PAID-IN WARRANTS ACCUMULATED DUE FROM STOCK --------- SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT STOCKHOLDER AWARD SHARES --------- ----------- --------- --------- --------- ----------- ------------- ----------- --------- Balance at February 2, 1991................. 13,093 $ 89 $ 71,391 -- -- $ (10,071) -- -- 1,996 Net loss............... -- -- -- -- -- (15,811) -- -- -- Adjustment to carrying value of warrants.... -- -- (2,700) -- -- -- -- -- -- Adjustment to carrying value of common stock held by management investors............ -- -- (98) -- -- -- -- -- -- Public stock offering............. 6,883 47 166,494 -- -- -- -- -- -- Exercise of stock options.............. 41 -- 280 -- -- -- -- -- -- Reclassification of warrants............. -- -- -- 1,985 $ 32,350 -- -- -- -- Reclassification of common stock held by management investors. 289 2 2,416 -- -- -- $ (999) -- -- Exercise of warrants... -- -- 11,839 (1,270) (20,702) -- -- -- (1,270) --------- ----- --------- --------- --------- ----------- ------ ----------- --------- Balance at February 1, 1992................. 20,306 138 249,622 715 11,648 (25,882) (999) -- 726 Net income............. -- -- -- -- -- 5,917 -- -- -- Exercise of stock options.............. 792 6 5,436 -- -- -- -- -- -- Tax benefits related to stock options........ -- -- 3,536 -- -- -- -- -- -- Exercise of warrants... -- -- 1,892 (203) (3,307) -- -- -- (203) Common stock issued as restricted stock award................ 60 -- 1,327 -- -- -- -- $ (1,327) -- Amortization of restricted stock award................ -- -- -- -- -- -- -- 929 -- Common stock issued as employee stock award. -- -- 7 -- -- -- -- -- -- --------- ----- --------- --------- --------- ----------- ------ ----------- --------- Balance at January 30, 1993................. 21,158 144 261,820 512 8,341 (19,965) (999) (398) 523 Net income............. -- -- -- -- -- 3,209 -- -- -- Exercise of stock options.............. 745 5 6,121 -- -- -- -- -- -- Exercise of warrants... -- -- 550 (66) (963) -- -- -- (66) Tax benefits related to stock options........ -- -- 3,240 -- -- -- -- -- -- Common stock issued as employee stock award. -- -- 79 -- -- -- -- -- (6) Amortization of restricted stock award................ -- -- -- -- -- -- -- 279 -- Repayment of note due from stockholder..... -- -- -- -- -- -- 999 -- -- --------- ----- --------- --------- --------- ----------- ------ ----------- --------- Balance at January 29, 1994................. 21,903 $ 149 $ 271,810 446 $ 7,378 $ (16,756) $ 0 $ (119) 451 --------- ----- --------- --------- --------- ----------- ------ ----------- --------- --------- ----- --------- --------- --------- ----------- ------ ----------- --------- TOTAL STOCKHOLDERS' AMOUNT EQUITY ------ ----------- Balance at February 2, 1991................. $ (13,926) $ 47,483 Net loss............... -- (15,811) Adjustment to carrying value of warrants.... -- (2,700) Adjustment to carrying value of common stock held by management investors............ -- (98) Public stock offering............. -- 166,541 Exercise of stock options.............. -- 280 Reclassification of warrants............. -- 32,350 Reclassification of common stock held by management investors. -- 1,419 Exercise of warrants... 8,863 -- --------- ----------- Balance at February 1, 1992................. (5,063) 229,464 Net income............. -- 5,917 Exercise of stock options.............. -- 5,442 Tax benefits related to stock options........ -- 3,536 Exercise of warrants... 1,415 -- Common stock issued as restricted stock award................ -- -- Amortization of restricted stock award................ -- 929 Common stock issued as employee stock award. 3 10 --------- ----------- Balance at January 30, 1993................. (3,645) 245,298 Net income............. -- 3,209 Exercise of stock options.............. -- 6,126 Exercise of warrants... 413 -- Tax benefits related to stock options........ -- 3,240 Common stock issued as employee stock award. 41 120 Amortization of restricted stock award................ -- 279 Repayment of note due from stockholder..... -- 999 --------- ----------- Balance at January 29, 1994................. $ (3,191) $ 259,271 --------- ----------- --------- -----------
See accompanying notes to consolidated financial statements. 37 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992
FISCAL YEARS ENDED ------------------------------------- JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ----------- ----------- ----------- (IN THOUSANDS) Operating activities: Net income (loss)........................................................... $ 3,209 $ 5,917 $ (15,811) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss..................................................... 17,244 -- 25,900 Distribution center restructuring charge............................... 2,000 -- -- Equity earnings in CAT................................................. (517) -- -- Provision for loss on accounts receivable.............................. 1,171 1,240 1,211 Depreciation and amortization.......................................... 8,505 7,486 6,203 Amortization of goodwill............................................... 9,508 9,504 9,506 Accretion of original issue discount................................... 2,864 5,726 8,893 Amortization of deferred financing costs............................... 1,335 1,524 2,140 Amortization of deferred compensation.................................. 279 929 -- Deferred income taxes.................................................. (1,750) (1,500) (1,000) Issuance of Exchange Notes............................................. -- 1,331 1,210 Loss on disposal of property and equipment............................. 312 72 338 Decrease (increase) in receivables..................................... (7,447) (2,539) 6,606 Decrease (increase) in merchandise inventories......................... (10,583) (4,325) 3,433 Increase in prepaid expenses and other current assets.................. (1,280) (187) (1,633) Decrease (increase) in refundable income taxes......................... 5,097 (2,078) (3,019) Increase (decrease) in accounts payable and accrued liabilities........ 18,218 (250) (4,799) Decrease (increase) in other non-current assets and liabilities, net... (843) 729 964 ----------- ----------- ----------- Net cash provided by operating activities................................... 47,322 23,579 40,142 Investing activities: Purchases of property and equipment......................................... (25,062) (4,303) (10,004) Investment in CAT........................................................... (1,640) (88) -- ----------- ----------- ----------- Net cash used by investing activities....................................... (26,702) (4,391) (10,004) Financing activities: Borrowings (repayments) under line of credit agreement...................... (3,500) 2,500 (19,000) Increase (decrease) in bank overdrafts...................................... (2,361) (4,660) 2,267 Payments of long-term debt.................................................. (96,969) (26,000) (13,000) Purchase of Subordinated Debt Securities.................................... (93,689) -- (166,938) Proceeds from issuance of common stock...................................... -- -- 166,541 Net proceeds from 8 3/4% Notes.............................................. 107,387 -- -- Proceeds from Term Loan..................................................... 80,000 -- -- Proceeds from note due from Stockholder..................................... 999 -- -- Payment of 10% Junior Subordinated Notes.................................... (14,641) -- -- Payment of Term Loan........................................................ (26,000) -- -- Proceeds from Receivables Facility.......................................... 33,000 -- -- Purchase of 8 3/4% Notes.................................................... (10,225) -- -- Proceeds from exercise of stock options..................................... 9,486 8,988 280 Payment of financing costs.................................................. (4,041) -- (232) ----------- ----------- ----------- Net cash used by financing activities....................................... (20,554) (19,172) (30,082) ----------- ----------- ----------- Net increase in cash.......................................................... 66 16 56 Cash, beginning of year....................................................... 226 210 154 ----------- ----------- ----------- Cash, end of year............................................................. $ 292 $ 226 $ 210 ----------- ----------- ----------- ----------- ----------- ----------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest...................................... $ 12,664 $ 13,917 $ 22,611 ----------- ----------- ----------- ----------- ----------- ----------- Cash paid during the year for income taxes.................................. $ 5,114 $ 11,192 $ 4,501 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 38 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 conducts no business other than the management of Ann Taylor. All intercompany accounts have been eliminated in consolidation. Certain fiscal 1992 and 1991 amounts have been reclassified to conform to the fiscal 1993 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. FINANCE SERVICE CHARGE INCOME Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $6,166,000 for fiscal 1993, $5,608,000 for fiscal 1992 and $5,850,000 for fiscal 1991. 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. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets (3 to 15 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. LEASED SHOE DEPARTMENT SALES Net sales include leased shoe department sales of $8,207,000 for fiscal 1992 and $16,056,000 for fiscal 1991. Leased shoe departments were phased out beginning August 1, 1990, and the phaseout was completed by February 1, 1993. Accordingly, there were no leased shoe department sales during fiscal 1993. The gross profit margin on leased shoe department sales was approximately 14.4%. DEFERRED FINANCING COSTS Deferred financing costs are being amortized using the interest method over the terms of the related debt. GOODWILL Goodwill is being amortized on a straight-line basis over 40 years. 39 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) INCOME TAXES Income tax expense is based on reported results of operations before income taxes. During the first quarter of 1993, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Adoption of SFAS 109 did not have a material effect on the results of operations. ADVERTISING EXPENSES Advertising expense was $6,388,000 for fiscal 1993, $5,509,000 for fiscal 1992 and $8,645,000 for fiscal 1991. NET INCOME (LOSS) PER SHARE Net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and common share equivalents outstanding during the period and assumes the exercise of the warrants and the dilutive effect of the stock options. 2. RESTRUCTURING The Company recorded a $2,000,000 pre-tax restructuring charge in the fourth quarter of 1993 in connection with the announced relocation of its distribution center from New Haven, Connecticut to Louisville, Kentucky. The primary components of the restructuring charge are approximately $1,100,000 for employee related costs, principally for severance and job training benefits, and approximately $900,000 for the write-off of the estimated net book value of fixed assets at the time of relocation. 3. EXTRAORDINARY ITEMS In 1993, the Company entered into a series of debt refinancing transactions that resulted in an extraordinary loss of $17,244,000 ($11,121,000 net of income tax benefit). The loss was attributable to the premiums paid in connection with the purchase or discharge of Ann Taylor's 14 3/8% Senior Subordinated Discount Notes due 1999 ("Discount Notes") and its 13 3/4% Subordinated Notes due 1999 ("Notes") and the purchase of $10,000,000 principal amount of Ann Taylor's 8 3/4% Subordinated Notes due 2000 ("8 3/4% Notes"), and the write-off of deferred financing costs. During May 1991, the Company completed an initial public offering of its common stock (the "IPO"). The net proceeds of the IPO were used to repurchase outstanding Discount Notes and Notes. The repurchase and write-off of related deferred financing costs resulted in an extraordinary loss of $25,900,000 ($16,835,000 net of income tax benefit) in the second quarter of 1991. 40 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT The following summarizes long-term debt outstanding at January 29, 1994 and January 30, 1993:
JANUARY 29, 1994 JANUARY 30, 1993 ------------------------ ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- (IN THOUSANDS) Senior Debt: Term loan................................................... $ 54,000 $ 54,000 $ 96,969 $ 96,969 Revolving credit loan....................................... 2,000 2,000 5,500 5,500 14 3/8% Discount Notes, net of unamortized discount of $6,261,000.................................................. -- -- 44,069 46,800 13 3/4% Notes, net of unamortized discount of $287,000........ -- -- 34,295 37,350 10% exchange notes............................................ -- -- 14,641 17,300 8 3/4% Notes.................................................. 100,000 102,750 -- -- Receivables facility.......................................... 33,000 33,000 -- -- ----------- ----------- ----------- ----------- 189,000 191,750 195,474 203,919 Less current portion.......................................... 8,757 8,757 37,000 37,000 ----------- ----------- ----------- ----------- Total.................................................. $ 180,243 $ 182,993 $ 158,474 $ 166,919 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The bank credit agreement entered into on June 28, 1993 between Ann Taylor and Bank of America, as agent for a syndicate of banks (the "Bank Credit Agreement") provides for an $80,000,000 term loan ("Term Loan") and a $55,000,000 revolving credit facility ("Revolving Credit Facility") (collectively, the "Bank Loans"). The Term Loan is subject to regularly scheduled semi-annual repayments of principal, which commenced on January 15, 1994. The Company made the semi-annual payment of $6,000,000 in January 1994, and an additional payment of $20,000,000 which reduced the originally scheduled payments to $8,757,000 in fiscal years 1994 and 1995, $11,676,000 in fiscal years 1996 and 1997, and $13,134,000 in fiscal year 1998. Amounts borrowed under the Revolving Credit Facility may be repaid at any time and are not subject to scheduled repayment prior to January 1999. The maximum amount that may be borrowed under this facility is reduced by the amount of commercial and standby letters of credit outstanding under the Bank Credit Agreement. Amounts borrowed under the Revolving Credit Facility mature on January 15, 1999; however, the Company is required to reduce the outstanding balance of the Revolving Credit Facility to $20,000,000 or less for a 30-day period in fiscal 1994 and to $15,000,000 or less for a 30-day period each year thereafter. At January 29, 1994 and January 30, 1993, the amount available under the Revolving Credit Facility was $46,150,000 and $35,320,000, respectively. The Term Loan and the Revolving Credit Facility bear interest at a rate per annum equal to, at the Company's option, Bank of America's (1) Base Rate plus .875%, or (2) Eurodollar rate plus 1.875%. In addition, Ann Taylor is required to pay Bank of America a quarterly commitment fee of .375% per annum of the unused revolving loan commitment. At January 29, 1994, the $54,000,000 outstanding under the Term Loan bore interest at a weighted average rate of 5.13% per annum and the $2,000,000 outstanding under the Revolving Credit Facility bore interest at the rate of 6.875% per annum. Under the terms of the Bank Credit Agreement, Bank of America obtained a pledge of Ann Taylor's common stock and a security interest in certain assets. The Bank Credit Agreement requires, 41 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT--(CONTINUED) with certain exceptions, that any net proceeds from the sale of assets and debt or equity securities be applied to repay borrowings. In addition, the Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens, investments and capital expenditures, restrictions on dividends or other distributions to stockholders, and maintaining certain financial ratios and specified levels of net worth. In the fourth quarter of 1993, Ann Taylor sold its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary, which used the receivables to secure borrowings under a new receivables financing facility due 1996 (the "Receivables Facility"). As of January 29, 1994, $33,000,000 was outstanding under the Receivables Facility. AnnTaylor Funding, Inc. can borrow up to $40,000,000 under the Receivables Facility based on its accounts receivable balance. The interest rate as of January 29, 1994 was 3.67%. At January 29, 1994, AnnTaylor Funding, Inc. had total assets of approximately $41,000,000 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% Notes, the net proceeds of $107,387,000 of which were used in part to repay the outstanding indebtedness under Ann Taylor's then existing bank credit agreement. The outstanding principal amount of these notes as of January 29, 1994 was $100,000,000. Ann Taylor's obligations with respect to the Discount Notes and Notes were discharged on July 29, 1993 when Ann Taylor deposited with the trustees for the Discount Notes and Notes an aggregate of $50,734,000 in irrevocable trusts. The Discount Notes and the Notes will be redeemed with the proceeds of the trusts on or about July 15, 1994. The aggregate carrying value of the Discount Notes and Notes as of January 29, 1994 would have been $45,004,000. In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement. Under the agreement, the Company receives a fixed rate of 4.75% and pays a floating rate based on LIBOR, as determined in six month intervals. This agreement lowered the effective interest rate on the 8 3/4% Notes by 125 basis points for the first semi-annual period ended January 1994. The swap agreement matures in July 1996. The Company is exposed to credit loss in the event of non-performance by the other party to the swap agreement; however, the Company does not anticipate non-performance by the other party, which is a major financial institution. As of January 29, 1994, the fair market value of the swap agreement was approximately $780,000. The aggregate principal payments of all long-term obligations for the next five fiscal years are as follows:
(IN FISCAL YEAR THOUSANDS) - ------------------------------------------------------------------------------ 1994........................................................................ $ 8,757 1995........................................................................ 8,757 1996........................................................................ 44,676 1997........................................................................ 11,676 1998........................................................................ 15,134
At January 29, 1994, January 30, 1993 and February 1, 1992, Ann Taylor had outstanding commercial and standby letters of credit with Bank of America totaling $6,850,000, $9,180,000 and $3,280,000, respectively. 42 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT--(CONTINUED) 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 debt instruments using quoted market information, as available, or interest rates which are available to the Company. As judgment is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of activity in the allowance for doubtful accounts for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 is as follows:
FISCAL YEARS ENDED ---------------------------------------------------- JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992 ---------------- ---------------- ---------------- (IN THOUSANDS) Balance at beginning of year......... $ 1,006 $ 899 $ 1,000 Provision for loss on accounts receivable........................... 1,171 1,240 1,211 Accounts written off................. (1,390) (1,133) (1,312) ---------------- ---------------- ---------------- Balance at end of year............... $ 787 $ 1,006 $ 899 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
6. COMMITMENTS AND CONTINGENCIES Ann Taylor occupies its retail stores, distribution center and administrative facilities under operating leases, most of which are non-cancellable. 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 leases require Ann Taylor to pay taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. 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. Future minimum lease payments under non-cancellable operating leases at January 29, 1994 are as follows:
(IN FISCAL YEAR THOUSANDS) - ----------- 1994........................................................................ $ 30,504 1995........................................................................ 27,620 1996........................................................................ 26,054 1997........................................................................ 23,416 1998........................................................................ 21,613 1999 and thereafter......................................................... 82,242 ------------- Total.................................................................... $ 211,449 ------------- -------------
43 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. COMMITMENTS AND CONTINGENCIES--(CONTINUED) Rent expense for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 was as follows:
FISCAL YEARS ENDED ---------------------------------------------------- JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992 ---------------- ---------------- ---------------- (IN THOUSANDS) Minimum rent.............................................. $ 28,076 $ 24,933 $ 22,135 Percentage rent........................................... 3,343 4,217 4,423 ---------------- ---------------- ---------------- Total................................................ $ 31,419 $ 29,150 $ 26,558 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
In January 1993, the Company and the other defendants agreed to settle the stockholder class action lawsuit filed against them in October 1991. As a result of the settlement, the Company was required to pay to or for the benefit of the plaintiff class $2,800,000 (after application of the insurance proceeds). To provide for the settlement, the Company recorded an expense of $3,905,000 ($.11 per share, net of income tax benefit), which includes certain of the legal defense costs and other expenses associated with the suit, in its fiscal 1992 financial statements. Ann Taylor 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 or results of operations of the Company. 7. COMMON STOCK WARRANTS In conjunction with the sale by Ann Taylor of the Discount Notes and Notes on July 20, 1989, the Company sold warrants to acquire, in the aggregate, 1,985,294 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 IPO. During the fiscal year ended February 1, 1992, the Company charged $2,700,000 to additional paid-in capital with a corresponding increase to the carrying value of the Warrants. 8. PREFERRED STOCK At January 29, 1994, January 30, 1993 and February 1, 1992, there were 2,000,000 shares of preferred stock, par value $.01, authorized and unissued. 9. STOCK OPTION PLANS In 1989 and 1992, the Company established stock option plans. Under the terms of both plans, the exercise price of any option may not be less than 100% of the fair value of the common stock on the date of grant. 248,185 shares of common stock have been reserved for issuance under the 1989 plan and 974,000 shares of common stock have been reserved for issuance under the 1992 plan. At January 29, 1994, there were 14,373 shares under the 1989 plan and 498,500 shares under the 1992 plan available for future grant. Generally, options granted under the plans expire ten years from the date of the grant. 44 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. STOCK OPTION PLANS--(CONTINUED) Pursuant to an employment agreement with the Company, as of February 3, 1992, the Chairman of the Board and Chief Executive Officer of the Company was granted 100,000 stock options at $22.125 per share and 100,000 stock options at $26.00 per share. The following summarizes stock option transactions for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992:
OPTION PRICES NUMBER OF SHARES ------------------ ----------------- Outstanding Options February 2, 1991....................................... $6.80-$13.60 1,775,555 Granted.................................................................. $22.10 33,675 Exercised................................................................ $6.80 (41,112) Cancelled................................................................ $6.80 (14,151) ----------------- Outstanding Options February 1, 1992....................................... $6.80-$22.10 1,753,967 Granted.................................................................. $18.625-$26.00 517,500 Exercised................................................................ $6.80-$22.10 (792,210) Cancelled................................................................ $6.80-$22.25 (17,173) ----------------- Outstanding Options January 30, 1993....................................... $6.80-$26.00 1,462,084 Granted.................................................................. $18.125-$26.00 279,000 Exercised................................................................ $6.80-$22.25 (745,346) Cancelled................................................................ $6.80-$22.25 (86,426) ----------------- Outstanding Options January 29, 1994....................................... $6.80-$26.00 909,312 ----------------- -----------------
At January 29, 1994, January 30, 1993 and February 1, 1992 there were exercisable 516,889 options, 995,407 options and 1,496,953 options, respectively. 10. RESTRICTED STOCK AWARD Pursuant to an employment agreement with the Company, as of February 3, 1992, the Chairman of the Board and Chief Executive Officer of the Company was entitled to receive 60,000 shares of restricted common stock. The resulting unearned compensation expense of $1,327,500, 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. 45 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. INCOME TAXES The provision for income taxes for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 consists of the following:
FISCAL YEARS ENDED ---------------------------------------------------- JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992 ---------------- ---------------- ---------------- (IN THOUSANDS) Federal: Current............................ $ 14,339 $ 9,300 $ 6,203 Deferred........................... (1,750) (1,500) (1,000) State and Local...................... 4,600 3,350 2,500 ---------------- ---------------- ---------------- Total.............................. $ 17,189 $ 11,150 $ 7,703 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 is as follows:
FISCAL YEARS ENDED ------------------------------------- JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ----------- ----------- ----------- (IN THOUSANDS) Income before income taxes and extraordinary loss........................ $ 31,519 $ 17,067 $ 8,727 ----------- ----------- ----------- ----------- ----------- ----------- Federal statutory rate................................................... 35% 34% 34% ----------- ----------- ----------- ----------- ----------- ----------- Provision for income taxes at federal statutory rate..................... $ 11,032 $ 5,803 $ 2,967 State and local income taxes, net of federal income tax benefit.......... 2,990 2,211 1,650 Non-deductible amortization of goodwill.................................. 3,328 3,232 3,232 Other.................................................................... (161) (96) (146) ----------- ----------- ----------- Provision for income taxes.......................................... $ 17,189 $ 11,150 $ 7,703 ----------- ----------- ----------- ----------- ----------- -----------
The tax effects of significant items comprising the Company's deferred tax asset as of January 29, 1994 are as follows:
(IN DEFERRED TAX ASSETS: THOUSANDS) Current: Inventory........................................................................ $ 981 Accrued expenses................................................................. 1,288 Restructuring.................................................................... 700 Other............................................................................ 781 ------------- Total current...................................................................... $ 3,750 ------------- ------------- Noncurrent: Depreciation..................................................................... $ 125 Rent expense..................................................................... 1,375 ------------- Total noncurrent................................................................... $ 1,500 ------------- -------------
For 1992 deferred income tax benefits have been provided for temporary differences which result from recording certain transactions in different years for income tax purposes than for financial 46 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. INCOME TAXES--(CONTINUED) reporting purposes. Such transactions principally relate to merchandise inventories, accounts receivable, fixed assets and accrued expenses. 12. RETIREMENT PLANS SAVINGS PLAN. During 1989, Ann Taylor adopted a defined contribution 401(k) savings plan for substantially all 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 1993, fiscal 1992 and fiscal 1991 were $199,000, $111,000 and $111,000, respectively. PENSION PLAN. Substantially all employees of Ann Taylor are covered under a noncontributory defined benefit pension plan established during 1989. The pension plan is a "cash balance pension plan". An account balance is established for each participant which is credited with 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 January 29, 1994, January 30, 1993 and February 1, 1992, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions":
JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Actuarial present value of benefits obligation: Accumulated benefit obligation, including vested benefits of $1,056,000, $702,000 and $411,000, respectively..................................... $ 2,401 $ 1,832 $ 997 ------------ ------------ ------------ ------------ ------------ ------------ Projected benefit obligation for service rendered to date............... $ 2,401 $ 1,832 $ 997 Plan assets at fair value............................................... 2,344 1,847 855 ------------ ------------ ------------ Plan assets in excess of projected benefit obligation (projected benefit obligation in excess of plan assets).................................... (57) 15 (142) Unrecognized net gain................................................... (58) -- -- ------------ ------------ ------------ Prepaid (accrued) pension cost.......................................... $ (115) $ 15 $ (142) ------------ ------------ ------------ ------------ ------------ ------------ Net periodic pension cost for fiscal 1993, 1992 and 1991 included the following components: Service cost/benefits earned during the year............................ $ 680 $ 521 $ 372 Interest cost on projected benefit obligation........................... 117 100 61 Actual return on plan assets............................................ (124) (100) (76) Net amortization and deferral........................................... (36) 9 30 ------------ ------------ ------------ Net periodic pension cost............................................... $ 637 $ 530 $ 387 ------------ ------------ ------------ ------------ ------------ ------------ Assumptions used in the development of pension cost and accrual were: Discount rate...................................................... 7.0% 7.0% 9.0% Rate of increase in compensation level............................. 4.0% 4.0% 6.0% Expected long-term rate of return on assets........................ 8.0% 9.0% 10.0%
47 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. QUARTERLY FINANCIAL DATA--(UNAUDITED)
QUARTER -------------------------------------------------- FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) FISCAL 1993 Net sales..................................................... $ 120,175 $ 124,837 $ 122,025 $ 134,612 Operating income.............................................. 12,410 12,929 12,850 10,832 Income before extraordinary loss.............................. 3,290 3,630 4,321 3,089 Extraordinary loss............................................ -- (10,496) -- (625) Net income (loss)............................................. 3,290 (6,866) 4,321 2,464 Income per share before extraordinary loss.................... $ .15 $ .16 $ .20 $ .14 Extraordinary loss per share.................................. -- (.47) -- (.03) Net income (loss) per share................................... $ .15 $ (.31) $ .20 $ .11 FISCAL 1992 Net sales..................................................... $ 114,739 $ 112,492 $ 115,274 $ 125,876 Operating income.............................................. 11,304 8,301 14,718 8,181 Net income (loss)............................................. 2,138 624 4,265 (1,110) Net income (loss) per share................................... $ .10 $ .03 $ .20 $ (.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. The early retirement of indebtedness in the fourth quarter of 1993 led to an extraordinary pre-tax charge to earnings of $1,096,000 ($625,000 net of income tax benefit). The Company also recorded a $2,000,000 pre-tax restructuring charge in the fourth quarter of 1993 for the relocation of its distribution center from New Haven, Connecticut to Louisville, Kentucky in early 1995. The net loss in the fourth quarter of 1992 was primarily due to the stockholder litigation settlement of $3,386,000. 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES At January 29, 1994, certain affiliates of Merrill Lynch & Co., Inc. ("ML&Co.") held approximately 52% of the outstanding common stock and, as a result, have the voting power to determine the composition of the Board of Directors of the Company and otherwise control the business and affairs of Ann Taylor and the Company. Two of the members of the Boards of Directors of the Company and Ann Taylor are officers of Merrill Lynch Capital Partners, Inc. ("ML Capital Partners") and serve as representatives of certain limited partnerships controlled directly or indirectly by ML Capital Partners, together with certain other affiliates of ML&Co. See Note 15. The Company paid an underwriting commission of approximately $3,357,000 to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") in connection with the IPO. In addition, the Company paid a commission of approximately $599,000 to Merrill Lynch in connection with the repurchase of the subordinated debt securities with the proceeds from the IPO. In January 1993, in connection with the settlement of the class action lawsuit, the Company, Merrill Lynch and ML&Co., among others, entered into an agreement pursuant to which ML&Co. 48 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--(CONTINUED) paid $750,000 and the Company paid the balance of the settlement to or for the benefit of the plaintiffs. The Company also reimbursed Merrill Lynch $128,000 for certain costs incurred by it in connection with the class action in fiscal 1992, pursuant to the Company's indemnification obligations. The Company paid commissions aggregating approximately $2,692,000 to Merrill Lynch in connection with the issuance of the 8 3/4% Notes, and repurchases of Discount Notes, Notes and 8 3/4% Notes. TRANSACTIONS WITH CAT The Company commenced a joint venture known as CAT U.S., Inc. ("CAT") with Cygne Designs, Inc., which was formed for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. As of January 29, 1994, the Company owned a 40% interest in CAT which is being accounted for under the equity method of accounting, an increase of 20% from January 30, 1993. CAT places orders directly with manufacturers exclusively as agent for Ann Taylor. Merchandise purchased by Ann Taylor through CAT was $67,202,000 or 23.5%, and $19,091,000, or 7.3%, of all merchandise purchased by the Company in 1993 and 1992, respectively. Accounts payable to CAT in the ordinary course of business was approximately $3,100,000 as of January 29, 1994. 15. SUBSEQUENT EVENTS The Company intends to file a registration statement for a sale of its common stock in the first quarter of 1994. 1,000,000 shares will be sold by the Company and 4,000,000 shares are expected to be sold by certain stockholders of the Company affiliated with ML&Co. 49
INDEX TO EXHIBITS EXHIBITS - --------- 3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit No. 3.1 to Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 of AnnTaylor, Inc. filed on May 29, 1991 (Registration No. 33-28522). 3.1.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit No. 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 No. 3.2 to the Quarterly Report on Form 10-Q of the Company 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. 4.2 Irrevocable Trust Agreement dated as of July 29, 1993, between Ann Taylor and State Street Bank and Trust Company, as trustee under Indenture dated as of July 15, 1989, with respect to the Discount Notes. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Ann Taylor on Form 10-Q for the Quarter Ended July 31, 1993 filed on September 2, 1993. 4.3 Irrevocable Trust Agreement dated as of July 29, 1993 between Ann Taylor and United States Trust Company of New York, as trustee under Indenture dated as of July 15, 1989 with respect to the Notes. Incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter Ended July 31, 1993 filed on September 2, 1993. 10.1 Form of U.S. Purchase Agreement among Merrill Lynch, Robertson, Stephens & Company, the other U.S. Underwriters, the Selling Warrantholders and the Company, including the form of Price Determination Agreement. Incorporated by reference to Exhibit No. 1.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.2 Form of International Purchase Agreement among Merrill Lynch International Limited, Robertson, Stephens & Company, the other International Underwriters and the Company, including the form of Price Determination Agreement. Incorporated by reference to Exhibit No. 1.2 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.3 Form of Indenture entered into between Ann Taylor and United States Trust Company of New York, as Trustee, including the form of Subordinated Note due 1999. Incorporated by reference to Exhibit No. 4.1 to Amendment No. 1 to the Registration Statement of the Company and AnnTaylor filed on June 21, 1989 (Registration No. 33-28522). 10.4 Form of Indenture entered into between Ann Taylor and State Street Bank and Trust Company of Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National Association, as Trustee, including the form of Senior Subordinated Discount Note due 1999. Incorporated by reference to Exhibit No. 4.2 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522). 10.5 Form of Warrant Agreement entered into between Ann Taylor and The Connecticut Bank and Trust Company, National Association, including the form of Warrant. Incorporated by reference to Exhibit No. 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). 10.6 Credit Agreement, dated as of June 28, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, 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 July 7, 1993.
INDEX TO EXHIBITS EXHIBITS - --------- 10.6.1 Amendment No. 1 to Credit Agreement, dated as of August 10, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.6.2 Amendment No. 2 to Credit Agreement dated as of October 6, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q of AnnTaylor, Inc. for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.6.3 Amendment No. 3 to Credit Agreement dated as of December 23, 1993, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. 10.6.4 Amendment No. 4 to Credit Agreement dated as of January 24, 1994, between Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto, and Bank of America, as Agent. 10.7 Guaranty, dated as of June 28, 1993, 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 July 7, 1993. 10.8 Security and Pledge Agreement, dated as of June 28, 1993, 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 July 7, 1993. 10.9 License Agreement, dated as of April 30, 1984, between Ann Taylor and Joan & David. Incorporated by reference to Exhibit No. 10.14 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.10 Agreement, dated March 22, 1990, between Ann Taylor and Chapel Street Shoes, Inc. Incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of the Company filed on April 30, 1990. 10.11 Form of Investor Stock Subscription Agreement, dated February 8, 1989, between the Company and each of the ML Entities. Incorporated by reference to Exhibit No. 10.15 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.12 1989 Stock Option Plan. Incorporated by reference to Exhibit No. 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.12.1 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. 10.13 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit No. 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.13.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit No. 10.17.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.13.2 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. 10.13.3 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 Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993.
INDEX TO EXHIBITS EXHIBITS - --------- 10.14 Lease, dated December 1, 1985, between Hamilton Realty Co. and Ann Taylor concerning the New Haven distribution center. Incorporated by reference to Exhibit No. 10.22 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.14.1 Agreement, dated March 22, 1993, between Hamilton Realty Co. and Ann Taylor amending the New Haven distribution center lease. Incorporated by reference to Exhibit No. 10.14.1 to the Annual Report on Form 10-K of Ann Taylor filed on April 30, 1993. 10.15 Lease, dated October 1, 1988, between Dixson Associates and Ann Taylor concerning Ann Taylor's 3 East 57th Street offices and store, as amended. Incorporated by reference to Exhibit No. 10.23 to the Registration Statement of the Company and Ann Taylor dated May 3, 1989 (Registration No. 33-28522). 10.15.1 Agreement, dated April 12, 1993, between Dixson Associates and Ann Taylor amending the 3 East 57th Street lease. Incorporated by reference to Exhibit No. 10.15.1 to the Annual Report on Form 10-K of Ann Taylor filed on April 30, 1993. 10.16 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit No. 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). 10.17 Employment Agreement, effective as of February 3, 1992, between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K of the Company filed on April 28, 1992. 10.18 The AnnTaylor Stores Corporation 1992 Stock Option Plan. Incorporated by reference to Exhibit No. 4.3 to the Company's Registration Statement on Form S-8 filed with the Commission on August 10, 1992 (Registration No. 33-50688). 10.19 Management Performance Compensation Plan. Incorporated by reference to Exhibit 10.30 to the Quarterly Report on Form 10-Q filed on December 15, 1992. 10.20 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Quarterly Report on Form 10-Q filed on December 15, 1992. 10.21 Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated Action. Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.22 Agreement among Defendants to the Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated Action. Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.23 Opinion Re Settlement Plan of Allocation and Application for Attorney's Fees and Expenses dated May 25, 1993, In Re AnnTaylor Stores Securities Litigation. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 1, 1993 filed on May 28, 1993. 10.24 Consulting and Severance Agreement dated April 6, 1993 between the Company and Joseph J. Schumm. Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K filed on April 30, 1993. 10.25 Interest Rate Swap Agreement dated as of July 22, 1993, between AnnTaylor, Inc. and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.26 Stock Purchase Agreement, dated as of July 13, 1993, between AnnTaylor, Inc. and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.27 Agreement, dated July 13, 1993, among Cygne Designs, Inc., Cygne Designs F.E. Limited, CAT US, Inc., C.A.T. Far East Limited and AnnTaylor, Inc. Incorporated by reference to Exhibit 10.8 on Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. (Confidential treatment has been granted with respect to certain portions of this Exhibit.)
INDEX TO EXHIBITS EXHIBITS - --------- 10.28 Receivables Financing Agreement dated January 27, 1994, among AnnTaylor Funding, Inc., Ann Taylor, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank National Association. 10.29 Purchase and Sale Agreement dated as of January 27, 1994 between AnnTaylor, Inc. and AnnTaylor Funding, Inc. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche.
EX-10.6.3 2 AMENDMENT NO. 3 TO CREDIT AGREEMENT This Amendment No. 3 to Credit Agreement dated as of December 23, 1993 (this "Amendment") is entered into among ANNTAYLOR, INC., a Delaware corporation (the "Borrower"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and BANK OF MONTREAL, as Co-Agents (the "Co-Agents"), the financial institu tions party hereto (the "Lenders") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as agent for the Lenders (the "Agent"). WHEREAS, the parties hereto are party to that certain Credit Agreement dated as of June 28, 1993 (as heretofore amended, the "Credit Agreement"); and WHEREAS, the Borrower has requested the Lenders to amend certain provisions of the Credit Agreement and the Lenders are willing to agree to such amendments; NOW, THEREFORE, on the terms and subject to the conditions set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINED TERMS ------------- Unless otherwise defined herein, defined terms used herein shall have the meanings assigned to such terms in the Credit Agreement. ARTICLE II AMENDMENTS TO CREDIT AGREEMENT ------------------------------ (1) Amendment of Minimum Amount of Swing Loans. ------------------------------------------ The second sentence of clause (i) of Section 2.03(a) of ---------- --------------- the Credit Agreement is hereby amended to read as follows: "Swing Loans shall be in a minimum amount of $100,000." (2) Amendment of Minimum Amounts of Voluntary Prepayments. ----------------------------------------------------- Paragraph (a) of Section 2.06 of the Credit Agreement ------------- ------------ is hereby amended by deleting the words ", in the case of a prepayment of Base Rate Loans, and $10,000,000, in - 1 - the case of a prepayment of Eurodollar Loans," appearing on lines 14, 15 and 16 thereof. (3) Amendment to Use of Proceeds Restrictions. ----------------------------------------- Section 2.12 of the Credit Agreement is hereby amended ------------ to read as follows: "2.12 Use of Proceeds of the Loans. The ---------------------------- proceeds of the Term Loans may be used only (a) to repay Indebtedness owed by the Borrower under the Existing Credit Agreement; (b) to redeem, repurchase and pay interest and premiums on the Bonds; and (c) to pay fees and expenses associated with the redemption or repurchase of the Bonds and the refinancing of the Existing Credit Agreement. The proceeds of the Revolving Loans may be used for general corporate purposes, to repay Indebtedness owed by the Borrower under the Existing Credit Agreement, to purchase or make Restricted Payments to ATSC to repay or redeem outstanding Exchange Notes and to prepay, redeem or purchase outstanding New Subordinated Notes (and interest, premiums, fees and expenses in connection therewith) in a maximum aggregate principal amount of $15,000,000; provided, however, that only up to a ----------------- maximum aggregate principal amount of $10,000,000 may be prepaid, redeemed or purchased prior to the consum mation of the first sale of Receivables permitted under clause (iii) of Section 8.02(a) to occur after ------------------ --------------- the Effective Date." (4) Amendment of Restricted Payment Provisions. ------------------------------------------ Section 8.05 of the Credit Agreement is hereby amended ------------ as follows: (a) The words ", except as provided in paragraph (c) ------------- below," are hereby added after the word "but" appearing on line one of paragraph (b) thereof. ------------- (b) The words "and to prepay, redeem or purchase New Subordinated Notes in a maximum principal amount of $15,000,000" are hereby added after the word "Bonds" appearing on line three of paragraph (c) ------------- thereof. (5) Paragraph (a) of Section 9.05 of the Credit Agreement ------------- ------------ is hereby amended by increasing the amount of Capital Expenditures permitted to be made or incurred in the - 2 - Fiscal Year ending in January 1995 from $21,000,000 to $28,000,000. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ The Company hereby represents and warrants that after giving effect to this Amendment, the representations and warranties contained in Section 5.02 of the Credit Agreement (except for ------------ representations and warranties relating to a particular point in time) are true and complete in all material respects as if made on and as of such date and no Potential Event of Default or Event of Default has occurred and is continuing. ARTICLE IV MISCELLANEOUS ------------- (1) Effectiveness. ------------- This Amendment will become effective when the Agent has received (a) counterparts hereof signed by the Borrower and the Requisite Lenders and (b) an amendment fee for the account of the Lenders having responded to the request of the Borrower to execute this Amendment on or prior to December 23, 1993 equal to 1/16% of the aggre gate Facility Commitments of such Lenders. (2) Reference and Effect on the Loan Documents. ------------------------------------------ (a) Upon the effectiveness of this Amendment as provided in paragraph (b) of Section (1) of this ------------- ----------- Article VI, each reference in the Credit Agreement ---------- to "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended or waived above, the Credit Agreement and each other Loan Document shall remain in full force and effect and are hereby ratified and confirmed in all respects. (c) The execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power, or remedy of any Lender or the Agent under the Credit Agreement or any of the other Loan - 3 - Documents, nor constitute a waiver of any provision of any of the Loan Documents. (3) Execution in Counterparts. ------------------------- This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (4) Governing Law. ------------- THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, this Amendment has been duly executed as of the date set forth above. ANNTAYLOR INC., as Borrower By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Co-Agent By: _______________________ Title: ____________________ - 4 - BANK OF MONTREAL, as Co-Agent By: _______________________ Title: ____________________ ARAB BANKING CORPORATION By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _______________________ Title: ____________________ BANK OF MONTREAL By: _______________________ Title: ____________________ THE FIRST NATIONAL BANK OF BOSTON By: _______________________ Title: ____________________ FLEET BANK, N.A. By: _______________________ Title: ____________________ THE FUJI BANK, LIMITED By: _______________________ Title: ____________________ - 5 - GIROCREDIT BANK, NEW YORK BRANCH By: _______________________ Title: ____________________ THE INDUSTRIAL BANK OF JAPAN, LIMITED, New York Branch By: _______________________ Title: ____________________ THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By: _______________________ Title: ____________________ MIDLANTIC NATIONAL BANK By: _______________________ Title: ____________________ NATWEST USA CREDIT CORP. By: _______________________ Title: ____________________ PNC BANK, NA By: _______________________ Title: ____________________ SHAWMUT BANK, N.A. By: _______________________ Title: ____________________ - 6 - UNITED STATES NATIONAL BANK OF OREGON By: _______________________ Title: ____________________ - 7 - EX-10.6.4 3 AMENDMENT NO. 4 AND CONSENT TO CREDIT AGREEMENT This Amendment No. 4 and Consent to Credit Agreement dated as of January 24, 1994 (this "Amendment") is entered into among --------- ANNTAYLOR, INC., a Delaware corporation (the "Borrower"), BANK OF -------- AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and BANK OF MONTREAL, as Co-Agents (the "Co-Agents"), the financial --------- institutions party hereto (the "Lenders") and BANK OF AMERICA ------- NATIONAL TRUST AND SAVINGS ASSOCIATION as agent for the Lenders (the "Agent"). ----- WHEREAS, the parties hereto are party to that certain Credit Agreement dated as of June 28, 1993 (as heretofore amended, the "Credit Agreement"); and ---------------- WHEREAS, the Borrower has requested the Lenders to amend certain provisions of the Credit Agreement and to consent to the terms and conditions of a securitization program for Receivables and the Lenders are willing to agree to such amendments and consent to such Receivables program. NOW, THEREFORE, on the terms and subject to the conditions set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINED TERMS ------------- Unless otherwise defined herein, defined terms used herein shall have the meanings assigned to such terms in the Credit Agreement. ARTICLE II AMENDMENTS TO CREDIT AGREEMENT ------------------------------ (1) Addition to and Amendment of Definitions. ---------------------------------------- (a) The definitions of "Disposition" and "Receivables" ----------- ----------- appearing in Section 1.01 of the Credit Agreement are hereby ------------ amended to read as follows: "'Disposition' shall mean (a) the sale, lease, ----------- conveyance or other disposition of Property to a Person other than the Borrower or any Restricted Subsidiary of the Borrower, including any Receivables Transaction (but excluding the sale or disposition of Cash Equivalents), and (b) the sale or transfer by the Borrower or ATSC or any Subsidiary of the Borrower or ATSC of any equity Securities issued by the Borrower or ATSC." "'Receivables'" shall mean and include all of the ----------- Borrower's presently existing and hereafter arising or acquired right, title and interest in and to (a) any rights to payment (the "Pool Receivables") from any Person (an "Obligor") whether constituting an account, chattel paper, instrument or a general intangible, arising under revolving credit card accounts established pursuant to contracts (the "Contracts") between the Borrower and each Obligor pursuant to which indebtedness may arise for the purchase of goods, including rights to payment of any interest or finance charges and other obligations of such Obligors with respect thereto, (b) all rights to, but not obligations under, all Contracts, (c) all rights in the merchandise (including returned merchandise), if any, relating to the sale which gave rise to any Pool Receivable, (d) all other security interests or liens and property subject thereto from time to time purporting to secure payment of a Pool Receivable, whether pursuant to the Contract related to such Pool Receivable or otherwise, (e) all UCC financing statements covering any collateral securing payment of any Pool Receivables, (f) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of any Pool Receivable whether pursuant to the contract related to such Pool Receivable or otherwise, (g) all monies due or to become due with respect thereto, (h) all books and records related to any of the foregoing, and (i) all proceeds thereof (as defined in the Uniform Commercial Code) including funds received from or on behalf of the Obligors in payment of any amounts owed (including finance charges, interest and all other charges) in respect of the Pool Receivables or are applied to such amounts owed by the Obligors (including insurance payments to be applied to amounts owed in respect of any Pool Receivable)." (b) New definitions of "Ongoing Receivables Sales" and ------------------------- "Receivables Transaction" are hereby added to Section 1.01 of ----------------------- ------------ the Credit Agreement reading as follows: "'Ongoing Receivables Sales' shall mean sales of ------------------------- Receivables which do not result in an increase in the amount of outstanding loans, investments or purchases by any lender, investor or purchaser (other than any Subsidiary of the Borrower) in any Receivables Transaction over the highest such amount previously outstanding at any time under any Receivables Transaction."; and "'Receivables Transaction' shall mean a transaction ----------------------- which involves (a) sales of Receivables in connection with a public or private transfer of installment - 2 - Receivables or credit card Receivables (including in connection with a securitization program) which transfer is recorded as a sale according GAAP or (b) loans made by a lender to the Borrower or a Subsidiary of the Borrower which loans are secured by Receivables, provided the -------- terms and conditions of such transaction are satisfactory to Lenders whose Pro Rata Shares in the aggregate are greater than 50% (whose approval shall not be unreasonably withheld or delayed)." (2) Amendment of Mandatory Prepayment Provisions. -------------------------------------------- (a) Clause (i) of Section 2.06(b) of the Credit ---------- --------------- Agreement is hereby amended by adding the words "or as a result of a Receivables Transaction" after the word "securities" appearing on line five thereof. (b) A new clause (v) is hereby added to paragraph (b) of ---------- ------------- Section 2.06 of the Credit Agreement reading as follows and ------------ present clauses (v) and (vi) thereof are hereby renumbered as ----------- ---- clauses (vi) and (vii): ------------ ----- "(v) Simultaneously with the receipt by the Borrower of the Net Cash Proceeds of any Receivables Transaction (other than proceeds received from Ongoing Receivables Sales), the Borrower shall prepay the Term Loans to the extent outstanding in an amount equal to such Net Cash Proceeds; provided, however, that the ----------------- Borrower may apply a maximum amount of $15,000,000 of Net Cash Proceeds received in connection with the first Receivables Transaction to occur after the Effective Date to prepay Revolving Loans to the extent outstanding." (c) The first sentence of renumbered clause (vii) of ------------ paragraph (b) of Section 2.06 of the Credit Agreement is ------------- ------------ hereby amended to read as follows: "Prepayments under this Section 2.06(b)(i), (ii), ------------------------- (iii) and (v) made after the Term Availability ----- --- Termination Date shall be applied to the repayment of the Term Loans pro rata across all remaining unpaid installments of the Term Loans." (3) Amendment to Use of Proceeds Restrictions. ----------------------------------------- Section 2.12 of the Credit Agreement is hereby amended to read ------------ as follows: "2.12 Use of Proceeds of the Loans. The proceeds of the ---------------------------- Term Loans may be used only (a) to repay Indebtedness owed by the Borrower under the Existing Credit Agreement; (b) to redeem, repurchase and pay interest and premiums on the Bonds; and (c) to pay fees and expenses associated with the - 3 - redemption or repurchase of the Bonds and the refinancing of the Existing Credit Agreement. The proceeds of the Revolving Loans may be used (i) for general corporate purposes; (ii) to repay Indebtedness owed by the Borrower under the Existing Credit Agreement; (iii) to purchase or make Restricted Payments to ATSC to repay or redeem outstanding Exchange Notes; and (iv) to prepay, redeem or purchase outstanding New Subordinated Notes (and interest, premiums, fees and expenses in connection therewith) in a maximum aggregate principal amount of $15,000,000, provided, however, that only up to a ----------------- maximum aggregate principal amount of $10,000,000 of New Subordinated Notes may be prepaid, redeemed or purchased prior to the consummation of the first Receivables Transaction to occur after the Effective Date." (4) Amendment to Corporate Powers, Etc. ---------------------------------- The second sentence of Section 7.02 of the Credit Agreement is ------------ hereby amended to read as follows: "The Borrower will, and will cause each of its Subsidiaries to, transact business in its own name (and in any other name disclosed to the Agent in writing) and will invoice all accounts in its own name." (5) Amendment to Permitted Indebtedness. ----------------------------------- Section 8.01(e) of the Credit Agreement is hereby amended to --------------- read as follows: "(e) Indebtedness in connection with any Receivables Transaction;" (6) Amendment to Sales of Assets Provisions. --------------------------------------- Section 8.02(a)(iii) of the Credit Agreement is hereby amended -------------------- to read as follows: "(iii) Receivables Transactions;" (7) Amendment to Permitted Liens Provisions. --------------------------------------- Section 8.02(b)(vii) of the Credit Agreement is hereby amended -------------------- to read as follows: "(vii) Liens in respect of Receivables sold pursuant to a Receivables Transaction;" (8) Amendment to Permitted Investments. ---------------------------------- Section 8.03(d) of the Credit Agreement is hereby amended to --------------- read as follows: - 4 - "(d) Investments in Subsidiaries if such Subsidiaries have been organized in connection with a Receivables Transaction; and investments in other Subsidiaries which are Restricted Subsidiaries in an amount not to exceed $1,000,000 in any Fiscal Year;" (9) Amendment to Accommodation Obligations. -------------------------------------- Section 8.04(iii) of the Credit Agreement is hereby amended to ----------------- read as follows: "(iii) obligations in respect of any Receivables Transaction; and" (10) Amendment to Conduct of Business Provisions. ------------------------------------------- Clause (d) of Section 8.06 of the Credit Agreement is hereby ---------- ------------ amended to read as follows: "any Receivables Transaction." ARTICLE III CONSENT TO RECEIVABLES TRANSACTION ---------------------------------- The Banks hereby consent to the terms and conditions of the proposed sale of Receivables as outlined in the letter attached hereto as Exhibit A. --------- ARTICLE IV CONFIRMATION OF AUTHORITY TO RELEASE COLLATERAL ----------------------------------------------- Each Lender hereby confirms, in accordance with Section ------- 11.11(d) of the Credit Agreement, the authority of the Agent to - -------- release Collateral sold pursuant to any Receivables Transaction. ARTICLE V BORROWER SECURITY AGREEMENT --------------------------- (1) The second sentence of Section 4(b) of the Borrower ------------ Security Agreement is hereby amended by including the following at the end thereof: "4) AnnTaylor Factory Stores." (2) Annex I-A of the Borrower Security Agreement is hereby --------- amended by including the following entry as the last entry thereof: - 5 - Stock Class of Certificate No. of Issuer Stock No. Shares - ------ -------- ----------- ------ AnnTaylor Funding, common 1 100 Inc. (3) Annex I-B of the Borrower Security Agreement is hereby --------- amended to read as follows: "Subordinated Promissory Note dated as of January __, 1994 by AnnTaylor Funding, Inc. to AnnTaylor, Inc." ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ The Company hereby represents and warrants that after giving effect to this Amendment, the representations and warranties contained in Section 5.02 of the Credit Agreement (except for ------------ representations and warranties relating to a particular point in time) are true and complete in all material respects as if made on and as of such date and no Potential Event of Default or Event of Default has occurred and is continuing. ARTICLE VII MISCELLANEOUS ------------- (1) Effectiveness. ------------- This Amendment will become effective when the Agent has received counterparts hereof signed by the Borrower and the Requisite Lenders. (2) Reference and Effect on the Loan Documents. ------------------------------------------ (a) Upon the effectiveness of this Amendment as provided in Section (1) of this Article VII, each reference in the ----------- ----------- Credit Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended or waived above, the Credit Agreement and each other Loan Document shall remain in full force and effect and are hereby ratified and confirmed in all respects. (c) The execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power, or remedy of any Lender or the Agent under the Credit Agreement or any of the - 6 - other Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. (3) Execution in Counterparts. ------------------------- This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (4) Governing Law. ------------- THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. - 7 - IN WITNESS WHEREOF, this Amendment has been duly executed as of the date set forth above. ANNTAYLOR, INC., as Borrower By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Co-Agent By: _______________________ Title: ____________________ BANK OF MONTREAL, as Co-Agent By: _______________________ Title: ____________________ ARAB BANKING CORPORATION By: _______________________ Title: ____________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _______________________ Title: ____________________ - 8 - BANK OF MONTREAL By: _______________________ Title: ____________________ THE FIRST NATIONAL BANK OF BOSTON By: _______________________ Title: ____________________ FLEET BANK, N.A. By: _______________________ Title: ____________________ THE FUJI BANK, LIMITED By: _______________________ Title: ____________________ GIROCREDIT BANK, NEW YORK BRANCH By: _______________________ Title: ____________________ THE INDUSTRIAL BANK OF JAPAN, LIMITED By: _______________________ Title: ____________________ THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH By: _______________________ Title: ____________________ - 9 - MIDLANTIC NATIONAL BANK By: _______________________ Title: ____________________ NATWEST USA CREDIT CORP. By: _______________________ Title: ____________________ PNC BANK, NA By: _______________________ Title: ____________________ SHAWMUT BANK, N.A. By: _______________________ Title: ____________________ UNITED STATES NATIONAL BANK OF OREGON By: _______________________ Title: ____________________ - 10 - EX-10.28 4 - ------------------------------------------------------------------ - ------------------------------------------------------------------ RECEIVABLES FINANCING AGREEMENT Dated as of January 27, 1994 Among ANNTAYLOR FUNDING, INC. as the Company -------------- ANNTAYLOR, INC. as Servicer ----------- and CLIPPER RECEIVABLES CORPORATION as Lender --------- and STATE STREET BOSTON CAPITAL CORPORATION as Administrator ---------------- and PNC BANK, NATIONAL ASSOCIATION as Relationship Bank -------------------- - ------------------------------------------------------------------ - ------------------------------------------------------------------ || TABLE OF CONTENTS ARTICLE I LOANS SECTION 1.01. Commitments to Lend; Limits on Lender's Obligations . . . . . . . . . . . . . 2 SECTION 1.02. Loan Procedures . . . . . . . . . . . . . . . 2 SECTION 1.03. Borrowing Base . . . . . . . . . . . . . . . . 2 SECTION 1.04. Note . . . . . . . . . . . . . . . . . . . . . 3 SECTION 1.05. Principal . . . . . . . . . . . . . . . . . . 3 ARTICLE II INTEREST SECTION 2.01. Interest . . . . . . . . . . . . . . . . . . . 4 SECTION 2.02. Payment Dates . . . . . . . . . . . . . . . . 4 SECTION 2.03. Funding with Commercial Paper . . . . . . . . 4 ARTICLE III SETTLEMENTS SECTION 3.01. Settlement Procedures . . . . . . . . . . . . 5 SECTION 3.02. Deemed Collections; Reduction of Outstanding Principal, Etc . . . . . . . . . . 8 SECTION 3.03. Payments and Computations, Etc. . . . . . . . 10 SECTION 3.04. Treatment of Collections and Deemed Collections 11 SECTION 3.05. Spread Account; Customer Letter of Credit . . 11 ARTICLE IV FEES AND YIELD PROTECTION SECTION 4.01. Fees . . . . . . . . . . . . . . . . . . . . . 13 SECTION 4.02. Yield Protection . . . . . . . . . . . . . . . 13 SECTION 4.03. Funding Losses . . . . . . . . . . . . . . . . 15 ARTICLE V CONDITIONS OF LOANS SECTION 5.01. Conditions Precedent to Initial Loan . . . . . 15 SECTION 5.02. Conditions Precedent to All Loans . . . . . . 17 ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . 18 SECTION 6.02. Representations and Warranties of AnnTaylor . 23 i ARTICLE VII GENERAL COVENANTS OF THE COMPANY AND ANNTAYLOR SECTION 7.01. Affirmative Covenants . . . . . . . . . . . . 26 SECTION 7.02 Separate Corporate Existence . . . . . . . . . 28 SECTION 7.03. Reporting Requirements . . . . . . . . . . . . 30 SECTION 7.04. Negative Covenants of the Company . . . . . . 32 SECTION 7.05 Negative Covenants of AnnTaylor . . . . . . . 34 ARTICLE VIII ADMINISTRATION AND COLLECTION SECTION 8.01. Designation of Servicer . . . . . . . . . . . 35 SECTION 8.02. Duties of Servicer . . . . . . . . . . . . . . 36 SECTION 8.03. Rights of the Administrator . . . . . . . . . 37 SECTION 8.04. Responsibilities of the Company . . . . . . . 39 SECTION 8.05. Further Action Evidencing Security Interest . 39 SECTION 8.06. Application of Collections . . . . . . . . . . 40 ARTICLE IX SECURITY INTEREST SECTION 9.01. Grant of Security Interest . . . . . . . . . . 40 SECTION 9.02. Remedies . . . . . . . . . . . . . . . . . . . 40 ARTICLE X EVENTS OF DEFAULT SECTION 10.01. Events of Default . . . . . . . . . . . . . . 41 SECTION 10.02. Remedies . . . . . . . . . . . . . . . . . . . 43 ARTICLE XI THE ADMINISTRATOR; RELATIONSHIP BANK SECTION 11.01. Authorization and Action . . . . . . . . . . . 43 SECTION 11.02. Administrator's and Relationship Bank's Reliance, Etc . . . . . . . . . . . . . . . . 44 SECTION 11.03. State Street Capital and PNC Bank and Affiliates 44 ARTICLE XII ASSIGNMENT OF LENDER'S INTEREST SECTION 12.01. Restrictions on Assignments . . . . . . . . . 45 SECTION 12.02. Rights of Assignee . . . . . . . . . . . . . . 46 SECTION 12.03. Evidence of Assignment . . . . . . . . . . . . 46 SECTION 12.04. Rights of the Banks and Collateral Agent . . . 46 ARTICLE XIII INDEMNIFICATION SECTION 13.01. Indemnities . . . . . . . . . . . . . . . . . 46 ii ARTICLE XIV MISCELLANEOUS SECTION 14.01. Amendments, Etc . . . . . . . . . . . . . . . 50 SECTION 14.02. Notices, Etc. . . . . . . . . . . . . . . . . 50 SECTION 14.03. No Waiver; Remedies . . . . . . . . . . . . . 51 SECTION 14.04. Binding Effect; Survival . . . . . . . . . . . 51 SECTION 14.05. Costs, Expenses and Taxes . . . . . . . . . . 52 SECTION 14.06. No Proceedings . . . . . . . . . . . . . . . . 52 SECTION 14.07. Confidentiality of the Company Information . . 53 SECTION 14.08. Confidentiality of Program Information . . . . 55 SECTION 14.09. Captions and Cross References . . . . . . . . 57 SECTION 14.10. Governing Law . . . . . . . . . . . . . . . . 57 SECTION 14.11. Waiver Of Jury Trial . . . . . . . . . . . . . 57 SECTION 14.12. Consent To Jurisdiction; Waiver Of Immunities 57 SECTION 14.13. Execution in Counterparts . . . . . . . . . . 58 SECTION 14.14. No Recourse Against Other Parties . . . . . . 58 iii APPENDICES APPENDIX A Definitions SCHEDULES SCHEDULE 6.01(n) List of Offices of the Company where Records Are Kept SCHEDULE 6.01(o) List of Lock-Box Banks SCHEDULE 6.01(p)-1 Forms of Contracts SCHEDULE 6.01(p)-2 Description of Credit and Collection Policy SCHEDULE 6.02(k) List of Offices of the Servicer where Records Are Kept SCHEDULE 6.02(l) List of Bank Accounts SCHEDULE 6.01(r) Trade Names SCHEDULE 7.03(c) Method of Aging EXHIBITS EXHIBIT 1.02(a) Form of Borrowing Notice EXHIBIT 1.04 Form of Note EXHIBIT 3.01(a) Form of Information Package EXHIBIT 3.05 Form of Spread Account Agreement EXHIBIT 5.01(g) Form of Lock-Box Agreement EXHIBIT 5.01(h)-(i) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom - Enforceability EXHIBIT 5.01(h)-(ii) Form of Opinion of General Counsel for the Company EXHIBIT 5.01(h)-(iii) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom - True Sale EXHIBIT 5.01(h)-(iv) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom - Substantive Consolidation EXHIBIT 5.01(h)-(v) Form of Opinion of Connecticut Counsel || iv RECEIVABLES FINANCING AGREEMENT THIS IS A RECEIVABLES FINANCING AGREEMENT, dated as of January 27, 1994, among ANNTAYLOR FUNDING, INC., a Delaware corporation (the "Company"), ANNTAYLOR, INC., a Delaware ------- corporation ("AnnTaylor"), as initial servicer, CLIPPER --------- RECEIVABLES CORPORATION, a Delaware corporation ("Lender"), STATE ------ STREET BOSTON CAPITAL CORPORATION, a Massachusetts corporation ("State Street Capital"), as administrator for Lender under the -------------------- Program Administration Agreement (in such capacity, the "Administrator") and PNC BANK, NATIONAL ASSOCIATION, a national ------------- banking association, as a referral agent for Lender under the Relationship Bank Agreement (in such capacity, together with any successors thereto in such capacity, the "Relationship Bank" and ----------------- in its individual capacity, "PNC Bank"). Unless otherwise -------- indicated, capitalized terms used in this Agreement are defined in Appendix A. ---------- Background ---------- 1. The Company is a limited purpose subsidiary of AnnTaylor formed for the purpose of purchasing Receivables generated by AnnTaylor in the ordinary course of its business. 2. The Company has, and expects to have, Pool Receivables which the Company intends to finance pursuant to this Agreement. The Company has requested Lender, and Lender has agreed, subject to the terms and conditions contained in this Agreement, to make loans to the Company from time to time during the term of this Agreement, which loans will be secured by the Receivables Pool. 3. AnnTaylor has been requested by the Company, Lender and the Administrator to act, and has agreed to act, as initial Servicer. 4. State Street Capital has been requested, and is willing, to act as the Administrator. 5. PNC Bank has been requested, and is willing, to act as the Relationship Bank. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I LOANS SECTION 1.01. Commitments to Lend; Limits on Lender's --------------------------------------- Obligations. Upon the terms and subject to the conditions of - ----------- this Agreement, from time to time prior to the Termination Date, the Company may request that Lender make loans to the Company (each being a "Loan") and Lender shall make such Loans; provided ---- -------- that no Loan shall be made by Lender if, after giving effect thereto, the then Outstanding Principal would exceed either (a) $40,000,000 (the "Lending Limit"), or (b) the Borrowing Base then ------------- in effect; and provided further that each Loan made pursuant to ---------------- this Section 1.01 shall have an original principal amount of at ------------ least $5,000,000 and shall be in integral multiples of $1,000,000, unless the Outstanding Principal is $20,000,000 or more, in which case, each Loan shall have an original principal amount of at least $100,000 and shall be in integral multiples of $100,000. SECTION 1.02. Loan Procedures. --------------- (a) Notice of Loan. Each Loan to the Company by Lender -------------- shall be made on notice from the Company to the Administrator substantially in the form of Exhibit 1.02(a) (each, a "Borrowing --------------- --------- Notice") received by the Administrator not later than noon (New - ------ York City time) on the Business Day next preceding the date of such proposed Loan (or, in the case of the initial Loan, not later than 9:00 a.m. (New York City time) on the date of such initial Loan). Each such notice of a proposed Loan shall specify the desired amount and date of such Loan, which date shall be a Settlement Date. (b) Funding of Loan. On the date of each Loan, Lender --------------- shall, upon satisfaction of the applicable conditions set forth in Article V, make available to the Administrator at the --------- Administrator's Office the principal amount of its Loan in same day funds, and after receipt by the Administrator of such funds, the Administrator will disburse such funds to an account of the Company designated in writing by the Company in the applicable Borrowing Notice. SECTION 1.03. Borrowing Base. -------------- (a) Computation of Borrowing Base. On any date, the ----------------------------- "Borrowing Base" means an amount equal to -------------- NPB - LR where: 2 LR = the Loss Reserve on such date; and NPB = the Net Pool Balance on such date. (b) Frequency of Computation. The Borrowing Base shall be ------------------------ computed and reported, as provided in Section 3.01, as of (i) the ------------ date of the initial Loan and (ii) the Cut-Off Date for each Settlement Period. In addition, if the Administrator or the Relationship Bank reasonably believes that there shall exist any event or occurrence that has a reasonable possibility of causing a Material Adverse Effect, the Administrator or the Relationship Bank may require the Servicer to provide a computation of Collections received by the Company or the Servicer since the last Cut-Off Date, the then aggregate Unpaid Balance of all Pool Receivables and such other information comprising a part of the Information Package that can be updated from the last Cut-Off Date for purposes of computing the Borrowing Base as of any other date, and the Servicer agrees to do so within 5 Business Days of its receipt of the Administrator's or the Relationship Bank's request. SECTION 1.04. Note. The Loans shall be evidenced by a ---- promissory note (as from time to time supplemented, extended, amended, modified or replaced from time to time, the "Note"), ---- substantially in the form set forth in Exhibit 1.04, with ------------ appropriate insertions, dated the date hereof, payable to the order of Lender in the maximum principal amount of $40,000,000 (or, if less, in the aggregate unpaid principal amount of all of the Loans) on the Termination Date. The Administrator shall record in its records, or at its option on the schedule attached to the Note, the date and amount of each Loan made hereunder, each repayment thereof and the other information provided for thereon. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Note. The failure so to record any such information or the error in so recording any such information shall not, however, limit or otherwise affect the actual obligations of the Company hereunder or under the Note to repay the principal amount of all Loans, together with all interest accruing thereon. SECTION 1.05. Principal. The Company shall repay the --------- principal of the Loans (i) on each Settlement Date in an amount equal to the excess, if any, of the Outstanding Principal over the Borrowing Base then in effect and (ii) in full on the Termination Date. Outstanding Principal shall not be considered reduced by any allocation, setting aside or distribution of any portion of Collections unless such Collections shall have been actually delivered to the Administrator pursuant hereto (or deemed delivered pursuant to Section 3.03(a)(i)). Outstanding Principal shall not be considered reduced by any distribution of 3 any portion of Collections if at any time such distribution is rescinded or must otherwise be returned for any reason. ARTICLE II INTEREST SECTION 2.01. Interest. The Company hereby promises to pay -------- interest for each Interest Period on the unpaid principal amount of each Loan (or the applicable portion thereof) for the period commencing on the date of such Loan until such Loan is paid in full, as follows: (a) at all times while the making or maintenance of such Loan (or the applicable portion thereof) by Lender is funded by the issuance of Commercial Paper Notes, the CP Rate for such Interest Period; (b) at all times while the making or maintenance of such Loan (or the applicable portion thereof) by Lender is funded by a Liquidity Loan, the Bank Rate applicable to such Interest Period; and (c) at all times while the making or maintenance of such Loan (or the applicable portion thereof) by Lender is funded by a Credit Draw, a rate per annum equal for each date during the Interest Period to the Alternate Base Rate in effect on such day plus 1% per annum; provided, however, that on any day when an Event of Default shall - -------- ------- have occurred and be continuing, the Loans shall accrue interest at a rate per annum equal to the higher of (i) the Alternate Base Rate plus 2% per annum and (ii) the rate otherwise applicable to such Loan during such Interest Period plus 2% per annum. The interest rate on any Loan bearing interest at the Alternate Base Rate shall change simultaneously with each change in the Alternate Base Rate. SECTION 2.02. Payment Dates. Interest accrued on each Loan ------------- shall be payable, without duplication; (a) on the Termination Date; (b) on the date of any payment or repayment, in whole or in part, of any principal outstanding of such Loan and (c) on each Settlement Date. Interest accrued on Loans after the date such Loan is due and payable (whether on the Termination Date, upon acceleration or otherwise), together with interest on any and all other amounts remaining unpaid, shall be payable upon demand. No provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law. Interest for any Loan shall not be considered 4 paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. SECTION 2.03. Funding with Commercial Paper and Liquidity ------------------------------------------- Loans. The Lender will fund the Loans with Commercial Paper - ----- Notes unless the Lender is unable to issue such Commercial Paper Notes to fund the Loans. If the Lender is unable to issue Commercial Paper Notes to fund the Loans (by virtue of prohibitions or restrictions on such issuance in the Liquidity Agreement or the Program Administration Agreement or otherwise), the Lender will fund the Loans with Liquidity Loans to the extent permitted pursuant to the Liquidity Agreement. In the event that the Lender has funded any Loan with a Liquidity Loan, as soon as practicable, on a Settlement Date, the Lender will replace such Liquidity Loan funding with Commercial Paper Notes. ARTICLE III SETTLEMENTS SECTION 3.01. Settlement Procedures. --------------------- The parties hereto will take the following actions with respect to each Settlement Period: (a) Information Package. On or before the fifth day ------------------- of the calendar month immediately following the calendar month in which the Cut-Off Date for such Settlement Period occurs, or, if such day is not a Business Day, the next succeeding Business Day (each, a "Reporting Date"), Servicer -------------- shall deliver to the Relationship Bank and the Administrator a report, substantially in the form of Exhibit 3.01 (each, ------------ an "Information Package"). ------------------- (b) Collections. Servicer shall set aside for the ----------- sole benefit of Lender, the Administrator and the Relationship Bank all Collections received to the extent necessary to pay the Estimated Amount as it accrues (whether or not then due) that will be payable during such Settlement Period or on the next occurring Settlement Date; provided -------- that, unless the Administrator or the Relationship Bank shall request it to do so in writing after the occurrence and during the continuance of an Event of Default, Servicer shall not be required to hold such Collections in a separate deposit account containing only such Collections. So long as no Event of Default has occurred and is continuing, Collections received during a Settlement Period in excess of the amount to be set aside with respect to the Estimated Amount for such Settlement Period shall be used by the Company to pay the purchase price for Receivables generated by AnnTaylor, as seller, pursuant to the Purchase Agreement; 5 if any Collections remain after such payment, they shall be retained by the Company for use in its sole discretion (subject to the terms of this Agreement). If an Event of Default has occurred and is continuing, all Collections shall be held by Servicer pursuant to the first sentence of this paragraph (b). On each Settlement Date, Servicer shall ------------- remit to the Administrator an amount equal to the lesser of (1) the amount of Collections received during the Settlement Period related to such Settlement Date and (2) the sum of (i) the amount of interest on the Loans accrued during the most recently ended Interest Period (plus any interest previously accrued and remaining unpaid), plus (ii) the ---- amount of principal then due and owing with respect to the Loans (plus any principal previously due and remaining unpaid), plus (iii) all fees and other amounts accrued and ---- payable by the Company under this Agreement. To the extent that the amount described in the foregoing clause (1) is ---------- less than the amount described in the foregoing clause (2), ---------- the Administrator shall first, withdraw the amount of any ----- such deficiency from the Spread Account and second, draw the ------ amount of any remaining deficiency from the Customer Letter of Credit. All Collections received during the applicable Settlement Period that exceed the amount described in the foregoing clause (2) shall be (A) deposited by the Servicer ---------- to the Spread Account and/or (B) paid by the Servicer to the issuer of the Customer Letter of Credit, in each case, to the extent necessary to bring the sum of the funds in the Spread Account plus the stated amount of the Customer Letter of Credit up to the Enhancement Limit; unless an Event of Default has occurred and is continuing, all remaining Collections shall be available to the Company pursuant to the second sentence of this paragraph (b). ------------- (c) Order of Application of Collections Prior to -------------------------------------------- Termination Date. Upon receipt by the Administrator of ---------------- amounts on any Settlement Date pursuant to the foregoing paragraph (b) prior to the occurrence of the Termination ------------- Date, the Administrator shall apply such amounts to the items specified in the subclauses below, in the order of priority of such subclauses: (i) to accrued and unpaid Servicer's Fee; (ii) to interest accrued during the most recently ended Interest Period in respect of any outstanding Liquidity Loans, plus any such interest previously due and remaining unpaid; (iii) to interest accrued during the most recently ended Interest Period in respect of Commercial 6 Paper Notes issued to fund the Loans, plus any such interest previously due and remaining unpaid; (iv) to the Program Fee accrued during the most recently ended Interest Period, plus any portion of the Program Fee previously due and remaining unpaid; (v) to the extent of any principal due on the Loans, to the outstanding principal (A) first, of the ----- Liquidity Loans until reduced to zero, (B) second, of ------ the Commercial Paper Notes issued to fund the Loans until reduced to zero and (C) third, to the outstanding ----- principal of any Credit Draws made to fund the Loans; (vi) to interest accrued during the most recently ended Interest Period in respect of Credit Draws made to fund the Loans, plus any such interest previously due and remaining unpaid; (vii) to accrued and unpaid amounts owed to the Administrator hereunder; (viii) to other accrued and unpaid amounts owing to Lender hereunder; (ix) on a pro rata basis, to accrued and unpaid --- ---- amounts owing to the Relationship Bank or any other Affected Party hereunder; and (x) any remaining amounts to the Spread Account, up to the Enhancement Limit or to the issuer of the Customer Letter of Credit, up to the amount necessary to restore the stated amount thereof to the Enhancement Limit, as applicable. (d) Order of Application of Collections After ----------------------------------------- Termination Date. Upon receipt by the Administrator of ---------------- amounts on any Settlement Date pursuant to the foregoing paragraph (b) on or after the occurrence of the Termination ------------- Date, the Administrator shall apply such items to the item specified in the subclauses below, in the order of priority of such subclauses: (i) to accrued and unpaid Servicer's Fee; (ii) to interest accrued during the most recently ended Interest Period in respect of any outstanding Liquidity Loans, plus any such interest previously due and remaining unpaid; 7 (iii) to interest accrued during the most recently ended Interest Period in respect of Commercial Paper Notes issued to fund the Loans, plus any such interest previously due and remaining unpaid; (iv) to the Program Fee accrued during the most recently ended Interest Period, plus any such Program Fee previously due and remaining unpaid; (v) to the outstanding principal of any Liquidity Loans until reduced to zero; (vi) to the outstanding principal of the Commercial Paper Notes issued to fund the Loans until reduced to zero; (vii) to interest accrued during the most recently ended Interest Period in respect to Credit Draws made to fund the Loans, plus any such interest previously due and remaining unpaid; (viii) to the outstanding principal of any Credit Draws made to fund the Loans until reduced to zero; (ix) to accrued and unpaid amounts owed to the Administrator hereunder; (x) to other accrued and unpaid amounts owing to Lender hereunder; (xi) on a pro rata basis, to accrued and unpaid --- ---- amounts owing to the Relationship Bank or any other Affected Party hereunder; and (xii) any remaining amounts to the Company. (e) Non-Distribution of Servicer's Fee. If the ---------------------------------- Administrator consents (which consent may be revoked at any time during the continuance of an Event of Default), the amount in respect of Servicer's Fee may be retained by Servicer, in which case no distribution shall be made in respect of the Servicer's Fee pursuant to clause (c) or (d) ---------- --- above, as the case may be. (f) Delayed Payment. If on any day described in this --------------- Section 3.01, a payment is not paid because the sum of (i) ------------ Collections during the relevant Settlement Period, (ii) the amounts in the Spread Account and (iii) the amounts available to be drawn on the Customer Letter of Credit were less than the aggregate amounts payable, the next available Collections shall be applied to such payment. 8 SECTION 3.02. Deemed Collections; Reduction of Outstanding -------------------------------------------- Principal, Etc. - -------------- (a) Deemed Collections. If on any day ------------------ (i) the Unpaid Balance of any Pool Receivable is (A) reduced as a result of any defective, rejected or returned merchandise or services, any cash discount, or any adjustment by the Company or any Affiliate of the Company, (B) reduced or cancelled as a result of a setoff in respect of any claim by the Obligor thereof against the Company or any Affiliate of the Company (whether such claim arises out of the same or a related or an unrelated transaction), or (C) reduced on account of the obligation of the Company to pay to the related Obligor any rebate or refund, or (D) less than the amount included in calculating the Net Pool Balance for purposes of any Information Package, or (ii) any of the representations or warranties of the Company set forth in Section 6.01(l), (p) or (v) were not --------------- --- --- true when made with respect to any Pool Receivable, or any of the representations or warranties of the Company set forth in Section 6.01(l) or (v) are no longer true with --------------- --- respect to any Pool Receivable, or (iii) without duplication, the Company receives a Deemed Collection (as defined in the Purchase Agreement), then, on such day, the Company shall be deemed to have received a Collection of such Pool Receivable (I) in the case of clause (i) above, in the ---------- amount of such reduction or cancellation or the difference between the actual Unpaid Balance and the amount included in calculating such Net Pool Balance, as applicable; (II) in the case of clause (ii) above, in the ----------- amount of the Unpaid Balance of such Pool Receivable; and (III) in the case of clause (iii) above, in the ------------ amount so received as a Deemed Collection. 9 If the Company has paid in full the Unpaid Balance of a Receivable, such Receivable, and any Related Security therefor, shall be released from the security interest therein created by this Agreement, without any further act, and such Receivable shall no longer be a Pool Receivable. (b) The Company's Optional Prepayment. The Company may at --------------------------------- any time elect to prepay the Loans in whole or in part, by giving the Administrator at least 3 Business Days' prior written notice of such prepayment (including the amount of such proposed reduction and the proposed date on which such prepayment will be made), provided that, - -------- (A) the amount of any such prepayment shall be not less than $100,000 and shall be an integral multiple of $100,000, and the Outstanding Principal after giving effect to such reduction shall be not less than $20,000,000 (unless the Outstanding Principal shall thereby be reduced to zero), and (B) any prepayment shall be accompanied by the interest accrued on the amount being prepaid, plus any Liquidation Fee, plus, if the Termination Date shall have occurred and the Outstanding Principal shall thereby be reduced to zero, all other amounts then due to the Lender, the Administrator or the Relationship Bank. SECTION 3.03. Payments and Computations, Etc. ------------------------------ (a) Payments. All amounts to be paid, remitted or -------- deposited by the Company or Servicer to the Administrator or any other Person hereunder (other than amounts payable under Section 4.02) shall be paid or deposited in accordance with the - ------------ terms hereof no later than 11:30 a.m. (New York time) on the day when due in lawful money of the United States of America in same day funds (i) in the case of amounts to be paid, remitted or deposited in respect of accrued and unpaid interest on the Loans or in reduction of Outstanding Principal, to the Collateral Agent (which payment shall be deemed to be a payment actually delivered to the Administrator for the purposes hereof) at The First National Bank of Chicago, ABA# 071000013, Clearing Account 4811- 5377, for further credit to Account 21-201949-3 (ii) in the case of all fees, expenses and other amounts (other than amounts payable under Section 4.02), to the Administrator at State Street ------------ Bank & Trust Co., ABA# 011000028, Account 13585872, Attention: Jeff Noordhoek, ext. 4-4940, Route Code 5, Function 5, and (iii) in all other cases to the address of the Person entitled to such payment or deposit as such Person shall specify. 10 (b) Late Payments. Without duplication, the Company shall, ------------- to the extent permitted by law, pay to Lender interest on all amounts not paid or deposited when due hereunder and the Servicer shall, to the extent permitted by law, pay to Lender interest on all amounts not remitted when due hereunder because of any failure of the Servicer to comply with its obligations as Servicer hereunder, in each case at 2% per annum above the --- ----- Alternate Base Rate, payable on demand, provided, however, that -------- ------- such interest rate shall not at any time exceed the maximum rate permitted by applicable law. (c) Method of Computation. All computations of interest, --------------------- Liquidation Fee, any fees payable under Sections 4.01(b) and any ---------------- other fees payable by the Company to Lender, the Administrator or the Relationship Bank in connection with Loans hereunder shall be made on the basis of a year of 360 days (other than interest calculated by reference to the Alternate Base Rate, in which case such calculation shall be made on the basis of a year of 365 or 366 days, as applicable) for the actual number of days (including the first day but excluding the last day) elapsed. SECTION 3.04. Treatment of Collections and Deemed ----------------------------------- Collections. The Company shall forthwith deliver to Servicer all - ----------- Collections deemed received by the Company pursuant to Section ------- 3.02(a), and Servicer shall hold or distribute such Collections - ------- pursuant to the terms hereof to the same extent as if such Collections had actually been received on the date of such delivery to Servicer. During the continuance of an Event of Default, if requested by the Administrator or the Relationship Bank, Servicer shall cause such deemed Collections to be paid on the second Business Day after they arise to the Lock-Box Bank or, if Collections are being paid to the Collateral Agent pursuant to Section 8.03(c), to the Collateral Agent. So long as the Company - --------------- shall hold any Collections or deemed Collections required to be paid to Servicer, the Administrator or Collateral Agent, it shall hold such Collections for the sole benefit of the Lender, the Administrator and the Relationship Bank and shall clearly mark its records to reflect such benefit (subject to the Company's right to use certain Collections to pay the purchase price due under the Purchase Agreement as set forth in Section 3.01(b)); --------------- provided that unless the Administrator or the Relationship Bank - -------- shall request it to do so in writing after the occurrence and during the continuance of an Event of Default, the Company shall not be required to hold such Collections in a separate deposit account containing only such Collections. SECTION 3.05. Spread Account; Customer Letter of Credit. ----------------------------------------- (a) Unless the Company has delivered a Customer Letter of Credit pursuant to Section 3.05(e), the Company, for the benefit of --------------- Lender, shall establish and maintain or cause to be established and maintained in the name of the Company, on behalf of Lender, 11 with the Relationship Bank, a segregated account (the "Spread ------ Account"), bearing a designation clearly indicating that the - ------- funds deposited therein are held for the benefit of Lender. The Spread Account, all funds deposited therein from time to time, all investments of such funds and all proceeds of any of the foregoing shall be subject to a pledge and security interest in favor of the Administrator for the benefit of Lender pursuant to an agreement substantially in the form attached hereto as Exhibit ------- 3.05 (such agreement, as amended, supplemented or otherwise - ---- modified from time to time, being the "Spread Account -------------- Agreement"). - --------- (b) Except as expressly provided in this Agreement, Servicer agrees that it shall have no right of setoff or banker's lien against, and no right to otherwise deduct from, any funds held in the Spread Account for any amount owed to it by the Administrator, the Relationship Bank or Lender. (c) Funds on deposit in the Spread Account shall be invested at the direction of Servicer in accordance with the Spread Account Agreement; provided, however, investments of funds -------- ------- representing Collections collected during any Settlement Period shall be invested in investments that will mature so that such funds will be available for transfer on the applicable Settlement Date with respect to such Settlement Period. All interest and other investment earnings (net of losses and investment expenses) on funds on deposit in the Spread Account shall be added to the balance in the Spread Account and applied in accordance with this Agreement. (d) On or prior to the date of the initial Loan hereunder, the Company will deposit $200,000 in the Spread Account. If on any Settlement Date, no Event of Default has occurred and is continuing and the amount of funds in Spread Account, after giving effect to all withdrawals therefrom on such date, exceeds 1.5% of the Lending Limit (the "Enhancement Limit"), the amount ----------------- of such excess shall be released to the Company. (e) The Company may, at its option, in lieu of establishing and maintaining the Spread Account, deliver to the Administrator, for the benefit of Lender, and maintain in force until the Final Payout Date, one or more irrevocable letters of credit (collectively, with any substitutions therefor and replacements thereof, the "Customer Letter of Credit"), with a stated amount ------------------------- equal to the Enhancement Limit, from a bank or other financial institution whose short term unsecured debt obligations are rated at least A-1 by Standard and Poor's Corporation and P-1 by Moody's Investors Service, Inc., and who is otherwise acceptable to the Administrator (whose acceptance shall not be unreasonably withheld), and in a form reasonably acceptable to the Administrator, together with an opinion of counsel for such 12 Customer Letter of Credit issuer acceptable in form and substance to the Administrator; provided that a copy of such Customer -------- Letter of Credit shall have been provided to Standard & Poor's Corporation and Moody's Investors Service, Inc. and they shall have either confirmed (orally or in writing) the rating of the Commercial Paper Notes or waived (orally or in writing) such requirement of confirmation. (f) The Company may satisfy its obligations pursuant to this Section 3.05 by providing both a Spread Account and a ------------ Customer Letter of Credit, provided that the sum of the amount of -------- funds from time to time in the Spread Account plus the stated amount from time to time of the Customer Letter of Credit is at least equal to the Enhancement Limit. ARTICLE IV FEES AND YIELD PROTECTION SECTION 4.01. Fees. ---- (a) Arrangement Fee. AnnTaylor shall pay to the --------------- Administrator, for the account of Lender and the Relationship Bank, an arrangement fee ("Arrangement Fee") payable on such --------------- dates and in such amounts as are set forth in the letter dated December 7, 1993 from the Relationship Bank to AnnTaylor. (b) Other Fees. The Company shall pay to the Administrator ---------- for the account of the Lender certain other fees payable in such amounts and on such dates as are set forth in the fee letter, dated as of the date hereof (as amended or supplemented from time to time, the "Fee Letter") among the Company, AnnTaylor, the ---------- Relationship Bank and the Administrator. SECTION 4.02. Yield Protection. ---------------- (a) If (i) Regulation D or (ii) any Regulatory Change occurring after the date hereof (A) shall subject an Affected Party to any tax, duty or other charge with respect to any Loan owned by, owed to or funded by it, or any obligations or right to make Loans or to provide funding therefor, or shall change the basis of taxation of payments to the Affected Party of any part of the Loans owned by, owed to or funded in whole or in part by it or any other amounts due under this Agreement in respect of the Loans (or any portion thereof) owned by or funded by it or its obligations or rights, if any, to make Loans or to provide funding therefor (except for changes in the rate of any tax which is a franchise tax or a tax on the net income 13 of such Affected Party imposed by the United States of America, by any jurisdiction in which such Affected Party's principal executive office is located and, if such Affected Party's principal executive office is not in the United States of America, by any jurisdiction where such Affected Party's principal office in the United States is located); or (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Federal Reserve Board, but excluding any reserve included in the determination of the interest rate applicable to the Loans), special deposit or similar requirement against assets of any Affected Party, deposits or obligations with or for the account of any Affected Party or with or for the account of any affiliate (or entity deemed by the Federal Reserve Board to be an affiliate) of any Affected Party, or credit extended by any Affected Party; or (C) shall change the amount of capital maintained or required or requested or directed to be maintained by any Affected Party in respect of the transactions contemplated hereby; or (D) shall impose any other condition affecting any Loan owned by, owed to or funded in whole or in part by any Affected Party, or its obligations or rights, if any, to make Loans or to provide funding therefor; and the result of any of the foregoing is or would be (x) to increase the cost to (I) an Affected Party funding or making or maintaining any Loans (or any portion thereof), any purchases, reinvestments, or loans or other extensions of credit under the Liquidity Agreement, or any Credit Draw, or any commitment of such Affected Party with respect to any of the foregoing, or (II) the Administrator for continuing its or the Company's relationship with Lender, (y) to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, or under the Liquidity Agreement or the Credit Agreement with respect thereto, or (z) in the sole determination of such Affected Party, to reduce the rate of return on the capital of an Affected Party as a consequence of its obligations hereunder or arising in connection herewith to a level below that which such Affected Party could otherwise have achieved, 14 then within thirty days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis of such demand), the Company shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost or such reduction. (b) Each Affected Party will promptly notify the Company and the Administrator of any event of which it has knowledge which will entitle such Affected Party to compensation pursuant to this Section 4.02; provided, however, no failure to give or ------------ -------- ------- delay in giving such notification shall adversely affect the rights of any Affected Party to such compensation except that no Affected Party shall be entitled to compensation under this Section 4.02 with respect to any increased costs or reduced - ------------ return incurred more than 90 days prior to the date on which a responsible officer of such Affected Party had actual knowledge and notified the Company of the event giving rise to such increased cost or reduced return. (c) In determining any amount provided for or referred to in this Section 4.02, an Affected Party may use any reasonable ------------ averaging and attribution methods that it reasonably shall deem applicable; provided that such Affected Party shall not be -------- arbitrary with respect to requesting similar compensation with respect to similar transactions to the extent it is entitled to do so pursuant to the applicable agreements. Any Affected Party when making a claim under this Section 4.02 shall submit to the ------------ Company a statement as to such increased cost or reduced return (including calculation thereof in reasonable detail), which statement shall, in the absence of demonstrable error, be conclusive and binding upon the Company. (d) Any Affected Party which is a participant shall only be entitled to amounts under this Section 4.02 to the extent that ------------ such amounts, together with all amounts due to the Person selling such participation under this Section 4.02, do not exceed the ------------ amounts that would have been due to such Person under this Section 4.02 if the participation had not been entered into or - ------------ sold. SECTION 4.03. Funding Losses. In the event that any -------------- Liquidity Bank shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Liquidity Bank to make any Liquidity Loan or maintain any Liquidity Loan, but not including loss of anticipated profit) as a result of any Loan not being made in accordance with a request therefore under Section 1.02 (other than by reason of the failure ------------ of Lender to fund such Loan pursuant to its commitment), then, upon written notice from the Administrator to the Company and 15 Servicer, but without duplication of any Liquidation Fee paid by the Company, the Company shall pay to Servicer, and Servicer shall remit such amount paid by the Company to the Administrator for the account of such Liquidity Bank, the amount of such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding upon the Company and Servicer. ARTICLE V CONDITIONS OF LOANS SECTION 5.01. Conditions Precedent to Initial Loan. The ------------------------------------ initial Loan hereunder is subject to the condition precedent that the Administrator shall have received, on or before the date of such Loan, the following, each (unless otherwise indicated) dated such date and in form and substance satisfactory to the Administrator: (a) A copy of the resolutions of the Board of Directors of each of the Company and AnnTaylor approving this Agreement and the other Transaction Documents to which it is a party to be delivered by it hereunder and the transactions contemplated hereby, certified by its Secretary or Assistant Secretary; (b) Good standing certificates for the Company issued by the Secretaries of State of Delaware and Connecticut; good standing certificates for AnnTaylor issued by the Secretaries of State of New York and Delaware. (c) A certificate of the Secretary or Assistant Secretary of each of the Company and AnnTaylor certifying the names and true signatures of the officers authorized on its behalf to sign this Agreement and the other Transaction Documents to be delivered by it hereunder (on which certificate the Administrator and Lender may conclusively rely until such time as the Administrator shall receive from the Company or AnnTaylor, as the case may be, a revised certificate meeting the requirements of this subsection ---------- (c)); --- (d) The Certificate of Incorporation of each of the Company and AnnTaylor, duly certified by the Secretary of State of Delaware, as of a recent date acceptable to Administrator, together with a copy of the by-laws of each of the Company and AnnTaylor, duly certified by the Secretary or an Assistant Secretary of the Company or AnnTaylor, as the case may be; 16 (e) Copies of proper financing statements (Form UCC- 1), filed or delivered to the Lender or the Administrator for filing on or prior to the date of the initial Loan, naming (i) AnnTaylor as the debtor and seller of Receivables, the Company as the secured party and purchaser and Lender as the assignee and (ii) the Company as the debtor and Lender as the secured party; (f) A search report provided in writing to the Administrator by LEXIS Document Service, listing all effective financing statements that name the Company or AnnTaylor as debtor and that are filed in the jurisdictions in which filings were made pursuant to subsection (e) above -------------- and in such other jurisdictions that Administrator shall reasonably request, together with copies of such financing statements (none of which shall cover the Receivables Pool or any interests therein); (g) Duly executed copies of Lock-Box Agreements with each of the Lock-Box Banks; (h) Opinions of (i) Skadden, Arps, Slate, Meagher & Flom, special counsel to the Company, in substantially the form of Exhibits 5.01(h)-(i), 5.01(h)-(iii) and 5.01(h)- -------------------- ------------- -------- (iv), (ii) Jocelyn F.L. Barandiaran, Esq., general counsel ---- for the Company, in substantially the form of Exhibit ------- 5.01(h)-(ii) and (iii) Tyler, Cooper & Alcorn, special ------------ Connecticut counsel to the Company, in substantially the form of Exhibit 5.01(h)-(v); ------------------- (i) Such powers of attorney as the Administrator shall reasonably request to enable the Administrator to collect all amounts due under any and all Pool Receivables; (j) A pro forma Information Package, prepared in --- ----- respect of the proposed initial Loan, assuming a Cut-Off Date of December 24, 1993; (k) A report in form and substance satisfactory to the Administrator from the Relationship Bank as to a pre-closing due diligence audit of the Company by the Relationship Bank; (l) The Liquidity Agreement, duly executed by Lender, the Liquidity Agent and each Liquidity Bank; (m) Written approval by the Credit Bank of this Agreement and the transactions contemplated hereby; (n) Letters from the rating agencies then rating the Commercial Paper Notes, confirming in effect that the existing ratings of the Commercial Paper Notes will remain 17 in effect after giving effect to the transactions contemplated hereby; (o) The Purchase Agreement, duly executed by the Company and AnnTaylor; (p) The Note, duly executed by the Company; (q) The Fee Letter, duly executed by the Company and AnnTaylor; (r) A copy of all documents required to be delivered under the Purchase Agreement; (s) The written consent of the required banks pursuant to the AnnTaylor Credit Agreement to the transactions contemplated by the Transaction Documents; and (t) Partial releases (UCC-3 statements) executed by Bank of America National Trust and Savings Association, as Agent, releasing all of its interest in the Receivables Pool. SECTION 5.02. Conditions Precedent to All Loans. Each Loan --------------------------------- (including the initial Loan) shall be subject to the further conditions precedent that on the date of such Loan the following statements shall be true (and the Company by accepting the amount of such Loan shall be deemed to have certified that): (a) the representations and warranties contained in Section 6.01 are correct on and as of such day as though ------------ made on and as of such day and shall be deemed to have been made on such day, (b) no event has occurred and is continuing, or would result from such Loan, that constitutes an Event of Default or Unmatured Event of Default, (c) after giving effect to each proposed Loan, the Outstanding Principal will not exceed the Lending Limit or the Borrowing Base, and (d) the Termination Date shall not have occurred. ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. Representations and Warranties of the ------------------------------------- Company. The Company represents and warrants as follows: - ------- 18 (a) Organization and Good Standing. It has been duly ------------------------------ organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted, and had at all relevant times, and now has, all necessary power, authority, and legal right to acquire and own the Pool Receivables. (b) Due Qualification. It is duly qualified to do ----------------- business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals except where the failure to be in good standing or to so qualify has not had and will not have a Material Adverse Effect. (c) Power and Authority; Due Authorization. It (i) -------------------------------------- has all necessary power, authority and legal right to (A) execute and deliver this Agreement, the Note and the other Transaction Documents to which it is a party, (B) carry out the terms of the Transaction Documents, and (C) borrow the Loans and grant the security interest in the Receivables Pool on the terms and conditions herein provided and (ii) has duly authorized by all necessary corporate action the execution, delivery and performance of this Agreement, the Note and the other Transaction Documents to which it is a party and the borrowing of the Loans and the granting of the security interest in the Receivables Pool on the terms and conditions herein provided. (d) Valid Security Interest; Binding Obligations. -------------------------------------------- This Agreement creates a valid first priority security interest in the Receivables Pool in favor of the Lender, enforceable against creditors of, and purchasers from, the Company; and this Agreement constitutes, and the Note and each other Transaction Document to be signed by it when duly executed and delivered will constitute, its legal, valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the ------------ transactions contemplated by this Agreement, the Note and the other Transaction Documents and the fulfillment of the terms hereof will not (i) conflict with, result in any 19 breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the certificate of incorporation or by-laws of the Company or any indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument to which the Company is a party or by which it or any of its properties is bound, except where such conflict, breach or default has not had and will not have a Material Adverse Effect, (ii) result in the creation or imposition of any Lien upon any of the Company's properties pursuant to the terms of any such indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument, other than this Agreement, or (iii) violate any law or any order, rule, or regulation applicable to the Company of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Company or any of its properties except where such violation has not had and will not have a Material Adverse Effect. (f) No Proceedings. There are no proceedings or -------------- investigations pending, or to the Company's knowledge threatened, before any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (i) asserting the invalidity of this Agreement or any other Transaction Document, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document, or (iii) seeking any determination or ruling that could reasonably be expected to have a Material Adverse Effect. (g) Bulk Sales Act. No transaction contemplated -------------- hereby requires compliance with any bulk sales act or similar law. (h) Government Approvals. No authorization or -------------------- approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement or any other Transaction Document, except for the filing of the UCC financing ------ statements referred to in Article V, all of which, at the --------- time required in Article V, shall have been duly made and --------- shall be in full force and effect (or, in the case of the initial Loan, shall have been duly delivered to the Administrator). (i) Financial Condition. (x) The balance sheet of ------------------- the Company as of the date hereof certified by a Responsible 20 Officer, copies of which have been furnished to the Administrator, fairly presents the Company's assets and liabilities as of such date (after giving effect to the transactions contemplated by the Transaction Documents); and (y) since the date of the Company's incorporation, there has been no material adverse change in any of the Company's financial condition, business, or operations. (j) Litigation. No injunction, decree or other ---------- decision has been issued or made by any court, governmental agency or instrumentality thereof that could reasonably be expected to have a Material Adverse Effect, and no written threat by any person has been made to attempt to obtain any such decision. (k) Margin Regulations. The use of all funds obtained ------------------ by the Company under this Agreement will not conflict with or contravene any of Regulations G, T, U and X promulgated by the Board of Governors of the Federal Reserve System from time to time. (l) Quality of Title. The Receivables Pool is owned ---------------- by the Company free and clear of any Lien (other than any Lien arising hereunder solely as the result of any action taken by Lender (or any assignee thereof) or by the Administrator); upon the filing of UCC-1 financing statements with the Secretary of State of Connecticut and the execution of the Spread Account Agreement, Lender shall have acquired and shall at all times thereafter continuously maintain a valid and perfected first priority security interest in the Receivables Pool (other than with respect to the Spread Account, in which case such security interest shall be in respect of the Eligible Investments (as defined in the Spread Account Agreement) credited thereto), free and clear of any Lien (other than any Lien arising hereunder solely as the result of any action taken by Lender (or any assignee thereof) or by the Administrator); and no financing statement or other instrument similar in effect covering the Receivables Pool or any portion thereof is on file in any recording office except such as may be filed (i) in favor of AnnTaylor in accordance with the Contracts, (ii) in favor of Lender or the Administrator in accordance with this Agreement or in connection with any Lien arising hereunder solely as the result of any action taken by Lender (or any assignee thereof) or by the Administrator, (iii) in favor of the Company pursuant to the Purchase Agreement, (iv) in favor of the Collateral Agent or (v) in favor of Bank of America National Trust and Savings Association, as Agent, for which partial releases have been delivered pursuant to Section 5.01(t). --------------- 21 (m) Accurate Reports. No Information Package (if ---------------- prepared by the Company or to the extent information therein was supplied by the Company) or other information, exhibit, financial statement, document, book, record or report furnished or to be furnished in writing by or on behalf of the Company to the Administrator, Lender or the Relationship Bank in connection with this Agreement was or will be inaccurate in any material respect (in light of the circumstances under which such information was furnished and taken as a whole together with all other information previously furnished or then being furnished) as of the date it was or will be dated or (except as otherwise disclosed to the Administrator, Lender and the Relationship Bank at or prior to such time) as of the date so furnished, or contained or will contain any material misstatement of fact or omitted or will omit to state a material fact or any fact necessary to make the statements contained therein not materially misleading on the date as of which such information is dated or certified. (n) Offices. The chief place of business and chief ------- executive office of the Company is located at its address specified in Schedule 6.01(n), and the offices where the ---------------- Company keeps all its books, records and documents evidencing Pool Receivables, the related Contracts and all agreements related to such Pool Receivables are located at the addresses specified in Schedule 6.01(n) (or at such ---------------- other locations, notified to the Administrator in accordance with Section 7.01(f), in jurisdictions where all action --------------- required by Section 8.05 has been taken and completed). ------------ (o) Lock-Box Accounts. The names and addresses of all ----------------- the Lock-Box Banks, together with the account numbers of the lock-box accounts of the Company at such Lock-Box Banks, are specified in Schedule 6.01(o) (or have been notified to the ---------------- Administrator and the Relationship Bank in accordance with Section 7.04(d)). --------------- (p) Eligible Receivables. Each Receivable included in -------------------- the Net Pool Balance as an Eligible Receivable on the date of any calculation of the Borrowing Base shall be an Eligible Receivable on such date. (q) Capitalization. The authorized capital stock of -------------- the Company consists of one hundred (100) shares of common stock, $1.00 par value, of which all are currently issued and outstanding. All of such outstanding shares are validly issued, fully paid and nonassessable and are owned (beneficially and of record) by AnnTaylor. 22 (r) Trade Names. Except as disclosed on Schedule ----------- -------- 6.01(r), the Company does not use any trade name other than ------- its actual corporate name. From and after the date that fell five (5) years before the date hereof, the Company has not been known by any legal name other than its corporate name as of the date hereof, nor has it been the subject of any merger or other corporate reorganization except as disclosed on Schedule 6.01(r). ---------------- (s) Taxes. The Company has filed all tax returns and ----- reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any taxes not yet delinquent and any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its respective books. (t) Compliance with Applicable Laws. The Company is ------------------------------- in compliance in all material respects with the requirements of all applicable laws, rules, regulations, and orders of all governmental authorities (including, without limitation, Regulation Z, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy and all other consumer laws, rules and regulations applicable to the Receivables and related Contracts), a breach of any of which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (u) Receivable Evidenced By Instruments. None of the ----------------------------------- Receivables is evidenced by an instrument (other than instruments received in connection with collection efforts, all of which shall be delivered, duly endorsed, to the Administrator if requested by the Administrator or the Relationship Bank during the continuance of an Event of Default). SECTION 6.02. Representations and Warranties of AnnTaylor. ------------------------------------------- AnnTaylor, as Servicer, represents and warrants as follows: (a) Organization and Good Standing. It has been duly ------------------------------ organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. (b) Due Qualification. It is duly qualified to do ----------------- business as a foreign corporation in good standing, and has 23 obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals except where the failure to be in good standing or to so qualify has not had and will not have a Servicer Material Adverse Effect. (c) Power and Authority; Due Authorization. It (i) -------------------------------------- has all necessary power, authority and legal right to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party, and (B) carry out the terms of the Transaction Documents, in its capacity as Servicer, and (ii) has duly authorized by all necessary corporate action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party in its capacity as Servicer. (d) Binding Obligations. This Agreement constitutes, ------------------- and each other Transaction Document to be signed by it in its capacity as Servicer when duly executed and delivered will constitute, its legal, valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the ------------ transactions contemplated by this Agreement and the other Transaction Documents to which AnnTaylor is a party in its capacity as Servicer, and the fulfillment of the terms hereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the certificate of incorporation or by-laws of AnnTaylor or any indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument to which AnnTaylor is a party or by which it or any of its properties is bound, except where such conflict, breach or default has not had and will not have a Servicer Material Adverse Effect, (ii) result in the creation or imposition of any Lien upon any of AnnTaylor's properties pursuant to the terms of any such indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument, other than this Agreement, or (iii) violate any law or any order, rule, or regulation applicable to AnnTaylor of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over 24 AnnTaylor or any of its properties except where such violation has not had and will not have a Servicer Material Adverse Effect. (f) No Proceedings. There are no proceedings or -------------- investigations pending, or to AnnTaylor's knowledge threatened, before any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (i) asserting the invalidity of this Agreement or any other Transaction Document to which AnnTaylor is a party as Servicer, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which AnnTaylor is a party as Servicer, or (iii) seeking any determination or ruling that could reasonably be expected to have a Servicer Material Adverse Effect. (g) Government Approvals. No authorization or -------------------- approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by AnnTaylor of this Agreement or any other Transaction Document to which it is a party in its capacity as Servicer. (h) Financial Condition. (x) The consolidated ------------------- balance sheets of ATSC and its consolidated Subsidiaries as at January 30, 1993, and the related statements of income and shareholders' equity of ATSC and its consolidated Subsidiaries for the fiscal year then ended, certified by Deloitte & Touche, independent certified public accountants, copies of which have been furnished to the Administrator, fairly present the consolidated financial condition, business, business prospects and operations of ATSC and its consolidated Subsidiaries as at such date and the consolidated results of the operations of ATSC and its consolidated Subsidiaries for the period ended on such date, all in accordance with GAAP consistently applied; and (y) since January 30, 1993 there has been no material adverse change in any such condition, business, or operations. (i) Litigation. No injunction, decree or other ---------- decision has been issued or made by any court, governmental agency or instrumentality thereof that could reasonably be expected to have a Servicer Material Adverse Effect, and no written threat by any person has been made to attempt to obtain any such decision. (j) Accurate Reports. No Information Package (if ---------------- prepared by AnnTaylor or any of its Affiliates, (other than the Company), as Servicer, or to the extent information therein was supplied by AnnTaylor or any of its Affiliates 25 (other than the Company), as Servicer, or other information, exhibit, financial statement, document, book, record or report furnished or to be furnished in writing by or on behalf of AnnTaylor or any of its Affiliates (other than the Company), as Servicer to the Administrator, Lender or the Relationship Bank in connection with this Agreement was or will be inaccurate in any material respect (in light of the circumstances under which such information was furnished and taken as a whole together with all other information previously furnished or then being furnished) as of the date it was or will be dated or (except as otherwise disclosed to the Administrator, Lender and the Relationship Bank at or prior to such time) as of the date so furnished, or contained or will contain any material misstatement of fact or omitted or will omit to state a material fact or any fact necessary to make the statements contained therein not materially misleading. (k) Offices. The chief place of business and chief ------- executive office of AnnTaylor is located at its address specified in Schedule 6.02(k), and the offices where ---------------- AnnTaylor keeps all its books, records and documents evidencing Pool Receivables, the related Contracts and all agreements related to such Pool Receivables are located at the addresses specified in Schedule 6.02(k) (or at such ---------------- other locations, notified to the Administrator in accordance with Section 7.01(f)). --------------- (l) Bank Accounts. The names and addresses of all ------------- banks with accounts in which Collections received at AnnTaylor's stores or its headquarters are deposited, together with the account numbers of such accounts are specified in Schedule 6.02(l) (or have been notified to the ---------------- Administrator and the Relationship Bank in accordance with Section 7.03(d)). --------------- (m) Servicing Programs. No further license or ------------------ approval is required for the Administrator's use of any program used by Servicer in the servicing of the Pool Receivables, other than those which have been obtained and are in full force and effect. (n) Taxes. AnnTaylor has filed all tax returns and ----- reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any taxes not yet delinquent and any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its respective books. 26 (o) Compliance with Applicable Laws. AnnTaylor, as ------------------------------- Servicer, is in compliance in all material respects with the requirements of all applicable laws, rules, regulations, and orders of all governmental authorities (including, without limitation, Regulation Z, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy and all other consumer laws, rules and regulations applicable to the Receivables and related Contracts), a breach of any of which, individually or in the aggregate, could reasonably be expected to have a Servicer Material Adverse Effect. ARTICLE VII GENERAL COVENANTS OF THE COMPANY AND ANNTAYLOR SECTION 7.01. Affirmative Covenants. From the date hereof --------------------- until the Final Payout Date, the Company and AnnTaylor each covenants, as to itself, that it will unless, in each case, the Administrator shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all material ------------------------- respects with all applicable laws, rules, regulations and orders with respect to the Pool Receivables and related Contracts except where such noncompliance has not had and will not have a Material Adverse Effect, in the case of this covenant by the Company, or Servicer Material Adverse Effect, in the case of this covenant by AnnTaylor. (b) Preservation of Corporate Existence. Preserve and ----------------------------------- maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would have a Material Adverse Effect, in the case of this covenant by the Company, or Servicer Material Adverse Effect, in the case of this covenant by AnnTaylor. (c) Audits. (i) At any time and from time to time ------ during regular business hours, upon reasonable notice and in a manner designed not to unreasonably disrupt the normal business operations of AnnTaylor or the Company, permit the Administrator, the Relationship Bank or any of their agents or representatives, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in its possession or under its control relating to the Receivables 27 Pool, including, without limitation, the related Contracts and other agreements, and (B) to visit its offices and properties for the purpose of examining such materials described in clause (i)(A) next above, and to discuss ------------- matters relating to the Receivables Pool or its performance hereunder with any of its officers or employees having knowledge of such matters; and (ii) without limiting the provisions of clause (i) next above, from time to time on ---------- request of Administrator or the Relationship Bank, permit certified public accountants or other auditors acceptable to the Administrator to conduct, at AnnTaylor's or the Company's expense, as the case may be, a review of its books and records; provided, however, that, unless an Event of -------- ------- Default has occurred and is continuing, AnnTaylor and the Company shall only be obligated to pay for (i) the out-of- pocket expenses of the internal auditors of the Administrator or the Relationship Bank incurred with respect to such reviews done not more frequently than three times per year (and such expenses shall be subject to Section ------- 14.05(a)) and (ii) in addition to the amounts set forth in -------- clause (i), the allocated cost of the internal auditors of ---------- the Administrator or the Relationship Bank with respect to such reviews done not more frequently than once a year. (d) Keeping of Records and Books of Account. Maintain --------------------------------------- and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Pool Receivables in the event of the destruction of the originals thereof), and keep and main- tain, all documents, books, records and other information reasonably necessary or advisable for the collection of all Pool Receivables (including, without limitation, records adequate to permit the daily identification of each new Pool Receivable and all Collections of and adjustments to each existing Pool Receivable). (e) Performance and Compliance with Receivables and ----------------------------------------------- Contracts. At its expense timely and fully perform and --------- comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Pool Receivables and all other agreements related to such Pool Receivables. (f) Location of Records. Keep its chief place of ------------------- business and chief executive office, and the offices where it keeps its records concerning the Pool Receivables, all related Contracts and all other agreements related to such Pool Receivables (and all original documents relating thereto), at its address(es) referred to in Section 6.01(n) --------------- or 6.02(k), as the case may be, or, upon 30 days' prior ------- written notice to the Administrator, at such other locations 28 in jurisdictions where all action required by Section 8.05 ------------ shall have been taken and completed. (g) Credit and Collection Policies. Comply in all ------------------------------ material respects with the Credit and Collection Policy in regard to each Pool Receivable and the related Contract. (h) Collections. Instruct all Obligors to cause all ----------- Collections of Pool Receivables to be deposited directly with a Lock-Box Bank. (i) Funding Account. Use its best efforts to deliver --------------- to the Administrator within 30 days of the initial Loan hereunder an agreement executed by it and the bank where the Funding Account (as defined in the Purchase Agreement) is located substantially in the form of a Lock-Box Agreement or in such other form as is reasonably acceptable to the parties hereto. SECTION 7.02 Separate Corporate Existence. The Company ---------------------------- hereby acknowledges that Lender, the Liquidity Banks and the Administrator, are entering into the transactions contemplated by this Agreement and the other Transaction Documents in reliance upon the Company's identity as a legal entity separate from AnnTaylor. Therefore, from and after the date hereof, the Company shall take all steps specifically required by this Agreement or by the Lender or Administrator to continue the Company's identity as a separate legal entity and to make it apparent to third Persons that the Company is an entity with assets and liabilities distinct from those of Servicer, AnnTaylor and any other Person, and is not a division of Servicer, AnnTaylor or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the other covenants set forth herein, the Company shall take such actions as shall be required in order that: (a) The Company will be a limited purpose corporation whose primary activities are restricted in its certificate of incorporation to purchasing or otherwise acquiring from AnnTaylor, owning, holding, granting security interests, or selling interests, in Receivables, Contracts, Related Security and Collections from AnnTaylor, entering into agreements for the servicing and financing of the Receivables Pool, entering into interest rate agreements, spread account agreements and similar documents and conducting such other activities as it deems necessary or appropriate to carry out its primary activities; (b) Not less than one member of the Company's Board of Directors (the "Independent Director") shall be an -------------------- individual who is not a direct, indirect or beneficial 29 stockholder, officer, director, employee, affiliate, associate, or supplier of the Company or any of its Affiliates. The certificate of incorporation of the Company shall provide that (i) the Company's Board of Directors shall not approve, or take any other action to cause the filing of, a voluntary bankruptcy petition with respect to the Company unless the Independent Director shall approve the taking of such action in writing prior to the taking of such action and (ii) such provision cannot be amended without the prior written consent of the Independent Director; (c) The Independent Director shall not at any time serve as a trustee in bankruptcy for the Company, AnnTaylor or any Affiliate thereof; (d) Any employee, consultant or agent of the Company will be compensated from the Company's funds for services provided to the Company. The Company will engage no agents other than its attorneys, auditors and other professionals, and a servicer for the Receivables Pool, which servicer will be fully compensated for its services to the Company by payment of the Servicer's Fee; (e) The Company will contract with Servicer to perform for the Company all operations required on a daily basis to service the Receivables Pool. The Company will pay Servicer the Servicer's Fee pursuant hereto. The Company will not incur any material indirect or overhead expenses for items shared between the Company and AnnTaylor (or any other Affiliate thereof) which are not reflected in the Servicer's Fee. To the extent, if any, that the Company and AnnTaylor (or any other Affiliate thereof) share items of expenses not reflected in the Servicer's Fee, such as legal, auditing and other professional services, such expenses will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered, it being understood that AnnTaylor shall pay all expenses relating to the preparation, negotiation, execution and delivery of the Transaction Documents, including, without limitation, legal, agency and other fees; (f) The Company's operating expenses will not be paid by AnnTaylor or any other Affiliate thereof; (g) The Company will have its own separate post office box and stationery; 30 (h) The Company's books and records will be maintained separately from those of AnnTaylor and any other Affiliate thereof; (i) All financial statements of AnnTaylor or any Affiliate thereof that are consolidated to include the Company will contain detailed notes clearly stating that (A) all of the Company's assets are owned by the Company, and (B) the Company is a separate corporate entity with creditors who have received security interests in the Company's assets; (j) The Company's assets will be maintained in a manner that facilitates their identification and segregation from those of AnnTaylor or any Affiliate thereof; (k) The Company will strictly observe corporate formalities in its dealings with AnnTaylor or any Affiliate thereof, and funds or other assets of the Company will not be commingled with those of AnnTaylor or any Affiliate thereof. The Company shall not maintain joint bank accounts or other depository accounts to which AnnTaylor or any Affiliate thereof (other than AnnTaylor in its capacity as Servicer) has independent access; and (l) The Company will maintain arm's-length relationships with AnnTaylor (and any Affiliate thereof). Any Person that renders or otherwise furnishes services to the Company will be compensated by the Company at market rates for such services it renders or otherwise furnishes to the Company. Except as contemplated in the Transaction Documents neither the Company nor AnnTaylor will be or will hold itself out to be responsible for the debts of the other or the decisions or actions respecting the daily business and affairs of the other. SECTION 7.03. Reporting Requirements. From the date hereof ---------------------- until the Final Payout Date, the Company and AnnTaylor each covenants as to itself that it will, unless the Administrator and the Relationship Bank shall otherwise consent in writing, furnish to the Administrator and the Relationship Bank the items set forth in paragraphs (a), (b), (g), (h), (i), (j), (k) and (m) in -------------- --- --- --- --- --- --- --- the case of the Company and the items set forth in paragraphs ---------- (c), (d), (e), (f), (g), (h), (i), (k), (l) and (m) in the case - --- --- --- --- --- --- --- --- --- --- of AnnTaylor: (a) Monthly Financial Statements - the Company. As ------------------------------------------ soon as available and in any event within 45 days after the end of each month copies of the financial statements of the Company prepared in conformity with GAAP (but subject to 31 year end audit adjustments), duly certified by a Responsible Officer of the Company; (b) Annual Financial Statements - the Company. As ----------------------------------------- soon as available and in any event within 90 days after the end of each fiscal year of the Company, copies of the financial statements of the Company prepared in conformity with GAAP, including a footnote containing the aggregate Unpaid Balance of the Pool Receivables, the Unpaid Balance of the Delinquent Receivables and of the Defaulted Receivables, duly certified by independent certified public accountants of recognized standing selected by the Company; (c) Quarterly Financial Statements - ATSC. As soon as ------------------------------------- available and in any event within 45 days after the end of each fiscal quarter of ATSC, copies of the financial statements of ATSC and its Subsidiaries prepared on a consolidated basis in conformity with GAAP, duly certified by a Responsible Officer of ATSC, together with a certificate from such officer containing a computation of, and showing compliance with, the financial restrictions contained in Sections 7.05(d) and (e); ---------------- --- (d) Annual Financial Statements - ATSC. As soon as ---------------------------------- available and in any event within 90 days after the end of each fiscal year of ATSC, copies of the financial statements of ATSC and its Subsidiaries prepared on a consolidated basis in conformity with GAAP, duly certified by independent certified public accountants of recognized standing selected by ATSC, together with a certificate from such accountants containing a computation of, and showing compliance with, the financial restrictions contained in Sections 7.05(d) and ---------------- (e); --- (e) Financial Statements - AnnTaylor. As soon as -------------------------------- practicable after requested by the Administrator or the Relationship Bank, copies of the financial statements of AnnTaylor and its Subsidiaries prepared on a consolidated basis in conformity with GAAP, duly certified by a Responsible Officer of AnnTaylor; (f) Reports to Holders and Exchanges. In addition to -------------------------------- the reports required by subsections (a), (b), (c), (d) and --------------- --- --- --- (e) next above, promptly upon the Administrator's or --- Relationship Bank's request, copies of any reports which ATSC sends to any of its securityholders, and any reports or registration statements that ATSC files with the Securities and Exchange Commission or any national securities exchange other than registration statements relating to employee benefit plans and to registrations of securities for selling securities; 32 (g) ERISA. Promptly after the filing or receiving ----- thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA as to which the 30-day notice requirement has not been waived by the Pension Benefit Guaranty Corporation which ATSC, the Company or AnnTaylor, as the case may be, files under ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Company or AnnTaylor, as the case may be, receives from the Pension Benefit Guaranty Corporation; (h) Events of Default. As soon as possible and in any ----------------- event within five days after a Responsible Officer of the Company or AnnTaylor, as the case may be, has knowledge of the occurrence of each Event of Default and each Unmatured Event of Default, a written statement of a Responsible Officer of the Company or AnnTaylor, as the case may be, setting forth details of such event and the action that the Company proposes to take with respect thereto; (i) Litigation. As soon as possible and in any event ---------- within five Business Days of the Company's or AnnTaylor's, as the case may be, knowledge thereof, notice of (i) any litigation, investigation or proceeding which may exist at any time could reasonably be expected to have a Material Adverse Effect and (ii) any material adverse development in previously disclosed litigation; (j) Management Report. As soon as available, a copy ----------------- of the annual management report of ATSC prepared in connection with the annual audit referred to in Section ------- 7.03(d). ------- (k) Change in Credit and Collection Policy. Prior to -------------------------------------- its effective date, notice of any change in the Credit and Collection Policy; (l) Bank Accounts. On or prior to each January 27th ------------- and, during the continuance of an Event of Default, as often as requested by the Administrator or the Relationship Bank, an updated and corrected Schedule 6.02(l); and ---------------- (m) Other. Promptly, from time to time, such other ----- information, documents, records or reports respecting the Pool Receivables or the condition or operations, financial or otherwise, of the Company or AnnTaylor, as the case may be, as the Administrator or the Relationship Bank may from time to time reasonably request in order to protect the interests of the Administrator or Lender under or as contemplated by this Agreement. 33 SECTION 7.04. Negative Covenants of the Company. From the --------------------------------- date hereof until the Final Payout Date, the Company will not without the prior written consent of the Administrator: (a) Sales, Liens, Etc. Except as otherwise provided ------------------ herein or in the Purchase Agreement, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Lien upon or with respect to, the Receivables Pool, or any interest therein, or any lock- box account to which any Collections of any Pool Receivable are sent, or any right to receive income or proceeds from or in respect of any of the foregoing. (b) Extension or Amendment of Receivables. Except in ------------------------------------- accordance with the Credit and Collection Policy as permitted in Section 8.02, extend, amend or otherwise modify ------------ the terms of any Pool Receivable, or amend, modify or waive any term or condition of any Contract related thereto. (c) Change in Business or Credit and Collection ------------------------------------------- Policy. Make any change in the character of its business or ------ in the Credit and Collection Policy, which change would, in either case, adversely affect the collectability of a significant portion of the Pool Receivables or otherwise adversely affect the first priority, perfected security interest or remedies of Lender under this Agreement or any other Transaction Document or, without limiting the generality of the foregoing, change the method of calculating aging, which method is described on Schedule -------- 7.03(c). ------- (d) Change in Payment Instructions to Obligors. Add ------------------------------------------ or terminate any bank as a Lock-Box Bank from those listed in Schedule 6.01(o) or make any change in its instructions ---------------- to Obligors regarding payments to be made to the Company or Servicer or payments to be made to any Lock-Box Bank, unless the Administrator and the Relationship Bank shall have received notice of such addition, termination or change and duly executed copies of Lock-Box Agreements with each new Lock-Box Bank. (e) Mergers, Acquisitions, Sales, etc. Be a party to --------------------------------- any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or sell, transfer, convey or lease all or any substantial part of its assets (other than pursuant hereto and the Purchase Agreement), or sell or assign with or without recourse any Receivables or any interest therein (other than pursuant hereto or the Purchase Agreement). 34 (f) Restricted Payments. Purchase or redeem any ------------------- shares of the capital stock of the Company, declare or pay any dividends thereon (other than stock dividends), make any distribution to stockholders or set aside any funds for any such purpose, or make any payment in cash with respect to the Company Note (as defined in the Purchase Agreement) issued pursuant to the Purchase Agreement, unless after giving effect thereto, the Company's Net Worth is at least $850,000. (g) Deposits to Special Accounts. Deposit or ---------------------------- otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections of Pool Receivables. (h) Incurrence of Indebtedness. Incur or permit to -------------------------- exist any indebtedness or liability on account of deposits or advances or for borrowed money or for the deferred purchase price of any property or services, except (i) indebtedness not exceeding in the aggregate $4,995 at any one time outstanding, (ii) the Company's obligations hereunder or under the other Transaction Documents and (iii) the Company's obligations under a reimbursement agreement related to the Customer Letter of Credit, provided that such -------- obligations are subordinate to the Company's obligations hereunder and under the Note and the parties thereto have agreed to non-petition language with respect to the Company reasonably satisfactory to the Administrator. (i) Purchase Agreement. Amend or waive any provision ------------------ of the Purchase Agreement, or terminate the Purchase Agreement. (j) Certificate of Incorporation. Amend, repeal or ---------------------------- waive Articles III, VII, X, XI, XII or XIV of its certificate of incorporation. SECTION 7.05 Negative Covenants of AnnTaylor. From the ------------------------------- date hereof until the Final Payout Date, AnnTaylor will not, without the prior written consent of the Administrator and the Relationship Bank: (a) Conduct of Business. Engage in any business other ------------------- than the business engaged in by AnnTaylor on the date hereof and any business activities substantially similar or related thereto. (b) Mergers, Acquisitions, etc. Be a party to any --------------------------- merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, 35 any other Person, other than a merger of a Subsidiary into AnnTaylor or, except in the ordinary course of its business, sell, transfer, convey or lease all or any substantial part of its assets, or sell or assign with or without recourse any Receivables or any interest therein (other than (i) pursuant to the Purchase Agreement and (ii) to a Restricted Subsidiary relating to factory store outlets, provided that -------- the assets sold, transferred, conveyed or leased do not, in the aggregate, exceed 15% of Net Worth). (c) Restricted Payments. Violate the provisions of ------------------- Section 8.05 of the AnnTaylor Credit Agreement as in effect ------------ from time to time or, if the AnnTaylor Credit Agreement is terminated or cancelled or it expires, as in effect immediately prior to such termination, cancellation or expiration (and such provisions, and the definitions related thereto, are herein incorporated by reference as if fully set forth herein). (d) Net Worth. Allow Net Worth to be less than --------- $250,000,000. (e) Fixed Charge Coverage Ratio. Allow the Fixed --------------------------- Charge Coverage Ratio to be less than 1.4 to 1. (f) Purchase Agreement. Amend or waive any provision ------------------ of the Purchase Agreement, or terminate the Purchase Agreement. ARTICLE VIII ADMINISTRATION AND COLLECTION SECTION 8.01. Designation of Servicer. ----------------------- (a) AnnTaylor as Initial Servicer. The servicing, ----------------------------- administering and collection of the Pool Receivables shall be conducted by the Person designated as Servicer hereunder ("Servicer") from time to time in accordance with this Section -------- ------- 8.01. Until the Administrator or the Relationship Bank gives to - ---- AnnTaylor a Successor Notice (as defined in Section 8.01(b)), --------------- AnnTaylor is hereby designated as, and hereby agrees to perform the duties and obligations of, Servicer pursuant to the terms hereof. (b) Successor Notice; Servicer Transfer Events. Upon ------------------------------------------ AnnTaylor's receipt of a notice from the Administrator or Relationship Bank of the Administrator's or Relationship Bank's designation of a new Servicer (a "Successor Notice"), AnnTaylor ---------------- agrees that it will terminate its activities as Servicer 36 hereunder in a manner that the Administrator believes will facilitate the transition of the performance of such activities to the new Servicer, and the Administrator (or its designee) shall assume each and all of AnnTaylor's obligations to service and administer such Receivables, on the terms and subject to the conditions herein set forth, and AnnTaylor shall use its best efforts to assist the Administrator (or its designee) in assuming such obligations, including, without limitation, by allowing the Administrator (or its designee) access to all computer software and programs used by AnnTaylor to service the Pool Receivables. The Administrator and Relationship Bank agree not to give AnnTaylor a Successor Notice until after the occurrence and only during the continuance of any Event of Default (any such Event of Default being herein called a "Servicer Transfer Event"), in ----------------------- which case such Successor Notice may be given at any time in the Administrator's or the Relationship Bank's discretion. If AnnTaylor disputes the occurrence of a Servicer Transfer Event, AnnTaylor may take appropriate action to resolve such dispute; provided that AnnTaylor must terminate its activities hereunder - -------- as Servicer and allow the newly designated Servicer to perform such activities on the date provided by the Administrator or Relationship Bank as described above, notwithstanding the commencement or continuation of any proceeding to resolve the aforementioned dispute. (c) Subcontracts. Servicer may, with the prior consent of ------------ the Administrator, subcontract with any other Person for servicing, administering or collecting the Pool Receivables, provided that Servicer shall remain liable for the performance of the duties and obligations of Servicer pursuant to the terms hereof. SECTION 8.02. Duties of Servicer. ------------------ (a) Appointment; Duties in General. Each of the Company, ------------------------------ Lender and the Administrator hereby appoints as its agent Servicer, as from time to time designated pursuant to Section ------- 8.01, to enforce its rights and interests in and under the Pool - ---- Receivables, the Related Security and the related Contracts. Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Pool Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. (b) Allocation of Collections; Segregation. Servicer shall -------------------------------------- set aside for the account of the Lender the Collections of Pool Receivables as set forth in Section 3.01, but shall not be ------------ required (unless otherwise requested by the Administrator or the Relationship Bank after the occurrence and during the continuance of an Event of Default) to segregate the funds constituting such 37 portions of such Collections prior to the remittance thereof in accordance with such Section. If instructed by the Administrator or the Relationship Bank after the occurrence and during the continuance of an Event of Default, Servicer shall segregate and deposit with a bank designated by the Relationship Bank, with the approval of the Administrator, the Collections of Pool Receivables, on the second Business Day following receipt by Servicer of such Collections in immediately available funds. Such Collections shall be applied in accordance with Section ------- 3.01. - ---- (c) Modification of Receivables. So long as AnnTaylor is --------------------------- the Servicer, Servicer, may, (A) in accordance with the Credit and Collection Policy, (i) extend the maturity of, or defer interest payments or finance charges with respect to, any Pool Receivable as Servicer may determine to be appropriate to maximize Collections thereof, and (ii) adjust the Unpaid Balance of any Receivable to reflect the reductions or cancellations described in the first sentence of Section 3.02(a) or (B) as a --------------- result of a natural disaster, extend the maturity or defer interest payments or finance charges with respect to any Pool Receivable of an Obligor that is located in the area affected by such natural disaster as Servicer may determine; provided that -------- the aggregate Unpaid Balance of such extended or deferred Pool Receivables does not exceed 3% of Outstanding Principal. (d) Documents and Records. The Company shall deliver to --------------------- Servicer, and Servicer shall hold for the sole benefit of the Company and Lender in accordance with their respective interests, all documents, instruments and records (including, without limitation, computer tapes or disks) that evidence or relate to Pool Receivables. (e) Certain Duties to the Company. Servicer, if other than ----------------------------- AnnTaylor, shall, as soon as practicable upon demand, deliver to the Company copies of all documents, instruments and records in its possession that evidence or relate to Pool Receivables. (f) Termination. Servicer's authorization under this ----------- Agreement shall terminate upon the Final Payout Date. (g) Power of Attorney. The Company hereby grants to ----------------- Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of the Company all steps which are necessary or advisable to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by the Company or transmitted or received by Lender (whether or not from the Company) in connection with any Pool Receivable. 38 (h) Information. Servicer shall take such steps as shall ----------- be necessary to enable it to provide complete and accurate information, within five (or, if an Event of Default is continuing, one) Business Day(s) of request, to the Administrator and the Relationship Bank, with respect to the daily amounts and corresponding locations of those Collections received by the Company that have not been sent directly to the Lock-Box Banks. SECTION 8.03. Rights of the Administrator. --------------------------- (a) Notice to Obligors. At any time after the occurrence ------------------ and during the continuance of an Event of Default the Administrator may notify the Obligors of Pool Receivables, or any of them, of the security interest held by Lender. (b) Notice to Lock-Box Banks. At any time following the ------------------------ occurrence and during the continuance of a Event of Default the Administrator is hereby authorized to give notice to the Lock-Box Banks, as provided in the Lock-Box Agreements, of the transfer to the Administrator of dominion and control over the lock-boxes and related accounts to which the Obligors of Pool Receivables make payments. The Company hereby transfers to the Administrator, effective when the Administrator shall give notice to the Lock- Box Banks as provided in the Lock-Box Agreements, the exclusive dominion and control over such lock-boxes and accounts, and shall take any further action that the Administrator may reasonably request to effect such transfer. To the extent that the Lock-Box Banks are transferring Collections directly to the Administrator or pursuant to instructions from the Administrator, neither the Company nor the Servicer shall have any obligation to pay over such Collections pursuant to Section 3.01(b). The Administrator --------------- hereby agrees that upon the request of the Company (i) at and after such time that this Agreement is no longer in effect, it will provide written notice to the Lock-Box Banks and any bank referred to in Section 7.01(i) to such effect and (ii) unless an --------------- Event of Default is then continuing, it will within 1 Business Day of such request by the Company deliver instructions to any Lock-Box Bank whose Lock-Box Agreement has been cancelled or terminated directing that mail addressed to the lock-box account, administered by such Lock-Box Bank be forwarded to another Lock- Box Bank as specified in such request by the Company. (c) Rights on Servicer Transfer Event. At any time --------------------------------- following a Servicer Transfer Event: (i) The Administrator may direct the Obligors of Pool Receivables, or any of them, to pay all amounts payable under any Pool Receivable directly to the Collateral Agent. (ii) AnnTaylor shall, at the Administrator's or Relationship Bank's request and at AnnTaylor's expense, give 39 notice of the Lender's security interest to each said Obligor and direct that payments be made directly to the Collateral Agent. (iii) AnnTaylor shall, at the Administrator's or Relationship Bank's request, (A) assemble all of the documents, instruments and other records (including, without limitation, computer programs, tapes and disks) which evidence the Pool Receivables, and the related Contracts and Related Security, or which are otherwise necessary or desirable to collect such Pool Receivables, and make the same available to the Administrator at a place selected by the Administrator or the Relationship Bank, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Pool Receivables in a manner acceptable to the Administrator and promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Collateral Agent. (iv) Each of AnnTaylor, the Company and Lender hereby authorizes the Administrator, and grants to the Administrator an irrevocable power of attorney, to take any and all steps in the Company's or AnnTaylor's name and on behalf of the Company, AnnTaylor and Lender which are necessary or desirable, in the determination of the Administrator, to collect all amounts due under any and all Pool Receivables, including, without limitation, endorsing the Company's or AnnTaylor's name on checks and other instruments representing Collections and enforcing such Pool Receivables and the related Contracts; provided that the -------- Administrator shall not exercise its rights under such power of attorney unless a Servicer Transfer Event shall have occurred and be continuing. SECTION 8.04. Responsibilities of the Company. Anything ------------------------------- herein to the contrary notwithstanding: (a) Contracts. The Company shall perform all of its --------- obligations under the Contracts related to the Pool Receivables and under the other agreements related thereto to the same extent as if the security interest had not been granted hereunder and the exercise by the Administrator or its designee of its rights hereunder shall not relieve the Company from such obligations. (b) Limitation of Liability. The Administrator, the ----------------------- Relationship Bank and Lender shall not have any obligation or liability with respect to any Pool Receivables, the Contracts related thereto or any other agreements related thereto, nor shall any of them be obligated to perform any of the obligations of the Company thereunder. 40 SECTION 8.05. Further Action Evidencing Security Interest. ------------------------------------------- (a) Further Assurances. The Company agrees that from time ------------------ to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Administrator or its designee may reasonably request in order to perfect or more fully evidence the security interest granted hereunder, or to enable Lender or the Administrator or its designee to exercise or enforce any of their respective rights hereunder or under any Transaction Document. Without limiting the generality of the foregoing, the Company will upon the request of the Administrator or its designee: (i) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate; (ii) mark its summary master control data processing records evidencing such Pool Receivables and related Contracts with a legend, acceptable to the Administrator, that the Pool Receivable and related Contracts have been pledged hereunder. (b) Additional Financing Statements; Performance by ----------------------------------------------- Administrator. The Company hereby authorizes the Administrator - ------------- or its designee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any portion the Receivables Pool now existing or hereafter arising in the name of the Company. If the Company fails to perform any of its agreements or obligations under this Agreement, the Administrator or its designee may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Administrator or its designee incurred in connection therewith shall be payable by the Company as provided in Section 14.05. ------------- (c) Continuation Statements; Opinion. Without limiting the -------------------------------- generality of subsection (a), the Company will, not earlier than -------------- six (6) months and not later than three (3) months prior to the fifth anniversary of the date of filing of the financing statement referred to in Section 5.01(e) or any other financing --------------- statement filed pursuant to this Agreement or in connection with any Loan hereunder, unless the Final Payout Date shall have occurred execute and deliver and file or cause to be filed an appropriate continuation statement with respect to such financing statement. SECTION 8.06. Application of Collections. Any payment by -------------------------- an Obligor in respect of any indebtedness owed by it to the Company shall, except as otherwise specified by such Obligor, 41 required by the underlying Contract or law be applied, first, as ----- a Collection of any Finance Charge Receivable or Receivables that are Pool Receivables then outstanding of such Obligor in the order of the age of such Finance Charge Receivables, starting with the oldest of such Finance Charge Receivable, second, as a ------ Collection of any Principal Receivable or Receivables that are Pool Receivables then outstanding of such Obligor in the order of the age of such Principal Receivables, starting with the oldest of such Principal Receivable, and third, to any other ----- indebtedness of such Obligor. ARTICLE IX SECURITY INTEREST SECTION 9.01. Grant of Security Interest. To secure all -------------------------- obligations of the Company arising in connection with this Agreement, the Note and each other Transaction Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, the principal of and interest on the Loans, all Indemnified Amounts, payments on account of deemed Collections and fees, the Company hereby assigns and grants to Lender a continuing security interest in all of the Company's right, title and interest, now or hereafter existing, in, to and under the Receivables Pool (other than the Spread Account, it being understood that the Company has granted a continuing security interest in the Spread Account to the Lender under the Spread Account Agreement). SECTION 9.02. Remedies. Upon the occurrence and during the -------- continuance of an Event of Default, Lender shall have, with respect to the collateral granted pursuant to Section 9.01, and ------------ in addition to all other rights and remedies available to Lender or the Administrator under this Agreement or other applicable law, all the rights and remedies of a secured party upon default under the UCC. ARTICLE X EVENTS OF DEFAULT SECTION 10.01. Events of Default. The following events ----------------- shall be "Events of Default" hereunder: ----------------- (a) (i) The Company shall fail to pay any principal of, or interest on, any Loan when due (whether or not sufficient Collections have then been received to make such payment) or (ii) Servicer (if AnnTaylor or its Affiliate is 42 Servicer) shall fail to perform or observe any term, covenant or agreement that is an obligation of Servicer hereunder (other than as referred to in clause (iii) next ------------ following) and such failure shall remain unremedied for three Business Days or (iii) Servicer (if AnnTaylor or its Affiliate is Servicer) shall fail to make any payment or deposit to be made by it hereunder when due; or (b) Any representation or warranty made or deemed to be made by the Company or AnnTaylor (or any of their respective officers) under or in connection with this Agreement shall prove to have been false or incorrect in any material respect when made (other than a breach of the representations set forth in Section 6.01(l), 6.01(p) or ------------------------ 6.01(u)); or ------- (c) The Company or AnnTaylor shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any of the other Transaction Documents on its part to be performed or observed and any such failure shall remain unremedied for twenty days; or (d) A default shall have occurred and be continuing under any instrument or agreement evidencing, securing or providing for the issuance of indebtedness for borrowed money in excess of $2,000,000 of, or guaranteed by, AnnTaylor, ATSC or any Restricted Subsidiary, which default if unremedied, uncured, or unwaived (with or without the passage of time or the giving of notice or both) would permit acceleration of the maturity of such indebtedness and such default shall have continued unremedied, uncured or unwaived for a period long enough to permit such acceleration and any notice of default required to permit acceleration shall have been given; or any default under any agreement or instrument relating to the purchase of receivables of AnnTaylor, ATSC or any Restricted Subsidiary, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default is to terminate, or permit the termination of, the commitment of any party to such agreement or instrument to purchase receivables or the right of AnnTaylor, ATSC or any Restricted Subsidiary to reinvest in receivables the principal amount paid by any party to such agreement or instrument for interest in receivables; or (e) An Event of Bankruptcy shall have occurred and remain continuing with respect to the Company, AnnTaylor, ATSC or any Restricted Subsidiary; or (f) The Net Yield at any time is less than 0%; or 43 (g) The Gross Default-to-Liquidation Ratio exceeds 1.95% or the Net Default to Liquidation Ratio exceeds 1.325%; or (h) The Payment Rate is less than 27%; or (i) The Delinquency Ratio at any Cut-Off Date is greater than 11.5% or the average of the Delinquency Ratios for the most recent three Cut-Off Dates is greater than 11%; or (j) There shall exist any event, circumstance or occurrence that would be reasonably likely to have a material adverse effect on the validity or enforceability of this Agreement, the Note or any other Transaction Document or on the status, existence, perfection, priority or enforceability of Lender's interest in the Receivables Pool; or (k) The warranty in Section 6.01(i)(y) shall not be ------------------ true at any time; or (l) The occurrence of a Change-in-Control; or (m) The Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the Internal Revenue Code with regard to any of the assets of the Company and such lien shall not have been released within 5 days (or 30 days, if payment in full with respect thereto shall have been made within 5 days), or the Pension Benefit Guaranty Corporation shall file notice of a lien pursuant to Section 4068 of ERISA with regard to any of the assets of the Company; or (n) The Dilution Ratio exceeds 15%; or (o) The sum of (i) the balance in the Spread Account and (ii) the stated amount of the Customer Letter of Credit as of any Settlement Date, after giving effect to all withdrawals therefrom or draws thereupon on such date, shall be less than 0.5% of the then Outstanding Principal; or (p) The Outstanding Principal shall exceed the Borrowing Base as set forth in the most recently delivered Information Package (or portion thereof) and the Company shall not have prepaid the Loan in the amount of such excess within one Business Day. SECTION 10.02. Remedies. -------- (a) Optional Acceleration. Upon the occurrence of a Event --------------------- of Default (other than a Event of Default described in subsection ---------- 44 (e) of Section 10.01), the Administrator shall, at the request, - --- ------------- or may with the consent, of Lender, by notice to the Company declare the Loan Termination Date to have occurred, whereupon the obligation of Lender to make any Loans hereunder shall immediately terminate, and declare the unpaid principal amount of, and any and all accrued and unpaid interest on the Loans to be, and the same shall thereupon be, immediately due and payable, without presentment, further demand, or protest or other requirement of any kind, all of which are expressly waived by the Company. (b) Automatic Acceleration. Upon the occurrence of a Event ---------------------- of Default described in subsection (e) of Section 10.01 with -------------- ------------- respect to the Company, AnnTaylor or ATSC, or subsection (f), -------------- (g), (h), (i), (n), (o) or (p) of Section 10.01, the Loan - --- --- --- --- --- --- ------------- Termination Date shall occur automatically, whereupon the obligation of Lender to make any Loan hereunder shall immediately terminate, and the unpaid principal amount of and any and all accrued interest on the Loans shall automatically become immediately due and payable, without presentment, demand or protest or other requirement of any kind, all of which are hereby expressly waived by the Company. (c) Additional Remedies. Upon any Loan Termination Date ------------------- pursuant to this Section 10.02, no Loans thereafter will be made, ------------- and the Administrator, Lender and the Relationship Bank shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided to secured parties under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. ARTICLE XI THE ADMINISTRATOR; RELATIONSHIP BANK SECTION 11.01. Authorization and Action. Pursuant to the ------------------------ Program Administration Agreement and the Relationship Bank Agreement, Lender has appointed and authorized the Administrator and the Relationship Bank (or their respective designees) to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrator or the Relationship Bank by the terms hereof, together with such powers as are reasonably incidental thereto. SECTION 11.02. Administrator's and Relationship Bank's --------------------------------------- Reliance, Etc. The Administrator, the Relationship Bank and - ------------- their directors, officers, agents or employees shall not be liable for any action taken or omitted to be taken by it or them under or in connection with the Transaction Documents (including, without limitation, the servicing, administering or collecting 45 Pool Receivables as Servicer pursuant to Section 8.01), except ------------ for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, each of the Administrator and the Relationship Bank: (a) may consult with legal counsel (including counsel for the Company or AnnTaylor), independent certified public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) makes no warranty or representation to Lender or any other holder of any interest in Pool Receivables and shall not be responsible to Lender or any such other holder for any statements, warranties or representations made in or in connection with any Transaction Document; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Transaction Document by the Company or AnnTaylor, or to inspect the property (including the books and records) of the Company or AnnTaylor; (d) shall not be responsible to Lender or any other holder of any interest in Pool Receivables for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Transaction Document; and (e) shall incur no liability under or in respect of this Agreement by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by facsimile or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 11.03. State Street Capital and PNC Bank and ------------------------------------- Affiliates. State Street Capital and PNC Bank and any of their - ---------- respective Affiliates may generally engage in any kind of business with the Company, AnnTaylor or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of the Company, AnnTaylor or any Obligor or any of their respective Affiliates, all as if State Street Capital and PNC Bank were not the Administrator and the Relationship Bank, respectively, and without any duty to account therefor to Lender or any other holder of an interest in Pool Receivables. ARTICLE XII ASSIGNMENT OF LENDER'S INTEREST SECTION 12.01. Restrictions on Assignments. --------------------------- (a) Neither the Company, nor AnnTaylor, as Servicer, nor PNC Bank, individually or as the Relationship Bank (except as otherwise provided in the Relationship Bank Agreement), may assign its rights, or delegate its duties hereunder or any interest herein without the prior written consent of the Administrator. Lender may not assign its rights hereunder 46 (although it may delegate its duties hereunder as expressly indicated herein) or the Loans (or any portion thereof) to any Person without the prior written consent of the Company, which consent shall not be unreasonably withheld; provided, however, -------- ------- that (i) Lender may assign all of its rights and interests in the Transaction Documents, together with all its interest in the Loans, to State Street Capital or PNC Bank, or both, or any Affiliate of either of them, or to any "bankruptcy remote" special purpose entity the business of which is administered by State Street Capital or any Affiliate of State Street Capital; provided, however, no such assignment -------- ------- may be made unless the assignee shall agree with the Company that unless an Event of Default has occurred and is continuing, the Company shall not be obligated to pay interest on the Loans in excess of the interest that the Company would have been obligated to pay absent such assignment; and (ii) Lender may assign and grant a security interest in all of its rights in the Transaction Documents, together with all of its rights and interest in the Loans, to the Collateral Agent, to secure Lender's obligations under or in connection with the Commercial Paper Notes, the Liquidity Agreement, the Credit Agreement and any letter of credit issued thereunder, and certain other obligations of Lender incurred in connection with the funding of the Loans hereunder, which assignment and grant of a security interest (and any subsequent assignment by the Collateral Agent) shall not be considered an "assignment" for purposes of Section 12.01 or, prior to the enforcement of such security ------------- interest, for purposes of any other provision of this Agreement. (b) The Company agrees to advise the Administrator within five Business Days after notice to the Company of any proposed assignment by Lender of the Loans (or any portion thereof), not otherwise permitted under subsection (a), of the Company's -------------- consent or non-consent to such assignment and if it does not consent, the reasons therefor. If the Company does not consent to such assignment, Lender may immediately assign such Loans (or portion thereof) to State Street Capital, PNC Bank or any Affiliate of State Street Capital or PNC Bank. All of the aforementioned assignments shall be upon such terms and conditions as Lender and the assignee may mutually agree. SECTION 12.02. Rights of Assignee. Upon the assignment by ------------------ Lender in accordance with this Article XII, the assignee ----------- receiving such assignment shall have all of the rights of Lender 47 with respect to the Transaction Documents and the Loans (or such portion thereof as has been assigned). SECTION 12.03. Evidence of Assignment. Any assignment of ---------------------- the Loans (or any portion thereof) to any Person may be evidenced by such instrument(s) or document(s) as may be satisfactory to Lender, the Administrator and the assignee. SECTION 12.04. Rights of the Banks and Collateral Agent. ---------------------------------------- Each of AnnTaylor and the Company hereby agrees that, upon notice to the Company and AnnTaylor, the Collateral Agent may exercise all the rights of the Administrator hereunder, with respect to the Loans (or any portions thereof), and Collections with respect thereto, which are owned by Lender, and all other rights and interests of Lender in, to or under this Agreement or any other Transaction Document. Without limiting the foregoing, upon such notice Collateral Agent may request Servicer to segregate Lender's allocable shares of Collections from the Company's allocable share, may give a Successor Notice pursuant to Section ------- 8.01(a), may give or require the Administrator or Relationship - ------- Bank to give notice to the Lock-Box Banks as referred to in Section 8.03(b) and may direct the Obligors of Pool Receivables - --------------- to make payments in respect thereof directly to an account designated by them, in each case, to the same extent as the Administrator might have done. ARTICLE XIII INDEMNIFICATION SECTION 13.01. Indemnities. ----------- (a) General Indemnity. Without limiting any other rights ----------------- which any such Person may have hereunder or under applicable law, the Company hereby agrees to indemnify each of the Administrator, Lender, the Liquidity Banks, the Credit Bank, the Relationship Bank, the Liquidity Agent, each of their respective Affiliates, and all successors, transferees, participants and assigns and all officers, directors, shareholders, controlling persons, employees and agents of any of the foregoing (each an "Indemnified Party"), ----------------- forthwith on demand, from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "Indemnified ----------- Amounts") awarded against or incurred by any of them arising out - ------- of or relating to the Transaction Documents or the ownership or funding of the Loans or in respect of any Receivable or any Contract, excluding, however, (a) Indemnified Amounts to the --------- ------- extent determined by a court of competent jurisdiction to have resulted from gross negligence or willful misconduct of such 48 Indemnified Party, (b) recourse (except as otherwise specifically provided in this Agreement) for Defaulted Receivables, (c) taxes on net income, or (d) Indemnified Amounts resulting solely from acts or omissions of Servicer. Without limiting the foregoing, the Company shall indemnify each Indemnified Party for Indemnified Amounts arising out of or relating to: (i) the transfer by the Company of any interest in any Receivable other than the grant of a security interest to Lender pursuant to Section 9.01; ------------ (ii) any representation or warranty made by the Company under or in connection with any Transaction Document, any Information Package or any other information or report delivered by or on behalf of the Company pursuant hereto, which shall have been false, incorrect or misleading in any material respect when made or deemed made; (iii) the failure by the Company to comply with any applicable law, rule or regulation (including truth in lending, fair credit billing, usury, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) with respect to any Pool Receivable or the related Contract, or the nonconformity of any Pool Receivable or the related Contract with any such applicable law, rule or regulation; (iv) the failure to vest and maintain vested in Lender a first priority perfected security interest, in the Receivables in, or purporting to be in, the Receivables Pool, free and clear of any Lien, other than a Lien arising solely as a result of an act of Lender, the Administrator or the Relationship Bank, whether existing at the time of any Loan or at any time thereafter; (v) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables in, or purporting to be in, the Receivables Pool, whether at the time of any Loan or at any time thereafter; (vi) without duplication of amounts paid pursuant to Section 3.02(a), any dispute, claim, offset or defense --------------- (other than discharge in bankruptcy) of the Obligor to the payment of any Receivable in, or purporting to be in, the Receivables Pool (including, without limitation, a defense based on such Receivable's or the related Contract's not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or 49 services related to such Receivable or the furnishing or failure to furnish such merchandise or services; (vii) any failure of the Company or Servicer to perform its duties or obligations in accordance with the provisions of Article VIII; or ------------ (viii) any products liability claim arising out of or in connection with merchandise or services that are the subject of any Pool Receivable. (b) Indemnity by AnnTaylor. Without limiting any other ---------------------- rights which any such person may have hereunder under applicable law, AnnTaylor hereby agrees to indemnify each Indemnified Party, forthwith on demand, from and against any and all Indemnified Amounts awarded against or incurred by any of them arising out of or relating to: (i) any representation or warranty made by AnnTaylor under or in connection with any Transaction Document in its capacity as Servicer, any Information Package or any other information or report delivered by or on behalf of AnnTaylor in its capacity as Servicer pursuant hereto, which shall have been false, incorrect or misleading in any material respect when made or deemed made; (ii) the failure by AnnTaylor, in its capacity as Servicer, to comply with any applicable law, rule or regulation (including truth in lending, fair credit billing, usury, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) with respect to any Pool Receivable or other related contract; or (iii) any failure of AnnTaylor to perform its duties, covenants and obligations in accordance with the applicable provisions of this Agreement. (c) After-Tax Basis. Indemnification hereunder shall be in --------------- an amount necessary to make the Indemnified Party whole after taking into account any tax consequences to the Indemnified Party of the payment of any of the aforesaid taxes and the receipt of the indemnity provided hereunder or of any refund of any such tax previously indemnified hereunder, including the effect of such tax or refund on the amount of tax measured by net income or profits which is or was payable by the Indemnified Party. (d) Contest. Promptly after receipt of notice of the ------- commencement of any action involving any indemnified party in respect of which an indemnity will be sought pursuant to this Section 13.01, such indemnified party shall promptly notify the - ------------- Company or AnnTaylor, as applicable; provided, however, that such -------- 50 failure to so notify shall not affect the rights of such Indemnified Party to indemnity hereunder unless such failure prejudices the Company's or AnnTaylor's ability to contest such claim. The Company or AnnTaylor, as applicable, shall have the right to assume the defense with respect to such indemnified claim, and to retain counsel reasonably satisfactory to the Indemnified Party to represent such Indemnified Party; provided -------- that (i) AnnTaylor or the Company, as applicable, shall pay all of the fees, costs and expenses of such counsel related to such proceedings, (ii) the Company or AnnTaylor, as appropriate, has acknowledged in writing to such Indemnified Party that such claim is an indemnified claim hereunder and (iii) no Event of Default has occurred and is continuing. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel at its own expense, except that AnnTaylor or the Company, as applicable, shall pay the fees and expenses of such counsel retained by the Indemnified Party in the event that the Company or AnnTaylor, as applicable, and the Indemnified Party shall mutually agree to the retention of such counsel or, (ii) the named parties to any such proceeding (including any impleaded party) include both the Company and the Indemnified Party representation of both parties by the same counsel would be inappropriate, in the reasonable opinion of the Indemnified Party, due to actual or potential differing interest between them. Neither the Company nor AnnTaylor, as applicable, shall be liable for any settlement, compromise or fine or judgement by consent with respect to any proceeding effected without its written consent, unless an Event of Default has occurred and is continuing, but if settled with such consent or if there shall be a final judgement for the plaintiff, the Company or AnnTaylor, as applicable, agrees to indemnify the indemnified party to the extent set forth in this Section 13.01. In addition, neither the ------------- Company nor AnnTaylor will, without the prior written consent of the Indemnified Party, settle or compromise or consent to the entry of any judgement in any pending or threatened claim, action, suit, proceeding or investigation or agree to any fine in respect of which indemnification may be sought hereunder (whether or not the indemnified party is an actual or potential party to such claim, action, suit, proceeding, or investigation) unless such settlement, compromise, consent or agreement includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit, proceeding or investigation. If an Event of Default has occurred and is continuing, neither the Company nor AnnTaylor shall have the right to control the defense of any indemnified claim pursuant to this paragraph (d). ------------- (e) Contribution. If for any reason the indemnification ------------ provided above in this Section 13.01 is unavailable to an ------------- Indemnified Party or is insufficient to hold an Indemnified Party harmless, then the Company or AnnTaylor or both, as applicable, 51 shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party on the one hand and the Company or AnnTaylor or both, as applicable, on the other hand but also the relative fault of such Indemnified Party as well as any other relevant equitable considerations. (f) Participants. Any Indemnified Party which is a ------------ participant shall only be entitled to amounts under this Section ------- 13.01 to the extent that such amounts, together with all amounts - ----- due to the Person selling such participation under this Section ------- 13.01, do not exceed the amounts that would have been due to such - ----- Person under this Section 13.01 if the participation had not been ------------- entered into or sold. ARTICLE XIV MISCELLANEOUS SECTION 14.01. Amendments, Etc. No amendment or waiver of --------------- any provision of this Agreement nor consent to any departure by the Company or AnnTaylor therefrom shall in any event be effective unless the same shall be in writing and signed by (a) the Company, AnnTaylor, the Administrator and Lender (with respect to an amendment), provided that no amendment shall become -------- effective without the signature of the Relationship Bank, if such amendment materially increases the obligations or liabilities of the Relationship Bank, in either its individual or agent capacity hereunder, or materially reduces any amount payable to it hereunder or (b) the Administrator and Lender (with respect to a waiver or consent by them) or the Company or AnnTaylor (with respect to a waiver or consent by it), as the case may be, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The parties acknowledge that, before entering into such an amendment or granting such a waiver or consent, Lender may also be required to obtain the approval of some or all of the Liquidity Banks or the Credit Bank or to obtain confirmation from certain rating agencies that such amendment, waiver or consent will not result in a withdrawal or reduction of the ratings of the Commercial Paper Notes. SECTION 14.02. Notices, Etc. All notices and other ------------ communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by express mail or courier or by certified mail, postage prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on the signature pages hereof or 52 at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, (a) if personally delivered or sent by express mail or courier or if sent by certified mail, when received, and (b) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. SECTION 14.03. No Waiver; Remedies. No failure on the part ------------------- of the Administrator, the Relationship Bank, any Affected Party, any Indemnified Party, Lender or any other holder of the Loans (or any portion thereof) to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Without limiting the foregoing, to the fullest extent permitted by law, each of State Street Capital, individually and as Administrator, PNC Bank, individually and as Relationship Bank, the Collateral Agent, the Credit Bank and each Liquidity Bank is hereby authorized by the Company at any time and from time to time, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by State Street Capital, the Collateral Agent and such Liquidity Bank to or for the credit or the account of the Company now or hereafter existing under this Agreement, to the Administrator, any Affected Party, any Indemnified Party or Lender, or their respective successors and assigns. SECTION 14.04. Binding Effect; Survival. This Agreement ------------------------ shall be binding upon and inure to the benefit of the Company, AnnTaylor, the Administrator, the Relationship Bank, Lender and their respective successors and assigns, and the provisions of Section 4.02 and Article XIII shall inure to the benefit of the - ------------ ------------ Affected Parties and the Indemnified Parties, respectively, and their respective successors and assigns; provided, however, -------- ------- nothing in the foregoing shall be deemed to authorize any assignment not permitted by Section 12.01. This Agreement shall ------------- create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Final Payout Date. The rights and remedies with respect to any breach of any representation and warranty made by the Company or AnnTaylor pursuant to Article VI ---------- and the indemnification and other provisions of Article XIII and ------------ Sections 4.02, 14.05, 14.06, 14.07, 14.08 and 14.15 shall be - ------------- ----- ----- ----- ----- ----- continuing and shall survive any termination of this Agreement. SECTION 14.05. Costs, Expenses and Taxes. In addition to ------------------------- its obligations under Article XIII, the Company agrees to pay on ------------ demand: 53 (a) all costs and expenses incurred by the Administrator, the Relationship Bank, the Credit Bank, the Collateral Agent and the Lender in connection with the negotiation, preparation, execution and delivery, or the enforcement of, or any actual or claimed breach of, this Agreement and the other Transaction Documents, including, without limitation (i) the reasonable fees and expenses of counsel to any of such Persons incurred in connection with any of the foregoing or in advising such Persons as to their respective rights and remedies under any of the Transaction Documents, and (ii) subject to Section 7.01(c), all --------------- reasonable out-of-pocket expenses (including reasonable fees and expenses of independent accountants but, other than as set forth in Section 7.01(c), excluding allocations of any --------------- expenses relating to salaries of employees or other overhead expenses), incurred in connection with any review of the Company's or AnnTaylor's books and records either prior to the execution and delivery hereof or pursuant (it being understood that receipts will be required for expenses over $5, meal expenses will be limited to $40 per day per person, air travel shall be by unrestricted coach class and, unless an Event of Default has occurred and shall be continuing, flight and lodging arrangements shall be made through AnnTaylor Travel, Inc.); and (b) all stamp and other similar taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other Transaction Documents, and agrees to indemnify each Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees; provided that any Indemnified Party -------- which is a participant shall only be entitled to amounts under this Section 14.05(b) to the extent that such amounts, ---------------- together with all amounts due to the Person selling such participation under this Section 14.05, do not exceed the ------------- amounts that would have been due to such Person under this Section 14.05 if the participation had not been entered into ------------- or sold. SECTION 14.06. No Proceedings. The Company, AnnTaylor, -------------- Servicer, State Street Capital (individually and as Administrator) and PNC Bank (individually and as Relationship Bank) each hereby agrees that it will not institute against Lender, or join any other Person in instituting against Lender, any insolvency proceeding (namely, any proceeding of the type referred to in the definition of Event of Bankruptcy) so long as any Commercial Paper Notes issued by Lender shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such Commercial Paper Notes shall have been outstanding. The foregoing shall not limit the Company's or 54 AnnTaylor's right to file any claim in or otherwise take any action with respect to any insolvency proceeding that was instituted by any Person other than the Company or AnnTaylor. SECTION 14.07. Confidentiality of the Company Information. ------------------------------------------ (a) Confidential Company Information. Each party hereto -------------------------------- (other than the Company or AnnTaylor) acknowledges that certain of the information provided to such party by or on behalf of the Company or AnnTaylor in connection with this Agreement and the transactions contemplated hereby is or may be confidential, and each such party severally agrees that, unless the Company or AnnTaylor shall otherwise agree in writing, and except as provided in subsection (b), such party will not disclose to any -------------- other person or entity: (i) any information regarding, or copies of, any non- public financial statements, reports and other information furnished by the Company or AnnTaylor to Lender or the Administrator pursuant to Section 3.01, 5.01(j), 5.01(k), ------------ ------- ------- 6.01(i), 6.01(j), 6.01(m), 6.02(h), 6.02(i), 6.02(j), ------- ------- ------- ------- ------- ------- 7.01(c) or 7.03, or ------- ---- (ii) any other information regarding the Company or AnnTaylor which is designated by the Company or AnnTaylor to such party in writing as confidential (the information referred to in clauses (i) and (ii) above, -------------------- whether furnished by the Company, AnnTaylor or any attorney for or other representative of the Company or AnnTaylor (each a "Company Information Provider"), is collectively referred to as ---------------------------- the "Company Information"; provided, however, the "Company ------------------- -------- ------- ------- Information" shall not include - ----------- (A) any information which is or becomes generally available to the general public or to such party on a nonconfidential basis from a source other than any Company Information Provider, or which was known to such party on a nonconfidential basis prior to its disclosure by any Company Information Provider, or (B) information regarding the nature of this Agreement, the basic terms hereof (including without limitation the amount and nature of Lender's commitment and Outstanding Principal and of the recourse or other credit enhancement provided by the Company hereunder), the nature, amount and status of the Pool Receivables, and the current and/or historical ratios of losses to liquidations, dilutions and/or outstandings with respect to the Receivables Pool, such other information as may be required 55 to be disclosed, in the Administrator's reasonable judgement, under securities laws applicable to Lender. (b) Disclosure. Notwithstanding subsection (a), each party ---------- -------------- may disclose any of the Company Information: (i) to any of such party's independent attorneys, consultants and auditors, and to each Liquidity Bank, the Credit Bank, any dealer or placement agent for Lender's commercial paper, and any actual or potential assignees of, or participants in, any of the rights or obligations of Lender, any Liquidity Bank, the Credit Bank, the Administrator or the Relationship Bank under or in connection with this Agreement, who (A) in the good faith belief of such party, have a need to know such the Company Information, (B) are informed by such party of the confidential nature of the Company Information and the terms of this Section 14.07, and (C) are subject to ------------- confidentiality restrictions generally consistent with this Section 14.07, ------------- (ii) to any rating agency that maintains a rating for Lender's commercial paper or is considering the issuance of such a rating, for the purposes of reviewing the credit of Lender in connection with such rating, (iii) to any other party to this Agreement, for the purposes contemplated hereby, (iv) as may be required by any municipal, state, federal or other regulatory body having or claiming to have jurisdiction over such party, in order to comply, in the reasonable judgement of counsel to such party, with any law, order, regulation, regulatory request or ruling applicable to such party, or (v) subject to subsection (c), in the event such party -------------- is legally compelled (by interrogatories, requests for information or copies, subpoena, civil investigative demand or similar process) to disclose such the Company Information. (c) Legal Compulsion. In the event that any party hereto ---------------- (other than the Company or AnnTaylor) or any of its representatives is requested or becomes legally compelled (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the Company or AnnTaylor Information, such party will (or will cause its representative to) 56 (i) provide the Company or AnnTaylor with prompt written notice so that (A) the Company or any other Company Information Provider may seek a protective order or other appropriate remedy, or (B) the Company or AnnTaylor may, if it so chooses, agree that such party (or its representatives) may disclose such Company Information pursuant to such request or legal compulsion; and (ii) unless the Company or AnnTaylor agrees that such Company Information may be disclosed, make a timely objection to the request or compulsion to provide such the Company Information on the basis that such the Company Information is confidential and subject to the agreements contained in this Section 14.07. ------------- In the event such protective order or remedy is not obtained, or the Company or AnnTaylor waives compliance with the provisions of this Section 14.07, such party will furnish only that portion of ------------- the Company Information which (in such party's good faith judgment) is legally required to be furnished and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be afforded the Company Information. (d) This Section 14.07 shall survive termination of this ------------- Agreement. SECTION 14.08. Confidentiality of Program Information. -------------------------------------- (a) Confidential Information. Each party hereto ------------------------ acknowledges that State Street Capital regards the structure of the transactions contemplated by this Agreement to be proprietary, and each such party severally agrees that: (i) it will not disclose without the prior consent of State Street Capital (other than to the directors, employees, auditors, counsel or affiliates (collectively, "representatives")) of such party, each of whom shall be informed by such party of the confidential nature of the Information (as defined below) and of the terms of this Section 14.08, (A) any information regarding the pricing in, ------------- or copies of, the Fee Letter, (B) any information regarding the organization, business or operations of Lender generally or the services performed by the Administrator or the Relationship Bank for Lender, or (C) any information which is furnished by State Street Capital to such party and which is designated by State Street Capital to such party in writing as confidential or as not otherwise available to the general public (the information referred to in clauses (A), ------------ (B) and (C) is collectively referred to as the "Program --- --- ------- Information"); provided, however, that such party may ----------- -------- ------- disclose any such Program Information (I) to any other party 57 to this Agreement for the purposes contemplated hereby, (II) as may be required, in the reasonable judgement of counsel to such party, by any municipal, state, federal or other regulatory body having or claiming to have jurisdiction over such party, (III) in order to comply with any law, order, regulation, regulatory request or ruling applicable to such party, (IV) subject to subsection (c), in the event such -------------- party is legally compelled (by interrogatories, requests for information or copies, subpoena, civil investigative demand or similar process) to disclose any such Program Information, (V) to any of such party's independent attorneys, consultants and auditors, or (VI) in defending any action or proceeding relating to the Transaction Documents; (ii) it will use the Program Information solely for the purposes of evaluating, administering and enforcing the transactions contemplated by this Agreement and making any necessary business judgments with respect thereto; and (iii) it will, upon written demand, return (and cause each of its representatives to return) to State Street Capital, all documents or other written material received from State Street Capital, as the case may be, in connection with (a)(i)(B) or (C) above and all copies thereof made by --------- --- such party which contain the Program Information. The parties hereto acknowledge that AnnTaylor will file a copy of this Agreement with the Securities and Exchange Commission and will provide copies hereof to Persons requesting such copies as may be required by applicable law and to such Persons as may have a valid business need to review this Agreement; provided that -------- none of the Company, AnnTaylor nor any Affiliate thereof shall otherwise distribute copies of this Agreement. (b) Availability of Confidential Information. This Section ---------------------------------------- ------- 14.08 shall be inoperative as to such portions of the Program - ----- Information which are or become generally available to the public or such party on a nonconfidential basis from a source other than State Street Capital or were known to such party on a nonconfidential basis prior to its disclosure by State Street Capital. (c) Legal Compulsion to Disclose. In the event that any ---------------------------- party or anyone to whom such party or its representatives transmits the Program Information is requested or becomes legally compelled (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the Information, such party will 58 (i) provide State Street Capital with prompt written notice so that State Street Capital may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 14.08; and ------------- (ii) unless State Street Capital waives compliance by such party with the provisions of this Section 14.08, make a ------------- timely objection to the request or confirmation to provide such Program Information on the basis that such Program Information is confidential and subject to the agreements contained in this Section 14.08. ------------- In the event that such protective order or other remedy is not obtained, or State Street Capital waives compliance with the provisions of this Section 14.08, such party will furnish only ------------- that portion of the Program Information which (in such party's good faith judgment) is legally required to be furnished and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Program Information. (d) Survival. This Section 14.08 shall survive termination -------- ------------- of this Agreement. SECTION 14.09. Captions and Cross References. The various ----------------------------- captions (including, without limitation, the table of contents) in this Agreement are provided solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement. Unless otherwise indicated, references in this Agreement to any Section, Appendix, Schedule or Exhibit are to such Section of or Appendix, Schedule or Exhibit to this Agreement, as the case may be, and references in any Section, subsection, or clause to any subsection, clause or subclause are to such subsection, clause or subclause of such Section, subsection or clause. SECTION 14.10. Governing Law. THIS AGREEMENT, INCLUDING ------------- THE RIGHTS AND DUTIES OF THE PARTIES HERETO, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 14.11. Waiver Of Jury Trial. EACH PARTY HERETO -------------------- HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, THE NOTE, ANY OTHER TRANSACTION DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY BE IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING OR OTHER RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 59 SECTION 14.12. Consent To Jurisdiction; Waiver Of ---------------------------------- Immunities. EACH OF ANNTAYLOR AND THE COMPANY HEREBY - ---------- ACKNOWLEDGES AND AGREES THAT: (a) IT IRREVOCABLY (i) SUBMITS TO THE JURISDICTION, FIRST, OF ANY UNITED STATES FEDERAL COURT, AND SECOND, IF FEDERAL JURISDICTION IS NOT AVAILABLE, OF ANY NEW YORK STATE COURT, IN EITHER CASE SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, (ii) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED ONLY IN SUCH NEW YORK STATE OR FEDERAL COURT AND NOT IN ANY OTHER COURT, AND (iii) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. (b) TO THE EXTENT THAT IT HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM THE JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID TO EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, IT HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER OR IN CONNECTION WITH THIS AGREEMENT. SECTION 14.13. Execution in Counterparts. This Agreement ------------------------- may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. SECTION 14.14. No Recourse Against Other Parties. No --------------------------------- recourse under any obligation, covenant or agreement of Lender contained in this Agreement shall be had against any stockholder, employee, officer, director, or incorporator of Lender, provided, -------- however, that nothing in this Section 14.14 shall relieve any of - ------- ------------- the foregoing Persons from any liability which such Person may otherwise have for his/her or its gross negligence or willful misconduct. 60 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ANNTAYLOR FUNDING, INC. as the Company By ------------------------------- Title: Vice President 414 Chapel Street New Haven, CT 06511 Telephone No.: (203) 865-0811 Facsimile No.: (203) 865-2756 Attention: Bert A. Tieben Vice President ANNTAYLOR, INC., as initial Servicer By ------------------------------- Title: Senior Vice President 142 West 57th Street New York, NY 10019 Telephone No.: (212) 541-3300 Facsimile No.: (212) 541-3299 Attention: Jocelyn F.L. Barandiaran Vice President/Secretary and General Counsel with a copy to: AnnTaylor, Inc. 414 Chapel Street New Haven, CT 06511 Telephone No.: (203) 865-0811 Facsimile No.: (203) 865-2756 Attention: Walter Parks Vice President/Financial Reporting CLIPPER RECEIVABLES CORPORATION, as Lender By ------------------------------- Title -------------------------- P.O. Box 4024 Boston, Massachusetts 02101 Facsimile No.: (617) 951-7050 Attention: David M. Donaldson STATE STREET BOSTON CAPITAL CORPORATION, as Administrator By ------------------------------- Managing Director 225 Franklin Street Boston, Massachusetts 02110 Facsimile No.: (617) 350-4020 Attention: Clipper Funds PNC BANK, NATIONAL ASSOCIATION, as Relationship Bank By: --------------------------------- Title: Vice President Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Facsimile No.: (412) 762-4167 Attention: Marc Potter APPENDIX A DEFINITIONS This is Appendix A to the Receivables Financing Agreement dated as of January 27, 1994 among AnnTaylor Funding, Inc., AnnTaylor, Inc., Clipper Receivables Corporation, State Street Boston Capital Corporation, as Administrator and PNC Bank, National Association, as Relationship Bank (as amended, supplemented or otherwise modified from time to time, this "Agreement"). Each reference in this Appendix A to any Section, --------- ---------- Appendix or Exhibit refers to such Section of or Appendix or Exhibit to this Agreement. A. Defined Terms. As used in this Agreement, unless the ------------- context requires a different meaning, the following terms have the meanings indicated hereinbelow: "Account" means each revolving credit card account ------- established pursuant to a Contract between AnnTaylor and any Obligor pursuant to which indebtedness may arise for the purchase of goods. "Account Age" has the meaning set forth in Schedule 7.03(c). ----------- ---------------- "Administrator" has the meaning set forth in the preamble. ------------- -------- "Administrator's Office" means the office of the ---------------------- Administrator at 225 Franklin Street, Boston, Massachusetts 02110, Attention: Clipper Funds, or such other address as shall be designated by the Administrator in writing to the Company and Lender. "Affected Party" means each of Lender, each Liquidity Bank, -------------- any assignee or participant of Lender or any Liquidity Bank, the Credit Bank, any assignee or participant of the Credit Bank, State Street Capital, any successor to State Street Capital as Administrator, PNC Bank, any successor to PNC Bank as Relationship Bank, any sub-agent of the Administrator, the Collateral Agent, any successor of First Chicago as Collateral Agent and any co-agent or sub-agent of the Collateral Agent. "Affiliate" when used with respect to ATSC, AnnTaylor or the --------- Company means ATSC or any Subsidiary of ATSC and when used with respect to any other Person means any other Person controlling, controlled by, or under common control with, such Person. "Alternate Base Rate" means, on any date, a fluctuating rate ------------------- of interest per annum equal to the higher of --- ----- (a) the rate of interest most recently announced by PNC Bank in Pittsburgh, Pennsylvania, as its prime rate; and (b) the Federal Funds Rate (as defined below) most recently determined by PNC Bank plus 1.0% per annum. --- ----- The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by the Liquidity Agent in connection with extensions of credit. "AnnTaylor" has the meaning set forth in the preamble. --------- -------- "AnnTaylor Credit Agreement" means the Credit Agreement, -------------------------- dated as of June 28, 1993, among AnnTaylor, Bank of America National Trust and Savings Association and Bank of Montreal, as Co-Agents, the financial institutions from time to time party thereto and Bank of America National Trust and Savings Association, as Agent, as heretofore amended. "Arrangement Fee" has the meaning set forth in Section --------------- ------- 4.01(a). - ------- "ATSC" means AnnTaylor Stores Corporation, a Delaware ---- corporation. "Bank Rate" for any Interest Period means --------- (a) in the case of any Interest Period other than a Interest Period described in clause (b) or (c), an interest ---------- --- rate per annum equal to the sum of (x) the Bank Rate Spread, --- ----- plus (y) the Eurodollar Rate (Reserve Adjusted) for such ---- Interest Period; (b) in the case of (i) any Interest Period on or prior to the first day of which Lender, any Liquidity Bank or the Credit Bank shall have notified the Administrator that (A) the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Person to fund the applicable Loan (or portion thereof) at the rate described in clause (a), or (B) due to market ---------- conditions affecting the London interbank eurodollar market, funds are not reasonably available to such Person in such market in order to enable it to fund such Loan (or portion thereof) at the rate described in clause (a) (and in the case of subclause (A) or (B), ---------- ------------- --- such Person shall not have subsequently notified the -2- Administrator that such circumstances no longer exist), or (ii) any Interest Period as to which the Administrator does not receive notice or determine, by no later than 12:00 noon (New York City time) on the third Business Day preceding the first day of such Interest Period, that the applicable Loan (or portion thereof) will be funded by Liquidity Loans and not by the issuance of Commercial Paper Notes, an interest rate per annum equal to (x) the Bank Rate --- ----- Spread, plus (y) the Alternate Base Rate in effect on the ---- first day of from time to time during such Interest Period. "Bank Rate Spread" for purposes of determining the Bank Rate ---------------- for any Interest Period means a rate per annum equal to (i) if --- ----- the Bank Rate for such Interest Period will be based on the Eurodollar Rate (Reserve Adjusted), 1.00% per annum, and (ii) if --------- the Bank Rate for such Interest Period will be based on the Alternate Base Rate, 0% per annum. --- ----- "Board of Directors" means either the Board of Directors of ------------------ the Company or any duly authorized committee of that board. "Borrowing Base" has the meaning set forth in Section -------------- ------- 1.03(a). - ------- "Borrowing Notice" has the meaning set forth in Section ---------------- ------- 1.02(a). - ------- "Business Day" means a day on which both (a) the ------------ Administrator at its principal office in Boston, Massachusetts is open for business and (b) commercial banks in New York City and Chicago, Illinois are not authorized or required to be closed for business. "Capital Expenditures" shall mean, for any period, on a -------------------- consolidated basis for AnnTaylor and its Restricted Subsidiaries, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during that period and including that portion of Capital Leases (except any capitalized interest) which is capitalized on the consolidated balance sheet of AnnTaylor and its Restricted Subsidiaries) made by AnnTaylor or any Restricted Subsidiary during such period that, in conformity with GAAP, are required to be included in or reflected by property, plant or equipment, licenses and permits, or other similar fixed asset accounts as reflected in such balance sheet (including expenditures for equipment purchased simultaneously with the trade-in of existing equipment owned by AnnTaylor or any such Restricted Subsidiary to the extent the gross amount of such -3- purchase price exceeds the book value of the equipment being traded in, but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds or condemnation awards). "Capital Lease", as applied to any Person, shall mean any ------------- lease of any property (whether real, personal, or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Cash Interest Expense" shall mean, for any period, all --------------------- Interest Expense for such period payable in cash. "Change in Control" means any of the following: ----------------- "Change in Control" as defined in the Indenture dated as of June 15, 1993 from AnnTaylor to Fleet Bank, N.A., as Trustee relating to the 8-3/4% Subordinated Notes due 2000 of AnnTaylor as in effect on the date hereof; or (b) the failure of AnnTaylor to own directly or indirectly, 100% of the outstanding voting stock of the Company. "Collateral Agent" means First Chicago in its capacity as ---------------- collateral agent, together with any successors thereto, under the Security Agreement. "Collections" means, with respect to any Receivable, all ----------- funds which either (a) are received by the Company or Servicer from or on behalf of the related Obligors in payment of any amounts owed (including, without limitation, purchase prices, finance charges, interest and all other charges) in respect of such Receivable, or applied to such amounts owed by such Obligors (including, without limitation, insurance payments that the Company or Servicer applies in the ordinary course of its business to amounts owed in respect of such Receivable and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligor or any other party directly or indirectly liable for payment of such Receivable and available to be applied thereon), or (b) are deemed to have been received by the Company or any other Person as a Collection pursuant to Section 3.02. ------------ "Commercial Paper Notes" means short-term promissory notes ---------------------- issued or to be issued by Lender to fund its investments in accounts receivable or other financial assets. -4- "Commitment Fee" has the meaning set forth in the Fee -------------- Letter. "Company" has the meaning set forth in the preamble. ------- -------- "Company Information" has the meaning set forth in Section ------------------- ------- 14.07(a). - -------- "Company Information Provider" has the meaning set forth in ---------------------------- Section 14.07(a). - ---------------- "Company's Net Worth" means, at any time, the amount by ------------------- which the Company's total assets exceed the Company's total liabilities, as determined in accordance with GAAP. "Contract" means a contract between AnnTaylor and any Person -------- pursuant to or under which such Person establishes a revolving credit card account pursuant to which indebtedness may arise for the purchase of goods. A "related" Contract with respect to the Receivables means a Contract under which Receivables in the Receivables Pool arise or which is relevant to the collection or enforcement of such Receivables. "CP Rate" for any period means a rate per annum calculated ------- --- ----- by the Administrator equal to the sum of (i) the rate or, if more than one rate, the weighted average of the rates, determined by converting to an interest-bearing equivalent rate per annum the --- ----- discount rate (or rates) at which Commercial Paper Notes on each day during such period have been sold by the commercial paper placement agents selected by the Administrator, plus (ii) the ---- commissions and charges charged by such commercial paper placement agents with respect to such Commercial Paper Notes, expressed as a percentage of such face amount and converted to an interest-bearing equivalent rate per annum. --- ----- "Credit Agreement" means and includes (a) the Credit ---------------- Agreement, dated as of September 24, 1992 between Lender and the Credit Bank and (b) any other agreement (other than the Liquidity Agreement) hereafter entered into by Lender providing for the issuance of one or more letters of credit for the account of Lender, the making of loans to Lender or any other extensions of credit to or for the account of Lender to support all or any part of Lender's payment obligations under its Commercial Paper Notes or to provide an alternate means of funding Lender's investments in accounts receivable or other financial assets, in each case as amended, supplemented or otherwise modified from time to time. "Credit and Collection Policy" means those credit and ---------------------------- collection policies and practices relating to Contracts and Receivables described in Schedule 6.01(p)-2, as modified without ------------------ violating Section 7.03(c). --------------- -5- "Credit Bank" means and includes State Street Bank, as ----------- lender to Lender and as issuer of a letter of credit for Lender's account under the Credit Agreement, and any other or additional bank or other financial institution now or hereafter extending credit or having a commitment to extend credit to or for the account of Lender under the Credit Agreement. "Credit Draw means a loan made by the Credit Bank pursuant ----------- to the Credit Agreement or a disbursement made by the Credit Bank under a letter of credit issued pursuant to the Credit Agreement. "Customer Letter of Credit" has the meaning set forth in ------------------------- Section 3.05(e). - --------------- "Cut-Off Date" means the last day of each Settlement Period. ------------ "Defaulted Receivable" means a Receivable (a) with an -------------------- Account Age greater than 5, unless a payment has been received in the past 30 days, and in all cases where the Account Age is greater than 6, or (b) as to which the computer records of the Company or the Servicer identify that an Event of Bankruptcy with respect to the Obligor thereof has occurred and remains continuing. "Delinquency Ratio" means the ratio (expressed as a ----------------- percentage) computed as of any Cut-Off Date by dividing (x) the sum for each of the four billing dates in the Settlement Period ending on such Cut-Off Date of the aggregate Unpaid Balance of all Pool Receivables that are Delinquent Receivables and that have been billed on one of such four billing dates by (y) the sum for each of the four billing dates in the Settlement Period ending on such Cut-Off Date of the aggregate Unpaid Balance of all Pool Receivables that have been billed on one of such four billing dates. "Delinquent Receivable" means a Receivable that is not a --------------------- Defaulted Receivable and which has an Account Age of 2 or more. "Dilution Ratio" means the ratio (expressed as a percentage) -------------- computed as of any Cut-Off Date by dividing (x) the aggregate reductions in Unpaid Balance of all Pool Receivables on account of returns, allowances, revisions or cancellations during the three Settlement Periods ending on such Cut-Off Date by (y) the sum of the aggregate Unpaid Balance of all Pool Receivables on the last day of each of such three Settlement Periods. "Distribution Center" shall mean the new distribution ------------------- center, fulfillment facility and related systems and equipment, to be built, purchased or leased by AnnTaylor for the purpose of replacing AnnTaylor's existing distribution facilities. -6- "Dollars" means dollars in lawful money of the United States ------- of America. "Downgraded Liquidity Bank" means a Liquidity Bank which has ------------------------- been the subject of a Downgrading Event. "Downgrading Event" with respect to any Person means the ----------------- lowering of the rating with regard to the short-term securities of such Person to below (i) A-1 by Standard & Poor's Corporation, or (ii) P-1 by Moody's Investors Service, Inc. "Due Amount" with respect to any Settlement Period means the ---------- sum of (i) the amount of interest on the Loans that will be due on the Settlement Date relating to such Settlement Period, together with any interest previously accrued and remaining unpaid, plus (ii) the amount of principal that will be due and ---- owing with respect to the Loans on the Settlement Date relating to such Settlement Period, together with any principal previously due and remaining unpaid, plus (iii) all fees and other amounts ---- that will be payable by the Company on the Settlement Date relating to such Settlement Period pursuant to the Agreement, plus (iv) the amount required to be deposited into the Spread Account and/or reimbursed to the issuer of the Customer Letter of Credit on the Settlement Date relating to such Settlement Period to bring the sum of the amount of funds on deposit in the Spread Account plus the stated amount of the Customer Letter of Credit up to the Enhancement Limit. "Earned Discount Rate" means with respect to any Settlement -------------------- Period, the weighted average of the interest rates applicable to the Loans during such Settlement Period. "EBITDA" shall mean, for any period, the sum of the amounts ------ for such period, of (a) Net Income, plus (b) to the extent Net ---- Income is reduced thereby (i) all charges for amortization of intangibles and depreciation, (ii) Interest Expense, (iii) all income taxes and (iv) extraordinary losses, minus (c) ----- extraordinary gains (net of taxes). "Eligible Contract" means a Contract in one of the forms set ----------------- forth in Schedule 6.01(p)-1 or otherwise approved by the ------------------ Administrator. "Eligible Receivable" means, at any time, a Pool Receivable: ------------------- (a) which was generated by AnnTaylor in the ordinary course of business and was sold to the Company pursuant to the Purchase Agreement; (b) which, (i) if the perfection of Lender's security interest therein is governed by the laws of a jurisdiction -7- where the Uniform Commercial Code -- Secured Transactions is in force, constitutes an account or general intangible as defined in the Uniform Commercial Code as in effect in such jurisdiction, and (ii) if the perfection of Lender's security interest therein is governed by the law of any jurisdiction where the Uniform Commercial Code -- Secured Transactions is not in force, the Company has furnished to the Administrator such opinions of counsel and other evidence as has reasonably been requested, establishing to the reasonable satisfaction of the Administrator that Lender's security interest and other rights with respect thereto are not significantly less protected and favorable than such rights under the Uniform Commercial Code; (c) the Obligor of which is resident of the United States of America, or any of its possessions or territories, is not an Affiliate of the Company, and is not a government or a governmental subdivision or agency; (d) which is not a Defaulted Receivable or a Delinquent Receivable; (e) with regard to which the warranty of the Company in Section 6.01(l) is true and correct; --------------- (f) the sale of an undivided interest in which does not contravene or conflict with any law; (g) which is denominated and payable only in Dollars in the United States; (h) which arises under an Eligible Contract that has been duly authorized by the parties thereto and that, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable enforceable against such Obligor in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditor's rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law; (i) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party -8- to the Contract related thereto is in violation of any such law, rule or regulation in any material respect if such violation would impair the collectability of such Receivable; (j) which satisfies all applicable requirements of the Credit and Collection Policy; and (k) the Unpaid Balance (or any portion thereof) of which is not being disputed by the Obligor. "Enhancement Limit" has the meaning set forth in Section ----------------- ------- 3.05(d). - ------- "ERISA" means the U.S. Employee Retirement Income Security ----- Act of 1974, as amended from time to time. "Estimated Amount" means, with respect to any Settlement ---------------- Period, the sum of the (i) the Due Amount that the Company reasonably estimates will be due on the Settlement Date relating to such Settlement Period, plus (ii) the amount that the Company ---- reasonably estimates will be necessary to provide funds for all other expenses of the Company incurred during such Settlement Period. "Eurodollar Rate (Reserve Adjusted)" means, with respect to ---------------------------------- any Interest Period and any Loan (or portion thereof), a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined pursuant to the following formula: Eurodollar Rate = Eurodollar Rate --------------- (Reserve Adjusted) 1-Eurodollar Reserve Percentage where: ----- "Eurodollar Rate" means, with respect to any Interest Period --------------- and any Loan (or portion thereof), the rate per annum at which Dollar deposits in immediately available funds are offered to the Eurodollar Office of the Administrator two Eurodollar Business Days prior to the beginning of such period by prime banks in the interbank eurodollar market at or about 11:00 a.m., New York City time, for delivery on the first day of such Interest Period, for the number of days comprised therein and in an amount equal or comparable to such Loan (or portion thereof) for such Interest Period. "Eurodollar Business Day" means a day of the year on which ----------------------- dealings are carried on in the London eurodollar interbank market and banks are open for business in London and are not required or authorized to close in New York City or Boston. -9- "Eurodollar Office" means the Administrator's office located ----------------- at 225 Franklin Street, Boston, Massachusetts 02110, or such other office as shall be designated by the Administrator as its Eurodollar Office pursuant to a written notice delivered by the Administrator to the Relationship Bank, the Liquidity Agent, AnnTaylor and the Company. "Eurodollar Reserve Percentage" means, with respect to any ----------------------------- Interest Period, the applicable percentage (expressed as a decimal) prescribed by the Federal Reserve Board for determining reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D, on the first day of such Interest Period. "Event of Bankruptcy" shall be deemed to have occurred with ------------------- respect to a Person if either: (a) a case or other proceeding shall be commenced, without the application or consent of such Person, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution, winding up, or composition or readjustment of debts of such Person, the appointment of a trustee, receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or substantially all of its assets, or any similar action with respect to such Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts, and such case or proceeding shall continue undismissed, or unstayed and in effect, for a period of 60 consecutive days; or an order for relief in respect of such Person shall be entered in an involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in effect; or (b) such Person shall commence a voluntary case or other proceeding under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law now or hereafter in effect, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for, such Person or for any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail to, or admit in writing its inability to, pay its debts generally as they become due, or, if a corporation or similar entity, its board of directors shall vote to implement any of the foregoing. "Event of Default" has the meaning set forth in Section ---------------- ------- 10.01. - ----- -10- "Exchange Act" means the Securities and Exchange Act of ------------ 1934, as amended. "Federal Funds Rate" means, for any period, a fluctuating ------------------ interest rate per annum equal (for each day during such period) --- ----- to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of Boston; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by PNC Bank from three federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the --------------------- Federal Reserve System, or any successor thereto or to the functions thereof. "Fee Letter" has the meaning set forth in Section 4.01(b). ---------- --------------- "Final Payout Date" means the date following the Termination ----------------- Date on which Outstanding Principal shall have been reduced to zero and all other amounts payable by the Company under the Transaction Documents shall have been paid in full or all of the Pool Receivables existing on or prior to the Termination Date have been written off as uncollectible in accordance with the Credit and Collection Policy, whichever occurs first. "Finance Charge Receivables" shall mean all amounts billed -------------------------- to the Obligors on any Account in respect of finance charges, late charges, and other fees and charges with respect to the Accounts. "First Chicago" means The First National Bank of Chicago, a ------------- national banking association. "Fixed Charge Coverage Ratio" shall mean, for any period, --------------------------- the quotient obtained by dividing (a) EBITDA by (b) the sum of (i) Capital Expenditures permitted to be made and paid or accrued during such period excluding any Capital Expenditures made in --------- respect of the Distribution Center, plus (ii) scheduled payments ---- due in such period for principal on Indebtedness plus (iii) Cash ---- Interest Expense. "GAAP" means generally accepted accounting principles set ---- forth in the opinions and pronouncements of the Accounting -11- Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "Gross Default-to-Liquidations Ratio" means the ratio ----------------------------------- (expressed as a percentage) computed as of a Cut-Off Date by dividing (x) the aggregate Unpaid Balance of all Pool Receivables that became Defaulted Receivables during the three Settlement Periods ending on such Cut-Off Date by (y) the aggregate Collections of all Pool Receivables during such three Settlement Periods. "Indemnified Amounts" has the meaning set forth in Section ------------------- ------- 13.01. - ----- "Indemnified Party" has the meaning set forth in Section ----------------- ------- 13.01. - ----- "Information Package" has the meaning set forth in Section ------------------- ------- 3.01. - ---- "Interest Expense" shall mean, for any period for AnnTaylor ---------------- and its Restricted Subsidiaries on a consolidated basis, total consolidated interest expense, whether paid or accrued (including any amortization of discount and the interest component of Capital Leases), for such period, including to the extent included in interest expense, all commissions, discounts and other fees and charges owed with respect to the letters of credit, the fees payable under this Agreement and net costs under Interest Rate Contracts, all as determined in conformity with GAAP, plus (without duplication) all capitalized interest. ---- "Interest Period" means --------------- (a) the period from, and including, the date of the initial Loan hereunder to the next occurring Settlement Date; and (b) thereafter, each period from, and including, a Settlement Date to, but excluding, the next Settlement Date; provided, however, that the last Interest Period shall end on the - -------- ------- date on which the Loans have been reduced to zero and all other fees and expenses owed by the Company hereunder shall have been paid in full. "Lender" has the meaning set forth in the preamble. ------ -------- -12- "Lending Limit" has the meaning set forth in Section 1.01. ------------- ------------ "Lien" means any mortgage, lien, pledge, encumbrance, ---- charge, retained security title of a conditional vendor or lessor or other security interest of any kind, whether arising under a security agreement, mortgage, deed of trust, chattel mortgage, assignment, pledge, retention or security title, financing or similar statement or notice or arising as a matter of law, judicial process or otherwise. "Liquidation Fee" means, for each Loan (or portion thereof) --------------- for each day in any Interest Period the amount, if any, by which: (a) the additional interest (calculated without taking into account any Liquidation Fee) which would have accrued on any portion of the Loan prepaid during such Interest Period (as so computed) if such prepayments had not been made exceeds, (b) the income, if any, received by Lender from investing the proceeds of such prepayments of the Loan. "Liquidity Agent" means PNC Bank, as agent for the Liquidity --------------- Banks under the Liquidity Agreement, or any successor to PNC Bank in such capacity. "Liquidity Agreement" means and includes (a) the Liquidity ------------------- Agreement dated as of January 27, 1994 among Lender, as borrower, State Street Capital, as Program Administrator, the Liquidity Agent, and the Liquidity Banks, and (b) any other agreement hereafter entered into by Lender providing for the making of loans or other extensions of credit to Lender secured by a direct or indirect security interest in the Loans (or any portion thereof), to support all or part of Lender's payment obligations under the Commercial Paper Notes or to provide an alternate means of funding Lender's investments in accounts receivable or other financial assets, and under which the amount available from such extensions of credit is limited to an amount calculated by reference to the value or eligible unpaid balance of such accounts receivable or other financial assets or any portion thereof or the level of deal-specific credit enhancement available with respect thereto, as such Liquidity Agreement or other agreement may be amended, supplemented or otherwise modified from time to time. "Liquidity Bank" means any one of, and "Liquidity Banks" -------------- --------------- means all of, PNC Bank, United States National Bank of Oregon and the other commercial lending institutions that are at any time parties to the Liquidity Agreement. -13- "Liquidity Loan" means a loan made by the Liquidity Bank (or -------------- simultaneous loans made by the Liquidity Banks) pursuant to the Liquidity Agreement. "Loan" has the meaning set forth in Section 1.01. ---- ------------ "Loan Termination Date" means that day on which an Event of --------------------- Default has occurred and is continuing, and (a) the Administrator declares a Loan Termination Date in a notice to the Company in accordance with Section ------- 10.02(a); or -------- (b) in accordance with Section 10.02(b), becomes the ---------------- Loan Termination Date automatically. "Lock-Box Agreement" means a letter agreement, in ------------------ substantially the form of Exhibit 5.01(g), between the Company --------------- and any Lock-Box Bank. "Lock-Box Bank" means any of the banks holding one or more ------------- lock-box accounts for receiving Collections from Pool Receivables. "Loss Reserve" means on any day, an amount equal to the ------------ product of the Outstanding Principal multiplied by the sum of ---------- -- (1) 11%; plus ---- (2) if a positive number, 4.5% minus the Net Yield as of such ----- day, plus ---- (3) if a positive number, the Dilution Ratio on such day minus 12.5%, plus ---- (4) if a positive number, the Delinquency Ratio minus 11.0%. "Material Adverse Effect" means, with respect to any event ----------------------- or circumstance, a material adverse effect on: (i) the business, assets, financial condition, operations or prospects of the Company; (ii) the ability of the Company to perform its obligations under this Agreement, the Note or any other Transaction Document; (iii) the validity or enforceability of this Agreement, the Note or any other Transaction Document; -14- (iv) the status, existence, perfection, priority or enforceability of Lender's interest in the Receivables Pool; or (v) the collectability of a significant portion of the Pool Receivables. "Net Default-to-Liquidation Ratio" means the ratio -------------------------------- (expressed as a percentage) computed as of a Cut-Off Date by dividing (x) the aggregate Unpaid Balance of all Pool Receivables that became net charge-offs during the three Settlement Periods ending on the most recent Cut-Off Date by (y) the aggregate Collections of all Pool Receivables during such three Settlement Periods. "Net Income" means, for any period on a consolidated basis ---------- for AnnTaylor and its Restricted Subsidiaries, the consolidated net income (or loss) of AnnTaylor and its Restricted Subsidiaries for such period taken as a single accounting period, after adding or deducting the amount of any extraordinary gain and extraordinary loss net of taxes, determined in conformity with GAAP. "Net Pool Balance" at any time means an amount equal to the ---------------- aggregate Unpaid Balance of the Eligible Receivables in the Receivables Pool as set forth in the most recent delivered Information Package reduced by the amount by which the Unpaid Balance of the Eligible Receivables with respect to which interest payments have been deferred exceeds 3% of Outstanding Principal. "Net Worth" shall mean, as at any date of determination, the --------- amount by which (a) the total consolidated assets of ATSC, AnnTaylor and its Restricted Subsidiaries exceed (b) the total consolidated liabilities of ATSC, AnnTaylor and its Restricted Subsidiaries, as determined in conformity with GAAP. "Net Yield" means, with respect to any Settlement Period, --------- the Portfolio Yield minus the Servicer's Fee Rate, the Earned Discount Rate and the Program Fee rate. "Note" has the meaning set forth in Section 1.04. ---- ------------ "Obligor" means a Person obligated to make payments with ------- respect to a Receivable, including any guarantor thereof. "Outstanding Principal" means at any time an amount equal to --------------------- the aggregate principal amount of the Loans outstanding at such time. -15- "Payment Rate" means, with respect to any Settlement Period, ------------ the ratio, expressed as a percentage, of (x) the Collections received during such Settlement Period to (y) the aggregate Unpaid Balance of all Pool Receivables as of the last day of the previous Settlement Period. "Person" means an individual, partnership, corporation ------ (including a business trust), joint stock company, trust, unincorporated association, joint venture, government or any agency or political subdivision thereof or any other entity. "PNC Bank" has the meaning set forth in the preamble. -------- -------- "Pool Receivable" means each Receivable described in Section --------------- 1.1(a) or (b) of the Purchase Agreement. "Portfolio Yield" means, with respect to any Settlement --------------- Period, the annualized percentage equivalent of a fraction, the numerator of which is the amount of Finance Charge Receivables accrued during the immediately preceding Settlement Period, after subtracting therefrom the aggregate Unpaid Balance of Receivables which were net charge offs in such Settlement Period, and the denominator of which is the aggregate Unpaid Balance of Pool Receivables as of the last day of the immediately preceding Settlement Period. "Principal Receivables" means amounts (other than any --------------------- amounts which represent Finance Charge Receivables) billed to the Obligor on any Account in respect of purchases of goods. "Program Administration Agreement" means the Program -------------------------------- Administration Agreement dated as of September 24, 1992 between Lender and State Street Capital, as Program Administrator, as the same may be amended, supplemented or otherwise modified from time to time. "Program Fee" has the meaning set forth in the Fee Letter. ----------- "Program Information" has the meaning set forth in Section ------------------- ------- 14.08. - ----- "Purchase Agreement" means the Purchase and Sale Agreement, ------------------ dated as of January 27, 1994 between the Company and AnnTaylor, as seller, as it may be amended, supplemented or otherwise modified from time to time. "Qualifying Liquidity Bank" means a Liquidity Bank with a ------------------------- rating of its short-term securities equal to or higher than (i) A-1 by Standard & Poor's Corporation and (ii) P-1 by Moody's Investors Service, Inc. -16- "Receivable" means any right to payment from a Person, ---------- whether constituting an account, chattel paper, instrument or a general intangible, arising under an Account, and includes the right to payment of any interest or finance charges and other obligations of such Person with respect thereto. "Receivables Pool" means at any time all then outstanding ---------------- Pool Receivables, the Contracts related thereto, Related Security, the Spread Account, all amounts payable to, or for the benefit of, the Company under the interest rate agreements, if any, entered into by the Company, all rights and claims of the Company in and under the Purchase Agreement, all books and records related to any of the foregoing, and all proceeds of the foregoing, in each case whether now or hereafter existing. "Regulation D" means Regulation D of the Federal Reserve ------------ Board, or any other regulation of the Federal Reserve Board that prescribes reserve requirements applicable to nonpersonal time deposits or "Eurocurrency Liabilities" as presently defined in Regulation D, as in effect from time to time. "Regulatory Change" means, relative to any Affected Party ----------------- (a) any change in (or the adoption, implementation, change in phase-in or commencement of effectiveness of) any (i) United States federal or state law or foreign law applicable to such Affected Party; (ii) regulation, interpretation, directive, requirement or request (whether or not having the force of law) applicable to such Affected Party of (A) any court, government authority charged with the interpretation or administration of any law referred to in clause (a)(i) or of (B) any fiscal, monetary or ------------- other authority having jurisdiction over such Affected Party; or (iii) generally accepted accounting principles or regulatory accounting principles applicable to such Affected Party and affecting the application to such Affected Party of any law, regulation, interpretation, directive, requirement or request referred to in clause ------ (a)(i) or (a)(ii) above; or ------ ------- (b) any change in the application to such Affected Party of any existing law, regulation, interpretation, directive, requirement, request or accounting principles referred to in clause (a)(i), (a)(ii) or (a)(iii) above. ------------- ------- -------- -17- "Related Security" means, with respect to any Pool ---------------- Receivable: (a) all right, title and interest in and to all Contracts that relate to such Pool Receivable; (b) all interests in returned merchandise, if any, relating to the sale which gave rise to such Pool Receivable; (c) all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Pool Receivable, whether pursuant to the Contract related to such Pool Receivable or otherwise; (d) all UCC financing statements covering any collateral securing payment of such Pool Receivable; and (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Pool Receivable whether pursuant to the Contract related to such Pool Receivable or otherwise. "Relationship Bank" has the meaning set forth in the ----------------- preamble. "Relationship Bank Agreement" means the Relationship Bank --------------------------- Agreement, dated as of September 24, 1992, among Lender, the Administrator and the Relationship Bank, as such agreement may be amended, supplemented or otherwise modified from time to time. "Reporting Date" has the meaning set forth in Section -------------- ------- 3.01(a). - ------- "Responsible Officer" means (a) with respect to AnnTaylor or ------------------- ATSC: the Chief Financial Officer, Treasurer, Vice President - Financial Reporting or Vice President - Credit and (b) with respect to the Company: the President, Treasurer or any Vice President. "Secured Parties" means Lender, the Administrator, the --------------- Relationship Bank, the Indemnified Parties and the Affected Parties. "Security Agreement" means the Security Agreement dated as ------------------ of September 24, 1992, between Lender, as grantor, and the Collateral Agent, as secured party, as the same may be amended, supplemented or otherwise modified from time to time. "Servicer" has the meaning set forth in Section 8.01(a). -------- --------------- "Servicer Material Adverse Effect" means, with respect to -------------------------------- any event or circumstance, a material adverse effect on: (i) the business, assets, financial condition, operations or prospects of the Servicer; (ii) the ability of the Servicer to perform its obligations under this Agreement or any other Transaction -18- Document to which the Servicer, in its capacity as such, is a party; (iii) the validity or enforceability as against the Servicer of this Agreement or any other Transaction Document to which the Servicer, in its capacity as such, is a party; (iv) the status, existence, perfection, priority or enforceability of Lender's interest in the Receivables Pool; or (v) the collectability of a significant portion of the Pool Receivables. "Servicer Transfer Event" has the meaning set forth in ----------------------- Section 8.01(b). - --------------- "Servicer's Fee" accrued for any day means an amount equal -------------- to (x) the Servicer's Fee Rate, times (y) the Net Pool Balance at ----- the close of business on such day, times (z) 1/360. ----- "Servicer's Fee Rate" means (a) 2% per annum if AnnTaylor is ------------------- the Servicer and (b) up to 3% per annum if a Person other than AnnTaylor is the Servicer. "Settlement Date" means the second Business Day following --------------- each Reporting Date. "Settlement Period" means ----------------- (a) the period from, but excluding, December 24, 1994 to, and including, January 24, 1994; and (b) thereafter, each period from, but excluding, the last day of the next preceding Settlement Period to, and including, the 24th day of the next following calendar month. "Spread Account" has the meaning set forth in Section -------------- ------- 3.05(a). - ------- "Spread Account Agreement" has the meaning set forth in ------------------------ Section 3.05(a). - --------------- "State Street Bank" means State Street Bank & Trust Company, ----------------- a bank organized under the laws of the Commonwealth of Massachusetts. "State Street Capital" has the meaning set forth in the -------------------- preamble. - -------- -19- "Subsidiary" means a corporation of which AnnTaylor and/or ---------- its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors. "Successor Notice" has the meaning set forth in Section ---------------- ------- 8.01(b). - ------- "Termination Date" means the earliest of ---------------- (a) the date of termination (whether by scheduled expiration, termination on default or otherwise) of either the Liquidity Banks' commitments under the Liquidity Agreement or the Credit Bank's commitment under the Credit Agreement; (b) the Loan Termination Date; (c) the third anniversary of the date of this Agreement; (d) 3 Business Days after the Administrator has received a written request by the Company to terminate the commitment of Lender under this Agreement; (e) failure to obtain a Liquidity Agreement in substitution for the then existing Liquidity Agreement on or before 30-days prior to the expiration of the commitments of the Liquidity Banks thereunder; or (f) (i) a Downgrading Event with respect to a Liquidity Bank shall have occurred and been continuing for not less than 45 days, (ii) the Downgraded Liquidity Bank shall not have been replaced by a Qualifying Liquidity Bank pursuant to a Liquidity Agreement in form and substance acceptable to Lender and the Administrator, and (iii) the commitment of such Downgraded Liquidity Bank under the Liquidity Agreement shall not have been funded or collateralized in such a manner that such Downgrading Event will not result in a reduction or withdrawal of the credit rating applied to the Commercial Paper Notes by any of the rating agencies then rating the Commercial Paper Notes; or (g) Lender shall become an "investment company" within the meaning of the Investment Company Act of 1940, as amended. "Transaction Documents" means this Agreement, the Lock-Box --------------------- Agreements, the Purchase Agreement, the Fee Letter, the Note and the other documents to be executed and delivered in connection herewith. -20- "UCC" means the Uniform Commercial Code as from time to time --- in effect in the applicable jurisdiction or jurisdictions. "Unmatured Event of Default" means any event which, with the -------------------------- giving of notice or lapse of time, or both, would become an Event of Default. "Unpaid Balance" of any Receivable means at any time (a) in -------------- the case of any Principal Receivable, the unpaid amount thereof and (b) in the case of any Finance Charge Receivable, the amount thereof accrued in accordance with the related Contract and unpaid at such time. B. Other Terms. The following terms shall have the ----------- meanings assigned thereto in the AnnTaylor Credit Agreement, as in effect on the date hereof, and such definitions are hereby incorporated by reference: "Indebtedness", "Interest Rate ------------ ------------- Contracts", "Restricted Payment", "Restricted Subsidiary" and - --------- ------------------ --------------------- "Unrestricted Subsidiary". All accounting terms not specifically ----------------------- defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. C. Computation of Time Periods. Unless otherwise stated --------------------------- in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". -21- EXHIBIT 1.02(a) TO RECEIVABLES FINANCING AGREEMENT FORM OF BORROWING NOTICE [Date] State Street Boston Capital Corporation, as Administrator 225 Franklin Street Boston, Massachusetts 02110 Attention: Jeffrey Noordhoek Ladies and Gentlemen: All capitalized terms used but not otherwise defined herein which are defined in the Receivables Financing Agreement, dated as of January 27, 1994, among the undersigned, AnnTaylor, Inc., as Servicer, Clipper Receivables Corporation, as Lender, State Street Boston Capital Corporation, as Administrator, and PNC Bank, National Association, as Relationship Bank (as the same may be amended, modified or supplemented from time to time, called the "Receivables Financing Agreement"), have the same meanings ------------------------------- when used herein. The undersigned, ANNTAYLOR FUNDING, INC., refers to the Receivables Financing Agreement and hereby gives you notice, irrevocably, pursuant to Section 1.02(a) of the Receivables --------------- Financing Agreement that the undersigned hereby requests that a Loan be made in the aggregate principal amount of $ --------------- on , 199 ------------ - The undersigned hereby certifies as of the date hereof, and as of the date such Loan is made, as follows: (a) the representations and warranties contained in the Receivables Financing Agreement are correct, before and after giving effect to such Loan and to the application of the proceeds therefrom, as though made on and as of such dates; (b) no event has occurred and is continuing, or would result from such Loan or from the application of the proceeds therefrom, that constitutes an Event of Default or an Unmatured Event of Default; (c) the Borrowing Base as of the date hereof is $__________; (d) after giving effect to such Loan, the Outstanding Principal is $__________; and (e) the Termination Date has not occurred. IN WITNESS WHEREOF, the undersigned has caused this Borrowing Notice to be executed and delivered by its Responsible Officer on the date first written above. ANNTAYLOR FUNDING, INC. By:________________________________ Title:_____________________________ EXHIBIT 1.04 FORM OF NOTE $40,000,000 New York, New York January __, 1994 FOR VALUE RECEIVED, the undersigned, ANNTAYLOR FUNDING, INC. (the "Issuer"), hereby promises to pay to the order of CLIPPER ------ RECEIVABLES CORPORATION (the "Noteholder"), on or before ---------- January __, 1997, the principal amount of FORTY MILLION DOLLARS ($40,000,000), or, if less, the aggregate unpaid principal amount of all of the Loans (as defined in the Receivables Financing Agreement, dated as of January 27, 1994, among the Issuer, AnnTaylor, Inc., as Servicer, the Noteholder, State Street Boston Capital Corporation, as Administrator, and PNC Bank, National Association, as Relationship Bank (as the same may be amended, modified or supplemented from time to time, called the "Receivables Financing Agreement") made by the Noteholder to the -------------------------------- Issuer pursuant to the Receivables Financing Agreement (as shown in the records of the Administrator or, at the Administrator's option, on the schedule attached hereto and any continuation thereof). The amount of each Loan shall be payable from time to time in the amounts and at the times as provided in the Receivables Financing Agreement, and in any event shall be payable on the maturity date hereof. Unless otherwise defined, capitalized terms used herein have the meanings provided in the Receivables Financing Agreement. The undersigned also promises to pay interest on the unpaid principal amount of each Loan evidenced by this Note from the date of such Loan until such Loan is paid in full, at the rates and payable on the dates specified in the Receivables Financing Agreement. This Note evidences indebtedness incurred as Loans under, and is entitled to the benefits of, the Receivables Financing Agreement, to which Receivables Financing Agreement reference is hereby made for a statement of its terms and conditions, including those under which the maturity of this Note may be accelerated. Upon the occurrence of an Event of Default as specified in the Receivables Financing Agreement, the principal balance hereof and the interest accrued hereon may be declared to be forthwith due and payable. This Note is secured by and entitled to the benefits specified in Section 9.01 of the Receivables Financing Agreement, and reference is hereby made to such Section for a description of the nature and extent of the collateral and the rights of the parties to and beneficiaries of the Receivables Financing Agreement in respect of such collateral. In addition to and not in limitation of the foregoing and the provisions of the Receivables Financing Agreement, the undersigned further agrees, subject only to any limitation imposed by applicable law, to pay on demand all expenses, including reasonable attorneys' fees and legal expenses, incurred by the holder of this Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. This Note shall be governed by and construed in accordance with the laws of the State of New York. ANNTAYLOR FUNDING, INC. By: -------------------------------- Name Printed: __________________ Title: _________________________ -2- SCHEDULE
Schedule attached to Note dated January __, 1994 of ANNTAYLOR FUNDING, INC. payable to the order of CLIPPER RECEIVABLES CORPORATION. - ------------------------------------------------------------------------------ : Date of : Amount of : : : : : : : : Amount of : Outstanding: Notation : Loan : Loan : Rate : Repayment : Principal : Made by - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------ : : : : : : - ------------------------------------------------------------------------------
EXHIBIT 3.01(a) ANNTAYLOR FUNDING, INC. RECEIVABLES REPORT AS OF 12/24/93 FOR Dec-93 Portfolio Information I. Outstanding Principal $ -------- II. Beginning Receivables Balance $ -------- III. New Receivables to add $ -------- IV. Collections to deduct $ -------- V. Defaulted Receivables to deduct $ -------- VI. +/-Other Adjustments $ -------- VII. Delinquent Receivables to deduct $ -------- VIII. Other Ineligible Receivables to deduct $ -------- (Not including Defaulted Receivables) IX. Aging Schedule Current Age 1 Age 2 Age 3 Age 4 Age 5 Age 6 Age 7+ Calculations Reflecting Current Activity X. Eligible Receivables balance $ -------- (II)+(III)-(IV)-(V)+(VI)-(VII)-(VIII) XI. Loss Reserve (11% of X) $ -------- Borrowing Base (X)-(XI) XII. Excess Collateral (Borrowing Base-I) $ -------- Compliance XIII. Delinquency Ratio One-Month Calculation (less than 11.5%) -------- 3-Month rolling Average (less than 11%) -------- [Unreadable Line] XIV. Gross Default-to-Liquidation Ratio One-Month Calculation $ -------- 3-Month rolling Average (less than 1.95%) $ -------- Net Default-to-Liquidation Ratio One-Month Calculation -------- 3-Month rolling Average (less than 1.325%) -------- XV. Dilution Ratio One-Month Calculation $ -------- 3-Month rolling Average (less than 15.0%) $ -------- [Unreadable Line] XVI. Payment Rate (not less than 27%) -------- XVII. Net Yield (not less than 0%) -------- [Unreadable Line] XVIII. Spread Account Balance $ -------- The undersigned hereby represents and warrants that the foregoing is a true and accurate accounting with respect to outstandings as of in accordance with the Receivables Purchase Agreement dated as of and that all representations and warranties are restated and reaffirmed. ANNTAYLOR FUNDING, INC. Signed By: Title: EXHIBIT 3.05 SPREAD ACCOUNT AGREEMENT ------------------------ THIS SPREAD ACCOUNT AGREEMENT, dated as of January 27, 1994 (as it may be amended, supplemented or otherwise modified from time to time, this "Agreement") is among ANNTAYLOR FUNDING, INC., --------- a Delaware corporation (the "Company"), CLIPPER RECEIVABLES ------- CORPORATION, a Delaware corporation (the "Lender"), STATE STREET ------ BOSTON CAPITAL CORPORATION, as administrator for the Lender (the "Administrator") and PNC BANK, NATIONAL ASSOCIATION, a national ------------- banking association ("PNC Bank" or the "Bank"). -------- ---- BACKGROUND 1. The Company, AnnTaylor, Inc., as Servicer, the Lender, the Administrator and PNC Bank, as Relationship Bank, have entered into a Receivables Financing Agreement, dated as of January 27, 1994 (as it may be amended, modified or supplemented from time to time, the "Financing Agreement"), pursuant to which ------------------- the Lender has agreed to make certain loans to the Company on the terms and conditions set forth in the Financing Agreement, which loans shall be secured by certain assets of the Company. 2. In connection with the transactions contemplated by the Financing Agreement, the Company has agreed to establish a segregated account at the Bank, which account, together with the investments therein and earnings thereon, has been pledged to the Lender, to secure the Company's obligations pursuant to the Financing Agreement and the other transaction documents related thereto. 3. The parties hereto hereby desire to set forth their understanding with respect to such Account and the investment therein as set forth herein. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Definitions. Capitalized terms used in this ----------- Agreement and not otherwise defined herein shall have the meanings assigned thereto in Appendix A to the Financing Agreement. SECTION 2. Establishment of Account. The Company and the ------------------------ Bank hereby establish at the Bank account number 1001144887, titled in the name of "AnnTaylor Funding, Inc. and Clipper Receivables Corporation as Secured Party UA 1/27/94" (the "Spread ------ Account"). Pursuant to the Financing Agreement and hereto, the - ------- Company has, and hereby does, transfer exclusive dominion and control over the Spread Account to the Administrator (for the benefit of the Lender). The Bank shall be entitled to rely on, and to assume, the authority of any purported employee of the Administrator and is hereby authorized to act on any notice purportedly executed on behalf of the Administrator with respect to the Spread Account. SECTION 3. Deposits in, and Withdrawals from, the Spread --------------------------------------------- Account; Communications. (a) On the closing date for the initial - ----------------------- Loan pursuant to the Financing Agreement, the Company shall make an initial deposit into the Spread Account in the amount of $200,000. Thereafter, certain funds may be deposited from time to time into the Spread Account pursuant to Section 3.01 of the Financing Agreement. Amounts may only be withdrawn from the Spread Account by the Administrator pursuant to Article III of the Financing Agreement including, without limitation, Section ------- 3.05(d). - ------- (b) The Bank hereby covenants and agrees that it shall send all communications with respect to the Spread Account, including, without limitation, all account statements and confirmations to each of the Company, the Lender and the Administrator. SECTION 4. Permitted Investments. So long as the Bank does --------------------- not receive written notice that an Event of Default shall have occurred and be continuing, the funds in the Spread Account shall be invested and reinvested by the Bank pursuant to written instructions executed by a Responsible Officer of the Company in one or more Eligible Investments (as defined below). Subject to the restrictions on the maturity of investments set forth in Section 5, the Company may authorize the Bank to make specific - --------- Eligible Investments set forth in its notice, to make Eligible Investments from time to time consistent with general instructions set forth therein or to make specific Eligible Investments pursuant to instructions received in writing from a Responsible Officer of the Company, in each case in such amounts as the Company shall specify. The Company agrees to report as income for financial reporting and tax purposes (to the extent reportable) all investment earnings on amounts in the Spread Account. In the event that the Company shall fail to give investment directions to the Bank by 10:00 a.m., Pittsburgh time, on any Business Day on which there may be uninvested cash, the Bank shall invest such funds in Eligible Investments described in clause (v) of the definition thereof. The Bank shall invest - ---------- interest and reinvest proceeds of investments in the Spread Account, together with all other funds on deposit in the Spread Account, in Eligible Investments pursuant to the terms hereof. -2- If the Bank has received written notice that an Event of Default has occurred and is continuing, the Bank shall invest the funds in the Spread Account as directed by the Administrator. All investments made by the Bank shall mature no later than the maturity date therefore permitted by Section 5. --------- SECTION 5. Maturity of Investments. No investment of any ----------------------- amount held in the Spread Account shall mature later than the Business Day immediately preceding the Settlement Date which is scheduled to occur immediately following the date of investment (or, with respect to mutual fund investments or other investments redeemable (without penalty) shall be redeemable no later than such date). All income or other gain from the investment of monies deposited in the Spread Account shall be deposited by the Bank in such account immediately upon receipt and shall be invested pursuant to Section 4. Any net loss (determined on a --------- month-by-month basis) resulting from such investment of amounts in the Spread Account shall be charged to the Company, which, within five Business Days of notice thereof by the Bank, shall reimburse such account for such loss. SECTION 6. Eligible Investments. The term "Eligible -------------------- -------- Investments" shall mean any one or more of the following - ----------- obligations or securities: (i) direct non-callable obligations of, and non- callable obligations fully guaranteed by, the United States of America, or any agency or instrumentality of the United States of America the obligations of which are backed by the full faith and credit of the United States of America; (ii) demand and time deposits in, certificates of deposit of, and bankers' acceptances issued by, the Bank or any depository institution or trust company incorporated under the laws of the United States of America or any state thereof, having a combined capital and surplus of at least $500,000,000, and subject to supervision and examination by federal and/or state banking authorities, so long as at the time of such investment or contractual commitment providing for such investment the commercial paper or other short-term debt obligations of such depository institution or trust company (or, in the case of a depository institution that is the principal subsidiary of a holding company, the commercial paper or other short-term debt obligations of such holding company) have the highest short-term credit rating available from Moody's Investors Service, Inc. and not less than A-1 from Standard & Poor's Ratings Group; (iii) repurchase obligations with respect to and collateralized by (A) any security described in clause (i) ---------- above or (B) any other security issued or guaranteed by an -3- agency or instrumentality of the United States of America, in each case entered into with a depository institution or trust company (acting as principal) of the type described in clause (ii) above, provided that the Bank has taken delivery ----------- -------- of such security; (iv) commercial paper (including both non-interest- bearing discount obligations and interest-bearing obligations) payable on demand or on a specified date not more than one year after the date of issuance thereof having the highest short-term credit rating from Moody's Investors Service, Inc. and not less than A-1 from Standard & Poor's Ratings Group at the time of such investment; and (v) shares in the Treasury Trust Fund, so long as such fund is rated AA by Standard & Poor's Ratings Group and invests solely in short term securities of the United States government and/or securities described in clause (iii) ------------ above, or in a mutual fund investing solely in short term securities of the United States government and/or securities described in clause (iii) above where the mutual fund ------------ custodian has taken delivery of the collateralizing securities, provided that (i) such fund shall have the -------- ---- highest short-term credit rating available from Moody's Investors Service, Inc. and not less than A-1 from Standard & Poor's Ratings Group and (ii) such shares shall be freely transferable by the holder on a daily basis. SECTION 7. Designee Under the Uniform Commercial Code. The ------------------------------------------ parties hereto hereby acknowledge that the Company has granted, and hereby does grant, a security interest in the Spread Account, and all funds, certificates, securities, other instruments, general intangibles and other items, properties and assets credited thereto or on deposit therein and all investments thereof, all claims thereunder and all interest, dividends, monies, instruments, securities and other property from time to time received, receivable or otherwise distributable in respect of or in exchange for any of the foregoing, together with all proceeds thereof (collectively, the "Spread Account Property"), ----------------------- to the Lender and that the Bank shall maintain the Spread Account Property (and shall designate the Spread Account on its records as being held) for the benefit of, and subject to the interest of, the Lender. The Bank shall hold the Spread Account Property as the agent, designee and financial intermediary for the Lender pursuant to Section 8-313, or as bailee for the account of the Lender under Section 9-305, of the Uniform Commercial Code as in effect in any applicable jurisdiction (the "UCC"). --- SECTION 8. Duties of the Bank. The Bank's duties and ------------------ responsibilities shall be limited to those expressly set forth in this Agreement, and the Bank shall not be subject to nor -4- obligated to recognize, monitor or enforce the terms of any other agreement between, or direction or instruction of, any or all of the parties hereto. The Bank shall not in any way be held liable by reason of any insufficiency in the Spread Account resulting from losses on investments made strictly in accordance with the provisions of this Agreement. The Bank shall not be personally liable for any act taken or omitted hereunder or taken or omitted by the Bank in good faith and without gross negligence. The Bank shall be fully protected in relying upon any written notice, demand, certificate or document which the Bank in good faith believes to be genuine. The Bank shall not be responsible for the sufficiency or accuracy of the form, execution, validity or genuineness of documents or securities now or hereafter deposited hereunder, or of any endorsements thereon, or any lack of endorsement thereon, or any description therein, nor shall the Bank be responsible or liable in any respect on account of the identity, authority or rights of the persons executing or delivering or purporting to execute or deliver any such document, security or endorsement. The Bank may consult with counsel and shall be fully protected in respect of any action taken or suffered or omitted to be taken by the Bank hereunder in good faith and without gross negligence and in accordance with the opinion of such counsel. SECTION 9. Indemnity. The Company hereby agrees to --------- indemnify the Bank for, and defend the Bank and hold it harmless against, any loss, liability or expense incurred that arises out of or in connection with the performance of its duties hereunder, including, without limitation, the costs and expenses of defending itself against or investigating any claim or liability, except to the extent that a court of competent jurisdiction shall have determined that such loss, liability or expense resulted solely from the gross negligence or willful misconduct of the Bank. The Bank shall notify the Company promptly of any claim for which it may seek indemnity hereunder and, upon any such notification, the provisions of Section 13.01(d) of the Financing Agreement with respect to the Bank as an indemnified party, shall apply mutatis mutandis, as if such provision were set forth ------- -------- herein. SECTION 10. Resignation. The Bank shall have the right to ----------- resign at any time by giving written notice of such resignation to the Company and the Administrator. Within 30 days after receiving such notice, the Company agrees to appoint a successor bank that shall be acceptable to the Administrator (which acceptance shall not be unreasonably withheld). Upon the appointment of such a successor, the Bank shall distribute the property then held hereunder, less any fees, costs and expenses due to the Bank hereunder, if any, to such successor. If a successor bank has not been appointed, and has not accepted such appointment by the end of such 30-day period, the Bank may apply -5- to the court of competent jurisdiction for the appointment of a successor bank, and the costs, expenses and reasonable attorney's fees incurred in connection with such a proceeding shall be paid by the Company. SECTION 11. Termination. This Agreement shall terminate on ----------- the Final Payout Date, at which time the property then held hereunder shall be distributed to the Administrator unless the Administrator has given the Bank written notice that all liabilities of the Company pursuant to the Financing Agreement and the Transaction Documents have been paid in full, in which event, all funds hereunder shall be distributed to the Company. SECTION 12. Miscellaneous. This Agreement shall be ------------- governed by, and construed in accordance with, the laws of the State of New York. This Agreement may not be amended, waived or modified without the written consent of the parties hereto. All notices and other communications provided for herein shall, unless otherwise stated herein, be in writing and shall be personally delivered, sent by express mail or courier or by certified mail, postage prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on the signature pages hereof or such other address or facsimile number as shall be designated by such party in written notice to the other parties hereto. All such notices and communications shall be effective (a) if personally delivered or sent by express mail or courier or if sent by certified mail, when received and (b) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the Company shall not assign its rights - -------- ------- and obligations hereunder without the prior written consent of the Bank and the Administrator. This Agreement may be executed in any number of counterparts, and by the different parties on different counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. -6- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. ANNTAYLOR FUNDING, INC. By:_________________________________ Name Printed:_______________________ Title:______________________________ 414 Chapel Street New Haven, CT 06511 Telephone: (203) 865-0811 Facsimile: (203) 865-2756 PNC BANK, NATIONAL ASSOCIATION By:_________________________________ Name Printed:_______________________ Title:______________________________ Fifth Avenue and Wood Street Pittsburgh, PA 15265 Telephone: (412) __________________ Facsimile: (412) 762-4167 STATE STREET BOSTON CAPITAL CORPORATION By:_________________________________ Name Printed:_______________________ Title:______________________________ 225 Franklin Street Boston, MA 02110 Telephone: (617) __________________ Facsimile: (617) 350-4020 CLIPPER RECEIVABLES CORPORATION By:_________________________________ Name Printed:_______________________ Title:______________________________ P.O. Box 4024 Boston, MA 02101 Telephone: (617) __________________ Facsimile: (617) 951-7050 EXHIBIT 5.01(g) 414 Chapel St. New Haven, Connecticut ANNTAYLOR FUNDING, INC. 414 Chapel St. New Haven, CT 06511 ANNTAYLOR January 25, 1994 AmSouth Bank, N.A. 1900 Fifth Avenue North Birmingham, Alabama 35203 Ladies and Gentlemen: Reference is made to our lock-box account no. 55976026, together with the post office box related thereto, maintained with you (the "Account"). Pursuant to a Receivables Financing ------- Agreement dated as of January 27, 1994 among us, as borrower, AnnTaylor, Inc., as Servicer, Clipper Receivables Corporation, as lender (the "Lender"), State Street Boston Capital Corporation, ------ as administrator for the Lender (the "Administrator"), and PNC ------------- Bank, National Association, as Relationship Bank, we have pledged and granted a security interest to the Lender in the accounts, chattel paper, instruments or general intangibles (collectively, "Receivables") with respect to which payments are or may ----------- hereafter be made to the Account. Your execution of this letter agreement is a condition precedent to our continued maintenance of the Account with you. We hereby transfer exclusive ownership and control of the --------- Account to the Administrator, subject only to the condition subsequent that the Administrator shall have given you notice of its election to assume such ownership and control, which notice may be in the form attached hereto as Annex A or in any other ------- form that gives you reasonable notice of such election. We hereby irrevocably instruct you, at all times from and after the date of your receipt of notice from the Administrator as described above, to make all payments to be made by you out of or in connection with the Account directly to the Administrator, at its address set forth below its signature hereto or as the Administrator otherwise notifies you, for the account of the Lender, or otherwise in accordance with the instructions of the Administrator. We also hereby notify you that, at all times from and after the date of your receipt of notice from the Administrator as described above, the Administrator shall be irrevocably entitled to exercise in our place and stead any and all rights in respect of or in connection with the Account, including, without limitation, (a) the right to specify when payments are to be made out of or in connection with the Account and (b) the right to require preparation of duplicate monthly bank statements on the Account for the Administrator's audit purposes and mailing of such statements directly to an address specified by the Administrator (provided that you will continue to send copies of monthly bank statements to us). Notice from the Administrator may be personally served or sent by fascimile or U.S. mail, certified return receipt requested or by express mail or courier, to the address, facsimile number set forth under your signature to this letter agreement (or to such other address or facsimile number as to which you shall notify the Administrator in writing). If notice is given by facsimile, it will be deemed to have been received when the notice is sent and the receipt is confirmed by telephone or other electronic means. All other notices will be deemed to have been received when actually received or, in the case of personal delivery, delivered. By executing this letter agreement, you acknowledge the existence of the Administrator's right to ownership and control of the Account and its ownership of and security interest in the amounts from time to time on deposit therein and agree that from the date hereof the Account shall be maintained by you for the benefit of, and amounts from time to time therein held by you as agent for, the Administrator on the terms provided herein. The Account is to be entitled "AnnTaylor Funding, Inc. and State Street Boston Capital Corporation, as Administrator for Clipper Receivables Corporation as Secured Party". Except as otherwise provided in this letter agreement, payments to the Account are to be processed in accordance with the standard procedures currently in effect. All service charges and fees with respect to the Account shall continue to be payable by us as under the arrangements currently in effect. By executing this letter agreement, you irrevocably waive and agree not to assert, claim or endeavor to exercise, irrevocably bar and estop yourself from asserting, claiming or exercising, and acknowledge that you have not heretofore received a notice, writ, order or any form of legal process from any other party asserting, claiming or exercising any right of set-off, banker's lien or other purported form of claim with respect to the Account or any funds from time to time therein. Except for your right to payment of your service charges and fees and to make deduction for returned items and overdrafts, you shall have no rights in the Account or funds therein. To the extent you may ever have such rights, you hereby expressly subordinate all such rights to all rights of the Administrator. You may terminate this letter agreement by cancelling the Account maintained with you, which cancellation and termination shall become effective only upon sixty days' prior written notice thereof from you to us and the Administrator. Incoming mail addressed to the Account received after such cancellation shall be forwarded in accordance with the Administrator's instructions; provided that if no instructions are received from the Administrator by the seventh day prior to the effective date of such cancellation or termination, such mail shall be forwarded in accordance with our instructions. This letter agreement may also be terminated upon written notice to you by the Administrator stating that the Receivables Financing Agreement pursuant to which this letter agreement was obtained is no longer in effect. Except as otherwise provided in this paragraph, this letter agreement may not be terminated or amended without the prior written consent of the Administrator and us. Please acknowledge your agreement to the terms set forth in this letter agreement by signing the two copies of this letter agreement enclosed herewith in the space provided below, sending one such signed copy to the Administrator at its address provided above and returning the other signed copy to us. Very truly yours, ANNTAYLOR FUNDING, INC. By: Bert A. Tieben Title: Vice President Accepted and confirmed as of the date first written above: CLIPPER RECEIVABLES CORPORATION, as Lender By: ------------------------------ Title: --------------------------- ANNTAYLOR, INC. By: Bert A. Tieben ------------------------------- Title: Senior Vice President ---------------------------- Accepted and confirmed as of the date first written above: CLIPPER RECEIVABLES CORPORATION, as Lender By: Nancy D. Smith ------------------------------- Title: President ---------------------------- ANNTAYLOR, INC. By: ------------------------------- Title: ---------------------------- STATE STREET BOSTON CAPITAL CORPORATION, as Administrator By: -------------------------------- Title: ----------------------------- Address for notice: 225 Franklin Street Boston, Massachusetts 02110 Attention: Clipper Funds Facsimile No.: (617) 350-4020 Acknowledged and agreed to as of the date first written above: AMSOUTH BANK N.A. By: ------------------------------ Title: --------------------------- Address for notice: 1900 - 5th Avenue North Birmingham, Alabama 35203 Attention: --------------- Facsimile No.: ----------- STATE STREET BOSTON CAPITAL CORPORATION, as Administrator By: -------------------------------- Title: Managing Director ----------------------------- Address for notice: 225 Franklin Street Boston, Massachusetts 02110 Attention: Clipper Funds Facsimile No.: (617) 350-4020 Acknowledged and agreed to as of the date first written above: AMSOUTH BANK N.A. By: ------------------------------ Title: Vice President --------------------------- Address for notice: 1900 - 5th Avenue North Birmingham, Alabama 35203 Attention: Robert De Haven ----------------------- Facsimile No.: (205) 583-4436 ------------------- ANNEX A to Lock-Box Agreement [Letterhead of State Street Boston Capital Corporation] AmSouth Bank, N.A. 1900 - 5th Avenue North Birmingham, Alabama 35203 Re: AnnTaylor Funding, Inc./Lock-Box Account No. 55976026 Ladies and Gentlemen: Reference is made to the letter agreement, dated January 27, 1994 (as heretofore amended, the "Letter Agreement") among ---------------- AnnTaylor Funding, Inc., AnnTaylor, Inc., Clipper Receivables Corporation (the "Lender"), the undersigned, as Administrator for ------ the Lender, and you concerning the above described lock-box account (the "Account"). We hereby give you notice of our ------- assumption of ownership and control of the Account as provided in the Letter Agreement. We hereby instruct you to make all payments to be made by you out of or in connection with the Account [directly to the undersigned, at [our address set forth above], for the account of the Lender (account no. )]. ---------- [other instructions] Very truly yours, STATE STREET BOSTON CAPITAL CORPORATION, as Administrator By: ------------------------- Name: ----------------------- Title: ---------------------- EXHIBIT 5.01(h)(i) January 27, 1994 The Persons Listed on Schedule I Hereto Re: Receivables Facility of AnnTaylor, Inc. and AnnTaylor Funding, Inc. ----------------------- Ladies and Gentlemen: We have acted as special counsel to AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), and AnnTaylor, Inc., a Delaware corporation ("AnnTaylor", and together with the Company, the "Credit Parties") in connection with the preparation, execution and delivery of (i) the Purchase and Sale Agreement dated as of January 27, 1994 (the "Purchase Agreement") between the Company, as purchaser and AnnTaylor, as seller, (ii) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and (iii) certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Financing Agreement. This opinion is being delivered pursuant to Section 4.1(h) of the Purchase Agreement and Section 5.01(h)(i) of the Receivables Financing Agreement. Capi- talized terms used herein and not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivables Financing Agreement. In our examination we have assumed the genuine- ness of all signatures including endorsements, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, certified or photostatic copies, and the au- thenticity of the originals of such copies. As to any facts material to this opinion which we did not indepen- The Persons listed on Schedule I hereto January 27, 1994 Page 2 dently establish or verify, we have relied upon state- ments and representations of the Credit Parties and their respective officers and other representatives and of public officials, including the facts set forth in the Company's Certificate and AnnTaylor's Certificate, each as described below. In rendering opinions set forth herein, we have examined and relied on originals or copies of the follow- ing: (a) the Receivables Financing Agreement; (b) the Purchase Agreement; (c) the Spread Account Agreement; (d) the Note; (e) the Company Note (as defined in the Purchase Agreement); (f) the Fee Letter; (g) the certificate of the Company exe- cuted by an officer of the Company dated the date hereof, a copy of which is attached as Exhibit A hereto (the "Company's Certificate"); (h) the certificate of AnnTaylor executed by an officer of AnnTaylor, dated the date hereof, a copy of which is attached as Exhibit B hereto ("AnnTaylor's Certificate"); (i) the Certificate of Incorporation and By-laws of each of the Credit Parties; (j) certain resolutions of the Board of Directors of the Company adopted by unanimous written consent on January 24, 1994; (k) certain resolutions of the Board of Directors of AnnTaylor adopted on January 19, 1994; The Persons listed on Schedule I hereto January 27, 1994 Page 3 (l) signed, unfiled copies of financing statements under the Uniform Commercial Code as in effect in the State of New York, naming (i) AnnTaylor as the debtor, the Company as secured party and the Lender as the assignee and (ii) the Company as debtor and the Lender as the secured party, which we understand and have assumed in each case will be filed within ten days of the assignment of Pool Receivables from AnnTaylor to the Company and the transfer of the security interest therein from the Company to the Lender in the offices of the Secretary of State of the State of New York and the City Register of New York County, New York (the "Filing Offic- es") (such financing statements, the "Financing State- ments"); (m) search reports provided by Lexis Document Services, (i) dated January 25, 1994 and cover- ing the period through December 17, 1993 listing financ- ing statements that name AnnTaylor as debtor and that are filed in the Secretary of State of the State of New York and (ii) dated January 24, 1994, and covering the period through December 17, 1993, listing financing statements that name the Company as debtor and that are filed in the Secretary of State of the State of New York, together with copies of such financing statements, a summary of which search reports are attached as Exhibit C hereto (the "Search Reports"); (n) a certificate from the Secretary of State of the State of Delaware as to the good standing of the Company in such jurisdiction; and (o) such other documents as we have deemed necessary or appropriate as a basis for the opin- ions set forth below. Unless otherwise indicated, references in this opinion to the "New York UCC" shall mean the Uniform Com- mercial Code as in effect on the date hereof in the State of New York. The documents listed in paragraphs (a) through (f) above shall hereinafter be referred to col- lectively as the "Documents." The Persons listed on Schedule I hereto January 27, 1994 Page 4 Members of our firm are admitted to the bar of the State of New York. We express no opinion as to the laws of any jurisdiction other than (i) the laws of the State of New York, (ii) the General Corporation Law of the State of Delaware (the "DGCL"), and (iii) the federal laws of the United States of America to the extent spe- cifically referred to herein. The opinions set forth below are subject to the following qualifications: (i) enforcement of each of the Documents and of any interests created thereby may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforce- ment is sought in equity or at law); (ii) certain of the remedial provi- sions with respect to the security including waivers with respect to the exercise of remedies against the collateral contained in each of the Documents may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the Documents, each taken as a whole, and, subject to the other qualifications and exceptions contained in this opinion, each of the Documents, each taken as a whole, together with applicable law, contains adequate provisions for the practical realization of the benefits of the security created thereby; (iii) we express no opinion as to any provision with respect to governing law to the extent that it purports to affect the choice of law governing perfection and the effect of perfection and non-perfection of the security interests. (iv) enforcement of the Documents may be subject to the terms of instruments, leases, contracts or other agreements between the Credit Parties and the other parties to such agreements, The Persons listed on Schedule I hereto January 27, 1994 Page 5 the rights of such other parties and any claims or defenses of such other parties against the Credit Parties arising under or outside such instruments, leases or contracts or other agreements; and (v) we express no opinion as to the enforceability of any rights to contribution or indemnification provided for in the Documents which are violative of the public policy underlying any law, rule or regulation (including any federal or state securities law, rule or regulation). We have assumed for the purpose of the opinions set forth herein that the assignment from AnnTaylor to the Company pursuant to the Purchase Agreement consti- tutes the sale of (and not a lien upon) the assets pur- ported to be conveyed thereby. We call to your attention that we have delivered an opinion to you on even date herewith with respect to the characterization of such assignment in the event that AnnTaylor were to become a debtor under the United States Bankruptcy Code, 11 U.S.C. Sec. 101 et. seq. (the "Bankruptcy Code"). Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: 1. The Company has been incorporated and is validly existing and is in good standing under the laws of the State of Delaware. 2. Each of the Credit Parties has the corpo- rate power and corporate authority to execute, deliver and perform all of its obligations under each of the Documents to which it is a party. The execution and delivery by each of the Credit Parties of each of the Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of each such Credit Party. Each of the Documents has been duly executed and delivered by each Credit Party which is a party thereto. The Persons listed on Schedule I hereto January 27, 1994 Page 6 3. Each of the Documents constitutes the valid and binding obligation of each Credit Party that is a party thereto enforceable against such Credit Party in accordance with its terms. 4. The execution and delivery by each of the Credit Parties of each of the Documents to which it is a party and the performance by each such Credit Party of its obligations under each such Document, each in accor- dance with its terms, do not (i) conflict with the Cer- tificate of Incorporation or By-laws of such Credit Party, (ii) constitute a violation of or a default under any Applicable Contract (as hereinafter defined) or (iii) cause the creation of any security interest or lien (other than the liens granted under, created by or per- mitted by the Documents) upon any of the property of such Credit Party pursuant to any Applicable Contracts. We do not express any opinion, however, as to whether the execution, delivery or performance by any Credit Party of any Document to which it is a party will constitute a violation of or a default under any covenant, restriction or provision with respect to financial ratios or tests or any aspect of the financial condition or results of operations of such Credit Party or the effect of any such violation or default on the opinions expressed herein. For purposes of this paragraph 4, "Applicable Contracts" means those agreements or instruments set forth on Sched- ule I to the Company's Certificate with respect to the Company and on Schedule I to AnnTaylor's Certificate with respect to AnnTaylor and which have been identified to us as all the agreements and instruments (other than the Documents) which are material to the business or finan- cial condition of the Company and AnnTaylor respectively. 5. Neither the execution, delivery or perfor- mance by any Credit Party of any of the Documents to which it is a party nor the compliance by such Credit Party with the terms and provisions thereof will contra- vene any provision of any Applicable Law (as hereinafter defined). For purposes of this paragraph 5 and para- graph 6, "Applicable Laws" means the DGCL and those laws, rules and regulations of the State of New York and of the The Persons listed on Schedule I hereto January 27, 1994 Page 7 United States of America (including, without limitation, Regulations G, U and X of the Federal Reserve Board) which, in our experience, are normally applicable to transactions of the type contemplated by the Documents and are not the subject of a specific opinion herein referring expressly to a particular law or laws. 6. No Governmental Approval (as hereinafter defined) which has not been obtained or taken and is not in full force and effect is required to authorize or is required in connection with the execution, delivery or performance of any of the Documents by any Credit Party except the filing of the Financing Statements in the Filing Offices, the filing of financing statements in the State of Connecticut and the filing of partial releases (UCC-3 statements) with respect to security interests of the Bank of America National Trust and Savings Associa- tion, as agent (the "Bank of America Release State- ments"). For the purposes of this paragraph 6, the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording or registration with, any Governmental Authori- ty pursuant to Applicable Laws, and for the purposes of this paragraph 6 and paragraph 7, the term "Governmental Authority" means any federal, New York or, to the extent relating to the DGCL, Delaware executive, legislative, judicial, administrative or regulatory body. 7. Neither the execution, delivery or perfor- mance by any Credit Party of its obligations under the Documents to which it is a party nor compliance by such Credit Party with the terms thereof will contravene any Applicable Order (as hereinafter defined) against such Credit Party. For purposes of this paragraph 7, the term "Applicable Orders" means those orders or decrees of Governmental Authorities identified on Schedule II to the Company's Certificate with respect to the Company and on Schedule II to AnnTaylor's Certificate with respect to AnnTaylor. 8. The provisions of the Purchase Agreement are effective to create, in favor of the Company, a valid The Persons listed on Schedule I hereto January 27, 1994 Page 8 security interest (as such term is defined in Section 1- 201 of the New York UCC) in that portion of the Pool Receivables of AnnTaylor constituting accounts (as such term is defined in Section 9-106 of the New York UCC) (the "Accounts Property"), and the proceeds thereof. We call to your attention that the term security interest as defined in Section 1-201 of the New York UCC includes the sale of accounts. We express no opinion with respect to the nature or extent of the obligations being secured by the security interest granted to the Company. 9. While there is no case law precisely on point and the issue is not free from doubt, based upon our review of relevant case law authority in New York, including Stathos v. Murphy, 26 App. Div. 2d 500, 276 ----------------- N.Y. Supp. 2d 727, aff'd 19 N.Y.2d 883, 281 N.Y. Supp. 2d 81 (1967), and the principles set forth in Restatement of -------------- Contracts 2d (1981), the provisions of the Purchase - ------------ Agreement are effective to create, in favor of the Compa- ny, a valid interest under the common law of the State of New York in that portion (if any) of the Pool Receivables of AnnTaylor constituting general intangibles (as such term is defined in Section 9-106 of the New York UCC) (the "General Intangibles Property," and together with the Accounts Property, the "Receivables Property") that is enforceable against subsequent creditors of or pur- chasers from AnnTaylor. We note, however, that unless the Obligor in respect of a Pool Receivable has received notice of such sale, bona fide payments made by such Obligor to AnnTaylor or to a subsequent assignee of such Pool Receivable as to which the Obligor has received notice of such assignment will discharge such Obligor's obligations to the extent of such payment, and such payment will be recoverable only from AnnTaylor or such assignee. The opinions expressed in paragraphs 8 and 9 are subject to the following qualifications: (a) we have assumed that the Receivables Property exists and that AnnTaylor has sufficient rights in the Receivables Property for the interest of the The Persons listed on Schedule I hereto January 27, 1994 Page 9 Company to attach, and we express no opinion as to the nature or extent of any of AnnTaylor's rights in or title to any Receivables Property; (b) we call to your attention that Sec- tion 552 of the Bankruptcy Code limits the extent to which property acquired by a debtor after the commence- ment of a case under the Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (c) we call to your attention that the security interest of the Company in proceeds of the Accounts Property is limited to the extent set forth in Section 9-306 of the New York UCC and to property of a type subject to the New York UCC; (d) we have assumed that there are no agreements between AnnTaylor and any account debtor prohibiting, restricting or conditioning the assignment of any portion of the Receivables Property; (e) we call to your attention that the interest of the Company in the Receivables Property may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (f) we express no opinion regarding the interest of the Company in any of the Receivables Proper- ty consisting of claims against any government or gov- ernmental agency (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); and (g) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Company in and to such underlying property. The Persons listed on Schedule I hereto January 27, 1994 Page 10 10. The provisions of the Receivables Financ- ing Agreement are effective to create, in favor of the Lender, as security for the obligations of the Company described in Section 9.01 thereof, a valid security interest in that portion of the Pool Receivables consti- tuting accounts or general intangibles (as each such term is defined in Section 9-106 of the New York UCC) (the "Receivables Collateral"), and the proceeds thereof. The opinions expressed in paragraph 10 are sub- ject to the qualifications to opinion paragraphs 8 and 9 set forth above and to the following qualifications: (a) we have assumed that the Receivables Collateral exists and the Company has sufficient rights in the Receivables Collateral for the security interest of the Lender to attach, and, except to the extent set forth in opinion paragraphs 8 and 9 above, we express no opinion as to the nature or extent of the Company's rights in or title to any Receivables Collateral; (b) we call to your attention that Sec- tion 552 of the Bankruptcy Code limits the extent to which property acquired by a debtor after the commence- ment of a case under the Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (c) we call to your attention that the security interest of the Lender in proceeds is limited to the extent set forth in Section 9-306 of the New York UCC and to property of a type subject to the New York UCC; (d) we call to your attention that the security interest of the Lender may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (e) we express no opinion regarding the security interest of the Lender in any of the Receivables Collateral consisting of claims against any government or The Persons listed on Schedule I hereto January 27, 1994 Page 11 governmental agency (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); and (f) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Lender in and to such underlying property. 11. The Financing Statements are in appropri- ate form for filing in each of the Filing Offices under the New York UCC. 12. The security interest in favor of the Company in the Accounts Property described in the Financ- ing Statements naming AnnTaylor as debtor (the "Article 9 Filing Property") will be perfected upon the filing of such Financing Statements in the respective Filing Offic- es, and no other security interest of any other transfer- ee of AnnTaylor is equal or prior to the security inter- est of the Company in such Article 9 Filing Property. 13. If the chief executive office of the Company is located in the State of New York for the purposes of the New York UCC, the security interest in favor of the Lender in the Receivables Collateral de- scribed in the Financing Statements naming the Company as debtor (the "Article 9 Filing Collateral") will be per- fected upon the filing of such Financing Statements in the respective Filing Offices, and no other security interest of any other transferee from the Company is equal or prior to the security interest of the Lender in such Article 9 Filing Collateral. The opinions expressed in paragraphs 11, 12 and 13 are subject to the qualifications to opinion para- graphs 8, 9 and 10 set forth above and to the following qualifications: (a) we have assumed based upon AnnTaylor's Certificate that, for the purposes of the New York UCC, The Persons listed on Schedule I hereto January 27, 1994 Page 12 the chief executive office of AnnTaylor as of the date of filing of the Financing Statements is located in New York County in the State of New York; (b) we have assumed based upon the Company's Certificate that, for the purposes of the New York UCC, the chief executive office of the Company as of the date of filing of the Financing Statements is located either in New York County in the State of New York or in the State of Connecticut, and we express no opinion with respect to the perfection or priority of the security interest of the Lender in the Receivables Collateral to the extent that the chief executive office of the Company is located in the State of Connecticut; (c) we call to your attention that the perfec- tion and the effect of perfection and nonperfection of the security interest of the Company in the Article 9 Filing Property and the security interest of the Lender in the Article 9 Filing Collateral may be governed by laws other than those of the New York UCC to the extent that the chief executive office of either AnnTaylor or the Company respectively is or becomes located in a jurisdiction other than New York; (d) we call to your attention that (i) the perfection of the security interest of the Company as to the Article 9 Filing Property and the Lender as to the Article 9 Filing Collateral will be terminated as to any such property acquired by AnnTaylor or the Company re- spectively more than four months after AnnTaylor or the Company respectively changes its name, identity, or corporate structure so as to make the applicable Financ- ing Statements seriously misleading unless new appropri- ate financing statements indicating the new name, identi- ty or corporate structure of AnnTaylor or the Company, as the case may be, are properly filed before the expiration of such four months, and (ii) the New York UCC requires the filing of continuation statements within the period of six months prior to the expiration of five years from the date of the filing of the original Financing State- ments or the filing of any continuation statements in The Persons listed on Schedule I hereto January 27, 1994 Page 13 order to maintain the effectiveness of the original Financing Statements; (e) we express no opinion with respect to any of the Accounts Property consisting of accounts or gener- al intangibles arising from or relating to the sale of farm products by a farmer, consumer goods in the hands of AnnTaylor, crops growing or to be gown, timber to be cut or minerals or the like (including oil and gas) or ac- counts subject to subsection 5 of Section 9-103 of the New York UCC; (f) we express no opinion with respect to any of the Receivables Collateral consisting of accounts or general intangibles arising from or relating to the sale of farm products by a farmer, consumer goods in the hands of the Company, crops growing or to be grown, timber to be cut or minerals or the like (including oil and gas) or accounts subject to subsection 5 of Section 9-103 of the New York UCC; (g) we express no opinion as to the priority of the security interest of the Company in the Article 9 Filing Property or the Lender in the Article 9 Filing Collateral against: (i) any liens, claims or other interests that arise by operation of law and do not require any filing or possession in order to take priori- ty over security interests perfected through the filing of a financing statement; (ii) any lien, claim or encum- brance in favor of the United States of America or any state, or any agency or instrumentality of any of them or any other governmental entity (including, without limita- tion, federal tax liens, liens arising under the Employee Retirement Income Security Act of 1974, as amended, or claims given priority pursuant to 31 U.S.C. Sec. 3713); (iii) a lien creditor who attached or levied prior to the perfection of the security interest of the Company or the Lender, as the case may be; (iv) a lien creditor with respect to future advances to the extent set forth in Section 9-301(4) of the New York UCC; (v) another secured creditor with respect to any future advances to the extent set forth in Section 9-312(7) of the New York UCC; The Persons listed on Schedule I hereto January 27, 1994 Page 14 (vi) a security interest perfected under the laws of another jurisdiction to the extent that either AnnTaylor or the Company had its chief executive office in such jurisdiction within four months prior to the date of the perfection of the security interest of the Company or the Lender, as the case may be; (vii) a security interest perfected without filing any financing statement pursuant to Section 9-302(1) of the New York UCC; (viii) a secu- rity interest perfected by filing a financing statement naming AnnTaylor or the Company as debtor using a trade name, fictitious name or previous name; (ix) the holder of a perfected "purchase money security interest" as such term is defined in Section 9-107 of the New York UCC; (x) another secured party with a perfected security interest in other property of AnnTaylor or the Company to the extent the Pool Receivables are proceeds of such other creditor's collateral; (xi) any person who has en- tered into a subordination or intercreditor agreement with the Company with respect to the Accounts Property or with the Lender with respect to the Receivables Collat- eral; (xii) any claim for wages, salary or other compen- sation; (xiii) a purchaser of accounts purchased as part of the sale of the business out of which they arose; (xiv) an assignment of accounts for purposes of collec- tion only or a transfer of a single account; (xv) any claim arising out of tort or any surety who is subrogated to the rights of AnnTaylor or the Company, as the case may be; or (xvi) the security interest of a creditor who filed a financing statement based on a prior or incorrect location of the chief executive office of AnnTaylor or the Company to the extent such other financing statement would be effective under Section 9-401(2) or (3) of the New York UCC; (h) we have assumed that (i) all financing statements presented for filing prior to the effective date of the applicable search report in which each of AnnTaylor and the Company is named as debtor have been properly filed, indexed and recorded with the Secretary of State of the State of New York and are identified in the appropriate Search Report and (ii) no financing statements naming AnnTaylor or the Company as debtor were The Persons listed on Schedule I hereto January 27, 1994 Page 15 filed with Secretary of State of the State of New York between the effective date of the Search Reports and the date of the filing of the applicable Financing Statements in such Filing Office; and we call to your attention that we did not review any search report with respect to any financing statements naming AnnTaylor or the Company as debtor filed with the City Register of New York County, New York; and (i) we have assumed that the Bank of America Release Statements will be filed on or prior to the date of the filing of the Financing Statements. 14. No registration of AnnTaylor or the Compa- ny under the Investment Company Act of 1940, as amended, is required in connection with the initial assignment under the Purchase Agreement or the initial borrowing under the Receivables Financing Agreement, respectively. In rendering the foregoing opinions, we have assumed, with your consent, that: (a) AnnTaylor has been incorporated in the State of Delaware and is validly existing and in good standing under the laws of all jurisdictions in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary; (b) the execution, delivery and perfor- mance of each Credit Party's obligations under the Documents to which it is a party does not and will not conflict with, contravene, violate or constitute a default under (i) any lease, indenture, instrument or other agreement to which such Credit Party or its property is subject (other than the Applicable Contracts, as to which we make no such assumption), (ii) any rule, law or regulation to which such Credit Party is subject (other than Applicable Laws, as to which we make no such assumption), or (iii) any judicial or administrative order or decree of The Persons listed on Schedule I hereto January 27, 1994 Page 16 any governmental authority (other than Applicable Orders, as to which we make no such assumption); and (c) no authorization, consent or other approval of, notice to or filing with any court, governmental authority or regulatory body (other than Governmental Approvals, as to which we make no such assumption) is required to authorize or is required in connection with the execution, deliv- ery or performance by any Credit Party of any Docu- ment to which it is a party or the transactions contemplated thereby. Our opinions are also subject to the following assumptions and qualifications: (a) we have assumed each of the Documents constitutes the legal, valid and binding obligation of each party to such Document (other than the Credit Parties) enforceable against such party in accordance with its terms; and (b) we express no opinion as to the effect on the opinions expressed herein of (i) the compliance or noncompliance of the Administrator, the Relationship Bank, the Collateral Agent, the Credit Bank, the Liquidity Bank, the Lock-Box Bank, the Lender or any other party (other than the Credit Parties) to the Documents with any state, federal or other laws or regulations applicable to them or (ii) the legal or regulatory status or the nature of the business of any such Person. This opinion is being furnished only to you and is solely for your benefit and is not to be used, quoted, relied upon or otherwise referred to by any other Person or for any other purpose without our prior written con- sent. Very truly yours, SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02201 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Standard & Poor's Ratings Group 25 Broadway New York, New York 10004 Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 Exhibit A to Opinion of Special Counsel to AnnTaylor Funding, Inc. ------------------------------------------ Officer's Certificate --------------------- I, Jocelyn F.L. Barandiaran, am Corporate Secretary of AnnTaylor Funding, Inc., a Delaware corpora- tion ("Funding"). I understand that pursuant to Section 5.01(h)(i) of that certain Receivables Financing Agree- ment, dated as of January 27, 1994 (the "Receivables Fi- nancing Agreement"), among Funding, AnnTaylor, Inc. ("AnnTaylor") as servicer, Clipper Receivables Corpora- tion, State Street Boston Capital Corporation and PNC Bank, National Association, Skadden, Arps, Slate, Meagher & Flom is rendering an opinion (the "Opinion"). Defined terms used herein but not otherwise defined shall have the meaning set forth in Appendix A to the Receivables Financing Agreement. I further understand that Skadden, Arps, Slate, Meagher & Flom is relying on this certifi- cate and the statements made herein in rendering the Opinion. With regard to the foregoing, on behalf of Funding, I certify that: 1. The chief executive office of Funding is located at either 142 West 57th Street, New York, New York 10019 or 414 Chapel Street, New Haven, Connecticut 06511. 2. Set forth on Schedule I hereto are all of the agreements and instruments (other than the Transac- tion Documents) to which Funding is a party which are material to the business or financial condition of Fund- ing. 3. Set forth on Schedule II hereto are all of the orders, judgments and decrees of any governmental authority which are material to the business or property of Funding. 4. Funding holds no stock in any company. 5. Funding is engaged in the business set forth in the Transaction Documents. The value of all securities owned by Funding does not exceed 10% of the value of Funding's total assets. 6. Funding does not directly or indirectly own or operate facilities used for the generation, trans- mission or distribution of electric energy for sale or facilities used for the distribution at retail of natural or manufactured gas for heat, light or power and Funding does not own any interest in any company which owns or operates such facilities. 7. Neither Funding nor any of its subsidiaries is a person providing railroad transportation for compen- sation (a "rail carrier") or a person controlled by or affiliated with a rail carrier or a person providing sleeping car transportation for compensation (a "sleeping car carrier") or a corporation organzied to provide transportation by rail carrier or sleeping car carrier. IN WITNESS WHEREOF, I have executed this cer- tificate this day of January 1994. ---- By: -------------------------------------- Name: Jocelyn F.L. Barandiaran Title: Corporate Secretary 2 Schedule I Applicable Contracts -------------------- None 3 Schedule II Applicable Orders ----------------- None 4 Exhibit B to Opinion of Special Counsel to AnnTaylor, Inc. ---------------------------------- Officer's Certificate --------------------- I, Jocelyn F.L. Barandiaran, am Vice President, General Counsel and Corporate Secretary of AnnTaylor, Inc., a Delaware corporation ("AnnTaylor"). I understand that pursuant to (i) Section 5.01(h)(i) of that certain Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among AnnTaylor Funding, Inc. ("Funding"), AnnTaylor, as ser- vicer, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank, National Associ- ation and (ii) Section 4.1(h) of that certain Purchase and Sale Agreement, dated as of January 27, 1994 between Funding and AnnTaylor, Skadden, Arps, Slate, Meagher & Flom is rendering an opinion (the "Opinion"). Defined terms used herein but not otherwise defined shall have the meaning set forth in Appendix A to the Receivables Financing Agreement. I further understand that Skadden, Arps, Slate, Meagher & Flom is relying on this certifi- cate and the statements made herein in rendering the Opinion. With regard to the foregoing, on behalf of AnnTaylor, I certify that: 1. The chief executive office of AnnTaylor is located at 142 West 57th Street, New York, New York 10019. 2. Set forth on Schedule I hereto are all of the agreements and instruments (other than the Transac- tion Documents) to which AnnTaylor is a party which are material to the business or financial condition of AnnTaylor. 3. Set forth on Schedule II hereto are all of the orders, judgments and decrees of any governmental authority which are material to the business or property of AnnTaylor. 4. AnnTaylor holds no stock in any company other than the stock represented by the certificates set forth on Schedule III hereto; none of such stock is trad- ed on a national securities exchange. 5. AnnTaylor is primarily engaged in the business described in Schedule IV. The value of all securities owned by AnnTaylor (excluding those referred to in paragraph 4 above) does not exceed 10% of the value of AnnTaylor's total assets. 6. AnnTaylor does not directly or indirectly own or operate facilities used for the generation, trans- mission or distribution of electric energy for sale or facilities used for the distribution at retail of natural or manufactured gas for heat, light or power and AnnTaylor does not own any interest in any company which owns or operates such facilities. 7. Neither AnnTaylor nor any of its subsid- iaries is a person providing railroad transportation for compensation (a "rail carrier") or a person controlled by or affiliated with a rail carrier or a person providing sleeping car transportation for compensation (a "sleeping car carrier") or a corporation organzied to provide transportation by rail carrier or sleeping car carrier. 2 IN WITNESS WHEREOF, I have executed this cer- tificate this day of January 1994. ---- By: -------------------------------------- Name: Jocelyn F.L. Barandiaran Title: Vice President, General Counsel and Corporate Secretary 3 Schedule I Applicable Contracts -------------------- 1. Indenture, dated as of July 15, 1989, between AnnTaylor and United States Trust Company of New York, as Trustee, together with the Certificate of Satisfaction and Dis- charge in favor of AnnTaylor as of July 29, 1993 by such Trustee. 2. Indenture, dated as of July 15, 1989, between AnnTaylor and State Street Bank and Trust Company of Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National Association, as Trustee, together with the Certificate of Satisfaction and Discharge in favor of AnnTaylor as of July 29, 1993 by such Trustee. 3. Credit Agreement, dated as of June 28, 1993, among AnnTaylor, Bank of America, Bank of Montreal and the other financial institutions party thereto, as amended by Amendment No. 1 to Credit Agreement dated as August 10, 1993, Amendment No. 2 to Credit Agreement dated as Sep- tember 30, 1993, Amendment No. 3 to Credit Agreement dated as December 23, 1993, and Amendment No. 4 and Consent to Credit Agreement dated as January 24, 1994. 4. Security and Pledge Agreement, dated as of June 28, 1993, made by AnnTaylor in favor of Bank of America, as Agent, as modified by Amendment No. 4 and Consent to Credit Agreement dated as January 24, 1994. 5. Trademark Assignment, dated as of June 28, 1993, made by AnnTaylor with Bank of America, as Agent. 6. Tax Sharing Agreement, dated as of July 12, 1989, between the Company and AnnTaylor Stores Corporation ("ATSC"). 7. Agreement, dated as of July 13, 1993, among Cygne De- signs, Inc., Cygne Design F.E. Limited, CAT US Inc., C.A.T. (Far East) Limited and AnnTaylor. 8. Stock Purchase Agreement, dated as of July 13, 1993, between Cleveland Investment Limited and AnnTaylor. 9. Agreement, dated as of June 14, 1989, and the Trademark License Agreement, effective as of January 1, 1990, among Allied Stores Corporation, AnnTaylor and ATSC. 4 10. Indenture, dated as of June 15, 1993, between AnnTaylor and Fleet Bank, N.A., as Trustee. 11. Employment Agreement, effective as of February 3, 1992, between AnnTaylor, AnnTaylor Stores Corporation and Sally Frame Kasaks. 12. Lease, dated as of March 17, 1989, between Carven Associ- ates and AnnTaylor concerning the West 57th Street head- quarters, as amended by the First Amendment thereto dated as of November 14, 1990, the Second Amendment thereto dated as of February 28, 1993, the Third Amendment there- to dated as of June 24, 1993, and the letter agreement dated as of October 1, 1993. 13. Lease, dated December 1, 1985, between Hamilton Realty Co. and AnnTaylor (as successor in interest to ASC Stores III, Inc.) concerning the New Haven distribution center, as amended by the letter agreement dated March 22, 1993, and the letter agreement dated July 26, 1993. 14. Lease, dated June 12, 1986, between SMR 85-1 Limited Partnership and AnnTaylor (as successor in interest to ASC Stores III, Inc.) concerning the New Haven offices, as amended by the Amendment to Lease dated December 7, 1987 and the Second Amendment to Lease dated December 10, 1992. 5 Schedule II Applicable Orders ----------------- None 6 Schedule III Stock Certificates ------------------ Company Certificate Nos. No. of Shares - ------- ---------------- ------------- AnnTaylor Travel, Inc.1 1 1 CAT U.S. Inc.1 1 and 11 4,000 C.A.T. (Far East) Limited1 5 and 8 60,000 AnnTaylor Funding, Inc.1 1 100 - -------------------- 1 Pledged to Bank of America pursuant to the Security and Pledge Agreement, dated as of June 28, 1993. 7 Schedule IV Description of Business ----------------------- AnnTaylor is primarily engaged in the business of the retail sale of women's apparel, shoes and accessories. 8 EXHIBIT 5.01(h)(ii) January 27, 1994 The Persons Listed on Schedule I Hereto Dear Sirs and Madams: I am Vice President, General Counsel and Corpo- rate Secretary of AnnTaylor, Inc., a Delaware corporation ("AnnTaylor"). I am delivering this opinion in connec- tion with the preparation, execution and delivery of (i) the Purchase and Sale Agreement dated as of January 27, 1994 (the "Purchase Agreement") between AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), as purchaser and AnnTaylor, as seller, (ii) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and (iii) certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Fi- nancing Agreement. This opinion is being delivered pursuant to Section 4.1(h) of the Purchase Agreement and Section 5.01(h)(i) of the Receivables Financing Agree- ment. Capitalized terms used herein and not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivables Financing Agree- ment. In this connection, I have examined and am familiar with originals or copies, certified or otherwise identified to my satisfaction, of (i) the Receivables Financing Agreement; (ii) the Purchase Agreement; (iii) the Certificate of Incorporation and Bylaws of AnnTaylor, as presently in effect; and (iv) resolutions of the Board of Directors of AnnTaylor relating to the Receivables Financing Agreement and the Purchase Agree- ment. I have also examined and am familiar with origi- nals or copies, certified or otherwise identified to my January 27, 1994 Page 2 satisfaction, of such records of AnnTaylor and such agreements, certificates of public officials, certifi- cates of officers or representatives of AnnTaylor and others, and such other documents, certificates and corpo- rate or other records as I have deemed necessary or appropriate as a basis for the opinions set forth below. In my examination, I have assumed the genuiness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies. As to any facts material to this opinion which I did not independently establish or verify, I have relied upon certificates, statements and representations of officers and other representatives of AnnTaylor and others. I am admitted to the Bar of the State of New York and express no opinion as to the laws of any juris- diction except the General Corporation Law of the State of Delaware and the laws of the United States of America to the extent specifically referred to herein. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: (i) AnnTaylor is a corporation duly incor- porated, validly existing and in good standing under the laws of the State of Delaware. (ii) AnnTaylor is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts busi- ness of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on AnnTaylor. January 27, 1994 Page 3 This opinion is being furnished by me as Vice President, General Counsel and Corporate Secretary of AnnTaylor to you solely for your benefit, and is not to be used or relied upon by any other person without my express prior written consent. Very truly yours, SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02101 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Moody's Investors Service 99 Church Street New York, New York 10007 Standard & Poors Corporation 26 Broadway, 15th Floor New York, New York 10004 EXHIBIT 5.01(h)(iii) January 27, 1994 The Persons Listed on Schedule I Hereto Re: Purchase Agreement between AnnTaylor, Inc. and AnnTaylor Funding, Inc. ------------------------------------------ Ladies and Gentlemen: We have acted as special counsel to AnnTaylor, Inc., a Delaware corporation ("AnnTaylor"), and AnnTaylor Funding, Inc., a Delaware corporation and wholly owned subsidiary of AnnTaylor ("Funding"), in connection with the transactions contemplated by (i) the Purchase and Sale Agreement, dated as of January 27, 1994 (the "Pur- chase Agreement"), between AnnTaylor, as seller, and Funding, as buyer, providing for the sale and contribu- tion by AnnTaylor to Funding of certain credit-card receivables originated by AnnTaylor (the "Pool Receiv- ables"); and (ii) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among Funding, Clipper Receivables Corpora- tion (the "Lender"), AnnTaylor, as servicer (in such capacity, the "Servicer"), State Street Boston Capital Corporation (the "Administrator") and PNC Bank, National Association (the "Relationship Bank"). This opinion is being delivered pursuant to Section 5.01(h)(iii) of the Receivables Financing Agreement. Capitalized terms used herein and not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivables Financing Agreement or in the Purchase Agree- ment. SUMMARY OF THE TRANSACTIONS The Pool Receivables consist of a portfolio of accounts receivable arising under unsecured, revolving, consumer credit-card accounts established with AnnTaylor for the purchase of merchandise by the Obligors from AnnTaylor. The Pool Receivables include both indebted- ness owing from Obligors under the credit-card accounts in connection with purchases from AnnTaylor and finance- The Persons listed on Schedule I hereto January 27, 1994 Page 2 charge obligations relating thereto. The Purchase Agree- ment and the Receivables Financing Agreement provide for the transfer of the Pool Receivables from AnnTaylor to Funding, the appointment of AnnTaylor as servicer of the Pool Receivables and related matters (the "Transactions") described below. Pursuant to the Purchase Agreement, AnnTaylor will sell to Funding all Pool Receivables which will consist of all Receivables existing on the Initial Cut- Off Date or created by it from the specified Initial Cut- Off Date to and including the Purchase and Sale Termina- tion Date described therein and all Finance Charge Re- ceivables that relate to Principal Receivables created prior to the Purchase and Sale Termination Date. Funding will borrow funds from the Lender pursuant to the Receiv- ables Financing Agreement to fund, in part, the purchase of Pool Receivables, and Funding will grant to the Lender a security interest in the Pool Receivables to secure such loans. Pursuant to the Purchase Agreement, as consid- eration for the sale of the Pool Receivables, Funding will pay to AnnTaylor a Purchase Price equal to the aggregate Unpaid Balance of the Pool Receivables trans- ferred from time to time multiplied by the "Fair Market Value Discount Factor" (as described in the Purchase Agreement). The Fair Market Value Discount Factor is computed via a formula intended to discount the face value of the Pool Receivables by a factor that takes into consideration the time value of money based upon antici- pated dates of collection of the Pool Receivables, the risk of nonpayment, the cost of servicing and a reason- able profit. On the closing date of the Purchase Agree- ment, with respect to Pool Receivables that existed as of the close of business on the Initial Cut-Off Date or that were created thereafter but existed on the closing date, AnnTaylor will contribute certain of such Pool Receiv- ables to the capital of Funding, and Funding will pay the Purchase Price for the purchase of the remainder thereof by (i) the payment of cash borrowed from the Lender under the Receivables Financing Agreement and (ii) the issuance of a promissory note (the "Company Note") issued by Funding to AnnTaylor (which note will be subordinated to the promissory note issued by Funding on behalf of the The Persons listed on Schedule I hereto January 27, 1994 Page 3 Lender). Thereafter, Funding will pay funds to AnnTaylor from Collections on Pool Receivables (after setting aside amounts needed by Funding to pay other costs and expens- es) in payment or partial payment of the Purchase Price of Pool Receivables that arise after the closing date. To the extent that it is determined on any monthly Set- tlement Date that Funding did not have funds available during the related Settlement Period to pay the Purchase Price in cash with respect to Pool Receivables arising during such Settlement Period, either there will be an increase in the Company Note or AnnTaylor will make a capital contribution to Funding, which increase of the Company Note and capital contribution will in aggregate be in an amount equal to the difference between the Pur- chase Price with respect to Pool Receivables that arose during the related Settlement Period and the funds other- wise paid to AnnTaylor with respect thereto. AnnTaylor initially will be appointed as Servicer of the Pool Receivables pursuant to the Receiv- ables Financing Agreement. AnnTaylor may be removed only for cause upon specified Servicer Transfer Events, and the parties contemplate that AnnTaylor will remain the Servicer of the Pool Receivables. OPINION REQUESTED You have requested our opinion as to whether, in the event that AnnTaylor were to become a debtor under the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq. (the "Bank- ------- ruptcy Code"), the transfer of the Pool Receivables pursuant to the Purchase Agreement would be held to be a "sale" by AnnTaylor of the Pool Receivables transferred to Funding rather than the transfer of a security inter- est in connection with a borrowing made by AnnTaylor. In the event of a bankruptcy of AnnTaylor, if the transfers were held to be sales, Funding would own all of the Pool Receivables transferred to it, and such Pool Receivables and the Collections and other proceeds in respect of such Pool Receivables would not be part of AnnTaylor's estate. Members of our Firm are admitted to the bar in the State of New York, and we do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent re- The Persons listed on Schedule I hereto January 27, 1994 Page 4 ferred to specifically herein. Each of the Purchase Agreement and the Receivables Financing Agreement pro- vides that it shall be governed in accordance with the laws of the State of New York, which we have analyzed as the governing law for the purpose of the opinion set forth herein. FACTS AND ASSUMPTIONS In connection with rendering the opinion set forth below, we have examined and relied upon originals or copies of (i) the Purchase Agreement, (ii) the Receiv- ables Financing Agreement and (iii) such other documents relating to the Transactions as we have deemed necessary or advisable as a basis for such opinion. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, certified or photostatic copies and the authenticity of the origi- nals of such latter documents. In making our examination of such documents, for purposes of this opinion we have assumed that all parties thereto had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, the execution and delivery by such parties of such documents, the validity and binding effect thereof and that such docu- ments are enforceable against such parties. We have made no independent investigation of the facts referred to herein and, with respect to such facts, have relied, for the purpose of rendering this opinion, exclusively on those facts provided to us by AnnTaylor and Funding as confirmed in certificates pro- vided to us by AnnTaylor and Funding attached hereto as Exhibit A certifying the facts and assumptions set forth below and in the preceding "Summary of the Transactions," which we assume are true, and on those facts contained in the Purchase Agreement, the Receivables Financing Agree- ment and such other documents relating to the Transac- tions as we deemed advisable, including the factual The Persons listed on Schedule I hereto January 27, 1994 Page 5 representations and warranties contained therein as made by the respective parties thereto. It is our understanding that the relevant facts regarding the Transactions are as follows: 1. Purpose. Recognizing, among other fac- ------- tors, the tax, accounting and legal consequences of the Transactions, AnnTaylor and Funding determined that, from a business viewpoint, the sale of the Pool Receivables by AnnTaylor to Funding is in the best interests of AnnTaylor and Funding. Further, this determination has been explicitly memorialized by appropriate resolutions adopted by the respective Boards of Directors of AnnTaylor and Funding. 2. Economics of the Transaction. As indicat- ---------------------------- ed in paragraph 6 below, the parties intend that the transfer of the Pool Receivables pursuant to the Purchase Agreement constitutes a sale thereof. We understand that the economics of the Transactions reflect the intent of AnnTaylor and Funding that the transfer of the Pool Re- ceivables be considered a sale of the Pool Receivables by AnnTaylor to Funding rather than loans secured by the Pool Receivables. Specifically, the Purchase Price pay- able by Funding to AnnTaylor for the Pool Receivables is intended to be consistent with the terms of such a sale made at arm's length to a third party. In addition, if the Purchase Agreement evidenced secured loans to AnnTaylor, then such secured loans, rather than interests in the Pool Receivables owned by Funding, would be con- veyed as security by Funding to the Lender. We under- stand that the terms of the Receivables Financing Agree- ment reflect a loan by the Lender to Funding secured by interests in Pool Receivables owned by Funding, and that the terms would not be as favorable to Funding if the Lender were granted a security interest in secured loans made by Funding to AnnTaylor. 3. Complete, Irrevocable Transfer. Except as ------------------------------ described below with respect to permitted modifications to a Contract or a Pool Receivable that may be agreed to by AnnTaylor in its capacity as Servicer, AnnTaylor relinquishes all control and title over the Pool Receiv- ables upon the transfer of each Pool Receivable under the The Persons listed on Schedule I hereto January 27, 1994 Page 6 Purchase Agreement. It should be noted that the Servicer is granted such rights with respect to the Pool Receiv- ables as are necessary to allow it to fulfill its obliga- tion to Funding and the Lender to collect the payments on the Pool Receivables and to otherwise fulfill its obliga- tions as Servicer. In conjunction with its normal servicing activ- ities, the Servicer may, in accordance with the Credit and Collection Policy, extend the maturity of or defer interest payments or finance charges with respect to any Pool Receivable or adjust the Unpaid Balance of any Pool Receivable as the Servicer may determine to be appro- priate to maximize collections thereof. It is our under- standing that such an ability on the part of the Servicer is consistent with the delegation to a third party for consideration of the day-to-day administration of assets that are not owned by such third party. The Servicer will be compensated for these servicing activities by payment of the Servicer's Fee which we understand repre- sents a fair market value servicing fee. Except for AnnTaylor's obligation in certain circumstances (such as returned goods or disputed charg- es) and upon breaches of certain representations or war- ranties under the Purchase Agreement to repurchase the subject Pool Receivables, as described in paragraph 18 below, the sale of each Pool Receivable by AnnTaylor is irrevocable. 4. No Obligation Due from AnnTaylor to Fund- ----------------------------------------- ing as a Result of the Transactions. Except as set forth - ----------------------------------- in paragraphs 18 and 19 below, AnnTaylor is not indebted to Funding at the time of or as a result of the Transac- tions and AnnTaylor does not have an obligation to pay any amount to Funding or, in respect of any indebtedness of Funding, to any other creditor of Funding. 5. No Right to Surplus. AnnTaylor does not ------------------- have the right to receive any proceeds allocable to any Pool Receivable, even if Funding should receive more than the Purchase Price payable to AnnTaylor from Collections or other recoveries on the Pool Receivables. The Persons listed on Schedule I hereto January 27, 1994 Page 7 6. Intent/Nomenclature. The Purchase Agree- ------------------- ment recites that "in consideration of the Purchase Price . . . AnnTaylor agrees to sell, assign and trans- fer, and does hereby sell, assign and transfer to [Fund- ing], and [Funding] agrees to purchase, and does hereby purchase, from AnnTaylor, all of AnnTaylor's right, title and interest in and to: (a) each Receivable . . . ." The language used reflects the intention of the respec- tive parties that the transfers of such Pool Receivables be sales. 7. Notice to Creditors and Potential Bona -------------------------------------- Fide Purchasers. At the time of the closing under the - --------------- Purchase Agreement, AnnTaylor will report on its finan- cial records the transfer of the Pool Receivables made by it as a sale under generally accepted accounting princi- ples ("GAP"). Such GAP financial statements, to the extent prepared on a consolidated basis for AnnTaylor and its consolidated subsidiaries, will be appropriately footnoted or will otherwise disclose that the Pool Re- ceivables have been sold to Funding and that a security interest in such Pool Receivable has been transferred to the Lender. For purposes of GAP, the financial records of Funding will report the Transactions as the purchase of all Pool Receivables from AnnTaylor and the transfer of a security interest therein to the Lender. The com- puter records storing essential information on the Pool Receivables and similar assets of AnnTaylor will be appropriately coded to reflect the sale of the Pool Re- ceivables to Funding and the grant of a security interest by Funding to the Lender. We are informed that creditors of AnnTaylor and Funding rely substantially upon their respective books, records, tapes and appropriate filings of financing statements in making credit decisions. We are further informed that purchasers of Pool Receivables and similar assets rely on information generated from the computer records. In addition, it is our understanding that if a third party, including a potential purchaser of the Pool Receivables, inquires, AnnTaylor will promptly indicate that the Pool Receivables have been sold to Funding and that a security interest therein has been transferred by Funding to the Lender, and AnnTaylor will not claim any ownership interest in the Pool Receivables. The Persons listed on Schedule I hereto January 27, 1994 Page 8 8. No Postsale Adjustment. No provision ---------------------- exists in the Purchase Agreement (except with respect to Pool Receivables that are subject to a reduction or can- cellation of the Unpaid Balance by reason of credit adjustments or other dilution and Pool Receivables with respect to which the eligibility criteria are not met or a representation or warranty by AnnTaylor as seller has been violated) for any modification after the date on which a given Pool Receivable is transferred of the amount of the consideration delivered to AnnTaylor by Funding in exchange for such Pool Receivable, and we assume that no such modifications will be made. 9. Payment Risk. The amount and timing of ------------ payments made to Funding (or to the Servicer on behalf of Funding and the Lender) from the Obligors on the Pool Re- ceivables cannot be directly controlled by AnnTaylor. Funding (and the Lender as the principal creditor of Funding upon maturity of its loans), and not AnnTaylor, will bear the risk of a slower or faster rate of payment on the Pool Receivables than anticipated at the time of the transfer of the Pool Receivables. Although slower or faster payment on the Pool Receivables may affect timing on the payment of the Company Note issued by Funding to AnnTaylor, the Company Note will have a market interest rate to compensate AnnTaylor with respect to the out- standing principal amount thereof. 10. No Recourse for Defaults. AnnTaylor has ------------------------ not guaranteed to Funding (or to any assignee, including the Lender) the payment of any Pool Receivable. AnnTaylor is not obligated to repurchase from Funding any Pool Receivable in default, unless any such default is attributable to a breach of its representations and warranties with respect to such Pool Receivable under the Purchase Agreement. If the losses on the Pool Receiv- ables exceed the risk of loss factor reflected in the Fair Market Value Discount Factor at the time such Pool Receivables were first transferred, such losses will be absorbed by Funding (and the Lender as the principal creditor of Funding upon maturity of its loans). Al- though losses may affect the ability of Funding to pay its creditors, which would include its obligations to AnnTaylor under the Company Note, the initial size of the Company Note is viewed by AnnTaylor to be a reasonable The Persons listed on Schedule I hereto January 27, 1994 Page 9 amount relative to the initial capitalization of Funding, and increases in the Company Note (other than capitalized interest) will not exceed the incremental dollar amount of fluctuations in the aggregate balance of Pool Receiv- ables. 11. No Call or Put Feature. Because ---------------------- AnnTaylor, whether in its capacity as Servicer or as seller under the Purchase Agreement, is not entitled to repurchase the Pool Receivables transferred by it, AnnTaylor cannot cause an early payment of the Pool Receivables. Similarly, because Funding cannot require AnnTaylor to repurchase Pool Receivables, other than in connection with credit adjustments or other dilution, failure to meet specified eligibility criteria (measured at the time any such Pool Receivable was transferred) or the breach by AnnTaylor of representations and warranties as described in paragraph 18 below, Funding cannot cause an early payment of the Pool Receivables. When the loans from the Lender to Funding have matured or are accelerat- ed, Funding will have to either refinance the Pool Re- ceivables or extend the time of payment to the Lender while the Pool Receivables collect. Neither the Lender nor Funding has the ability to cause AnnTaylor to repur- chase the Pool Receivables at such time. 12. No Intent to Evade Public Policy, etc. We -------------------------------------- understand that AnnTaylor has a valid business reason for the sale of the Pool Receivables. We have no reason to believe that such sale is made with any intent to hinder, delay or defraud any entity to which AnnTaylor is or will become indebted on or after the date of transfer. We have no reason to believe that AnnTaylor is insolvent or that the sale of the Pool Receivables will render AnnTaylor insolvent on the date of the transfer or as a result of the transfer; we have been informed that AnnTaylor is not engaged in business or about to engage in business for which the assets remaining with it after the sale of the Pool Receivables will be an unreasonably small amount of capital; and we understand that AnnTaylor does not intend to incur or believe that it will incur debts beyond its ability to pay as such debts mature. We have no reason to believe that the consideration received The Persons listed on Schedule I hereto January 27, 1994 Page 10 by AnnTaylor upon the sale of the Pool Receivables to Funding will not constitute, in each case, reasonably equivalent value and fair consideration for the property sold, consistent with terms that would be arrived at on an arm's-length basis. We have no reason to believe that the sale of the Pool Receivables by AnnTaylor is done with any intent to evade any applicable laws or public policy. 13. Yield Considerations. While the discount -------------------- at which Funding purchases Pool Receivables from AnnTaylor is intended, among other things, to provide a yield on the purchase price paid reflective of a reason- able profit and the time that will elapse until purchased Pool Receivables are collected, AnnTaylor does not guar- antee or otherwise pay to Funding a specified yield if the collection time differs from that anticipated at the time a particular Pool Receivable is transferred. Simi- larly, AnnTaylor does not guarantee a specified yield to Funding (or any assignee, including the Lender). 14. Collections/Deposits to Accounts. The -------------------------------- Servicer will follow such collection procedures as it has customarily followed with respect to receivables it services for its own account comparable to the Pool Re- ceivables. In accordance with the requirements of the Receivables Financing Agreement and the Purchase Agree- ment, all Obligors will be directed to remit Collections to the Lock-Box Accounts. The Lock-Box Accounts are segregated bank accounts in the name of Funding and the Administrator as secured party and are not commingled with the general funds of AnnTaylor. AnnTaylor has no right to utilize monies received on Pool Receivables for its own purposes until such funds have been paid to it as part of the Purchase Price for Pool Receivables. If it is determined on any Settlement Date that AnnTaylor has received funds from Collections during the related Set- tlement Period in excess of the Purchase Price with respect to Pool Receivables that were generated during such Settlement Period, AnnTaylor must reduce the amount of the Company Note or otherwise refund to Funding the excess amount. The Persons listed on Schedule I hereto January 27, 1994 Page 11 15. Servicing. --------- (a) Choice of Initial Servicer. We -------------------------- understand that AnnTaylor originated the Pool Receivables in the ordinary course of business. We understand that AnnTaylor is fully familiar with servicing such Pool Receivables and has the administrative and other staff and agents necessary to service such Pool Receivables. In addition, we have been informed that receivables such as the Pool Receivables are structured to be serviced by servicers such as AnnTaylor. We further understand that physical possession of the documents associated with the Pool Receivables facilitates servicing of the Pool Re- ceivables. We have also been informed that, based on these factors, other entities could not comparably ser- vice the Pool Receivables as efficiently as AnnTaylor or for a lesser cost than that to be paid to AnnTaylor as the Servicer's Fee. We have been informed that servicing the Pool Receivables by any entity other than AnnTaylor could result in a diminution in the value of the Pool Receivables, and that it is thus in Funding's and the Lender's best interest that so long as AnnTaylor is in compliance with its obligations under the Receivables Financing Agreement, AnnTaylor service the Pool Receiv- ables. AnnTaylor has agreed to service the Pool Receiv- ables as agent on behalf of Funding, the Lender and the Administrator, subject to its right to delegate certain responsibilities to subservicers. We assume that AnnTaylor will discharge properly its fiduciary duty as Servicer with respect to servicing, administering and collecting the Pool Receivables. (b) Duties. AnnTaylor's duties as ------ Servicer under the Receivables Financing Agreement are customary for a servicer of credit-card receivables, interests in which are transferred as security to a third-party investor that has provided funding to the buyer for the purchase of such receivables. (c) Collection Fees and Expenses. The ---------------------------- Servicer will receive the Servicer's Fee as its primary compensation for servicing, administering and collecting the Pool Receivables. The Servicer's Fee will compensate AnnTaylor for performing the functions of a servicer, administrator and collector of credit-card receivables as The Persons listed on Schedule I hereto January 27, 1994 Page 12 an agent for Funding, the Lender and the Administrator, including billing, collecting and posting all payments, responding to inquiries of Obligors and investigating delinquencies. The Servicer's Fee will also compensate AnnTaylor for its services as the administrator of the Pool Receivables, including accounting for Collections and the furnishing on a monthly basis of the Information Package to the Administrator and the Relationship Bank. Such fee will also reimburse AnnTaylor for certain taxes, accounting fees, data-processing costs and other costs associated with administering the Pool Receivables. AnnTaylor would not receive any prescribed servicer fee if AnnTaylor were terminated as Servicer except with respect to amounts payable in respect of the activities of AnnTaylor as Servicer prior to its termination as Servicer. Any successor servicer assuming AnnTaylor's obligations would be entitled to at least the same servicer fees in respect of its activities as servicer. (d) Replacement of the Servicer. Upon --------------------------- any Servicer Transfer Event, the Administrator or the Relationship Bank may terminate AnnTaylor as Servicer. (e) Normal Servicer Arrangement. We --------------------------- understand that the servicer arrangements set forth above were arrived at as a result of arm's-length negotiations and that they are typical of servicer arrangements made for servicing, administering and collecting assets such as the Pool Receivables. (f) Reflection of Sale on Books and Re- ----------------------------------- cords. We understand that AnnTaylor utilizes a computer - ----- system to maintain information regarding the credit-card receivables that it owns or services, including informa- tion with respect to the legal ownership of such credit- card receivables. We understand and assume that Funding and others with an interest in credit-card receivables in AnnTaylor's possession place principal reliance on the computer-based records for information respecting the ownership and status of the credit-card receivables. AnnTaylor will maintain its computer records so that, from and after the closing, its summary master control data processing records that refer to the Pool Receiv- ables will indicate clearly that such Pool Receivables have been sold to Funding and that security interests in The Persons listed on Schedule I hereto January 27, 1994 Page 13 such Pool Receivables have been subsequently transferred by Funding to the Lender. If at any time AnnTaylor proposes to sell, grant a security interest in or other- wise transfer any interest in credit-card receivables, AnnTaylor will give to such prospective purchaser, lender or other transferee computer tapes, records or printouts that, if they refer to the Pool Receivables, clearly reflect that the Pool Receivables have been sold and are held by Funding and that a security interest therein is held by the Lender. We assume that the creditors of AnnTaylor rely substantially upon computer records and appropriate searches reflecting the filings of financing statements in making credit decisions. (g) Posting of Payments. We understand ------------------- that the Servicer posts payments received on Pool Receiv- ables to the particular Obligor's account on or about the date of receipt. Consequently, on any given day, the total amount owed on a particular Pool Receivable may be determined from the computer records of the Servicer or its subservicers, if any. 16. Additional Notice of Sale. UCC-1 financ- ------------------------- ing statements satisfying the requirements of the appli- cable Uniform Commercial Codes will be filed, which will reflect that the Pool Receivables have been sold by AnnTaylor to Funding and that Funding has transferred a security interest therein to the Lender. 17. Accounting and Tax Treatment. Although ---------------------------- AnnTaylor prepares consolidated financial statements and tax returns that include Funding, the transfer from AnnTaylor to Funding will be treated by AnnTaylor and Funding as a sale for both tax and accounting purposes, as applicable. 18. Breach of Warranties. In the Purchase -------------------- Agreement, there are specified eligibility criteria with respect to the Pool Receivables and AnnTaylor makes representations and warranties with respect to the Pool Receivables, upon which Funding relies in purchasing the Pool Receivables and upon which the Lender relies in loaning funds to Funding secured by the Pool Receivables. Such eligibility criteria and representations and warran- ties include, among other things, information relating to The Persons listed on Schedule I hereto January 27, 1994 Page 14 the characteristics of the Pool Receivables, that the Pool Receivables comply with law, that the Pool Receiv- ables are not subject to liens and other representations and warranties customary for transactions of this type. If an officer of AnnTaylor obtains knowledge or receives notice from Funding or the Administrator that the eligibility criteria with respect to a Pool Receiv- able has not been met or that there is a breach of any of the representation or warranty with respect to a Pool Receivable, AnnTaylor is required to pay the Unpaid Balance thereof to Funding and Funding will thereupon reconvey such Pool Receivable to AnnTaylor. The obliga- tion to make payments with respect to noncompliance of the eligibility criteria or breaches of representations and warranties by AnnTaylor arises only if any such eligibility standard or representation or warranty was untrue at the time of transfer of the applicable Pool Receivable or based upon any action or inaction by AnnTaylor, and not as a result of any subsequent decline in value of such Pool Receivable. Moreover, the eligi- bility criteria and the representations and warranties contained in the Purchase Agreement reflect practical limitations on the ability of any prospective purchaser of the Pool Receivables to review fully every Pool Re- ceivable prior to purchase of the Pool Receivables, and AnnTaylor's superior knowledge of, and access to, facts concerning such Pool Receivables. These eligibility criteria and representations and warranties do not confer any additional rights on a purchaser or impose any added burden on a seller beyond those applicable under general contract law, as well as by analogy under Section 2-608 of the Uniform Commercial Code, in the rescission of a sale of nonconforming property. 19. Dilution. As used herein, "Dilution" re- -------- fers to reductions in the Unpaid Balances of Pool Receiv- ables attributable to factors such as defective, rejected or returned merchandise by Obligors, other adjustments in amounts owed by Obligors, exercises of setoffs by Obligors, allowance to Obligors of cash discounts and similar items that result in reductions to the Unpaid Balance of the Pool Receivables. AnnTaylor is respon- sible to Funding for Dilution to Pool Receivables sold by it to Funding. If due to Dilution AnnTaylor pays to The Persons listed on Schedule I hereto January 27, 1994 Page 15 Funding the Unpaid Balance of any Pool Receivable, Fund- ing will reconvey such Pool Receivable to AnnTaylor. Although AnnTaylor will be responsible for the payment of Dilutions affecting Pool Receivables sold by it, such obligation should not be viewed as recourse to AnnTaylor and is not inconsistent with the character- ization of the related transfer as a sale. Risk of asset "deterioration" due to Dilutions should not be viewed as a fundamental attribute of ownership of the Pool Receiv- ables, which should properly be transferred to a purport- ed buyer of the Pool Receivables in a true sale. This is because Dilutions, unlike extraordinary credit losses due to Obligor defaults, are essentially entirely within the control of the seller of the Pool Receivables. Dilutions arise due to the reality that although an Obligor's payment obligation may have been sold, the related seller is the party that maintains an ongoing business relation- ship with such customer. Therefore, if the seller, as part of its normal business activities with its custom- ers, accepts returns of merchandise, adjusts account balances, provides discounts as sales or marketing incen- tives or otherwise creates Dilutions, a buyer of the related Pool Receivables should not be required to accept the risk that its purchased assets will disappear due to such activities by the seller. On the other hand, the Transactions (as well as comparable securitized transac- tions) recognize that it is necessary to allow the seller of the Pool Receivables to engage in the activities that may give rise to Dilutions. Therefore, we understand that virtually all securitized sales of credit-card re- ceivables (as well as trade receivables and other types of receivables that are subject to Dilutions) have been structured to provide, in one form or another, for a full charge-back to the seller for purchased receivables balances that disappear due to Dilutions created by the seller. The existence of such provisions in the Purchase Agreement should not be viewed as inconsistent with sale characterization. 20. No Other Agreements. There is not and ------------------- will not be any other agreement between AnnTaylor, Fund- ing and the Lender or any of them that supplements or otherwise modifies the agreements of AnnTaylor, Funding and the Lender as expressed in the Purchase Agreement, The Persons listed on Schedule I hereto January 27, 1994 Page 16 the Receivables Financing Agreement and the agreements delivered on or prior to the closing date pursuant there- to and specifically referred to therein. 21. Terms of Documentation. To the extent ---------------------- that the terms of the documentation take into consider- ation the credit of AnnTaylor, it is the intent of the parties that, because the Transactions are intended to be a sale of the Pool Receivables and not a loan secured by Pool Receivables, the credit of AnnTaylor is only rele- vant to the extent of its obligations as seller with respect to Dilutions and with respect to Pool Receivables for which there has been a breach of a representation or warranty and to the extent of its servicing responsibili- ties. 22. Governing Law. Each of the Purchase ------------- Agreement and the Receivables Financing Agreement pro- vides that it is to be construed in accordance with the laws of the State of New York and that the obligations, rights and remedies of the parties thereto shall be determined in accordance with such laws. 23. Notification to Obligors. The Obligors ------------------------ will not be notified of the sale of Pool Receivables by AnnTaylor to Funding unless the Administrator exercises its right upon an Event of Default under the Receivables Financing Agreement. We have been advised that there are valid business reasons for not notifying the Obligors of the sale of the Pool Receivables, including that such notification could confuse some Obligors and could lead to defaults and to increased administrative burdens in servicing the Pool Receivables. OPINION Based upon the foregoing facts and on such investigation of the law as we have deemed pertinent, it is our opinion that under present law: (i) the transfer of Pool Re- ceivables under the Purchase Agreement, when all relevant factors are considered as a whole, constitutes the sale of the Pool Receivables from AnnTaylor to Funding; and The Persons listed on Schedule I hereto January 27, 1994 Page 17 (ii) in the event that AnnTaylor were to become a debtor under the Bankruptcy Code, the transfer of Pool Receiv- ables under the Purchase Agreement would not, after full consideration of all relevant fac- tors, be properly characterized as a pledge of the Pool Receivables to secure a borrowing by AnnTaylor from Funding, and accordingly, the Pool Receivables and the proceeds thereof would not be part of the estate of AnnTaylor under Section 541 of the Bankruptcy Code in such event, and consequently Section 362 of the Bankruptcy Code would not be applicable to the Pool Receivables and the proceeds thereof. In expressing the opinions expressed in para- graphs (i) and (ii) above, we wish to note that, while we believe the opinions are supported by a sound analysis of the Transactions, there is no reported controlling judi- cial precedent directly on point. We therefore examined decisions in which certain of the facts and circumstances of the Transactions were present as well as cases dis- cussing more generally whether the transfer of an asset was a transfer of ownership or a transfer of a limited interest for the purpose of security. Moreover, the sources we have examined contain certain cases and au- thorities that are arguably inconsistent with the conclu- sions expressed in our opinion. These cases and authori- ties are, however, in our opinion distinguishable in the context of the Transactions. While we believe that courts ultimately look to the parties' true intention (as objectively demonstrat- ed), the legal structure and characteristics of the transaction and the economic substance of the transaction to determine whether a transaction constitutes a sale, judicial analysis has typically proceeded on a case-by- case basis. A court's determination is usually made on the basis of an analysis of the facts and circumstances of the particular case, rather than as a result of the application of consistently applied legal doctrines. Existing reported decisional authority is thus not con- clusive as to the relative weight to be accorded to the factors present in the Transactions and does not provide consistently applied general principles or guidelines The Persons listed on Schedule I hereto January 27, 1994 Page 18 with which to analyze all of the factors present in the Transactions. There are also facts and circumstances present in the Transactions that we believe to be rele- vant to our conclusion but that, because of the particu- lar facts at issue in the reported cases, are not gener- ally discussed in the reported cases as being material factors. We also note that the holding of one recent case poses some risk that AnnTaylor would be deemed to retain an interest in the Pool Receivables that would constitute property of AnnTaylor's bankruptcy estate under Section 541 of the Bankruptcy Code in the event of AnnTaylor's bankruptcy, even though the transfer of the Pool Receivables to Funding has the indicia of a true sale. In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d ----------------------------------- 948 (10th Cir. 1993), cert. denied, ___ U.S. ___, 114 S. ------------ Ct. 554 (1993), the United States Court of Appeals for the Tenth Circuit held that the assignment of a royalty interest in proceeds of natural gas constituted the grant of a security interest in an account because under Arti- cle 9 of the Uniform Commercial Code ("Article 9") the grant of a security interest in accounts and the sale of accounts are both treated as "security interests" as that term is defined in the Uniform Commercial Code. Id. at --- 955 (citing U.C.C. Sec. 9-102(1)(b), 1-201(37) and 9- 105(1)). Thus, based on its reading of Article 9, the Octagon Gas court concluded that the debtor retained an - ----------- interest in an account sold by the debtor prior to bank- ruptcy, which interest constituted property of the debtor's bankruptcy estate. We believe that the Octagon Gas decision is ----------- wrong to the extent it implies that the applicability of the provisions of Article 9 should be used to determine the ownership of accounts or chattel paper. The Octagon ------- Gas case fails to recognize that Article 9 treats the - --- sale of accounts and chattel paper as secured transac- tions solely for the purpose of applying Article 9's rules relating to attachment, perfection and priority and should not be construed as precluding true sales of accounts or chattel paper. See Peter F. Coogan, et al., --- Secured Transactions under the Uniform Commercial Code Sec. - ------------------------------------------------------ 28.03[2], at 28-15 (Matthew Bender 1993) (stating that Article 9 is "designed to integrate [the] sale of chattel The Persons listed on Schedule I hereto January 27, 1994 Page 19 paper into the Article 9 scheme insofar as the rules dealing with attachment, perfection, and priority are concerned"). Article 9 does not abolish the distinction between sales of and liens on accounts for all purposes. See U.C.C. Sec. 9-502(2). For example, the Official Comment - --- to U.C.C. Sec. 9-502 recognizes that there may be a true sale of accounts or chattel paper even if recourse ex- ists. In addition, the Octagon Gas decision does not ad- ----------- dress other provisions of Article 9, such as Section 9- 504(2), that clearly maintain the distinction between a secured loan and a true sale with respect to accounts and chattel paper. The Octagon Gas decision also appears to ----------- conflict with other cases, such as Major's Furniture Mart ---------------------- v. Castle Credit Corp., 602 F.2d 538 (3d Cir. 1979), and - ---------------------- In re Contractor's Equipment Supply Co. v. Dewhirst, 861 - --------------------------------------------------- F.2d 241 (9th Cir. 1988). If it were asserted that the beneficial inter- est in the Pool Receivables was part of AnnTaylor's estate in the event that AnnTaylor were to become a debtor under the Bankruptcy Code, we express no opinion as to how long Funding would be denied possession of the Pool Receivables or proceeds in respect thereof in AnnTaylor's possession before such an assertion is final- ly decided on appeal or other review in any bankruptcy case. We also express no opinion as to whether, in the event it were asserted that the beneficial interest in the Pool Receivables and the proceeds in respect thereof were part of AnnTaylor's estate in the event AnnTaylor were a debtor under the Bankruptcy Code, a court would permit AnnTaylor to use any proceeds relating to the Pool Receivables in AnnTaylor's possession without Funding's consent, either before deciding the issue or pending a final decision on the merits were a prior decision to be the subject of an appeal. We also express no opinion as to the availabil- ity or effect of a preliminary injunction, temporary restraining order or other such temporary relief pending a decision on the merits, or as to the availability of the remedy of specific performance or other equitable remedies to Persons seeking enforcement of their rights under the Purchase Agreement. The Persons listed on Schedule I hereto January 27, 1994 Page 20 To the extent that proceeds of the Pool Receiv- ables are in the possession of AnnTaylor at such time as AnnTaylor becomes a debtor under the Bankruptcy Code, the rights of Funding to obtain such proceeds, or the prior- ity of a claim to such proceeds as against creditors or a trustee of AnnTaylor, are subject to Section 9-306 of the applicable Uniform Commercial Code and the provisions of the Bankruptcy Code, including without limitation Section 362 thereof, and we express no opinion herein as to such rights or priority. We note that under the terms of the Receivables Financing Agreement and the Purchase Agree- ment, Collections on the Pool Receivables are required to be directed to a segregated lock-box account maintained in the name of Funding, and that the Lender has the right under specified conditions to gain control of such lock- box account. This opinion is expressly subject to there being no material change in the statutory or decisional law, and there being no additional facts of which we are not aware that would materially affect the validity of the assumptions set forth herein (and we are not aware of any such additional material facts). This opinion is being furnished to you solely for your benefit. This opinion is not to be used, quot- ed, relied upon or otherwise referred to for any other purpose without our prior written permission. Very truly yours, Exhibit A --------- OFFICER'S CERTIFICATE AnnTaylor Funding, Inc. The undersigned, Bert A. Tieben, hereby certi- fies as follows: 1. He is the duly elected Vice President of AnnTaylor Funding, Inc. ("Funding"), and is authorized to execute and deliver this Certificate on behalf of Fund- ing. 2. This Certificate is executed and delivered knowing that it will be relied upon by Skadden, Arps, Slate, Meagher & Flom (the "Law Firm") in connection with a legal opinion (the "Opinion") to be delivered on the date hereof by the Law Firm to the persons listed on Schedule I to the Opinion, which Opinion addresses cer- tain "true sale" issues. 3. The undersigned is familiar with the transactions and other factual matters described in the Opinion, and has made such investigations and inquiries, including, without limitation, of personnel and employees of Funding having familiarity with such transactions and factual matters, as may be necessary to enable the under- signed to execute and deliver this Certificate. 4. The undersigned has reviewed the Opinion and, with respect to the factual assumptions set forth under "Assumptions of Fact" preceding the discussion in the Opinion, hereby certifies that (i) each factual statement contained therein relating to Funding is, to the best of his knowledge after due inquiry, true and correct and does not fail to state a material fact the omission of which makes the statement as it appears incomplete or misleading, (ii) with respect to factual statements contained therein which relate to parties to the transactions discussed other than Funding, while the undersigned expressly disclaims any certification hereby as to the truth, correctness or completeness of such other statements, based on the undersigned's participa- tion in the subject transactions, the undersigned does not have actual knowledge that the statements contained therein relating to parties other than Funding are un- true, incorrect or incomplete so as to be misleading. IN WITNESS WHEREOF, the undersigned has execut- ed this Certificate as of the ____ day of January 1994. AnnTaylor Funding, Inc. ------------------------- Name: Bert A. Tieben Title: Vice President Exhibit B --------- OFFICER'S CERTIFICATE AnnTaylor, Inc. The undersigned, Bert A. Tieben, hereby certi- fies as follows: 1. He is the duly elected Senior Vice Presi- dent of AnnTaylor, Inc. ("AnnTaylor"), and is authorized to execute and deliver this Certificate on behalf of AnnTaylor. 2. This Certificate is executed and delivered knowing that it will be relied upon by Skadden, Arps, Slate, Meagher & Flom (the "Law Firm") in connection with a legal opinion (the "Opinion") to be delivered on the date hereof by the Law Firm to the persons listed on Schedule I to the Opinion, which Opinion addresses cer- tain "true sale" issues. 3. The undersigned is familiar with the transactions and other factual matters described in the Opinion, and has made such investigations and inquiries, including, without limitation, of personnel and employees of AnnTaylor having familiarity with such transactions and factual matters, as may be necessary to enable the undersigned to execute and deliver this Certificate. 4. The undersigned has reviewed the Opinion and, with respect to the factual assumptions set forth under "Assumptions of Fact" preceding the discussion in the Opinion, hereby certifies that (i) each factual statement contained therein relating to AnnTaylor is, to the best of his knowledge after due inquiry, true and correct and does not fail to state a material fact the omission of which makes the statement as it appears incomplete or misleading, (ii) with respect to factual statements contained therein which relate to parties to the transactions discussed other than AnnTaylor, while the undersigned expressly disclaims any certification hereby as to the truth, correctness or completeness of such other statements, based on the undersigned's partic- ipation in the subject transactions, the undersigned does not have actual knowledge that the statements contained therein relating to parties other than AnnTaylor are un- true, incorrect or incomplete so as to be misleading. IN WITNESS WHEREOF, the undersigned has execut- ed this Certificate as of the ____ day of January 1994. AnnTaylor, Inc. ------------------------- Name: Bert A. Tieben Title: Sr. Vice President SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02101 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Moody's Investors Service 99 Church Street New York, New York 10007 Standard & Poors Corporation 26 Broadway, 15th Floor New York, New York EXHIBIT 5.01(h)(iii) January 27, 1994 Persons Listed on Schedule I Hereto Re: Receivables Facility of AnnTaylor, Inc. and AnnTaylor Funding, Inc. ------------------------------------------- Ladies and Gentlemen: We have acted as special Connecticut counsel to AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), to advise the Company with respect to the perfection, in Connecticut, of the security interest to be granted by the Company to Clipper Receivables Corporation (the "Lender") pursuant to the Receivables Financing agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, Inc. ("AnnTaylor"), as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Financing Agreement. This opinion is being delivered pursuant to Section 5.01(h)(iii) of the Receivables Financing Agreement. Capitalized terms used herein are not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivable Financing Agreement. January 27, 1994 Page 2 In our examination we have assumed the genuineness of all signatures including endorsements, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such copies. As to any facts material to this opinion which we did not independently establish or verify, we have relied upon statements and representations of the Company and its officers and other representatives and of public officials. In rendering the opinions set forth herein, we have examined and relied on originals or copies of the following: (a) the Receivables Financing Agreement; (b) signed, unfiled copies of the financing statement under the Uniform Commercial Code as in effect in the State of Connecticut, naming the Company as debtor and the Lender as the secured party, which we understand and have assumed will be filed within ten days of the grant of a security interest in the Pool Receivables from the Company to the Lender, in the office of the Secretary of the State of the State of Connecticut (the "Filing Office") (such financing statement, the "Financing Statement"); (c) a search report provided by Lexis Document Services, dated January 19, 1994 and covering the period through December 30, 1993 listing financing statements that name the Company as debtor and that are filed in the Filing Office, together with copies of such financing statements, a summary of which search report is attached as Exhibit A hereto (the "Search Report"); and (d) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. Unless otherwise indicated, references in this opinion to the "Connecticut UCC" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of Connecticut. Members of our firm are admitted to the bar of the State of Connecticut. We express no opinion as to the laws of any jurisdiction other than (i) the laws of the State of Connecticut, and (ii) the federal laws of the United States of America to the extent specifically referred to herein. Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: January 27, 1994 Page 3 1. The Financing Statement is in appropriate form for filing in the Filing Office under the Connecticut UCC. 2. To the extent that the chief executive office of the Company is located in the State of Connecticut, the security interest in favor of the Lender in the portion of the Pool Receivables that constitutes accounts or general intangibles (each as defined in Article 9 of the Connecticut UCC) (the "Article 9 Filing Collateral") will be perfected upon the later of (i) attachment of the security interest and (ii) the filing of the Financing Statement in the Filing Office. No other security interest of any other transferee from the Company is equal or prior to the security interest of the Lender in such Article 9 Filing Collateral. The opinions expressed herein are subject to the following qualifications, exceptions and limitations: (a) we express no opinion with respect to the validity of the security interest of the Lender but have assumed for purposes of the opinions set forth herein that such security interest is valid under the laws of the State of New York; (b) we have assumed that the Article 9 Filing Collateral exists and the Company has sufficient rights in the Article 9 Filing Collateral for the security interest of the Lender to attach, and we express no opinion as to the nature or extent of the Company's rights in or title to any Article 9 Filing Collateral; (c) we call to your attention that Section 552 of the United States Bankruptcy Code limits the extent to which property acquired by the debtor after the commencement of a case under the United States Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (d) we call to your attention that the security interest of the Lender in proceeds, and the perfection of such security interest, is limited to the extent set forth in Section 9-306 of the Connecticut UCC and to property of a type subject to the Connecticut UCC; (e) we call to your attention that the security interest of the Lender may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (f) we express no opinion regarding the security interest of the Lender in any of the Article 9 Filing Collateral consisting of claims against any government or governmental agency January 27, 1994 Page 4 (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); (g) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Lender in and to such underlying property; (h) we have assumed that the chief executive office of the Company as of the date of filing of the Financing Statement is located either in the State of New York or in the State of Connecticut, and we express no opinion with respect to the perfection or priority of the security interest of the Lender in the Article 9 Filing Collateral to the extent that the chief executive office of the Company is located in the State of New York or in any jurisdiction other than the State of Connecticut; (i) we call to your attention that the perfection of the security interest of the Lender in Article 9 Filing Collateral may be governed by laws other than the Connecticut UCC if the chief executive office of the Company is or becomes located in a jurisdiction other than Connecticut; (j) we call to your attention that (i) the perfection of the security interest of the Lender as to the Article 9 Filing Collateral will be terminated as to any such property acquired by the Company more than four months after the Company changes its name, identity or corporate structure so as to make the Financing Statement seriously misleading unless new appropriate financing statements indicating the new name, identity or corporate structure of the Company are properly filed before the expiration of such four months, and (ii) the Connecticut UCC requires the filing of continuation statements within the period of six months prior to the expiration of five years from the date of the filing of the original Financing Statement or the filing of any continuation statements in order to maintain the effectiveness of the original Financing Statement; (k) we express no opinion as to the priority of the security interest of the Lender in the Article 9 Filing Collateral against: (i) any liens, claims or other interests that arise by operation of law and do not require any filing or possession in order to take priority over security interests perfected through the filing of a financing statement; (ii) any lien, claim or encumbrance in favor of the United States of America or any State, or any agency or instrumentality of either of them or any other governmental entity (including, without limitation, federal tax liens, liens arising under the Employee Retirement Income Security Act of 1974, as amended, or claims given priority pursuant to 31 January 27, 1994 Page 5 U.S.C. Sec. 3713); (iii) a lien creditor who attached or levied prior to the perfection of the security interest of the Lender; (iv) a lien creditor with respect to future advances to the extent set forth in Section 9-301(4) of the Connecticut UCC; (v) another secured creditor with respect to any future advances to the extent set forth in Section 9-312(7) of the Connecticut UCC; (vi) a security interest perfected under the laws of another jurisdiction to the extent that the Company had its chief executive office in such jurisdiction within four months prior to the date of the perfection of the security interest of the Lender; (vii) a security interest perfected without filing any financing statement pursuant to Section 9-302(1) of the Connecticut UCC; (viii) a security interest perfected by filing a financing statement naming the Company as debtor using a trade name, fictitious name or previous name; (ix) the holder of a perfected "purchase money security interest" as such term is defined in Section 9-107 of the Connecticut UCC; (x) another secured party with a perfected security interest in other property of the Company to the extent the Pool Receivables are proceeds of such other creditor's collateral; (xi) any person who has entered into a subordination or intercreditor agreement with the Lender; (xii) any claim for wages, salary or other compensation; (xiii) a purchaser of accounts purchased as part of the sale of the business out of which they arose; (xiv) an assignment of accounts for purposes of collection only or a transfer of a single account; (xv) any claim arising out of tort or any surety who is subrogated to the rights of the Company; or (xvi) the security interest of a creditor who filed a financing statement based on a prior or incorrect location of the chief executive office of the Company to the extent such other financing statement would be effective under Section 9-401(2) or (3) of the Connecticut UCC; (xvii) a security interest or lien existing by reason of a security interest in or lien upon such collateral or upon any goods the sale or disposition of which has given rise to such collateral, which security interest or lien was created by or levied against any prior owner of any interest in such collateral or goods; and (l) we have assumed that (i) all relevant financing statements in which the Company is named as debtor have been properly filed(except for the Financing Statements), indexed and recorded in the Filing Office and are identified in the Search Report and (ii) no financing statements naming the Company as debtor were filed in the filing Office between the effective date of the Search Report and the date of the filing of the Financing Statement in the Filing Office. January 27, 1994 Page 6 This opinion is being furnished only to you and is solely for your benefit and is not to be used, quoted, relied upon or otherwise referred to by any other Person or for any other purposes without our prior written consent. Very truly yours, TYLER, COOPER & ALCORN By _______________________ Joseph C. Lee, A Partner January 27, 1994 Page 7 SCHEDULE I ---------- Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02201 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Standard & Poor's Ratings Group 25 Broadway New York, New York 10004 Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 EXHIBIT 5.01(h)(iv) January 27, 1994 The Persons Listed on Schedule I Hereto Re: AnnTaylor, Inc. AnnTaylor Funding, Inc. ----------------------- Ladies and Gentlemen: We have acted as special counsel to AnnTaylor, Inc., a Delaware corporation ("AnnTaylor") in connection with the transactions contemplated by (i) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement") among AnnTaylor Fund- ing, Inc., a Delaware corporation ("Funding"), AnnTaylor, as Servicer, Clipper Receivables Corporation (the "Lend- er"), State Street Boston Capital Corporation (the "Ad- ministrator") and PNC Bank, National Association (the "Relationship Bank") and (ii) the Purchase and Sale Agreement, dated as of January 27, 1994 (the "Purchase Agreement") between AnnTaylor, as Seller and Funding. Capitalized terms not otherwise defined herein have the meanings assigned to such terms in Appendix A to the Receivables Financing Agreement or in the Purchase Agree- ment. This opinion is being furnished to you pursuant to Section 5.01(h)(iv) of the Receivables Financing Agree- ment. Pursuant to the Purchase Agreement, AnnTaylor proposes to sell to Funding, and Funding proposes to purchase from AnnTaylor, Receivables and Related Rights. Pursuant to the Receivables Financing Agreement, Lender proposes to make Loans to Funding and Funding proposes to issue the Note to the Lender and grant to the Lender a security interest in all of its right, title and interest in, among other things, the Receivables and Related Rights to secure, among other things, Funding's obliga- The Persons listed on Schedule I hereto January 27, 1994 Page 2 tions to repay the Loan in accordance with the Note and the Receivables Financing Agreement. The relevant transactions are more fully de- scribed under Assumptions of Fact below. You have requested our opinion as to whether, in an action brought under Title 11 of the United States Code (the "Bankruptcy Code") in which AnnTaylor was the debtor, a creditor or the trustee in bankruptcy of AnnTaylor would have valid legal grounds to have a court disregard the corporate form so as to cause a substantive consolidation of the assets and liabilities of AnnTaylor and Funding. Members of our firm are admitted to the bar in the State of New York and we express no opinion as to the law of any jurisdiction other than the bankruptcy law of the United States. ASSUMPTIONS OF FACT ------------------- In rendering our opinion, we have made no inde- pendent investigation of the facts referred to herein and have relied for the purpose of rendering this opinion exclusively on (i) those facts set forth herein which have been provided to us by AnnTaylor and Funding, as confirmed in certificates provided to us by AnnTaylor and Funding attached hereto as Exhibits A and B and (ii) those facts set forth under "Summary of the Transactions" and "Facts and Assumptions" in our opinion to you of even date herewith addressing certain "true sale" issues, in each case which we assume have been and, except where such "Facts and Assumptions" are limited to a particular point in time, will continue to be true. We understand such facts to be as follows: Organization. Funding is a limited purpose ------------ corporation duly organized and validly existing under the laws of the State of Delaware. The Persons listed on Schedule I hereto January 27, 1994 Page 3 Existence. Funding maintains its corporate --------- existence and its good standing under the laws of the State of Delaware. Ownership. All of the outstanding common stock --------- of Funding is owned by AnnTaylor; the common stock issued to AnnTaylor is the only stock of Funding. Limited Activities. The Certificate of Incor- ------------------ poration (the "Certificate of Incorporation") of Funding limits its activities to the following: (a) to purchase or otherwise acquire from AnnTaylor, own, hold, grant security interests in or sell interests in, or interests in pools of, Receivables and Related Rights; (b) to enter into the Purchase Agreement and to incur intercompany indebtedness to AnnTaylor in connection with the purchase of Receivables and Related Rights; (c) to enter into the Receivables Financing Agreement and transactions contem- plated thereby; (d) to issue and deliver notes as contem- plated by the Receivables Financing Agreement; and (e) to enter into letter of credit agreements, interest rate agreements, spread account agreements, lock-box agree- ments, subscription agreements, and similar documents or to engage in other activities incidental to the forego- ing. Procedures Observed. Funding observes all ------------------- corporate procedures required by its Certificate of Incorporation, its bylaws and the corporation law of the State of Delaware, as well as those required under cove- nants contained in the Receivables Financing Agreement. Without limiting the foregoing, Funding complies with all requirements contained in the Certificate of Incorpo- ration relating to "Restrictions on Corporate Action" and "Maintenance of Separate Business". Management. The business and affairs of Fund- ---------- ing will be managed by or under the direction of its Board of Directors. Funding will at all times ensure that its Board of Directors duly authorizes all corporate actions requiring Board authorization. When necessary, The Persons listed on Schedule I hereto January 27, 1994 Page 4 Funding obtains proper authorization from its stockholder for corporate action. Independence. The Certificate of Incorporation ------------ requires that the Board of Directors of Funding shall include at least one Independent Director. The Certifi- cate of Incorporation defines an "Independent Director" as an individual who, among other restrictions, (a) is not and has not been employed by AnnTaylor or any of its subsidiaries or affiliates as a director, officer or employee within the five years prior to such appointment, (b) is not, or is not affiliated with a firm that is, a significant advisor or consultant to AnnTaylor or any of its subsidiaries or affiliates, a significant customer or supplier to AnnTaylor or any of its subsidiaries or affiliates, or as to which AnnTaylor or any of its sub- sidiaries or affiliates is a significant customer or supplier, in each case within the five years prior to such appointment, (c) does not have significant personal services contract(s) with, and is not affiliated with a tax-exempt entity that receives significant contributions from, AnnTaylor or any of its subsidiaries or affiliates within the five years prior to such appointment, (d) is not the beneficial owner of stock of AnnTaylor or any affiliate of AnnTaylor, (e) is not an immediate relative of any person described above, and (f) is not a major creditor of AnnTaylor or any of its subsidiaries or affiliates within the five years prior to such appoint- ment. Records. Funding maintains separate corporate ------- records and books of account from those of AnnTaylor or any other affiliate of AnnTaylor. Funding keeps correct and complete books and records of account and minutes of the meetings and other proceedings of its stockholder and Board of Directors. The resolutions, agreements and other instruments underlying the subject transactions will be continuously maintained as official records by Funding. Offices. The Certificate of Incorporation ------- provides that to the extent Funding's office is located The Persons listed on Schedule I hereto January 27, 1994 Page 5 in the office of AnnTaylor or any affiliate of AnnTaylor, Funding will pay fair market rent for any such office space and a fair share of any overhead costs. Identifiable Assets. The Certificate of Incor- ------------------- poration and covenants in the Receivables Financing Agreement require that Funding's assets are not commin- gled with those of AnnTaylor or any other entity. In conformity with such requirements, Funding's funds and other assets will be identifiable and will not be commin- gled with those of AnnTaylor, other than in-store collec- tions on the Receivables, which will either be paid to AnnTaylor as the purchase price for new Receivables, or will be deposited into a bank account of Funding within two Business Days. Funding will maintain separate bank accounts and books of account from those of AnnTaylor or any other affiliate of AnnTaylor. Accordingly, the sepa- rate assets and liabilities of Funding are and will continue to be readily distinguishable from those of AnnTaylor or any other affiliate of AnnTaylor. Capitalization. Prior to the Initial Closing -------------- Date, AnnTaylor will initially capitalize Funding with one hundred dollars. AnnTaylor will make an additional capital contribution to Funding in connection with the initial transfer of Receivables and Related Rights under the Purchase Agreement. Pursuant to the Purchase Agree- ment, on the Initial Closing Date, Funding will pay AnnTaylor the Purchase Price for the purchase to be made in cash in the amount of the proceeds of the Loans made to Funding under the Receivables Financing Agreement. On the Initial Closing Date, Funding shall issue a subordi- nated promissory note (the "Company Note") to AnnTaylor. The principal amount of the Company Note shall vary as prescribed in the Purchase Agreement. At and immediately after the Initial Closing Date, each of Funding and AnnTaylor will be solvent, will have adequate capital to carry on its business, and intends to and believes that it will be able to pay its debts as they mature. Neither Funding nor AnnTaylor intends to, or believes that it will, engage in any business for which its respective capitalization would not be adequate. None of the trans- The Persons listed on Schedule I hereto January 27, 1994 Page 6 actions is being entered into with the intent to hinder, defraud or delay any of the creditors of Funding or AnnTaylor. Expenses. The Certificate of Incorporation and -------- covenants in the Receivables Financing Agreement require Funding to pay from its own funds and assets all obliga- tions and indebtedness incurred by it, other than expens- es relating to the preparation, negotiation, execution and delivery of the Transaction Documents as referred to below. Each of Funding and AnnTaylor will continue to provide for its own operating expenses and liabilities from its own funds. General overhead and administrative expenses of AnnTaylor will not be charged or otherwise allocated to Funding (unless directly attributable to services provided to or for the account of Funding) and such expenses of Funding will not be charged or otherwise allocated to AnnTaylor. Certain of the organizational expenses of Funding and expenses relating to the prepara- tion, negotiation, execution and delivery of the Transac- tion Documents, however, have been paid by AnnTaylor. Conduct. Each of Funding and AnnTaylor con- ------- ducts and will continue to conduct its business solely in its own name so as not to mislead others as to the iden- tity of Funding. Without limiting the generality of the foregoing, all oral and written communications, including without limitation letters, invoices, purchase orders, contracts, statements, and applications are made and will continue to be made solely in the name of Funding if related to Funding, or solely in the name of AnnTaylor if related to AnnTaylor. AnnTaylor, as Servicer, is enti- tled to deal with Obligors in its own name, but any funds collected by it from the Receivables and Related Rights will be accounted for in accordance with the Receivables Financing Agreement. Funding and AnnTaylor have and will continue to have separate stationery and separate post office boxes. Intercompany Claims. There will be no guaran- ------------------- tees made by AnnTaylor with respect to obligations of Funding and there will be no guarantees made by Funding The Persons listed on Schedule I hereto January 27, 1994 Page 7 with respect to obligations of AnnTaylor. There will be no intercompany debt between Funding and AnnTaylor other than in connection with the Company Note. With respect to each of AnnTaylor and Funding, the Company Note will be (i) entered into in the ordinary course of its respec- tive business; (ii) will be properly documented on its books and records; and (iii) will pay a rate of interest consistent with that which independent entities with the same or similar bargaining leverage would pay after negotiating with each other at arm's length. Further- more, AnnTaylor is not obligated to advance funds under the Company Note but may do so pursuant to a capital con- tribution. Reliance by Others. Funding acts solely in its ------------------ name and through its duly authorized officers or agents in the conduct of its businesses. Funding and AnnTaylor each do not and will not: (a) hold itself out as having agreed to pay or become liable for the debts of AnnTaylor, in the case of Funding, or Funding, in the case of AnnTaylor; (b) fail to correct any known misrep- resentation with respect to the foregoing; (c) operate or purport to operate as an integrated, single economic unit with respect to each other or in their dealings with any other affiliated or unaffiliated entity; (d) seek or obtain credit or incur any obligation to any third party based upon the assets of each other or, with respect to Funding, any other affiliated or unaffiliated entity; or (e) induce any such third party to reasonably rely on the creditworthiness of each other or, with respect to Fund- ing, any other affiliated or unaffiliated entity. The Lender will have relied on the separate legal existence of Funding in agreeing to make the Loans. The Lender, the Administrator and the Relationship Bank will have relied on the separate legal existence of Funding in agreeing to enter into the Receivables Financing Agree- ment. The common stock of Funding and the Company Note will be pledged by AnnTaylor to the agent for the benefit of the lenders under the AnnTaylor Credit Agreement. However, the lenders thereunder are not necessarily relying on the assets of Funding because AnnTaylor is obligated pursuant to documents relating to the AnnTaylor The Persons listed on Schedule I hereto January 27, 1994 Page 8 Credit Agreement to pledge, with certain exceptions, all securities and instruments of debt owned by AnnTaylor, whether or not such securities and instruments are issued by subsidiaries of AnnTaylor. Arm's Length. Funding and AnnTaylor maintain ------------ and will continue to maintain an arm's length relation- ship between Funding and AnnTaylor and between Funding and any affiliates of AnnTaylor. The Purchase Price payable by Funding to AnnTaylor under the Purchase Agree- ment is intended to be consistent with the terms that would be obtained in an arm's length sale. The Servicer's Fee payable by Funding to AnnTaylor under the Receivables Financing Agreement is intended to be consis- tent with the terms that would be obtained in an arm's length sale. Disclosure of the Transactions. The annual ------------------------------ financial statements of Funding and AnnTaylor will dis- close the effects of the transactions in accordance with generally accepted accounting principles. The transfer of the Receivables and Related Rights by AnnTaylor to Funding pursuant to the Purchase Agreement will be treat- ed as a sale by AnnTaylor and a purchase by Funding under generally accepted accounting principles. In particular, the financial statements of Funding and AnnTaylor will clearly indicate their separate existence and will re- flect each of their respective separate assets and lia- bilities. None of such financial statements, nor any consolidated financial statements for AnnTaylor, will suggest in any way that the assets of Funding are avail- able to pay the claims of creditors of AnnTaylor or any other entity. Fairness of Transactions. The management of ------------------------ AnnTaylor has determined that the organization of Funding by AnnTaylor and the limited purposes of Funding are in the best interests of AnnTaylor. The Persons listed on Schedule I hereto January 27, 1994 Page 9 DISCUSSION ---------- The authority of a bankruptcy court to order substantive consolidation lies in its general equitable powers under section 105(a) of the Bankruptcy Code. That section merely provides that the court may issue orders necessary to carry out the provisions of the Bankruptcy Code. In re DRW Property Co. 82, 54 B.R. 489, 494 ------------------------- (Bankr. N.D. Tex. 1985). There is no direct statutory authority or prescribed standards for substantive consol- idation. Instead, judicially developed standards control whether substantive consolidation should be granted in any given case. The fluidity and uncertainty associated with such standards has been noted by several courts, but is best typified by the often-paraphrased comment "[t]hat as to substantive consolidation, precedents are of little value, thereby making each analysis on a case by case basis." In re Crown Mach. & Welding, Inc., 100 B.R. 25, --------------------------------- 27-28 (Bankr. D. Mont. 1989). This ad hoc approach is -- --- largely responsible for the unsettled nature of the appropriate standards, relevant factors, the weight to be attached to such factors and the significance of compet- ing considerations offered by all persons who object to substantive consolidation. Accordingly, this analysis, as well as any other analysis of whether there is a substantial risk of substantive consolidation, is subject to the general qualification that there can be no guaran- ty as to whether substantive consolidation will be grant- ed by a court exercising its discretionary equitable authority in any given instance. The nature and impact of the substantive con- solidation of affiliated corporate debtors' estates closely resembles a corporate merger in which the rights of shareholders and creditors of the merging entities are affected: Substantive consolidation usually results in, inter alia, pooling the assets of, and claims ----- ---- against, the two entities; satisfying liabili- The Persons listed on Schedule I hereto January 27, 1994 Page 10 ties from the resulting common fund; eliminat- ing inter-company claims; and combining the creditors of the two companies for purposes of voting on reorganization plans. In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d - ------------------------------ Cir. 1988). Certain creditors face a harsh economic result associated with an involuntary combination of their debtor's estate with less solvent estates. For this reason, the Second Circuit noted that "[t]he power to consolidate should be used sparingly," Chemical Bank New ----------------- York Trust Co. v. Kheel, 369 F.2d 845, 847 (2d Cir. - ----------------------- 1966). Another court concluded that virtually every request for substantive consolidation involves harm to creditors: It must be recognized and affirmatively stated that substantive consolidation, in al- most all instances, threatens to prejudice the rights of creditors. . . . This is so because separate debtors will almost always have dif- ferent ratios of assets to liabilities. Thus, creditors of a debtor whose asset-to-liability ratio is higher than that of its affiliated debtor must lose to the extent that the asset- to-liability ratio of the merged estates will be lower. In re Snider Bros., 18 B.R. 230, 234 (Bankr. D. Mass. - ------------------ 1982) (citation omitted). It should be recognized, however, that recently at least some courts have expressed a greater willingness to consider the appropriateness of substantive consolida- tion when faced with more complex corporate structures. See, e.g., Eastgroup Properties v. Southern Motel Assoc., - --- ---- ---------------------------------------------- Ltd., 935 F.2d 245 (11th Cir. 1991). - ---- Thus, courts have stated that substantive con- solidation should be 'used sparingly.'. . . The Persons listed on Schedule I hereto January 27, 1994 Page 11 There is, however, a 'modern' or 'liberal' trend toward allowing substantive consolida- tion, which has its genesis in the increased judicial recognition of the widespread use of interrelated corporate structures by subsidiary corporations operating under a parent entity's corporate umbrella for tax and business purpos- es. 935 F.2d at 248-49 (citations omitted). The reported decisions under the Bankruptcy Act and cases decided shortly after the enactment of the Bankruptcy Code rely principally on the presence or absence of certain "elements" that are identical or similar to factors relevant to "piercing the corporate veil" theories under applicable state law. See, e.g., In --- ---- -- re Vecco Constr. Indus., 4 B.R. 407 (Bankr. E.D. Va. - ----------------------- 1980); In re Gulfco Inv. Corp., 593 F.2d 921 (10th Cir. ----------------------- 1979); In re Food Fair, Inc., 10 B.R. 123 (Bankr. --------------------- S.D.N.Y. 1981). More recent cases take such factors into account within the context of a balancing test in which the interests of parties objecting to substantive consol- idation are considered. To a certain extent, the impact of consolidation on creditors appears to have been given a greater degree of significance than mere proof of the substantive consolidation "elements." See, e.g., In re --- ---- ----- Snider Bros., 18 B.R. 230 (Bankr. D. Mass. 1982); In re - ------------ ----- DRW Property Co. 82, 54 B.R. 489 (Bankr. N.D. Tex. 1985); - ------------------- In re Steury, 94 B.R. 553 (Bankr. N.D. Ind. 1988); In re - ------------ ----- Crown Mach. & Welding, Inc., 100 B.R. 25 (Bankr. D. Mont. - --------------------------- 1989); but cf. In re Gainesville P-H Properties, Inc., --- -- -------------------------------------- 106 B.R. 304 (Bankr. M.D. Fla. 1989) (relying on alter ego factors), aff'd sub nom. Eastgroup Properties v. ------------- ----------------------- Southern Motel Assoc., Ltd., 935 F.2d 245 (11th Cir. - --------------------------- 1991). The Second Circuit, in In re Augie/Restivo ------------------- Baking Co., Ltd., 860 F.2d 515 (2d Cir. 1988), reduced - ---------------- the laundry list of factors pertinent to the balancing The Persons listed on Schedule I hereto January 27, 1994 Page 12 test to two "critical factors," namely, "whether credi- tors dealt with the entities as a single economic unit and, did not rely on their separate identity in extending credit, . . . [or] whether the affairs of the debtors are so entangled that consolidation will benefit all credi- tors." Id. at 518 (citation omitted). Recently, the -- Eleventh Circuit, in Eastgroup Properties v. Southern -------------------------------- Motel Assoc., Ltd., 935 F.2d 245 (11th Cir. 1991), viewed - ------------------ the frequently cited list of factors as relevant to making a prima facie case for consolidation, "as examples of information that may be useful to courts charged with deciding whether there is substantial identity between the entities to be consolidated and whether consolidation is necessary to avoid some harm or to realize some bene- fit." Id. at 250. -- Irrespective of which variant of the standard for substantive consolidation is applied, the "elements" enumerated in several cases remain relevant, but not necessarily dispositive, as to whether substantive con- solidation should be granted. Two sets of substantive consolidation elements are often cited. In the cases that depend primarily on the alter ego analog to substan- tive consolidation, the following factors are cited as relevant to the issue of whether substantive consolida- tion is justified: (1) Parent corporation owns all or a major- ity of the capital stock of the subsid- iary; (2) Parent and subsidiary have common offi- cers and directors; (3) Parent finances subsidiary; (4) Parent is responsible for incorporation of subsidiary; (5) Subsidiary has grossly inadequate capi- tal; (6) Parent pays salaries, expenses or loss- es of subsidiary; The Persons listed on Schedule I hereto January 27, 1994 Page 13 (7) Subsidiary has substantially no busi- ness except with parent; (8) Subsidiary has essentially no assets except for those conveyed by parent; (9) Parent refers to subsidiary as depart- ment or division of parent; (10) Directors or officers of subsidiary do not act in interests of subsidiary, but take directions from parent; and (11) Formal legal requirements of the sub- sidiary as a separate and independent corporation are not observed. In re Tureaud, 45 B.R. 658, 662 (Bankr. N.D. Okla. 1985), - ------------- aff'd, 59 B.R. 973 (N.D. Okla. 1986) (citing Fish v. - ----- ------- East, 114 F.2d 177 (10th Cir. 1940) and In re Gulfco Inv. - ---- ----------------- Corp., 593 F.2d 921 (10th Cir. 1979)). A second state- - ----- ment of substantive consolidation "elements," which are cited in some of the more recent cases, appears in Vecco ----- Constr.: - ------- (1) The degree of difficulty in segregating and ascertaining individual assets and liabilities; (2) The presence or absence of consolidated financial statements; (3) The profitability of consolidation at a single physical location; (4) The commingling of assets and business functions; (5) The unity of interests and ownership between the various corporate entities; (6) The existence of parent and inter-cor- porate guarantees on loans; and (7) The transfer of assets without formal observance of corporate formalities. Vecco Constr., 4 B.R. at 410. - ------------- The Persons listed on Schedule I hereto January 27, 1994 Page 14 Many of the above factors are present in most bankruptcy cases involving affiliated debtors. For example, stock ownership, inter-affiliate transfers, incorporation caused by the parent, common directors and officers, the existence of inter-corporate claims, and consolidated financial statements or tax returns are all typical of most affiliated corporations. Accordingly, such factors should be afforded less weight than the remaining ones in a court's determination of whether substantive consolidation is appropriate. There is no conclusive determination to be reached based on the presence or absence of some or all of the "elements." It is not, therefore, a foregone conclusion that, if proponents demonstrate that all of the elements of substantive consolidation are present, substantive consolidation should be granted. This is particularly true under the cases purporting to apply some form of balancing test (see discussion below of the --- balancing test adopted in In re Snider Bros.). Converse- ------------------ ly, persons who object cannot rely solely upon rebutting a majority of the factors to successfully defeat substan- tive consolidation. Poor or nonexistent recordkeeping of separate assets (particularly cash and other liquid assets) and liabilities and inter-affiliate transactions, whether by design or otherwise, is one of the more common reasons for imposing substantive consolidation. When the combi- nation of affiliates' assets, liabilities and business affairs are so "hopelessly entangled" such that segrega- tion is either prohibitively expensive or impossible, courts exhibit little reluctance in granting substantive consolidation. However, the degree of entanglement is the central question to be examined, because the poten- tially prejudicial effect of substantive consolidation cannot be justified based on mere contentions of adminis- trative convenience. The Persons listed on Schedule I hereto January 27, 1994 Page 15 The Second Circuit recognized the benefits to be realized by all creditors upon substantive consolida- --- tion of estates whose financial affairs had not been segregated: [I]n the rare case such as this, where the ------------------ interrelationships of the group are hopelessly obscured and the time and expense necessary even to attempt to unscramble them so substan- tial as to threaten the realization of any net assets for all the creditors, equity is not helpless to reach a rough approximation of justice to some rather than deny any to all. Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, - ----------------------------------------- 847 (2d Cir. 1966) (emphasis added). The Second Circuit appears to have established a stringent standard for the degree to which the debtors' affairs need to be obscured before consolidation is appropriate. In reversing the lower court's substantive consolidation order, the Second Circuit held: Resort to consolidation in such circumstances [involving commingling of assets and business functions], however, should not be Pavlovian. Rather substantive consolidation should be used ---------------------------------------- only after it has been determined that all ------------------------------------------ creditors will benefit because untangling is -------------------------------------------- either impossible or so costly as to consume -------------------------------------------- the assets. . . . Commingling, therefore, can ---------- justify substantive consolidation only where ---- "the time and expense necessary even to attempt to unscramble them [is] so substantial as to threaten the realization of any net assets for all the creditors," . . . or where no accurate identification and allocation of assets is possible. In such circumstances, all creditors are better off with substantive consolidation. The Persons listed on Schedule I hereto January 27, 1994 Page 16 In re Augie/Restivo Baking Co., 860 F.2d 515, 519 (2d - ------------------------------ Cir. 1988) (emphasis added; citations omitted). Kheel and Augie/Restivo indicate that substan- ----- ------------- tive consolidation should not be justified merely in terms of the administrative convenience of dealing with affiliated debtors on a consolidated basis, even if the financial affairs of the debtors are not easily distin- guishable. In some instances, protection of creditors whose interests would be adversely and unfairly affected by consolidation predominates over financial entanglement concerns. See In re Flora Mir Candy Corp., 432 F.2d --- --------------------------- 1060, 1063 (2d Cir. 1960) (unlikely that any showing of accounting difficulties would justify consolidation when claims of debentureholders of formerly independent enti- ty, whose stock was subsequently transferred, would be extinguished or diluted; no evidence of accounting diffi- culties when financial statements for each debtor had been prepared by accountants); but see In re I.R.C.C., --- --- --------------- Inc., 105 B.R. 237 (Bankr. S.D.N.Y. 1989) (evidence - ---- considered by court applying Augie/Restivo financial ------------- entanglement standard consisted primarily of representa- tions by debtor's counsel and chapter 7 trustee of inade- quate accounting practices, undocumented inter-affiliate loans, commingled bank accounts, common use of assets, cross-funding of expenses and consolidated tax returns). Other cases involving financial entanglement as one of the factors considered also illustrate some degree of variation in the proof required to demonstrate that substantive consolidation is warranted. Compare In re ------- ----- Vecco Constr. Indus., 4 B.R. 407, 408-09 (Bankr. E.D. Va. - -------------------- 1980) (substantive consolidation granted without opposi- tion when debtors had single operating account and con- solidated financials, had made no attempt to segregate receivables, disbursements or income, had inaccurately allocated affiliate expenses through inter-company ac- counts, and had filed bankruptcy schedules on consolidat- ed basis), In re Baker & Getty Fin. Serv., 78 B.R. 139, ------------------------------ 142 (Bankr. N.D. Ohio 1987) (substantive consolidation The Persons listed on Schedule I hereto January 27, 1994 Page 17 ordered when corporate funds were commingled and used for principal's personal purposes, inadequate records of transfers were made, and corporate entities were alter ego of principal who admitted having engaged in Ponzi scheme to defraud investors) and In re Tureaud, 45 B.R. --- ------------- 658, 661 (Bankr. N.D. Okla. 1985), aff'd, 59 B.R. 973 ----- (N.D. Okla. 1986) (alter ego finding based on majority of "elements" and fraud supported substantive consolidation of nondebtor entities in face of "hopeless" commingling of personal and corporate assets, numerous undocumented inter-corporate transfers, lack of distinction between inter-company transactions despite separateness of books and records, and impossibility of accurately tracing all transfers) with In re Ford, 54 B.R. 145, 147-48 n.6 ---- ---------- (Bankr. W.D. MD. 1984) (evidence of commingled corporate and personal funds in corporate bank account, common use of funds, and common responsibility for loans insuffi- cient for substantive consolidation; appropriate remedies for diversion of debtors' funds for nondebtor uses are avoidance actions). Strict adherence to maintaining separate books and records, avoiding commingling of assets, and other corporate policies designed to preserve the separateness of corporate assets and liabilities should make it more difficult for a court to order substantive consolidation. Substantive consolidation may be ordered as a result of the debtors' failure to comply with corporate formalities in connection with interaffiliate transfers and third party transactions, directors and shareholders meetings, representations made to third parties regarding corporate entities, and any other formal conduct required by corporate law. The failure to observe consistently corporate formalities is typically given some evidentiary weight in the cases, but usually is not dispositive unless such elements, together with other evidence, support a finding of fraudulent or inequitable conduct by the debtors or their principals. For example, in The Persons listed on Schedule I hereto January 27, 1994 Page 18 Tureaud, 45 B.R. at 661, the court found "an almost total - ------- disregard of the corporate fiction; the corporations are a sham -- functionally indistinguishable from each other with commingling of assets and business functions." The court also found that directors and officers of the nondebtor affiliates, which were substantively consoli- dated with the debtor-principal, acted in the interest of their principal rather than independently. Some of the affiliates failed to file tax returns and others were suspended for failure to make requisite corporate fil- ings. More significant evidence in Tureaud included the ------- debtors' principals' fraudulent purposes for incorpora- tion ("front to raise money for [principal's personal] purposes, and to hinder and delay judgment creditors"; id. at 660), and "hopeless commingling" of assets and - -- liabilities. Under the balancing analysis appearing in a majority of the more recent decisions, proponents of consolidation must not only demonstrate the existence of substantive consolidation "elements," including those pertaining to corporate formalities, but also submit proof of the harm suffered as a result of the existence of the "elements." In re Snider Bros., 18 B.R. 230, 238 ------------------ (Bankr. D. Mass. 1982). Although the risks of substan- tive consolidation are reduced if all corporate formali- ties are consistently observed, such formalities appear to play a secondary role under this type of analysis. In In re Donut Queen, Ltd., 41 B.R. 706, 708 (Bankr. - ----------------------- E.D.N.Y. 1984), a case in which the Snider Bros. balanc- ------------ ing test is applied, the proponents offered evidence of the debtors' failure to observe corporate formalities: The debtors failed on occasion to observe the formalities of corporate separateness. For example, no corporate resolutions were recorded by Bapajo regarding its guarantor relationship with Donut Queen and Westbury Donuts or its lease arrangement with Donut Queen. The Persons listed on Schedule I hereto January 27, 1994 Page 19 Id. The court nonetheless rejected the proponent's - -- argument that the lack of corporate formalities was sufficient basis for granting substantive consolidation: The absence of several corporate resolu- tions from the Bapajo corporate records is not a sufficient basis to conclude that Donut Queen and Bapajo failed to observe the formalities of corporate separateness. Earlier cases that have determined consolidation to be warranted have found a more extensive lack of corporate formalities than is indicated by this evidence. . . . In this case, the absence of the corpo- rate resolutions might be indicative of both the corporate informality inherent in the oper- ating of a small corporation and the unity of ownership that exists between the debtors. Without further evidence, this court cannot assume that the articulated failure by these debtors to observe corporate formalities would warrant consolidation. Id. at 710 (citations omitted). - -- Some courts still primarily rely on the alter ego or "piercing the corporate veil" doctrine derived from state law in the substantive consolidation analysis. See In re Tureaud, 45 B.R. 658 (Bankr. N.D. Okla. 1985), - --- ------------- aff'd, 59 B.R. 973 (N.D. Okla. 1986); In re 1438 Meridian - ----- ------------------- Place, N.W., Inc., 15 B.R. 89 (Bankr. D.C. 1981); In re - ----------------- ----- Stop & Go of America, Inc., 49 B.R. 743 (Bankr. D. Mass. - -------------------------- 1985); In re Baker & Getty Fin. Serv., 78 B.R. 139 ------------------------------ (Bankr. N.D. Ohio 1987); see also In re S.I. Acquisition, --- ---- ----------------------- Inc., 58 B.R. 454, 460 n.3 (Bankr. W.D. Tex. 1986), rev'd - ---- on other grounds, 817 F.2d 1142 (5th Cir. 1987). This line of cases, however, either involves an attempt to consolidate nondebtor affiliates (see Tureaud and 1438 --- ------- ---- Meridian Place; see also In re DRW Property Co. 82, 54 - -------------- --- ---- ------------------------- B.R. 489 (Bankr. N.D. Tex. 1985) (substantive consolida- The Persons listed on Schedule I hereto January 27, 1994 Page 20 tion of nondebtor entities denied under Snider Bros. ------------ balancing test)) or assertions of inequitable conduct/ fraud on the part of affiliated debtors or their princi- pals (see Baker & Getty Fin. Serv. and Stop & Go). These --- ------------------------ --------- cases are, therefore, factually distinguishable from other substantive consolidation cases based on the recent trend in affording greater significance to inter-creditor issues under the balancing test of Snider Bros., as ------------ adopted in cases such as Eastgroup Properties, or the -------------------- narrow approach of Augie/Restivo. These alter ego cases ------------- represent an independent means of accomplishing the effect of substantive consolidation by the application of recognized remedies under nonbankruptcy law. The need to protect interests of creditors affected by substantive consolidation was underscored in Flora Mir Candy Corp., 432 F.2d at 1063 (consolidation - --------------------- denied due to resulting unfair treatment of certain creditors). In recent cases, the substantive consolida- tion "elements" or alter ego liability approaches have been modified to incorporate a balancing analysis to address the potential adverse impact on creditors. The balancing test shifts the focus from the manner in which affiliated debtors conducted business to the effect of substantive consolidation on creditors. Although Snider ------ Bros. is often cited as the seminal case for requiring a - ----- balancing of the benefits derived from consolidation against the harm to some creditors caused thereby, prior case law established the fundamental premise that the prejudicial impact of the imposition of an equitable remedy must be taken into account. Judge Friendly's concurring opinion in Chemical Bank New York Trust Co. v. ----------------------------------- Kheel, 369 F.2d 845, 848-49 (2d Cir. 1966), articulated - ----- this fundamental premise: I cannot agree that a practice of handling the business of a group of corporations so as to impede or even prevent completely accurate ascertainment of their respective assets and The Persons listed on Schedule I hereto January 27, 1994 Page 21 liabilities in their subsequent bankruptcy justifies failure to make every reasonable endeavor to reach the best possible approxima- tion in order to do justice to a creditor who had relied on the credit of one -- especially to a creditor who was ignorant of the loose manner in which corporate affairs were being conducted. Equality among creditors who have --------------------------------- lawfully bargained for different treatment is --------------------------------------------- not equity, but its opposite. . . . ---------------------------- Id. (emphasis added). Other prior cases echoed the - -- concern for creditors prejudiced by substantive consoli- dation and identified considerations that would later appear in the Snider Bros. formulation of the balancing ------------ test. See In re Richton Int'l Corp., 12 B.R. 555, 558 --- ------------------------- (Bankr. S.D.N.Y. 1981) (after analyzing the Vecco Constr. ------------- "elements," court considered additional element: "sub- stantive consolidation . . . will yield an equitable treatment of creditors without any undue prejudice to any particular group"); In re Food Fair, Inc., 10 B.R. 123, --------------------- 127 (Bankr. S.D.N.Y. 1981) (equitable treatment without undue prejudice is key factor). The court in Snider Bros. reviewed grounds for ------------ substantive consolidation, including the various formula- tions of the "elements" test appearing in prior deci- sions. The Snider Bros. court's synthesis of the appro- ------------ priate test for substantive consolidation focused upon objecting creditors' interests instead of "elements" that are largely attributable to the debtors' pre-petition conduct: A review of the case law reveals that equity has provided the remedy of consolidation in those instances where it has been shown that the possibility of economic prejudice which would result from continued separateness out- weighed the minimal prejudice that consolida- The Persons listed on Schedule I hereto January 27, 1994 Page 22 tion would cause. While several courts have recently attempted to delineate what might be called "the elements of consolidation", [citing Vecco Constr. and Food Fair], I find that the ------------- --------- only real criterion is that which I have re- ferred to, namely the economic prejudice of continued debtor separateness versus the eco- nomic prejudice of consolidation. There is no ----------- one set of elements, which, if established, ------------------------------------------- will mandate consolidation in every instance. ---------------------------------------------- Moreover, the fact that corporate formalities --------------------------------------------- may have been ignored, or that different debt- ---------------------------------------------- ors are associated in business in some way, ------------------------------------------- does not by itself lead inevitably to the con- ---------------------------------------------- clusion that it would be equitable to merge ------------------------------------------- otherwise separate estates. -------------------------- Snider Bros., 18 B.R. at 234 (emphasis added). The court - ------------ articulated the following balancing test principles: (1) the proponent must demonstrate a "necessity for consolidation, or a harm to be avoided by use of the equitable remedy of consolidation"; (2) supporting evi- dence must go beyond a mere showing of commingling or unity of interest and must demonstrate the harm caused thereby or prejudice without consolidation; (3) "ele- ments" are only one factor in the proof of necessity; and (4) even if the proponent can demonstrate the necessity for consolidation, objecting creditors possess the de- fense that the benefits of consolidation do not counter- balance the harm to the objector. Id. at 238. -- The balancing test formulated in Snider Bros. ------------ has been adopted, either expressly (see In re Auto-Train --- ---------------- Corp., 810 F.2d 270, 276 (D.C. Cir. 1987); In re F.A. - ----- ---------- Potts & Co., 23 B.R. 569, 572 (Bankr. E.D. Pa. 1982); In - ----------- -- re Lewellyn, 26 B.R. 246, 251 (Bankr. S.D. Iowa 1982); In - ----------- -- re Donut Queen, Ltd., 41 B.R. 706, 709 (Bankr. E.D.N.Y. - -------------------- 1984); In re DRW Property Co. 82, 54 B.R. 489, 495 ------------------------- (Bankr. N.D. Tex. 1985); Holywell Corp. v. Bank of New ----------------------------- The Persons listed on Schedule I hereto January 27, 1994 Page 23 York, 59 B.R. 340, 347 (S.D. Fla. 1986), appeal dis- - ---- ----------- missed, 838 F.2d 1547 (11th Cir.), cert. denied, 488 U.S. - ------ --------- ------------ 823 (1988); In re Baker & Getty Fin. Serv., Inc., 78 B.R. ------------------------------------ 139, 143 (Bankr. N.D. Ohio 1987); In re Steury, 94 B.R. ------------ 553, 554 (Bankr. N.D. Ind. 1988)) or implicitly (see In --- -- re Luth, 28 B.R. 564, 567 (Bankr. D. Idaho 1983) (citing - ------- Snider Bros. test as another "element"); In re Helms, 48 - ------------ ----------- B.R. 714, 717 (Bankr. D. Conn. 1985) (balancing interests is another important factor); In re N.S. Garrott & Sons, ------------------------- 48 B.R. 13, 18 (Bankr. E.D. Ark. 1984) (adopting Snider ------ Bros. principles as important factors); In re Silver - ----- ------------ Falls Petroleum Corp., 55 B.R. 495, 498 (Bankr. S.D. Ohio - --------------------- 1985)) by a vast majority of courts. Recently, the Eleventh Circuit, in expressly adopting the approach of Snider Bros., as thereafter ------------ accepted by the D.C. Circuit in In re Auto-train Corp., ---------------------- formulated the standard in a slightly different manner: The D.C. Circuit has elaborated a stan- dard, which we adopt today, by which to deter- mine whether to grant a motion for substantive consolidation. Under this standard, the propo- nent of substantive consolidation must show that (1) there is substantial identity between the entities to be consolidated; and (2) con- solidation is necessary to avoid some harm or to realize some benefit. . . . When this show- ing is made, a presumption arises 'that credi- tors have not relied solely on the credit of one of the entities involved.' . . . Once the proponent has made this prima facie case for consolidation, the burden shifts to an object- ing creditor to show that (1) it has relied on the separate credit of one of the entities to be consolidated; and (2) it will be prejudiced by substantive consolidation. . . . Finally, if an objecting creditor has made this showing, 'the court may order consolidation only if it The Persons listed on Schedule I hereto January 27, 1994 Page 24 determines that the demonstrated benefits of consolidation heavily outweigh the harm.' Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 - --------------------------------------------------- F.2d 245, 249 (11th Cir. 1991) (citations omitted). The burden of proof is placed on the parties seeking substantive consolidation, Silver Falls Petroleum ---------------------- Corp., 55 B.R. at 498, irrespective of whether substan- - ----- tive consolidation is sought by motion or through a confirmed plan of reorganization. Id. Moreover, the -- "burden of proof for those seeking consolidation is substantial." N.S. Garrott & Sons, 48 B.R. at 18. The ------------------- court in Snider Bros. required a threshold showing of ------------ more than the mere presence of substantive consolidation "elements." Snider Bros., 18 B.R. at 238; accord In re ------------ ------ ----- Coventry Energy Corp., 5 Bankr. Ct. Dec. 98, 99 (Bankr. - --------------------- S.D. Ohio 1979). If successful on the issue of necessi- ty, the proponents must carry the burden of demonstrating that the benefits of consolidation outweigh the prejudice to creditors. Id. Finally, the objecting creditors are -- charged with the burden of proof on defenses to consoli- dation, including the issues of creditor reliance and the question of whether the benefits of consolidation out- weigh the harm. Id. -- Notwithstanding the widespread acceptance of the Snider Bros. balancing analysis, there remain several ------------ unsettled issues. The significance of the presence of the sub- stantive consolidation "elements" is unclear. Snider ------ Bros. and those cases directly following its balancing - ----- standard tend to relegate proof of the substantive con- solidation "elements" to a secondary role, i.e., the ---- "elements," in aggregate, may be considered as a single factor in the balancing analysis. Snider Bros., 18 B.R. ------------ at 234. However, some courts take the opposite approach by treating the conclusion reached under the balancing The Persons listed on Schedule I hereto January 27, 1994 Page 25 test as another, albeit important, "element" in the substantive consolidation "elements" analysis followed by Vecco Constr. and many of the earlier cases. See, e.g., - ------------- --- ---- In re Luth, 28 B.R. 564, 567 (Bankr. D. Idaho 1983) - ---------- (citing Snider Bros. test as another "element"). ------------ Augie/Restivo represents a third approach that results in - ------------- the reduction of the traditional "elements" to a single significant factor, financial entanglement, and applica- tion of the balancing test with emphasis on the reliance of proponents on the consolidated credit of the debtors. Finally, Eastgroup Properties views the elements as -------------------- factually relevant to a determination by the court as to substantial identity between the entities and the neces- sity for consolidation. Accordingly, traditional sub- stantive consolidation "elements" analysis retains some vitality under the more recent case law, although the importance of this analysis is unsettled. Snider Bros. compels proponents to prove the ------------ necessity of consolidation or the substantial benefits to be derived therefrom. The determination of substantive consolidation benefits is, however, dependent on a court's perspective of the type of benefit that is pro- moted by consolidation. It is unclear under reported decisions whether the appropriate benefit is distributional, i.e., reallocation of certain creditors' ---- rights to a greater number of other creditors, or a net collective benefit for all creditors, i.e., substantive --- ---- consolidation results in an economic advantage for the consolidated estates that exceeds the extent of prejudice to certain creditors' interests. Compare In re I.R.C.C., ------- --------------- Inc., 105 B.R. 237, 242 (Bankr. S.D.N.Y. 1989) ("The - ---- critical issue is whether the same trustee in bankruptcy of each entity may pool their assets for the benefit of ---------- all their creditors collectively, rather than liquidating - -------------------------------- each debtor separately . . ."; "The trustee's motion for substantive consolidation . . . is made in furtherance of his duty to ensure the equitable treatment of all credi- ---------- tors."; emphasis added); In re Augie/Restivo Baking Co., - ---- ------------------------------- The Persons listed on Schedule I hereto January 27, 1994 Page 26 Ltd., 860 F.2d 515, 518 (2d Cir. 1988) (purpose of sub- - ---- stantive consolidation is equitable treatment of all --- creditors) with In re Baker & Getty Fin. Serv., Inc., 78 - --------- ---- ------------------------------------ B.R. 139, 141 (Bankr. N.D. Ohio 1987) (substantive con- solidation "to effect a more equitable distribution of -------------- property among creditors"; emphasis added); Eastgroup --------- Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245, - ----------------------------------------- 250 (11th Cir. 1991) (relevant factor supporting consoli- dation is that "absent substantive consolidation, the majority of creditors will receive only a small portion of their claims, while the equity interest holders may receive a substantial distribution", referring to the findings made by the bankruptcy court; the court in Eastgroup Properties also appears to have viewed the fact - -------------------- that administrative and other priority claimants of one of the estates would receive a larger portion of their claims, as opposed to pre-petition unsecured creditors of the other estate, if consolidation were approved as a factor supporting its decision); In re Luth, 28 B.R. 564, ---------- 568 (Bankr. D. Idaho 1983) ("The likelihood of creditors [of one of the debtors] receiving a dividend are small or nonexistent should consolidation be denied."). If distributional benefits are properly considered under the balancing test, which seems to be inconsistent with Snider Bros. and certain of its progeny, but which may be - ------------ viewed as supported by the court's discussion in Eastgroup Properties, the proponent's burden to demon- - -------------------- strate a substantial justification for consolidation may be more readily satisfied. Another area of uncertainty under the balancing test is the approach taken by the courts with respect to asserted prejudice to an objecting creditor's interests or its reliance on the credit of separate debtors. Some courts apply an objective standard that relates to the degree of adverse economic impact that would result from consolidation. Steury, 94 B.R. at 555 ("Before embarking ------ upon a broad discussion of the intricacies of bankruptcy law, it is appropriate to first consider the relative The Persons listed on Schedule I hereto January 27, 1994 Page 27 rights of the debtors and their creditors under state law. In this way we will have a standard against which ------------------------------------------------- any prejudice, that might befall either of them, can be - ------------------------------------------------------- measured"; emphasis added). Other courts apply a subjec- - -------- tive standard, which measures prejudice caused by a creditor's subjective expectations at the time credit was extended. See Snider Bros., 18 B.R. at 238 (reference to --- ------------ harm to creditor who looked solely to credit of single debtor); Donut Queen, 41 B.R. at 709 (when creditors ----------- treat their debtor "as a distinct and separate entity, consolidation would be manifestly prejudicial"); In re ----- Helms, 48 B.R. at 717. Some courts seem to apply subjec- - ----- tive and objective standards: In this case there has been no proof of- fered that any creditor relied on solely one or the other of the entities Tyler seeks to con- solidate. Further, there is no evidence that a ------------------------------------ consolidation would tend to improve the finan- ---------------------------------------------- cial position of any group of creditors as com- ----------------------------------------------- pared with another. ------------------ Lewellyn, 26 B.R. at 252 (emphasis added). This lack of - -------- clarity on the appropriate standard to be applied to objecting creditors' principal defense to substantive consolidation contributes to the unpredictability of whether substantive consolidation should be granted under circumstances that may substantially impair the rights of objectors who cannot demonstrate that they actually relied exclusively on their debtor's creditworthiness (e.g., creditors with affiliate guaranties, cross-de- ---- faults and cross-collateralization). The objecting creditor in Eastgroup Properties, for example, failed in -------------------- its attempt to demonstrate adequate reliance on its debtor, with no suggestion as to what type of proof would have sufficed. While we acknowledge that they have shown that they will be prejudiced by substantive consoli- The Persons listed on Schedule I hereto January 27, 1994 Page 28 dation, we do not believe that appellants have established that they relied solely on SMA's ------ separate credit in dealing with SMA. Appel- lants point to two pieces of evidence which, they contend, prove that they relied on the separate credit of SMA: (1) . . . both GPH and SMA held themselves out to the public and to their creditors as separate corporations and (2) the fact that Eastgroup pursued a court fight over the identity of the tenant in the lease contracts with Eastgroup . . . . That GPH and SMA may have held themselves out to the public and to their creditors as separate cor- porations does not mean that appellants did not rely on the credit of both corporations. Nor does Eastgroup's litigations over the identity of its tenant satisfy its burden. That litiga- tion only proves that Eastgroup's tenant was SMA; it proves nothing about whether Eastgroup relied on SMA's separate credit in deciding to deal with SMA. 935 F.2d at 251-52 (emphasis added). Based on the facts set forth above, and subject to the discussion contained herein and the reasoned analysis of analogous case law (although there is no precedent directly on point), notwithstanding that cer- tain aspects of the law in this area remain unsettled as discussed above, in the event that AnnTaylor were to be a debtor in a case under the Bankruptcy Code, for the reasons, among others, set forth below, it is our opinion that regardless of which of the approaches or standards discussed herein the court would elect to follow, it would not be a proper exercise by the court of its equi- table discretion to disregard the separate corporate existence of Funding so as to order substantive consoli- dation under the Bankruptcy Code of the assets and lia- The Persons listed on Schedule I hereto January 27, 1994 Page 29 bilities of Funding with the bankruptcy estate of AnnTaylor. First, the financial and business affairs of Funding will be segregated and readily distinguishable from those of AnnTaylor. Thus, assets and liabilities of Funding and of AnnTaylor will be ascertainable in bank- ruptcy or otherwise so as to preclude valid assertions of financial entanglement as support for substantive consol- idation under any of the standards discussed above. Second, each of Funding and AnnTaylor will strictly observe all corporate and other statutory for- malities. As a result of strict compliance with appro- priate formalities and preservation of all indicia of separateness, third parties should not reasonably rely on the assets of Funding to satisfy obligations of AnnTaylor. It should be difficult for any such third party to persuade a court that substantive consolidation is warranted under the balancing test or substantive consolidation "elements" approach because of the lack of any actual prejudice to creditors' interests associated with the recognition of separate entities. Third, the absence of the more egregious "ele- ments" discussed above (other than those present in most instances involving affiliated entities as indicated in the discussion) which would support a finding that Fund- ing is an alter ego or instrumentality of AnnTaylor favor denial of substantive consolidation. Specifically, (1) Funding will have at least one Independent Director, (2) Funding should not have inadequate capital for its in- tended purposes, (3) Funding will provide for its expens- es on an ongoing basis, and such expenses will not be routinely paid by AnnTaylor, nor will any losses of Funding be paid by AnnTaylor, (4) by virtue of the trans- actions contemplated by the Receivables Financing Agree- ment, Funding will be engaged in meaningful business activities with third parties other than AnnTaylor, (5) The Persons listed on Schedule I hereto January 27, 1994 Page 30 Funding will not be referred to as a division or depart- ment of AnnTaylor, (6) the directors and officers of Funding are expected to act in the interests of Funding, and are not expected to act contrary to those interests at the direction of AnnTaylor, (7) as indicated above, all formal legal requirements relating to Funding will be strictly observed, (8) as indicated above, there should be no difficulty in segregating and ascertaining respec- tive assets and liabilities, (9) while Funding would be included in AnnTaylor's consolidated financial state- ments, such statements will not reflect the assets of Funding as belonging to AnnTaylor, (10) there is no bene- fit to consolidation at a single physical location in the context of this arrangement, (11) there is no commingling of business functions among AnnTaylor and Funding -- the activities of Funding are expected to be entirely sepa- rate from whatever business activities AnnTaylor may otherwise be engaged in except to the extent that AnnTaylor is involved in the transactions contemplated by the Receivables Financing Agreement by virtue of acting as Servicer thereunder, and to the extent that such commingling arises from in-store collections, in the manner indicated above, (12) there will be no guarantees made by AnnTaylor with respect to obligations of Funding and there will be no guarantees made by Funding with respect to obligations of AnnTaylor, and (13) there will be no transfers of assets, without formal observance of corporate formalities. Fourth, in the case of a court applying some variation of the balancing test, not only should credi- tors of AnnTaylor be unable to demonstrate any harm to be remedied by substantive consolidation with respect to creditor reliance and expectations that the assets of Funding would be available to satisfy their claims or otherwise served as a basis for extending credit, but from a policy perspective there would appear to be no incentive to collapse Funding. Funding was neither established for the purpose of perpetrating a fraud or The Persons listed on Schedule I hereto January 27, 1994 Page 31 circumventing public policy, nor would the continued recognition of Funding as an entity distinct from AnnTaylor lead to such a result. Moreover, the Lender, the Administrator and the Relationship Bank will have relied on the separate legal existence of Funding, and would likely be materially harmed by a failure to respect the separate existence of Funding. The foregoing opinion is expressly subject to there being no material change in the law, and there being no additional facts which would materially affect the validity of the assumptions and conclusions set forth herein or upon which this opinion is based. However, in the course of our representation of AnnTaylor, we have not become aware of any additional facts which would materially affect the validity of such assumptions and conclusions. This opinion is being furnished to you solely for your benefit is not to be used, quoted, relied upon or otherwise referred to for any other purpose without our express written permission. Very truly yours, Exhibit A --------- OFFICER'S CERTIFICATE AnnTaylor Funding, Inc. The undersigned, Bert A. Tieben, hereby certi- fies as follows: 1. He is the duly elected Vice President of AnnTaylor Funding, Inc. ("Funding"), and is authorized to execute and deliver this Certificate on behalf of Funding. 2. This Certificate is executed and deliv- ered knowing that it will be relied upon by Skadden, Arps, Slate, Meagher & Flom (the "Law Firm") in connec- tion with a legal opinion (the "Opinion") to be delivered on the date hereof by the Law Firm to the persons listed on Schedule I to the Opinion, which Opinion addresses certain bankruptcy issues related to substantive consoli- dation and property of the estate of AnnTaylor, Inc. 3. The undersigned is familiar with the transactions and other factual matters described in the Opinion, and has made such investigations and inquiries, including, without limitation, of personnel and employees of Funding having familiarity with such transactions and factual matters, as may be necessary to enable the under- signed to execute and deliver this Certificate. 4. The undersigned has reviewed the Opin- ion and, with respect to the factual assumptions set forth under "Assumptions of Fact" preceding the discus- sion in the Opinion, hereby certifies that (i) each factual statement contained therein relating to Funding is, to the best of his knowledge after due inquiry, true and correct and does not fail to state a material fact the omission of which makes the statement as it appears incomplete or misleading, (ii) with respect to factual statements contained therein which relate to parties to the transactions discussed other than Funding, while the undersigned expressly disclaims any certification hereby as to the truth, correctness or completeness of such other statements, based on the undersigned's participa- tion in the subject transactions, the undersigned does not have actual knowledge that the statements contained therein relating to parties other than Funding are un- true, incorrect or incomplete so as to be misleading. 5. To the best of his knowledge, there are no additional facts which would materially affect the truth, correctness or completeness of the matters certi- fied herein. IN WITNESS WHEREOF, the undersigned has execut- ed this Certificate as of the ____ day of January 1994. AnnTaylor Funding, Inc. ------------------------- Name: Bert A. Tieben Title: Vice President Exhibit B --------- OFFICER'S CERTIFICATE AnnTaylor, Inc. The undersigned, Bert A. Tieben, hereby certi- fies as follows: 1. He is the duly elected Senior Vice President of AnnTaylor, Inc. ("AnnTaylor"), and is autho- rized to execute and deliver this Certificate on behalf of AnnTaylor. 2. This Certificate is executed and deliv- ered knowing that it will be relied upon by Skadden, Arps, Slate, Meagher & Flom (the "Law Firm") in connec- tion with a legal opinion (the "Opinion") to be delivered on the date hereof by the Law Firm to the persons listed on Schedule I to the Opinion, which Opinion addresses certain bankruptcy issues related to substantive consoli- dation and property of the estate of AnnTaylor. 3. The undersigned is familiar with the transactions and other factual matters described in the Opinion, and has made such investigations and inquiries, including, without limitation, of personnel and employees of AnnTaylor having familiarity with such transactions and factual matters, as may be necessary to enable the undersigned to execute and deliver this Certificate. 4. The undersigned has reviewed the Opin- ion and, with respect to the factual assumptions set forth under "Assumptions of Fact" preceding the discus- sion in the Opinion, hereby certifies that (i) each factual statement contained therein relating to AnnTaylor is, to the best of his knowledge after due inquiry, true and correct and does not fail to state a material fact the omission of which makes the statement as it appears incomplete or misleading, (ii) with respect to factual statements contained therein which relate to parties to the transactions discussed other than AnnTaylor, while the undersigned expressly disclaims any certification hereby as to the truth, correctness or completeness of such other statements, based on the undersigned's partic- ipation in the subject transactions, the undersigned does not have actual knowledge that the statements contained therein relating to parties other than AnnTaylor are un- true, incorrect or incomplete so as to be misleading. 5. To the best of his knowledge, there are no additional facts which would materially affect the truth, correctness or completeness of the matters certi- fied herein. IN WITNESS WHEREOF, the undersigned has execut- ed this Certificate as of the ____ day of January 1994. AnnTaylor, Inc. ------------------------- Name: Bert A. Tieben Title: Sr. Vice President SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02101 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Moody's Investors Service 99 Church Street New York, New York 10007 Standard & Poor's Corporation 26 Broadway, 15th Floor New York, New York 10004 EXHIBIT 5.01(h)(v) January 27, 1994 Persons Listed on Schedule I Hereto Re: Receivables Facility of AnnTaylor, Inc. and AnnTaylor Funding, Inc. ------------------------------------------- Ladies and Gentlemen: We have acted as special Connecticut counsel to AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), to advise the Company with respect to the perfection, in Connecticut, of the security interest to be granted by the Company to Clipper Receivables Corporation (the "Lender") pursuant to the Receivables Financing agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, Inc. ("AnnTaylor"), as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Financing Agreement. This opinion is being delivered pursuant to Section 5.01(h)(iii) of the Receivables Financing Agreement. Capitalized terms used herein are not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivable Financing Agreement. January 27, 1994 Page 2 In our examination we have assumed the genuineness of all signatures including endorsements, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such copies. As to any facts material to this opinion which we did not independently establish or verify, we have relied upon statements and representations of the Company and its officers and other representatives and of public officials. In rendering the opinions set forth herein, we have examined and relied on originals or copies of the following: (a) the Receivables Financing Agreement; (b) signed, unfiled copies of the financing statement under the Uniform Commercial Code as in effect in the State of Connecticut, naming the Company as debtor and the Lender as the secured party, which we understand and have assumed will be filed within ten days of the grant of a security interest in the Pool Receivables from the Company to the Lender, in the office of the Secretary of the State of the State of Connecticut (the "Filing Office") (such financing statement, the "Financing Statement"); (c) a search report provided by Lexis Document Services, dated January 19, 1994 and covering the period through December 30, 1993 listing financing statements that name the Company as debtor and that are filed in the Filing Office, together with copies of such financing statements, a summary of which search report is attached as Exhibit A hereto (the "Search Report"); and (d) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. Unless otherwise indicated, references in this opinion to the "Connecticut UCC" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of Connecticut. Members of our firm are admitted to the bar of the State of Connecticut. We express no opinion as to the laws of any jurisdiction other than (i) the laws of the State of Connecticut, and (ii) the federal laws of the United States of America to the extent specifically referred to herein. Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: January 27, 1994 Page 3 1. The Financing Statement is in appropriate form for filing in the Filing Office under the Connecticut UCC. 2. To the extent that the chief executive office of the Company is located in the State of Connecticut, the security interest in favor of the Lender in the portion of the Pool Receivables that constitutes accounts or general intangibles (each as defined in Article 9 of the Connecticut UCC) (the "Article 9 Filing Collateral") will be perfected upon the later of (i) attachment of the security interest and (ii) the filing of the Financing Statement in the Filing Office. No other security interest of any other transferee from the Company is equal or prior to the security interest of the Lender in such Article 9 Filing Collateral. The opinions expressed herein are subject to the following qualifications, exceptions and limitations: (a) we express no opinion with respect to the validity of the security interest of the Lender but have assumed for purposes of the opinions set forth herein that such security interest is valid under the laws of the State of New York; (b) we have assumed that the Article 9 Filing Collateral exists and the Company has sufficient rights in the Article 9 Filing Collateral for the security interest of the Lender to attach, and we express no opinion as to the nature or extent of the Company's rights in or title to any Article 9 Filing Collateral; (c) we call to your attention that Section 552 of the United States Bankruptcy Code limits the extent to which property acquired by the debtor after the commencement of a case under the United States Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (d) we call to your attention that the security interest of the Lender in proceeds, and the perfection of such security interest, is limited to the extent set forth in Section 9-306 of the Connecticut UCC and to property of a type subject to the Connecticut UCC; (e) we call to your attention that the security interest of the Lender may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (f) we express no opinion regarding the security interest of the Lender in any of the Article 9 Filing Collateral consisting of claims against any government or governmental agency January 27, 1994 Page 4 (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); (g) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Lender in and to such underlying property; (h) we have assumed that the chief executive office of the Company as of the date of filing of the Financing Statement is located either in the State of New York or in the State of Connecticut, and we express no opinion with respect to the perfection or priority of the security interest of the Lender in the Article 9 Filing Collateral to the extent that the chief executive office of the Company is located in the State of New York or in any jurisdiction other than the State of Connecticut; (i) we call to your attention that the perfection of the security interest of the Lender in Article 9 Filing Collateral may be governed by laws other than the Connecticut UCC if the chief executive office of the Company is or becomes located in a jurisdiction other than Connecticut; (j) we call to your attention that (i) the perfection of the security interest of the Lender as to the Article 9 Filing Collateral will be terminated as to any such property acquired by the Company more than four months after the Company changes its name, identity or corporate structure so as to make the Financing Statement seriously misleading unless new appropriate financing statements indicating the new name, identity or corporate structure of the Company are properly filed before the expiration of such four months, and (ii) the Connecticut UCC requires the filing of continuation statements within the period of six months prior to the expiration of five years from the date of the filing of the original Financing Statement or the filing of any continuation statements in order to maintain the effectiveness of the original Financing Statement; (k) we express no opinion as to the priority of the security interest of the Lender in the Article 9 Filing Collateral against: (i) any liens, claims or other interests that arise by operation of law and do not require any filing or possession in order to take priority over security interests perfected through the filing of a financing statement; (ii) any lien, claim or encumbrance in favor of the United States of America or any State, or any agency or instrumentality of either of them or any other governmental entity (including, without limitation, federal tax liens, liens arising under the Employee Retirement Income Security Act of 1974, as amended, or claims given priority pursuant to 31 January 27, 1994 Page 5 U.S.C. Sec. 3713); (iii) a lien creditor who attached or levied prior to the perfection of the security interest of the Lender; (iv) a lien creditor with respect to future advances to the extent set forth in Section 9-301(4) of the Connecticut UCC; (v) another secured creditor with respect to any future advances to the extent set forth in Section 9-312(7) of the Connecticut UCC; (vi) a security interest perfected under the laws of another jurisdiction to the extent that the Company had its chief executive office in such jurisdiction within four months prior to the date of the perfection of the security interest of the Lender; (vii) a security interest perfected without filing any financing statement pursuant to Section 9-302(1) of the Connecticut UCC; (viii) a security interest perfected by filing a financing statement naming the Company as debtor using a trade name, fictitious name or previous name; (ix) the holder of a perfected "purchase money security interest" as such term is defined in Section 9-107 of the Connecticut UCC; (x) another secured party with a perfected security interest in other property of the Company to the extent the Pool Receivables are proceeds of such other creditor's collateral; (xi) any person who has entered into a subordination or intercreditor agreement with the Lender; (xii) any claim for wages, salary or other compensation; (xiii) a purchaser of accounts purchased as part of the sale of the business out of which they arose; (xiv) an assignment of accounts for purposes of collection only or a transfer of a single account; (xv) any claim arising out of tort or any surety who is subrogated to the rights of the Company; or (xvi) the security interest of a creditor who filed a financing statement based on a prior or incorrect location of the chief executive office of the Company to the extent such other financing statement would be effective under Section 9-401(2) or (3) of the Connecticut UCC; (xvii) a security interest or lien existing by reason of a security interest in or lien upon such collateral or upon any goods the sale or disposition of which has given rise to such collateral, which security interest or lien was created by or levied against any prior owner of any interest in such collateral or goods; and (l) we have assumed that (i) all relevant financing statements in which the Company is named as debtor have been properly filed(except for the Financing Statements), indexed and recorded in the Filing Office and are identified in the Search Report and (ii) no financing statements naming the Company as debtor were filed in the filing Office between the effective date of the Search Report and the date of the filing of the Financing Statement in the Filing Office. January 27, 1994 Page 6 This opinion is being furnished only to you and is solely for your benefit and is not to be used, quoted, relied upon or otherwise referred to by any other Person or for any other purposes without our prior written consent. Very truly yours, TYLER, COOPER & ALCORN By _______________________ Joseph C. Lee, A Partner January 27, 1994 Page 7 SCHEDULE I ---------- Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02201 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Standard & Poor's Ratings Group 25 Broadway New York, New York 10004 Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 SCHEDULE 6.01(n) ---------------- List of Offices Where Records Are Kept --------------------- AnnTaylor Funding, Inc. - ----------------------- Chief place of business and chief executive office: 414 Chapel Street New Haven, Connecticut 06511 or 142 West 57th Street New York, New York 10019 location of books and records, etc: 142 West 57th Street New York, New York 10019 414 Chapel Street New Haven, Connecticut 06511 SCHEDULE 6.01(o) ---------------- List of Lock-Box Banks ---------------------- AmSouth (Bank) N.A. 1900 5th Avenue North Birmingham, Alabama 35203 Account Number: 55976026 2 SCHEDULE 6.01(p)-1 ANN TAYLOR Credit Card Application ANN TAYLOR CREDIT CARD APPLICATION ----------------------- FOR STORE USE ONLY STORE EMPLOYEE NO WEEKLY SEMI-MO ---------- ---------- ----- ----- CHECK BOX FOR INSTANT CREDIT ACCOUNT NUMBER - --- ----------------- - ----------------------------------------------------------------- INSTRUCTIONS TO APPLICANT: 1. If you are applying for an individual account and relying on your own income or assets for repayment of the credit requested, do not complete the shaded section. 2. If you are applying for a joint account, complete both sections of application; if joint applicant is not a spouse, both applicants must sign the Retail Installment Credit Agreement in the place provided below. 3. If you are applying for an individual account but are relying on income from alimony, child support or separate maintenance for repayment of the credit requested, complete both sections, providing information about the person on whose alimony, support or maintenance payment you are relying. 4. Alimony, child support or separate maintenance need not be revealed under "Other Income" if you do not wish to have it considered as a basis for repaying this obligation. - ------------------------------------------------------------------ TYPE OF CREDIT CARD ACCOUNT REQUESTED - CHECK ONE INDIVIDUAL ACCOUNT in one name and based solely on your own credit worthiness. Applicant if married, may apply for an Individual Account. JOINT ACCOUNT is based on credit worthiness of both Applicant and Co-applicant. Both will be mutually liable and responsible for payments. COMPLETE FOR APPLICANT ---------------------- LAST NAME FIRST, INITIAL DATE OF BIRTH / / - ----------------------------------------------------------------- SOCIAL SECURITY HOME TELEPHONE ( ) - ----------------------------------------------------------------- PRESENT ADDRESS (STREET AND NUMBER) CITY STATE ZIP - ----------------------------------------------------------------- OWN RENT OTHER YRS MOS - ---- ---- ---- ----- ----- PREVIOUS ADDRESS (IF PRESENT IS LESS THAN THREE YEARS) - ----------------------------------------------------------------- CITY STATE ZIP YRS MOS - -------------------------------------------- ---- ---- APPLICANT'S EMPLOYER - ----------------------------------------------------------------- ANNUAL SALARY UNDER $15,000 15,000 - 24,999 ---- ---- 25,000 - 34,999 35,000 - 49,999 ---- ---- 50,000 - 74,999 75,000 - ABOVE ---- ---- BUSINESS ADDRESS POSITION YRS MOS - --------------------------- --------------------- ---- ---- BUSINESS TELEPHONE IF SELF EMPLOYED NAME OF BUSINESS ( ) - -------------------- ---------------------------------------- TYPE OF BUSINESS BUSINESS BANK REFERENCE - ------------------------------- ------------------------------ PREVIOUS EMPLOYER BUSINESS ADDRESS - ------------------------------- ------------------------------ POSITION # YRS # MOS ----------------------------------- ---- ---- IF FULL TIME COLLEGE STUDENT, LIST SCHOOL - ----------------------------------------------------------------- SENIOR OR GRADUATE STUDENT YES NO ---- ---- SOURCE AND AMOUNT OF OTHER INCOME (SEE INSTRUCTIONS #4 ABOVE) - ----------------------------------------------------------------- CHARGE REFERENCES: FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- IF YOUR CREDIT REFERENCES CAN BE VERIFIED IN ANOTHER NAME, PRINT THAT NAME HERE -------------------------------------------------- NAME AND ADDRESS OF NEAREST RELATIVE NOT LIVING WITH YOU - ----------------------------------------------------------------- TELEPHONE ( ) ( ) - ---------------------------- COMPLETE FOR SPOUSE OR OTHER CO-APPLICANT ----------------------------------------- CO-APPLICANT NAME RELATIONSHIP TO APPLICANT - ------------------------------- ------------------------------ DATE OF BIRTH SOCIAL SECURITY HOME TELEPHONE / / ( ) - ------------------ ------------------------ ------------------- PRESENT ADDRESS (STREET AND NUMBER) CITY STATE ZIP - ----------------------------------------------------------------- OWN RENT OTHER YRS MOS - ---- ---- ---- ----- ----- C0-APPLICANT'S EMPLOYER - ----------------------------------------------------------------- ANNUAL SALARY UNDER $15,000 15,000 - 24,999 ---- ---- 25,000 - 34,999 35,000 - 49,999 ---- ---- 50,000 - 74,999 75,000 - ABOVE ---- ---- BUSINESS ADDRESS POSITION YRS MOS - --------------------------- --------------------- ---- ---- BUSINESS TELEPHONE IF SELF EMPLOYED NAME OF BUSINESS ( ) - -------------------- ---------------------------------------- TYPE OF BUSINESS BUSINESS BANK REFERENCE - ------------------------------- ------------------------------ PREVIOUS EMPLOYER BUSINESS ADDRESS - ------------------------------- ------------------------------ POSITION # YRS # MOS ----------------------------------- ---- ---- IF FULL TIME STUDENT, LIST SCHOOL - ----------------------------------------------------------------- SENIOR OR GRADUATE STUDENT YES NO ---- ---- SOURCE AND AMOUNT OF OTHER INCOME (SEE INSTRUCTIONS #4 ABOVE) - ----------------------------------------------------------------- CHARGE REFERENCES: FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- FIRM NAME ACCOUNT NUMBER - ----------------------------------------- -------------------- IF YOUR CREDIT REFERENCES CAN BE VERIFIED IN ANOTHER NAME, PRINT THAT NAME HERE -------------------------------------------------- ADDITIONAL CREDIT CARD FOR AUTHORIZED USER (OTHER THAN CO- APPLICANT) - ----------------------------------------------------------------- LAST NAME FIRST, INITIAL - ----------------------------------------------------------------- ================================================================= TO FIND OUT ABOUT CHANGES IN THE INFORMATION IN THIS APPLICATION, WRITE TO US AT P.O. BOX 1304, NEW HAVEN, CONNECTICUT 06505. CALIFORNIA RESIDENTS: After credit approval each applicant shall have the right to use this account to the extent of any credit limit set by the creditor and each applicant may be liable for all amounts of credit extended under this account to any joint applicant. NOTICE TO OHIO RESIDENTS ONLY: THE OHIO LAWS AGAINST DISCRIMINATION REQUIRE THAT ALL CREDITORS MAKE CREDIT EQUALLY AVAILABLE TO ALL CREDIT WORTHY CUSTOMERS AND THAT CREDIT REPORTING AGENCIES MAINTAIN SEPARATE CREDIT HISTORIES ON EACH INDIVIDUAL UPON REQUEST. THE OHIO CIVIL RIGHTS COMMISSION ADMINISTERS COMPLIANCE WITH THIS LAW. MARRIED WISCONSIN RESIDENTS ONLY: No provision of any marital property agreement, unilateral statement or court decree, applying to marital property will adversely affect our interests unless we are furnished with a copy of the agreement, statement or decree or we have actual knowledge of its terms before credit is granted or the account is opened. In addition, we are required to ask you to insert the name and address of your spouse here. - ------------------------------------------------------------------ So that we can provide your spouse with a disclosure required under Wisconsin law. BEFORE SIGNING BELOW, I HAVE READ THE RETAIL INSTALLMENT CREDIT AGREEMENT/CREDIT SALE CONTRACT, THE TERMS OF WHICH APPEAR ON THE REVERSE SIDE AND ARE INCORPORATED HEREIN BY REFERENCE. I ACKNOWLEDGE RECEIPT OF A COPY OF THE RETAIL INSTALLMENT CREDIT AGREEMENT/CREDIT SALE CONTRACT. - ----------------------- -------- ----------------------- ----- BUYER'S SIGNATURE DATE CO-BUYER'S CO-SIGNATURE DATE ANN TAYLOR RETAIL INSTALLMENT CREDIT AGREEMENT CREDIT SALE CONTRACT - ------------------------------------ "You" and "your" refer to each person to whom a credit card is issued or who is authorized to use it, or who signs this Agreement, "we", "us" and "our" refer to Ann Taylor, 414 Chapel St. New Haven, CT 06511. You agree to pay for all purchases charged by you according to the following terms: 1. COST OF CREDIT: Finance charge will be in amounts and at rates not in excess of those permitted by law and will be assessed on the outstanding balance(s) from month to month. There is never a finance charge in a monthly billing period (a) in which there is no beginning balance ("Previous Balance") or (b) during which "Payments" and "Credits" equal or exceed the "Previous Balance." You will avoid a finance charge if you pay the full amount of the "New Balance" shown on your monthly billing statement within 27 days after the billing date shown on that statement. If you do not, you agree to pay a finance charge, computed by applying a monthly Periodic Rate of 1.75% (ANNUAL PERCENTAGE RATE 21%) to the entire Average Daily Balance, with the following exceptions: _________________________________________________________________ ANNUAL Residents of: Periodic Rate PERCENTAGE RATE _________________________________________________________________ AK 1.50% up to $1,000.00 18.00% .660% over $1,000.00 8.00% _________________________________________________________________ AL 1.75% up to $750.00 21.00% 1.50% over $750.00 18.00% _________________________________________________________________ AR .660% 8.00% _________________________________________________________________ CA, IA 1.63% 19.8% _________________________________________________________________ MI 1.70% 20.40% _________________________________________________________________ NE 1.75% up to $500.00 21.00% 1.50% over $500.00 18.00% _________________________________________________________________ CT, DC, FL, HI, KS, LA, MA, ME, MN, MO, NC, MD, PA, RI, TX, VA, WA, WI, WV, 1.50% 18.00% _________________________________________________________________ There is a minimum FINANCE CHARGE OF $.50 in any billing period in which the finance charge as figured above would be less than $.50, except there is no minimum FINANCE CHARGE in AR, CT, DC, HI, MD, NC, ND, NE and RI. 2. BALANCE METHOD FOR COMPUTING FINANCE CHARGE: We figure the finance charge on your account by applying the Periodic Rate to the "average daily balance" of your account. To get the "average daily balance" we take the beginning balance of your account each day, add any new purchases (current month's purchases are not included for MA, ME, MN, MT, NM and RI residents) and subtract any payments or credits and any returned check fee and any unpaid finance charge. This gives us the daily balance. Then, we add up all the daily balances for the billing cycle and divide the total by the number of days in the billing cycle. This gives us the "average daily balance". 3. MINIMUM PAYMENT: Each month you agree to make a minimum payment of at least 1/5 of the "New Balance" shown on your bill, but not less than $20 (or your entire "New Balance" if it is less than $20) and any past due amount. At any time you may pay more than the minimum amount due, or you may pay the full unpaid balance. 4. DEFAULT: If you fail to make any payment as agreed, or if you file for bankruptcy, we have the right to demand payment of the full unpaid balance on your account, subject to any right you may have to receive notice of and to cure your default (except in WI you will not be in default until you fail to make a minimum payment on two occasions within a 12-month period). If your account is referred for collection to an attorney who is not our salaried employee, you agree to pay a reasonable attorney's fee of 20% of the balance owed (15% of the balance owed in MT and SC), or such lesser amount that is permitted by law, and any court costs. No attorney's fees will be imposed in AL (when the unpaid balance is under $300), IA, KS, ME, NE, OH, or WI. 5. RETURNED CHECK FEE: If any check sent to us in payment on your account is returned to us unpaid by the bank, we may charge you a reasonable processing fee of $15 ($10 in AZ, AR, FL, ID, IL, IA,KS, MD, MS, ND, NY, OK, WI; 5% of the check up to $15 in LA; $5 in CA and VT) to cover our collection costs, or such lesser amount as may be authorized by law, and you agree that we may add such fee to the balance due in your account. This fee is not imposed if you live in AK, DE, ME, MA, MO, NE, NJ, OH, OR, PA, WV or WY. 6. CANCELLING OR LIMITING CREDIT: We have the right to cancel or limit your credit at any time. Any credit card issued under this Agreement remains our property, and you agree to return it to us upon request. 7. CHANGE IN THIS AGREEMENT: We have the right to change any term in this Agreement at any time by giving you notice of the intended change or as otherwise permitted by law. If you use this account after the effective date of the change, you will have agreed to the new terms, and to the extent permitted by law, at our option we may apply any new terms to your entire account balance. If you do not agree to the change, you will return the credit card and pay the full unpaid balance under the original Agreement. 8. CREDIT INVESTIGATION: You give us permission to obtain a credit report in connection with this application or in connection with an update, renewal or extension of credit. Upon your request, you will be informed whether such a report was requested and, if it was, you will be told the name and address of any consumer reporting agency that furnished such a report. You authorize us to investigate your credit standing by obtaining credit reports and by making direct inquiries of businesses where you have accounts or where you work, and also to furnish information concerning your performance under this account to consumer reporting agencies and others who may properly receive that information. 9. BILLING INQUIRIES: See the bottom of this Agreement for important information regarding your rights to dispute billing errors. 10. WHAT LAW APPLIES: This Agreement will be governed by the laws of your state of residence. Your state of residence will be determined by the address to which we mail your monthly statement. If you move, you agree to promptly notify us in writing, and thereafter your entire account balance will be subject to the terms applicable to your new state of residence. MARYLAND RESIDENTS: Seller elects to be governed by Title 12, Subtitle 9 of the Maryland Commercial Law Article. NOTICE TO TEXAS RESIDENTS: To contact Ann Taylor about this account call 1-800-999-4554. This contract is subject in whole or in part to Texas Law which is enforced by the Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, TX 78705-4207. Phone (512) 479-1285, 1-800-538-1579. Contact the commissioner relative to any inquiries or complaints. NOTICE: ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER. NOTICE TO THE BUYER: 1. DO NOT SIGN THIS CREDIT AGREEMENT BEFORE YOU READ IT OR IF IT CONTAINS ANY BLANK SPACE. 2. YOU ARE ENTITLED TO A COMPLETELY FILLED IN COPY OF THIS CREDIT AGREEMENT. 3. YOU MAY AT ANY TIME PAY THE TOTAL BALANCE OUTSTANDING UNDER THIS AGREEMENT. 4. KEEP THIS AGREEMENT TO PROTECT YOUR LEGAL RIGHTS. HI RESIDENTS: THIS CONTRACT IS COVERED BY HAWAII'S CREDIT SALE LAW, AND YOU HAVE THE RIGHTS OF A BUYER UNDER THAT LAW. YOU ALSO HAVE RIGHTS UNDER OTHER STATE AND FEDERAL LAWS. ADDITIONAL NOTICE FOR MA RESIDENTS: YOU MAY CANCEL A PURCHASE UNDER THIS AGREEMENT IF IT HAS BEEN SIGNED BY A PARTY THERETO AT A PLACE OTHER THAN THE ADDRESS OF THE SELLER WHICH MAY BE HIS MAIN OFFICE OR BRANCH THEREOF; PROVIDED, YOU NOTIFY THE SELLER IN WRITING AT HIS MAIN OFFICE OR BRANCH BY ORDINARY MAIL POSTED, BY TELEGRAM SENT OR BY DELIVERY, NOT LATER THAN MIDNIGHT OF THE THIRD BUSINESS DAY FOLLOWING A PURCHASE UNDER THIS AGREEMENT. YOUR BILLING RIGHTS - ------------------- THIS NOTICE CONTAINS IMPORTANT INFORMATION ABOUT YOUR RIGHTS AND OUR RESPONSIBILITIES UNDER THE FAIR CREDIT BILLING ACT. NOTIFY US IN CASE OF ERRORS OR QUESTIONS ABOUT YOUR BILL. If you think your bill is wrong, or if you need more information about a transaction on your bill, write to us on a separate sheet at Ann Taylor - Bill Adjustment Department, P.O. Box 1304, New Haven, CT 06505. Write to us as soon as possible. We must hear from you no later than 60 days after we sent you this first bill on which the error or problem appeared. You can telephone us, but doing so will not preserve your rights. IN YOUR LETTER, GIVE US THE FOLLOWING INFORMATION: Your name and account number, the dollar amount of the suspected error; describe the error and explain, if you can, why you believe there is an error. If you need more information, describe the item you are not sure about. YOUR RIGHTS AND OUR RESPONSIBILITIES AFTER WE RECEIVE YOUR WRITTEN NOTICE: We must acknowledge your letter within 30 days, unless we have corrected the error by then. Within 90 days, we must either correct the error or explain why we believe the bill was correct. After we receive your letter, we cannot try to collect any amount you question, or report you as delinquent. We can continue to bill you for the amount you question, including finance charges, and we can apply any unpaid amount against your credit limit. You do not have to pay any questioned amount while we are investigating, but you are still obligated to pay the parts of your bill that are not in question. If we find we made a mistake on your bill, you will not have to pay any finance charges related to any questioned amount. If we didn't make a mistake, you may have to pay finance charges, and you will have to make up any missed payments on the questioned amount. In either case, we will send you a statement of the amount you owe and the date that it is due. If you fail to pay the amount we think you owe, we may report you as delinquent. However, if our explanation does not satisfy you and you write to us within ten days telling us that you still refuse to pay, we must tell anyone we report you to that you have a question about your bill. And, we must tell you the name of anyone we reported you to. We must tell anyone we report you to that the matter has been settled between us when it finally is. If we don't follow these rules, we can't collect the first $50 of the questioned amount, even if your bill was correct. SPECIAL RULE FOR CREDIT CARD PURCHASES. If you have a problem with the quality of property or services that you purchased with a credit card, and you have tried in good faith to correct the problem with us, you may have the right not to pay the remaining amount due on the property or services. SALLY FRAME KASAKS, CHAIRMAN AND CEO ANN TAYLOR, 414 CHAPEL STREET, NEW HAVEN, CT 06511 Schedule 6.01(p)-2 Credit and Collection Policy See Attached NEW ACCOUNTS DEPARTMENT NEW ACCOUNTS DEPARTMENT Charge applications are received from two primary sources: * Mailed in applications from customers/stores * "Instant" credit applications received by phone from store personnel. An average of 15,000 applications are processed per month and essentially all applications receive similar treatment, and require a full application and credit report. The credit granting process is accomplished through an on-line application processing system, which utilizes a statistical point-scoring method for approving or declining accounts (see attached). The point-scoring model was developed by Management Decisions Systems, Inc., and was installed in May 1991. It is an "empirically derived, statistically sound" system of evaluating new credit applicants as defined by Federal law, and was based on a statistical analysis of the payment behavior of existing Ann Taylor charge customers. Minimum Standards - ----------------- As a first step, all applications must meet basic minimum requirements: - - Income - $15,000 + per year ------ - - Length of residence (current plus previous) - at least 12 ------------------- months - - Length of employment (either current or previous ) - at least -------------------- 12 months - - Residence telephone ------------------- All applications received through the mail are prescreened by credit clerks to determine that minimum requirements have been met; "Instant" applications are screened for minimum requirements by the system. System Decision Process - ----------------------- Applications are assigned on a random basis and are keyed into the system by an account representative utilizing a CRT. If minimum standards have been met, the application information is scored by the system; a credit bureau report is automatically obtained, and also scored. A total score is calculated for each application, which is then directed by the system into one of the following categories: 1. Auto-decline - If the applicant's total number of points ------------ achieved based on the application information and credit bureau data does not meet the minimum score for approval, the application is automatically declined. A system-generated letter, listing three reasons for declination, is sent directly to the customer, referencing the areas in which the applicant lost the most points. 2. Auto Approval - Applications which achieve a passing score ------------- are automatically approved and released by the system. Depending on the applicant's score and income, the system will assign a limit of $400 to $1,500. Exception Policy - ---------------- All applications are point-scored; however, based on specific credit policy reasons, certain applications (typically 7-8% of total applications) are designated as "judgmental", and ---------- decisioned by a credit analyst. Policy reasons for judgmental classification: - - employee account - - student application - - reactivated purged account - - duplicate account - - system recommends approval, but credit report contains R9 rating - - system recommends decline, but primary decline reason is listed as "finance company inquiry" Typical approval rate for judgmental accounts: 50-55%. In addition, a certain portion of scored approvals (usually 2-3% of total applications) are passed to an analyst for verification ------------ of information prior to release. - -------------- Policy reasons for verification requirement: - - fraud file hit - - system recommends approval, but there is no credit file - - system recommends approval, but bankruptcy is listed on credit report - - consumer statement is listed on credit report Typical approval rate for verified accounts: 50-55% ------ Lending authority limits: - ------------------------ - - System - $400 to $1,500 - - Credit Analyst - $400 to $1,500 - - New Accounts Management Staff - up to $3,000 - - V.P. Credit - > $3,000 All new account activity is monitored using a variety of system generated reports, i.e.: Statistics by Solicit Code - Tracks # of applications processed - -------------------------- by store and solicit type (i.e., Instant, Mail, Employee, Reactivate) - calculates daily and cumulative MTD totals - report is sorted 2 ways - store # order and solicit type. Employee Statistics by Solicit Code - Daily tracking of new - ----------------------------------- accounts by store number and associate number. Application Statistics Report - 3 reports generated: daily, month - ----------------------------- to date, and year to date - shows # of applications processed; approved, declined or placed in judgmental category - sorted by operator. Instant Credit Application Report - Two reports sorted by store # - --------------------------------- or operator # - shows data entry information of instant credit application information. Normal Applications - shows data entry information of "mail in" - ------------------- credit application information - sorted by operator. New Account/Reactivate by Risk Code - Shows daily totals of new - ----------------------------------- accounts by limit assignment. Activity Summary by Credit Bureau - Reports daily and month to - --------------------------------- date credit bureau statistics by credit bureau (i.e., total # inquiries, # hits, errors, etc.) - also reflects month to date total of credit bureau system reports pulled by individual credit system (authorization, collections, and non-financial systems). Exception Report - Daily report that details override decisions - ---------------- to new applications, limit assignment, and applications keyed and decisioned by same operator. Report is sorted by user number. Decline Letter Report - Daily report detailing all decline - --------------------- request letters by applicant's name, reference #, letter type, decline reasons, and operation #. Immediate Attention Report - Tracks current status of pending - -------------------------- applications by date keyed, # days old and account #. Tracking and Monitoring Point Scoring Reports - Statistical - --------------------------------------------- reports include: Score Distribution; Approvals by Score; Delinquency by Score; Short Term Delinquency; Approve vs. Decline; and Override Report. All approved applications automatically update the A/R master file. Our supply of blank credit cards is maintained at a vendor location (Faraday, Inc.) where the cards are embossed and mailed according to a daily tape transmission containing new account records. The blank cards at Faraday are safeguarded in a locked area and entrance is limited to employees working on the cards only. Any charge cards that are undeliverable are returned directly to the credit department for investigation. POINT SCORING CHARACTERISTICS ----------------------------- Application Characteristics - --------------------------- -Type of Housing -Time at Current Residence -Applicant's Occupation -# of Bank Card References -# of Retail References Credit Bureau Characteristics - ----------------------------- -Type of Credit Bureau Report -Total # of Inquiries within last 6 months -# Finance Inquiries in the last 2 years -# Satisfactory Ratings -# of 30 and/or 60 Ratings -# of 90 or more day Ratings and/or Trade Line and/or Public Record Derogatory Items -Ratio of Satisfactory Trades to the # of Trades -# of Currently Past Due Balances -# of New Trade Lines opened in the last 6 months -# of Bank Trades -# of Credit Bureau Department Store Trades -# of Oil Company Trades -Age of Oldest Trade on the Credit Bureau Report -Ratio of Total Balances to High Credit or Limit AUTHORIZATION DEPARTMENT Authorization System Approximately 140-150,000 Ann Taylor charge transactions are processed each month; of these, about 88-90% are automatically approved by CICS (Customer Information Control Systems). Of the 10-12% which are referred to Credit, approximately 82-85% are approved. Transactions are referred for the following reasons, in the following order of priority: - - Cycle (P & L cycles always refer; the authorization system prevents charge approval on a P & L account). - - Level of Issue (number of times card was replaced for lost/stolen) - verify account # on charge card - obtain positive identification. - - Status Code (negative "flag") - see Attachment A. - - Multiple account in one cardholder name - verify correct account being used. - - MPI - missing payment indicator (all accounts MPI 2+ are referred). Two actions can be taken: (1) If the past due amount is < $100 and account no more than 60 days past due, the authorizer evaluates account information, i.e., date open; credit limit; previous delinquency; etc. and makes decision. (2) Past due amount > $100 and/or the account is 90 days or more past due, sale is referred to Collection Department for evaluation. - - Inactivity (account not used 24+ months). - - Overactive 1. more than 10 transactions in one day 2. according to ratio of "memo" payment amount to A/R balance (for fraud detection) - - Overlimit If overlimit is the only negative condition, the account is scored through CICS prior to referral (see Attachment B). If a score of 30 is attained, the account is allowed to go overlimit up to our programmed override % (currently set at 35%). Overlimit accounts which do not qualify for override are referred. The account information is reviewed and evaluated: amount over credit limit; payment history; account status; date opened; etc. Authorizers are allowed to approve up to 20% over the limit depending on the strength of the account information. Referral balances exceeding 20% of the limit are reviewed by a supervisor. If the referral is approved, a 4-digit approval code is generated by the system which is released to the store associate, and documented on the sales receipt. Small credit limit increases (typically $100-$300)may be approved based upon the customer's positive account history. Increases greater than $300 require that a credit report also be obtained and evaluated. Credit Limit Increase Authority: ------------------------------- - Authorizer - $100-$300 (maximum limit $1,000) - Lead Authorizer - up to $600 (maximum limit $1,500) - Management Staff - maximum limit $3,000 - V.P. of Credit -> $3,000 Note: An automatic limit increase program is usually run each ---- year affecting approximately 7-10% of total file. This program is based on individual account performance, and controlled by system parameters. (See Attachment C.) The following functions can be performed through the Authorization System: - - alpha-look up of account #'s - - authorization of charge referrals - - entering authorization notes for display on main inquiry screen - - credit bureau inquiry - - memo entries to correct voids Authorization System Reports: - - Daily Referral Detail - transaction details by account #, showing operator ID, time, account status, etc. - - Hourly Transaction Summary - shows total volume of all on- line transactions (including MC/Visa and Amex) by hour - - Credit Referral Summary - shows daily and MTD referrals by type - - Daily Authorization Activity - summarizes Ann Taylor, Amex, and Nabanco transactions (all of those which occurred on-line; any Ann Taylor off-line transactions which exceeded the floor release and called in to Credit are also included -- these are listed as "CRT" transactions) STATUS CODES (A-M...will cause referral) Code: Definition: Action: - ---- ---------- ------ AT closed/TRW update Pull new credit report and review for reopening. MT hold to limit/TRW update Keep account balance within credit limit. AB closed/TRW bankrupt alert Refer to Collections Department. MB hold to limit/TRW bankrupt alert Refer to Collections Department. A pending/TRW update Sales< $400 - approve, then pull credit report and refer for review. Sales> $400 - run report prior to decisioning and refer to supervisor for disposition. C return mail Verify customer's address and update account information. CQ return mail/telephone # Same as above, but also verify telephone number. D deceased Deny sale. E closed by collections Refer to Collections Department. E1 closed/derogatory credit info Update account with new credit report- refer to supervisor for review. E2 closed/customer request Verify customer into charge and reopen account. E3 closed/duplicate account Verify appropriate account #; deny sale and have store re-ring under correct account #. E4 closed/joint acct/non- Refer to supervisor for responsibility review. E5 closed/returned checks Deny sale and refer to Collections Department. E7 closed/fraud Deny sale. E8 closed/instant credit acct Deny sale. E9 closed/terminated employee New application required. F1 Mr. only Request positive I.D. from customer. F2 Mrs. only Request positive I.D. from customer. F3 I.D. required/corporate acct Request positive I.D. from customer. F4 Mr. or Mrs. only Request positive I.D. from customer. F5 new account flagged for Request positive I.D. and verification verify name, address, S.S.# and telephone #. F6 no mail or phone orders Purchases only allowed in the store; request I.D. H charge-off/P&L acct Refer to Collections Department. I no checks accepted Verify payment type. J card stolen/not replaced Request I.D. M hold to credit limit Review account condition; customer not to exceed credit limit; exceptions - new credit report taken to possibly increase credit line. STATUS CODES (N-Z... will not cause referral) S MPI reduced W employee/acct opened prior to hire date Y reopened collection account Z reopened P&L account ? force account to collection & adjustment pending/suppress from auto write-off # employee/derogatory credit information @ VIP account/preferred customer authorized user X account was previously status A' ALPHA DATA UTILITY, INC. SECTION 7 - C.I.C.S. POINT SCORE ALGORITHMS ADU AUTHORIZATION POINT SCORE SYSTEM DATE OPENED POINTS - ----------- ------ 12-24 Months 4 25-60 Months 6 Over 60 Months 10 MPI - --- 0 15 1 6 Over 1 0 HMPI - TY - --------- 0 5 1 3 Over 1 0 HIGH - BALANCE - -------------- Less than Current - Bal. 0 Greater than Current - Bal. 6 RISK - CODE - ----------- 0 0 1 2 2 4 Over 2 6 HISTORY - ------- Both Bal. & Paym. in M2, M3, M4 6 Both Bal. & Paym. in 2 of M2, M3, M4 4 All others 0 Over 29 points approves sale up to overlimit %. RISK CODE CHANGE PROGRAM ------------------------ Exclusions: - ---------- - - All accounts open later than 6/30/92 - - Limits < 04 - - Limits > 25 - - Cycles 5-8; 15; 45 to 99 - - Current MPI > o if credit limit is < $800 - - Current MPI > 1 if credit limit is $800 or greater - - Hi MPI & LY MPI > 1 - - Status codes A thru E; H; I; M; X; Y; Z - - Payment activity in less than three billing periods within the last eight months - - Total payments < $75 - - Accounts with a limit increase later than 12/31/92 - - Accounts with credit returns > 75% of sales All accounts not excluded by the above criteria are eligible ------------------------------------------------------------ for an increase in limit as follows: ----------------------------------- - - Calculate an average payment of the three most recent --------------- payments made, and multiply by six. --- - - Raise risk code to the level nearest this amount; if 50% or greater, advance to next level. - - Minimum increase = 20% of current risk code. - - Maximum increase = 40% of current risk code. COLLECTION DEPARTMENT COLLECTION POLICY Aging Criteria Account are aged for reserve purposes at billing time. To calculate an account's age, the system determines the last month in which the account was current (8 months maximum). Once this starting point has been established, we work forward to the current month and calculate the total payment deficiency (total amount due less total payments made). The system then calculates the number of payments (or age) that this deficiency represents. (In order to qualify for one month's aging, the payment deficiency must be more than one-half of the payment requirement.) Age can never exceed seven months. Charge Off Criteria Automatic - The system generates write-offs for all accounts greater than five months past due. If financial activity has occurred within the current month, write-off is delayed for one billing period. Collection Manager manually writes off bankruptcies and frauds. Re-aging Criteria If four consecutive payments equal to or greater than 20% of the previous balance are received on a delinquent account, the delinquency will be "cured". Ann Taylor's policy is to take no manual action to re-age individual accounts. Collection Policies and Procedures Accounts are brought into the on-line collection system according to MPI (missing payment indicator) and balance. Accounts with balance $500+: - - brought into Collections at MPI 2 (30 days past due) - - if date open is within the last 6 months, they are brought in at MPI 1 Accounts with balance $75-$499: - - brought in at MPI 3 (60 days past due) (if account shows 2+ missing consecutive payments, it will be brought in at MPI 2) Accounts with balance < $75: - - brought in at MPI 4 (90 days past due) Accounts are assigned to individual collectors by age, billing cycle or by balance, and distributed by time zone to P.M. collectors. Accounts are worked a minimum of twice a month. Dunning notices are automatically mailed each month, approximately 10 days after the billing cycle closes. A series of system letters are available for collectors to send. Collector Functions: - - review previous collection notes - - review 8 months of financial history - - make non-financial changes (address; phone #; etc.) - - send letters or stop duns - - enter notes and result codes - - reschedule accounts by date or time - - view customer's credit report - - access limited help screens Management Functions: - - A sample of each collector's work is done monthly to insure compliance with policies and procedures. - - High balance accounts (>$1,000) are reviewed by management. - - Daily collector productivity reports are reviewed to insure. proper number of accounts worked, and proper procedures followed. - - Silent monitoring is also done for each collector. - - Charge off review is held monthly. - - Monthly write-off requires approval of V.P. of Credit. - - Accounts are closed at 3 months past due. Reports: - - Potential P&L Report - listing of accounts age 4 & up - - Special Aging Report - listing of delinquent accounts by age, by cycle - - Detail and summary of collector's daily activity - - P&L Analysis - monthly write-off analysis - - MPI Movement Analysis - tracks movement between delinquency levels - - Collector Profile - number of accounts in collector's que - - Audit Reports such as non-financial changes CREDIT OPERATIONS/ CUSTOMER SERVICE DEPARTMENT Credit Operations Department The Credit Operations Department is primarily responsible for scheduling billing cycles, reconciling lock box differences and unapplied media, refunding credit balances, making non-financial changes to accounts including employees, posting on-line financial adjustments referred by Customer Service and researching returned mail. Billing Cycles - -------------- Customer accounts reside in one of four billing cycles. The A/R master file is updated and billing statements generated on the 3rd, 12th 18th and 24th of each month. All employees are billed on the 18th. The New York Data Center prints and forwards all regular billing statements to our billing house for mailing. All "exception" statements are forwarded to the Credit Department for review and subsequent mailing (e.g. credit balance >$300; multi-page statements; foreign address). Lockbox - ------- Lockbox activity reports are sent to the Credit Department daily from AM South Bank. Included in this package are detail reports of all payments processed, any exception items (e.g. Gift Certificates, live postdated checks), copies of all unapplied media, address changes and customer correspondence. Lockbox differences are a result of bank posting errors or unapplied funds. These amounts get posted to one of two control accounts and are reconciled on a monthly basis by the Assistant Manager of Credit Operations. Payments are processed by lockbox seven days a week and are transmitted to our mainframe in New York Monday through Friday at 6:00 PM and are reflected on our A/R system as of the actual date processed. Credit Balance Refunds - ---------------------- Credit balances are refunded upon customer request, or automatically when the credit balance has been outstanding for more than five months. All credit balances of $300 or more constitute an exception billing statement and are forwarded to the Credit Department for research. Requests for refunds are prepared by Credit Operations, reviewed and approved by Management and forwarded to the Accounts Payable Department, where the checks are issued and mailed to the customer. Non-Financial Changes - --------------------- Address and name change request forms are forwarded to Credit Operations from our store locations and are processed on line. These changes are effective immediately upon entering. On Line Financial Adjustments - ----------------------------- Financial adjustments originate mainly in the Customer Service Department and are entered in the A/R system by Credit Operations. These adjustments consist of finance charge credits, "Good Policy" adjustments, transfers between accounts due to account number error, sales audit adjustments, and employee discount corrections. These adjustments are keyed daily and are effective on the customer account immediately. All adjustments are captured on a mainframe report and are balanced and checked for approval daily. Authority Limits - ---------------- Financial adjustments are limited to the following authority limits: Finance Charge Write-Off .00 to 9.99 CSR Authority 10.00 to 19.99 Assistant Manager 20.00 to 35.00 Manager 35.00 and Over Vice President of Credit Good Policy Adjustments .00 to 25.00 CSR Authority 25.01 to 100.00 Assistant Manager 101.00 to 250.00 Manager 250.00 and Over Vice President of Credit Return Mail - ----------- Return mail is researched for current address and is either corrected or a status is placed on the account to obtain current information the next time the customer is in to charge. Customer Service Department The Customer Service Department handles all customer billing disputes and inquiries received either by mail or by telephone. Billing inquiries handled by this department range from a simple explanation of a customer statement to the more involved unauthorized activity dispute. Customer Service receives an average of 28,000 calls monthly and approximately 93% of these are resolved at the point of call. Customer Service Representatives have the authority (see previous page for limits) to remove finance charges assessed to an account should a customer have an address problem or a billing dispute. Good policy adjustments are made to a customer's account at the discretion of the Representative and/or Management (e.g. for discount coupon offers, store errors, etc). Customer billing disputes that cannot be resolved at the point of call are documented and the dollar amount in question is placed in "dispute". This amount will be excluded from the account balance when calculating finance charges and minimum due. All inquiries are also entered into a PC database in order to track their type and age. The Customer Service Department follows the Fair Credit Billing Act and Regulation Z regarding the timely resolution of billing disputes. SCHEDULE 6.01(r) ---------------- Trade Names ----------- AnnTaylor Funding, Inc. - ----------------------- [none] 5 SCHEDULE 6.02(k) ---------------- List of Offices Where Records Are Kept --------------------- AnnTaylor, Inc. - --------------- Chief place of business and chief executive office: 142 West 57th Street New York, New York 10019 location of books and records, etc: 142 West 57th Street New York, New York 10019 414 Chapel Street New Haven, Connecticut 06511 6 Customer Service Monthly Totals TOTAL TOTAL STATEMENTS % REC VS. MONTH INQUIRIES # OF CALLS MAILED STMT MAIL Jun-92 655 21,454 170,829 12.56% Jul-92 591 22,428 172,423 13.01% Aug-92 540 24,364 167,999 14.50% Sep-92 628 23,684 167,075 14.18% Oct-92 760 25,225 172,315 14.64% Nov-92 753 23,147 174,627 13.26% Dec-92 765 26,589 184,529 14.41% Jan-93 916 30,001 188,964 15.88% Feb-93 838 25,464 184,996 13.76% Mar-93 1,013 27,123 167,072 16.23% Apr-93 724 26,935 185,893 14.49% May-93 779 26,094 189,965 13.74% Jun-93 808 29,897 192,883 15.50% Jul-93 722 33,630 195,569 17.20% Aug-93 648 33,548 194,469 17.25% Sept-93 718 32,737 194,560 16.83% Oct-93 800 33,649 193,651 17.38% Nov-93 710 33,231 193,249 17.20% AVERAGE 743 27,733 182,837 15.17% Schedule 6.02(1) ANN TAYLOR INC. STORE BANK LIST STORE NAME BANK ACCOUNT NUMBER 1 New Haven Peoples 42-7004-109 2 Westport Chase 907-053-2 3 New Canaan Shawmut 00-6561-0893 4 Greenwich Fleet 000-142-9965 5 Braintree Fleet 93576-69824 6 Warwick Citizen's Bank 018-901-4 8 Palmer Square Chemical 0060-056363 9 Paramus Midland 01-009145-1 10 Burlington Baybank 921-258-2 11 Chestnut Hill Baybank 325-699-5 12 Cambridge Baybank 1000-355-5 13 Pheasant Lane First NH Bank 020163164801 14 80th & Madison Chase 034-1-209015 15 Eastchester Citibank 11788198 16 Holyoke Springfield 49815723 Institute 18 57th Street Chemical 026-0786945-65 19 South Str. Seaport Chemical 009-186115 20 Riverside United Jersey 111013224 21 George Town Riggs 01-218-077 22 Newbury Street Fleet 00-2661-5294 23 Hartford Shawmut 006552-7183 24 Wellesley Square Shawmut 05-0096-3922 25 Michigan Avenue First Nat'l 8008086 Bank Chicago 26 Old Orchard First American 12437000 28 Oak Street Northern Trust 431931 29 Manhasset Nat'l 2-009-35183-5 Westminster 30 Tyson's Riggs 01-755-552 31 White Flint Citizen's 057-4919 Bank 32 K Street Crestar 52021442 33 Continental Bank Continental 77-93189 34 Faneuil Hall Shawmut 02-0049-5677 35 Woodfield NBD 0000115479 36 Mazza First Union 2000031744689 40 Central Office Fleet 263624-7 41 Troy Michigan Nat'l 5963-11465-6 42 Beachwood Society 16-320-0361 43 Ardmore Corestates 0113-0691 First Penn. 44 King of Prussia Mellon Bank 2-540-672 45 Oakbrook Oakbrook 1066-86400 46 Oxford Center Mellon Bank 112-0741 47 Short Hills Summit Bank 0035630260 48 North Clark Str. Midtown Bank 1029745 & Trust 49 Third Avenue E A B 106-01414-5 50 Willow Grove Mellon Bank 2-512-333 51 Ross Park Mellon Bank 156-1627 52 Walnut Street First Fidelity 0003308285 53 Shady Side Integra-First 0008448889 Seneca Bank 54 Bridgewater Summit 0000-80305 55 Mt. Lebanon P N C 00-0124-0786 56 Glen Eagle P N C 0592-454-5 57 Nanuet Mall Chemical 654-0640488-65 58 Woodbridge Center First Fidelity 8407500691 59 Menlo Park First Fidelity 8503500135 60 Ft. Lauderdale Barnett 1800122224 61 Bal Harbour Sun 0599-000137380 62 Dadeland Dadeland 10164397500 63 Mayfair Coconut Grove 01-220062-06 64 The Falls Sun 0699-001009595 65 Boca Town Center Barnett 1611773909 66 RiverChase AmSouth 32-868-049 67 The Gardens First Federal 2070000757 69 Altamonte Mall Sun 0760-760205086 70 Westwood B O A 1233-9-54955 71 Woodland Hills B O A 1140-8-00593 73 Beverly Hills Bank of L.A. 200051126 75 Del Amo B O A 0993-0-10494 76 Beverly Center Nat'l Bank 166-001-005308 California 77 Mission Valley B O A 08188-11287 78 Glendale Wells Fargo 0795-055698 79 Horton Plaza Wells Fargo 0780-010542 81 Highland Park Nation's 109-091553-8 83 Houston Town First & Country Interstate Bank 21-1006-4350 84 No. Park Comerica 7831010215 85 Canal Place Alerion 0019-10-537-7 86 San Antonio Groos 840264768 87 Highland Mall First State 0001083392 88 Rivercenter Groos 285029947 89 New Orleans Ctr. First Nat'l 1102-93185 Bank Commerce 90 Sutter Street B O A 02600-15257 91 Embarcadero Square B O A 1233-8-54960 92 Ghirardelli Square Wells Fargo 0043-054006 94 Palo Alto B O A 05203-11068 95 Mail Order Fleet 000-224-7852 96 Corte Madera B O A 09780-08430 98 Lakeside Mall First Nat'l 67-21-2709-2 Bank Jefferson 99 Staten Island Anchor 201001039064 100 Old Hyde Park Southern 0-00-100153-2 Exchange 101 Fashion Mall Safra 70-100-0684 102 Boyton Beach Carney 100067500 103 The Avenues Barnett 2181703593 104 University Square Barnett 1406172621 105 Cherry Hill Mall Midlantic 14030-9651-2 106 Shreveport Premiere Bank 1101116666 107 Silver City Bristol Galleria Savings 270-13235 108 Cambridgeside E. Cambridge 04-80-8001076 Savings 109 Palm Beach Mall Nation's 3602836347 110 Larimer Square Colorado Nat'l 122700880646 111 Charlestown Mall MidAmerican 6100014352 Federal 112 Siena Square Norwest Bank 182-3473562 Boulder 114 Cherry Creek Cherry Creek 1683085 115 Trolley Square First Security 131-00283-43 116 Town Square NBD 0001709287 117 Lincoln Place First Inter- 43443 State Bank 118 Ocean County First Fidelity 3000512065 119 Las Vegas B O A 1501-9-9602 120 Plaza Frontenac Mark Twain 3614005591 121 St. Louis Center Mercantile 100128140-9 122 W. County Center Colonial 01-069446-01 123 One Pacific Place Firstier 00000827622 124 Country Club Country Club 078501 125 Galleria & Clayton Magna Bank 0537009380 126 Tower Place Fifth Third 714-16492 127 Tuscon Mall B O A 00000125709559 128 Freehold First Fidelity 3000398408 129 Rockingham Park New Dartmouth 510017916 Bank 130 Regency Square Nation's 0205-2218 131 Owings Mills Bank of 3114163 Baltimore 132 Harbour Place First Union 0-14-08032 133 Chesterfield Peoples 4031413700 134 Union Station Adams Nat'l 100161201 Bank 135 Fash Ctr Pentagon Chevy Chase 107-430051-3 136 Reston Town Center First Union 2070478000217 137 Montgomery Mall Bank of 3084272 Baltimore 138 Towson Town Center Maryland 09111774 Nat'l 139 Mayfair Mall Firstar 112-047743 140 Woodbury Commons Chemical 141-062437865 141 Danbury Fair Union Trust 2-082-007 142 Trumbull Lafayette 51008068 143 West Farms Farmington 30-57-3000093 Bank 144 Buckland Hills Savings Bank 662-002-398 Manchester 145 75th Street Marine Midland 027-71277-0 146 Walt Whitman Williamsburg 1366001368 150 Southdale First Bank - 1-367-3073-5026 First Southdale 151 Ridgedale Ameribank 1017039 152 Conservatory Twin City 1019000738 Federal 153 University Park First Source 119-865-4 154 Fairlane Town Ctr. Comerica 1011-104716 155 Briarwood NBD 205000023148 157 Century III Integra 0211938761 159 Springfield Mall First Union 2000072804083 163 Cumberland Mall Trust 9300313351 165 Augusta Mall First Union 208000090669 167 Mall of America First Bank 1-359-3010-7747 Bloomington 170 Santa Barbara B O A 04450-05554 171 City Corp Plaza B O A 1233-1-54959 172 Main Place B O A 1233-5-54957 173 LaJolla Wells Fargo 0734-011133 174 Biltmore First Inter- 964-66018 State Bank 175 Scottsdale First Inter- 509-13133 State Bank 176 Sherman Oaks B O A 03979-14183 177 South Lake Ave. Wells Fargo 0613-058866 178 Ala Moana Liberty 18-031620 179 Brea B O A 09522-35581 180 Desert Fashion Mall B O A 09506-01505 181 Santa Monica Place Sanwa Bank 0851-15848 182 Palos Verdes B O A 1233-7-54956 183 Media City Center Wells Fargo 0933-040495 184 No. County Fair Wells Fargo 0760-017830 185 University Town Wells Fargo 0721-113330 187 The Oaks B O A 10111-11247 191 Valley Fair B O A 05750-01049 192 Stonestown B O A 02529-00245 193 San Francisco B O A 00888-18805 Center 194 Pacific First Ctr. Seafirst 63497713 195 Arden Fair Wells Fargo 0347-056947 196 Pioneer Place US Bank Oregon 070-0008-980 197 Stoneridge Mall First Inter- 713-5-15701 State Bank 200 5th Avenue Chemical 134-0692452-65 201 Cedarhurst Nat'l West- 2-011-60823-5 minster 202 World Trade Center Chemical 024-033715 203 Upper West Side Chemical 067-0648979-65 204 Crossgate Albany Savings 280000222801 Bank 205 Walden Galleria Key 121-00-223-3 206 Carousel Center Key 221-02-515-6 207 A & S Plaza Chemical 023-0710291-65 208 87th Street Citibank 33608426 209 Roosevelt Field Crossland Mall Savings 041-770235-4 240 ErieView Star 570927814 241 Fashion Mall NBD 700002634309 242 Twelve Oaks Comerica 3001-00695-0 243 Grosse Pointe NBD 0041634-94 244 Kenwood Society 5000350436 245 Columbus City Bank One 11-8677-5 246 Woodland Mall Michigan Nat'l 5856-16009-7 247 Southern Park Dollar Savings 011-233-874 248 Westgate Mall Dollar Savings 2593219871 249 Laurel Park NBD 0010679-14 260 Saddlecreek Nat'l Bank 039-0500 Commerce 261 Bellevue Center First 9111646 Tennessee 262 Penn Place Charter Nat'l 101-251-7 263 Utica Square F & H 4000-2979-3 264 Hulen Mall Overton Park 58818 265 Green Hills Third Nat'l 176162-5 266 Willowbrook Mall Charter Nat'l 40044865 Bank 270 Oxmoor Center P N C 3095478350 271 Hanes Mall First Union 2071884185026 272 Southpark Mall First Union 2070490732110 273 Park Plaza Twin City Bank 9013-937-6 274 Shelter Cove Nation's 745040798 275 Fayette Mall Nat'l City 70408416 276 North Park Mall Trustmark 100-1447374 277 Ashville First Citizen's 121-26-43-130 278 Hamilton Place First Tennessee 000-006-213 279 Coolsprings Galleria First Tennessee 07-2259-6 280 Madison Square Mall Compass 700-5184-2 281 Houston Galleria Bank One 7070070037 282 Hillsdale Wells Fargo 0525-031290 283 Dallas Galleria Nation's 059-000134-7 284 Perimeter Mall Trust 8801928410 285 Bellevue Square Seafirst 76544715 286 South Coast B O A 0694-2-08817 287 Northbrook Firstar 102652 288 No. Shore Mall Salem Five 897101457 289 Century City B O A 1233-3-54958 290 Prudential Fleet 9363612920 291 Downtown Plaza B O A 1233-2-17890 292 Fairfield Commons Bank One 970649680 293 Stamford Fleet 000-886-1005 294 Lenox Square Trust 8800781216 295 Worthington Square NBD 4000003758 296 The Grove Shrewsbury 011074426 State Bank 298 Winter Park Barnett 2830666787 299 Broadway Plaza B O A 02240-04907 300 River Oaks Nation's 2663085222 700 Franklin Mills Mellon Bank 8-455-628 701 Sawgrass Mills Barnett 3871201716 703 Citadel Outlet Bank of 089-002428 California 704 Gurnee Mills NBD 0006000479 705 Potomac Mills Riggs 01801589 706 Lancaster Fulton 2318770851 707 San Marcos State Bank 1505920 708 Ellenton Barnett 1959193980 709 Woodbury Fleet of NY 9366179640 Schedule 7.03(c) January 4, 1993 Clipper Financing Facility _________________________________________________________________ Lending Authority Limits -Student accounts - $300 -System - $400 to $1,500 -Credit Analyst - $400 to $1,500 -New Accounts Management Staff - up to $3,000 -V.P. of Credit - over $3,000 COLLECTIONS ___________ Collections Billing Cycles Customer accounts reside in one of four billing cycles. The A/R master file is updated and billing statements generated on the 3rd, 12th, 18th, and 24th of each month. All employees are billed on the 18th. The New York Data Center prints and forwards all regular billing statements to the billing house for mailing. All "exception" statements are forwarded to the Credit Department for review and subsequent mailing (e.g., credit balances greater than $300; multi-page statements; foreign address). ______________ Aging Criteria Accounts are aged for reserve purposes at the time the bill is sent. The Company determines age for the collection process using the Missing Payment Indicator ("MPI"). For reserve and charge off calculations, the Company utilizes a slightly modified version of MPI that it refers to as Account Aging. Flexible Accounts "MPI" Calculation The calculation of the "MPI" for flexible accounts begins by going back in an account's history to the last month in which the account was paid up (had a balance of less than $5.00) ("starting point"), but no more than eight months ago (information prior to eight months is archived). Working forward from this starting point, for each month the system calculates the total amount of asked for but not received (amount requested - payments received) which is called the "deficiency". If the deficiency is negative (the amount paid was more than the amount requested) then the account is considered to have a deficiency of 0 for that month. The deficiencies for each month (from the starting point to the current month) are summed into the "total deficiency". PNC Bank January 4, 1993 Clipper Financing Facility _________________________________________________________________ If the total deficiency is greater than $4.99, the actual number of payments (the "MPI") this total deficiency represents will be calculated. Starting in the current month with MPI at 1 (with total deficiency greater than $4.99, the account has at least one missing payment), the current month's asked for payment is subtracted from the total deficiency which results in the "remaining deficiency". If the remaining deficiency is greater than $4.99 then the system moves back to the previous month and repeats the process (remaining deficiency - asked for payment = new remaining deficiency) until the remaining deficiency is less than $5.00. For each month the remaining deficiency is greater than $4.99, one is added to the MPI for that account. Flexible Account Aging Flexible accounts are aged for reserve purposes at billing time and, although the calculation is similar to the "MPI" calculation, they are completely independent of each other. The starting point for calculating an account's age is the same as for calculating its MPI (see above). The difference between calculating an account's age and its MPI is in determining the deficiency. To determine an account's deficiency under account aging the monthly balance is re-calculated by rounding the balance up to the next $50.00 increment and the amount asked for is recalculated by multiplying the new balance by 20%. For example: Amount ------ Balance Rounded X20% Asked For ------- ------- ---- --------- $649.52 $650.00 x.2 $130.00 $652.95 $700.00 x.2 $140.00 $101.21 $150.00 x.2 $30.00 If the total deficiency is less than $1 or less than one half of the next month's asked for payment then the account is considered current. Other than the calculation of the monthly deficiency number the account aging follows the same methodology as MPI (see above) to determine an account's age. The account aging calculation is done only to determine in which age category (1-7) the account will be classified. Once the category is determined, the actual dollar value of the receivable is included in the account aging. PNC Bank January 4, 1993 Clipper Financing Facility _________________________________________________________________ Re-aging Criteria If four consecutive payments of at least 20% of the previous balance are received on a delinquent account, the delinquency will be "cured". AnnTaylor's policy is to take no manual action to re-age individual accounts. Collection Policies and Procedures Accounts are brought into the on-line collection system according to MPI (missing payment indicator) and balance due: Accounts with a balance of $500+ are brought into collections at MPI 2 (30 days past due). If the account was opened within the last six months, the account is brought into collections at MPI 1; Accounts with a balance of $75-$499 are brought into collections at MPI 3 (60 days past due). If the account shows 2+ missing consecutive payments, it will be brought into collections at MPI 2. Accounts with a balance of less than $75 are brought into collections at MPI 4 (90 days past due). Accounts are assigned to individual collectors by age, billing cycle or balance, and distributed by time zone to P.M. collectors. The collectors work the accounts a minimum of twice a month. Dunning notices are automatically mailed each month, approximately 10 days after the close of the billing cycle. A series of system letters are available for collectors to send. _____________ System Reports Available Potential P & L Report - listing of accounts aged 4+ "MPI" Special Aging Report - listing of delinquent accounts by age, by cycle Detail and Summary of Collector Daily Activity Report P & L Analysis - monthly charge-off analysis MPI Movement Analysis - tracks movement between delinquency levels Collector Profile - number of accounts in collector's queue Audit Reports - such as non-financial changes PNC Bank EX-10.29 5 PURCHASE AND SALE AGREEMENT Dated as of January 27, 1994 between ANNTAYLOR, INC. and ANNTAYLOR FUNDING, INC. TABLE OF CONTENTS ----------------- PAGE ---- ARTICLE I AGREEMENT TO PURCHASE AND SELL . . . . . . . 3 1.1 Agreement to Purchase and Sell . . . . . . . 4 1.2 Timing of Purchases . . . . . . . . . . . . . 4 1.3 Consideration for Purchases . . . . . . . . . 4 1.4 Purchase and Sale Termination Date . . . . . 4 ARTICLE II CALCULATION OF PURCHASE PRICE . . . . . . . . 4 2.1 Calculation of Purchase Price . . . . . . . . 4 ARTICLE III PAYMENT OF PURCHASE PRICE . . . . . . . . . . 6 3.1 Initial Purchase Price Payment . . . . . . . 6 3.2 Subsequent Purchase Price Payments . . . . . 6 3.3 Settlement as to Specific Receivables . . . . 7 3.4 Settlement as to Dilution . . . . . . . . . . 7 ARTICLE IV CONDITIONS OF PURCHASES . . . . . . . . . . . 8 4.1 Conditions Precedent to Initial Purchase . . 8 4.2 Certification as to Representations and Warranties . . . . . . . . . . . . . . 10 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ANNTAYLOR . . . . . . . . . . . . . . . . 10 5.1 Organization and Good Standing . . . . . . . 10 5.2 Due Qualification . . . . . . . . . . . . . . 10 5.3 Power and Authority; Due Authorization . . . 11 5.4 Valid Sale; Binding Obligations . . . . . . . 11 5.5 No Violation . . . . . . . . . . . . . . . . 11 5.6 Proceedings . . . . . . . . . . . . . . . . . 11 5.7 Bulk Sales Act . . . . . . . . . . . . . . . 12 5.8 Government Approvals . . . . . . . . . . . . 12 5.9 Financial Condition . . . . . . . . . . . . . 12 5.10 Licenses, Contingent Liabilities, and Labor Controversies . . . . . . . . . 12 5.11 Margin Regulations . . . . . . . . . . . . . 12 5.12 Quality of Title . . . . . . . . . . . . . . 12 5.13 Accuracy of Information . . . . . . . . . . . 13 5.14 Offices . . . . . . . . . . . . . . . . . . . 13 5.15 Trade Names . . . . . . . . . . . . . . . . . 13 5.16 Taxes . . . . . . . . . . . . . . . . . . . . 14 5.17 Compliance with Applicable Laws . . . . . . . 14 5.18 Reliance on Separate Legal Identity . . . . . 14 5.19 Receivables . . . . . . . . . . . . . . . . . 14 -i- ARTICLE VI COVENANTS OF ANNTAYLOR . . . . . . . . . . . 15 6.1 Affirmative Covenants . . . . . . . . . . . . 15 6.2 Reporting Requirements . . . . . . . . . . . 17 6.3 Negative Covenants . . . . . . . . . . . . . 18 ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE RECEIVABLES . . . . . . . . . 18 7.1 Rights of the Company . . . . . . . . . . . . 18 7.2 Responsibilities of AnnTaylor . . . . . . . . 19 7.3 Further Action Evidencing Purchases . . . . . 19 7.4 Application of Collections . . . . . . . . . 20 ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . 20 9.1 Indemnities by AnnTaylor . . . . . . . . . . 20 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . 22 10.1 Amendments, Etc . . . . . . . . . . . . . . . 22 10.2 Notices, Etc . . . . . . . . . . . . . . . . 23 10.3 No Waiver; Cumulative Remedies . . . . . . . 23 10.4 Binding Effect; Assignability . . . . . . . . 23 10.5 Governing Law . . . . . . . . . . . . . . . . 23 10.6 Costs, Expenses and Taxes . . . . . . . . . . 23 10.7 Submission to Jurisdiction . . . . . . . . . 24 10.8 Waiver of Jury Trial . . . . . . . . . . . . 24 10.9 Captions and Cross References; Incorporation by Reference . . . . . . . . 24 10.10 Execution in Counterparts . . . . . . . . . . 24 10.11 Acknowledgment and Agreement . . . . . . . . 24 -ii- EXHIBIT A - Form of Purchase Report EXHIBIT B - Form of the Company Note EXHIBIT C - Form of Opinion of AnnTaylor's Counsel EXHIBIT D - Form of Subscription Agreement EXHIBIT E - Office Locations EXHIBIT F - Form of In-House Counsel's Opinion Schedule 4.1(k) Data Processing Reports Schedule 5.14 Trade Names -iii- PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (as amended, supplemented or modified from time to time, this "Agreement"), dated as of --------- January 27, 1994, is between ANNTAYLOR, INC., a Delaware corporation ("AnnTaylor"), as seller and ANNTAYLOR FUNDING, INC., --------- a Delaware corporation (the "Company"), as purchaser. ------- Definitions ----------- Unless otherwise indicated, certain terms that are capitalized and used throughout this Agreement are defined in Appendix A to the Receivables Financing Agreement of even-date - ----------- herewith (as, amended supplemented or otherwise modified, the "Receivables Financing Agreement"), among the Company, AnnTaylor, ------------------------------- as initial Servicer, CLIPPER RECEIVABLES CORPORATION, as lender ("Lender"), STATE STREET BOSTON CAPITAL CORPORATION, as ------ administrator for Lender under the Program Administration Agreement (the "Administrator") and PNC BANK, NATIONAL ------------- ASSOCIATION, as referral agent for Lender under the Relationship Bank Agreement (in such capacity, together with any successors thereto in such capacity, the "Relationship Bank" and in its ----------------- individual capacity, "PNC Bank"). The following terms have the -------- respective meanings indicated hereinbelow: Adverse Claim means a lien, security interest, charge or -------------- encumbrance, or similar right or claim of any Person. Company Note shall have the meaning assigned to such term in ------------ Section 3.1 hereof. - ----------- Deemed Collection means amounts payable by AnnTaylor pursuant ----------------- to Section 3.3 or 3.4. ----------- --- Funding Account means the bank account maintained by the ---------------- Company as specified by the Company to AnnTaylor and the Administrator from time to time; provided, that during the -------- continuance of an Event of Default, such account shall be the Lock-Box Account. Ineligible Purchased Receivable means a Receivable purchased ------------------------------- hereunder that does not comply with any of the following conditions in any material respect (a) was generated by AnnTaylor in the ordinary course of its business; (b) may be sold hereunder without contravening or conflicting any laws; (c) arises under an Eligible Contract that has been duly authorized by the parties thereto and that, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable enforceable against such Obligor in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding of equity or at law; (d) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Contract related thereto is in violation of any such law, rule or regulation in any material respect if such violation would impair the collectability of such Receivable; and (e) satisfies all applicable requirements of the Credit and Collection Policy. Initial Closing Date shall have the meaning assigned to such --------------------- term in Section 1.2 hereof. ----------- Initial Cut-Off Date means December 24, 1993. -------------------- Initial Posting Date means January 24, 1994. -------------------- Initial Reporting Period shall have the meaning assigned to ------------------------ such term in Section 2.1 hereof. ----------- Lock-Box Accounts means one or more lock-box accounts held in ----------------- Lock-Box Banks for receiving Collections from Pool Receivables. Payment Day means (i) the Initial Closing Date and (ii) each ----------- Business Day thereafter that AnnTaylor is open for business. Purchase and Sale Indemnified Amounts shall have the meaning -------------------------------------- assigned to such term in Section 8.1 hereof. ----------- Purchase and Sale Indemnified Party shall have the meaning ------------------------------------- assigned to such term in Section 9.1 hereof. ----------- Purchase and Sale Termination Date shall have the meaning ------------------------------------ assigned to such term in Section 1.4 hereof. ----------- -2- Purchase Facility shall have the meaning assigned to such ----------------- term in Section 1.1 hereof. ----------- Purchase Price shall have the meaning assigned to such term -------------- in Section 2.1 hereof. ----------- Purchase Report shall have the meaning assigned to such term --------------- in Section 2.1 hereof. ----------- Receivables Review shall have the meaning assigned to such ------------------- term in Section 6.1(c) hereof. -------------- Related Rights shall have the meaning assigned to such term -------------- in Section 1.1 hereof. ----------- Seller Material Adverse Effect means, with respect to any ------------------------------- event or circumstance, a material adverse effect on: (i) the business, assets, financial condition, operations or prospects of AnnTaylor, as seller; (ii) the ability of AnnTaylor to perform its obligations under this Agreement or any other Transaction Document to which AnnTaylor, as seller, in its capacity as such, is a party; (iii) the validity or enforceability as against AnnTaylor of this Agreement or any other Transaction Document to which AnnTaylor, as seller, in its capacity as such, is a party; (iv) the status, existence, perfection, priority or enforceability of the Company's interest in the Receivables assets described in Section 1.1; or ----------- (v) the collectability of a significant portion of the Pool Receivables. Subscription Agreement means the Subscription Agreement, ----------------------- dated as of January 24, 1994, between the Company and AnnTaylor, in the form of Exhibit D, as it may be amended, supplemented or --------- modified from time to time. Background ---------- 1. The Company is a limited purpose corporation, all of the issued and outstanding shares of capital stock of which are wholly-owned by AnnTaylor. -3- 2. AnnTaylor is concurrently transferring certain Receivables and Related Rights to the Company as part of the capitalization of the Company. 3. In order to finance its business, AnnTaylor wishes to sell Receivables and Related Rights to the Company, and the Company is willing, on the terms and subject to the conditions set forth herein, to purchase Receivables and Related Rights from AnnTaylor. 4. The Company intends to borrow from Lender from time to time pursuant to the Receivables Financing Agreement in order to finance, in part, its purchases of such Receivables and Related Rights hereunder. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I AGREEMENT TO PURCHASE AND SELL 1.1. Agreement to Purchase and Sell. On the terms and -------------------------------- subject to the conditions set forth in this Agreement (including Article V), and in consideration of the Purchase Price, AnnTaylor - --------- agrees to sell, assign and transfer, and does hereby sell, assign and transfer to the Company, and the Company agrees to purchase, and does hereby purchase, from AnnTaylor, all of AnnTaylor's right, title and interest in and to: (a) each Receivable of AnnTaylor that existed and was owing to AnnTaylor as of the close of AnnTaylor's business on the Initial Cut-Off Date; (b) each Receivable created or originated by AnnTaylor from the close of AnnTaylor's business on the Initial Cut-Off Date, to and including the Purchase and Sale Termination Date and all Finance Charge Receivables relating to Receivables that were created or originated prior to the Purchase and Sale Termination Date; (c) all rights to, but not the obligations under, the Contracts and all Related Security; (d) all monies due or to become due with respect thereto; (e) all books and records related to any of the foregoing; and -4- (f) all proceeds thereof (as defined in the UCC) received on or after the date hereof including, without limitation, all funds which either are received by AnnTaylor, the Company or the Servicer from or on behalf of the Obligors in payment of any amounts owed (including, without limitation, finance charges, interest and all other charges) in respect of Receivables, or are applied to such amounts owed by the Obligors (including, without limitation, insurance payments, if any, that AnnTaylor or the Servicer (if other than AnnTaylor) applies in the ordinary course of its business to amounts owed in respect of any Receivable). All purchases hereunder shall be made without recourse, but shall be made pursuant to and in reliance upon the representations, warranties and covenants of AnnTaylor, in its capacity as seller, set forth in each Transaction Document. The Company's foregoing commitment to purchase such Receivables and the proceeds and rights described in subsections (c), (d), (e) and (f) of this ---------------- --- --- --- Section 1.1 (collectively, the "Related Rights") is herein called - ----------- -------------- the "Purchase Facility". ----------------- 1.2. Timing of Purchases. ------------------- (a) Initial Closing Date Purchases. On January __, 1994 ------------------------------- (the "Initial Closing Date") AnnTaylor shall sell to the Company --------------------- in part, and contribute to the Company, in part, and the Company shall purchase and acquire, pursuant to Section 1.1, AnnTaylor's ----------- entire right, title and interest in (i) each Receivable that existed and was owing to AnnTaylor as of the close of AnnTaylor's business on the Initial Cut-Off Date, (ii) all Receivables created by AnnTaylor from and including the close of AnnTaylor's business on the Initial Cut-Off Date to and including the Initial Closing Date, and (iii) all Related Rights. (b) Regular Purchases. After the Initial Closing Date, ------------------ each Receivable and Related Rights created or originated by AnnTaylor and described in Section 1.1(b) hereof shall be owned -------------- by the Company (without any further action) upon the creation or origination of such Receivable. 1.3. Consideration for Purchases. On the terms and subject --------------------------- to the conditions set forth in this Agreement, the Company agrees to make all Purchase Price payments to AnnTaylor in accordance with Article III. ----------- 1.4. Purchase and Sale Termination Date. The "Purchase and ---------------------------------- ------------ Sale Termination Date" shall be the Final Payout Date under the - --------------------- Receivables Financing Agreement. -5- ARTICLE II CALCULATION OF PURCHASE PRICE 2.1. Calculation of Purchase Price. On each Reporting Date ----------------------------- (commencing February 7, 1994), the Servicer shall deliver to the Company, the Administrator, the Relationship Bank, and AnnTaylor (if the Servicer is other than AnnTaylor) a report in substantially the form of Exhibit A (each such report being --------- herein called a "Purchase Report") with respect to the Company's --------------- purchases of Receivables from AnnTaylor (a) that arose on or prior to the Initial Posting Date (in the case of the first Purchase Report to be delivered hereunder) or (b) that arose during the Settlement Period immediately preceding such Reporting Date (in the case of each subsequent Purchase Report). The "Purchase Price" (to be paid to AnnTaylor in accordance with -------------- the terms of Article III) for the Receivables and the Related ------------ Rights shall be determined in accordance with the following formula: PP = AUB X FMVD where: ----- PP = Purchase Price (to be paid to AnnTaylor in accordance with the terms of Article III) as ------------ calculated on the relevant Reporting Date AUB = (i) for purposes of calculating the Purchase Price on the initial Reporting Date, the aggregate Unpaid Balance of all Receivables that existed and were owing to AnnTaylor as measured as at the Initial Cut-Off Date plus the aggregate Unpaid ---- Balance of all Receivables that were created or originated by AnnTaylor from the Initial Cut-Off Date, to and including the close of AnnTaylor's business on the Initial Posting Date (excluding, in each case, all Receivables that had been written off the books of AnnTaylor as uncollectible), less ---- an amount equal to the sum of (A) the aggregate Unpaid Balance of all Receivables that comprised the capital contribution made by AnnTaylor to the Company on the Initial Closing Date, and (B) the aggregate Collections received by AnnTaylor after -6- the Initial Cut-Off Date to and including the Initial Posting Date, (ii) for purposes of calculating the Purchase Price for Receivables on the second Reporting Date, the aggregate Unpaid Balance of the Receivables that were generated by AnnTaylor during the immediately preceding Settlement Period less the ---- aggregate Collections received by AnnTaylor from but excluding the Initial Posting Date to but excluding the Initial Closing Date, and (iii) for purposes of calculating the Purchase Price for Receivables on each Reporting Date thereafter, the aggregate Unpaid Balance of the Receivables described in Section 1.1(b) hereof that were generated by AnnTaylor during the immediately preceding Settlement Period. FMVD = Fair Market Value Discount Factor on the determination date, which is the quotient of (i) one divided by (ii) an amount equal to 1+ (90/365 x ABR), where ABR is the Alternate Base Rate plus 2% on such day, expressed as a fraction. ARTICLE III PAYMENT OF PURCHASE PRICE 3.1. Initial Purchase Price Payment. On the Initial -------------------------------- Closing Date, AnnTaylor shall, and hereby does contribute to the capital of the Company, Receivables and Related Property Rights with respect thereto consisting of each Receivable described in Section 1.1(a) hereof beginning with the oldest of such Receivables and continuing chronologically thereafter and all or an undivided interest in the most recent of such contributed Receivables such that the aggregate Unpaid Balance of all such contributed Receivables shall be equal to $1,800,000. On the terms and subject to the conditions set forth in this Agreement, the Company agrees to pay to AnnTaylor on the Initial Closing Date a portion of the Purchase Price for the purchase to be made from AnnTaylor with respect to Receivables existing on or prior to the Initial Posting Date (a) in cash in the amount of the proceeds of the Loans made to the Company on the Initial Closing Date under the Receivables Financing Agreement and (b) by the issuance of a subordinated promissory note in the form of Exhibit ------- B to AnnTaylor (such promissory note, as it may be amended, - - supplemented, indorsed or otherwise modified from time to time in substitution therefor or renewal thereof in accordance with the Transaction Documents, being herein called a "Company Note") in ------------- -7- the initial principal amount equal to $5,412,000. The portion of the Purchase Price paid to AnnTaylor pursuant to the immediately preceding sentence shall be adjusted on the initial Reporting Date by the amount of the difference, if any, between (x) the Purchase Price calculated on the initial Reporting Date pursuant to Section 2.1 hereof and (y) the amount paid to AnnTaylor ----------- pursuant to the immediately preceding sentence. If the amount described in clause (x) is greater than the amount described in ----------- clause (y), the Company shall pay to AnnTaylor the difference by - ---------- increasing the principal amount outstanding under the Company Note, effective as of the last day of the related Settlement Period. If the amount described in clause (x) is less than the ---------- amount described in clause (y), AnnTaylor shall pay to the ----------- Company the difference by a reduction in the principal amount of the Company Note, effective as of the last day of the related Settlement Period; provided, however, that if at any time the -------- ------- unpaid principal amount of the Company Note has been reduced to zero, AnnTaylor shall pay the Company the remainder owed with respect thereto in immediately available funds to the Funding Account. 3.2. Subsequent Purchase Price Payments. On each Business ---------------------------------- Day after the Initial Closing Date until the termination of this Agreement pursuant to Section 9.4 hereof, the Company shall pay ----------- to AnnTaylor a portion of the Purchase Price due pursuant to Section 2.1 by depositing into such account as AnnTaylor shall - ----------- specify immediately available funds from monies then held by or on behalf of the Company from Collections or Deemed Collections, solely to the extent that such monies do not constitute Collections that are required to be segregated and held by the Servicer pursuant to the Receivables Financing Agreement or to be distributed to the Administrator pursuant to the Receivables Financing Agreement on the next Settlement Date or required to be paid to the Servicer as the Servicer's Fee on the next Settlement Date, or required to be deposited into the Spread Account or paid as a reimbursement to the issuer of the Letter of Credit pursuant to the Receivables Financing Agreement on the next Settlement Date, or otherwise necessary to pay current expenses of the Company (in its discretion) and provided that AnnTaylor has paid all amounts then owing by it hereunder. The portion of the Purchase Price paid to AnnTaylor shall be adjusted on each Settlement Date (beginning on March 5, 1994) by the amount of the difference, if any, between (x) the amount due pursuant to Section 2.1 with respect to all Receivables created or originated - ----------- by AnnTaylor that arose during the corresponding Settlement Period and (y) the amount paid to AnnTaylor during such Settlement Period pursuant to the foregoing sentence for such Receivables. If the amount described in clause (x) is greater ---------- than the amount described in clause (y), the Company shall pay to ---------- AnnTaylor the difference by increasing the principal amount outstanding under the Company Note, effective as of the last day -8- of the related Settlement Period. If the amount described in clause (x) is less than the amount described in clause (y), - ----------- ----------- AnnTaylor shall pay to the Company the difference by a reduction in the principal amount of the Company Note, effective as of the last day of the related Settlement Period; provided, however, -------- ------- that if at any time the unpaid principal amount of the Company Note has been reduced to zero, AnnTaylor shall pay the Company the remainder owed with respect thereto in immediately available funds to the Funding Account. On each Settlement Date, if no Event of Default under the Receivables Financing Agreement has occurred and is continuing and payment of the Company Note will not result in an Event of Default under the Receivables Financing Agreement, the Servicer will, upon the direction of the Company, make a payment on the Company Note to AnnTaylor in an amount equal to the amount of Collections (not previously paid to AnnTaylor hereunder) that are available to the Company under Section 3.01(b) of the Receivables Financing Agreement. Servicer shall make all appropriate record keeping entries with respect to the Company Note to reflect payments by the Company thereon and Servicer's books and records shall constitute rebuttable presumptive evidence of the principal amount of and accrued interest on the Company Note. AnnTaylor hereby irrevocably authorizes Servicer to return the Company Note to the Company upon the final payment thereof after the termination of this Agreement pursuant to Section 9.4 hereof. ----------- 3.3. Settlement as to Specific Receivables. Subject to --------------------------------------- Section 7.2(a) hereof, if an officer of AnnTaylor obtains knowledge or receives notice from the Company or the Administrator that (a) on the day that any Receivable purchased hereunder was created or originated by AnnTaylor any of the representations or warranties set forth in Section 5.11 was not ------------- true with respect to such Receivable, or such Receivable was an Ineligible Purchased Receivable or, (b) as a result of any action or inaction of AnnTaylor, on any day any of the representations or warranties set forth in Section 5.11 is no longer true with ------------ respect to a Receivable, then AnnTaylor forthwith shall reduce the Purchase Price with respect to Receivables that arose during the same Settlement Period in which such knowledge is obtained or notification is received by an amount equal to the Unpaid Balance of such Receivable; provided, however, that if there have been no -------- ------- purchases of Receivables (or insufficiently large purchases of Receivables to create a Purchase Price large enough to so reduce by the amount of such net reduction) from AnnTaylor during such Settlement Period, any amount owed by which the Purchase Price payable to AnnTaylor would have been reduced pursuant to the immediately preceding clause of this sentence shall be paid by either (at the option of AnnTaylor, unless the Company will, absent such payment in cash, be unable to meet its obligations under the Receivables Financing Agreement on the next occurring -9- Settlement Date, in which case AnnTaylor shall make a cash payment) a reduction in the principal amount of the Company Note (but not below zero) or by payment within two Business Days after the related Report Date in cash by AnnTaylor to the Company by deposit in the Funding Account of same day funds; provided, -------- further, that if the Company thereafter receives payment on - ------- account of Collections due with respect to such Receivable, the Company promptly shall deliver such funds to AnnTaylor. 3.4. Settlement as to Dilution. Each Purchase Report shall ------------------------- include, in respect of the Receivables previously generated by AnnTaylor (including those Receivables that were contributed to the capital of the Company on the Initial Closing Date), a calculation of the aggregate net reduction in the aggregate Unpaid Balance of such Receivables owed by particular Obligors on account of any defective, rejected or returned merchandise or services, any cash discount, or any incorrect billings, other adjustments, or setoffs in respect of any claims by the Obligor(s) thereof against AnnTaylor or any of its Affiliates (other than the Company) (whether such claims arise out of the same or a related or unrelated transaction), or any rebate or refund during the most recent month. Subject to Section 7.2(a) -------------- hereof, the Purchase Price to be paid to AnnTaylor for the Receivables generated during the Settlement Period for which such Purchase Report is delivered shall be decreased by the amount of such net reduction; provided, however, that if there have been no -------- ------- purchases of Receivables (or insufficiently large purchases of Receivables to create a Purchase Price large enough to so reduce by the amount of such net reduction) from AnnTaylor during such Settlement Period, any amount owed by which the Purchase Price payable to AnnTaylor would have been reduced pursuant to the immediately preceding clause of this sentence shall be paid by either (at the option of AnnTaylor, unless the Company will, absent such payment in cash, be unable to meet its obligations under the Receivables Financing Agreement on the next occurring Settlement Date, in which case AnnTaylor shall make a cash payment) a reduction in the principal amount of the Company Note (but not below zero) or by payment within two Business Days after the related Report Date in cash by AnnTaylor to the Company by deposit in the Funding Account of same day funds. 3.5. Reconveyance of Receivables. In the event that ---------------------------- AnnTaylor has paid to the Company the full Unpaid Balance of any Receivable pursuant to Section 3.3 or 3.4, the Company shall ------------ --- reconvey such Receivable to AnnTaylor, without representation or warranty, but free and clear of all liens created by the Company. -10- ARTICLE IV CONDITIONS OF PURCHASES 4.1. Conditions Precedent to Initial Purchase. The initial ---------------------------------------- purchase hereunder is subject to the condition precedent that the Company shall have received, on or before the Initial Closing Date, the following, each (unless otherwise indicated) dated the Initial Closing Date, and each in form, substance and date satis- factory to the Company: (a) A copy of the resolutions of the Board of Directors of AnnTaylor approving the Transaction Documents to be delivered by it and the transactions contemplated hereby and thereby, certified by the Secretary or Assistant Secretary of AnnTaylor; (b) Good standing certificates for AnnTaylor issued as of a recent date by the Secretary of State of Delaware; (c) A certificate of the Secretary or Assistant Secretary of AnnTaylor certifying the names and true signatures of the officers authorized on Anntaylor's behalf to sign the Transaction Documents to be delivered by it (on which certificate the Company and Servicer (if other than AnnTaylor) may conclusively rely until such time as the Company and the Servicer shall receive from AnnTaylor a revised certificate meeting the requirements of this subsection (c)); -------------- (d) The certificate of incorporation of AnnTaylor, duly certified by the Secretary of State of Delaware as of a recent date, together with a copy of the by-laws of AnnTaylor, each duly certified by the Secretary or an Assistant Secretary of AnnTaylor; (e) Copies of the proper financing statements (Form UCC-1) that have been duly executed and name AnnTaylor as the assignor and the Company as the assignee (and Lender as assignee of the Company) of the Receivables generated by AnnTaylor or other, similar instruments or documents, as may be necessary or, in Servicer's or the Administrators's opinion, desirable under the UCC of all appropriate jurisdictions or any comparable law of all appropriate jurisdictions to perfect the Company's ownership interest in all Receivables and such other rights, accounts, instruments and moneys (including, without limitation, Related Security) in which an ownership interest may be assigned to it hereunder; (f) A written search report from a Person satisfactory to Servicer and the Administrator listing all effective financing statements that name AnnTaylor as debtor -11- or assignor and that are filed in the jurisdictions in which filings were made pursuant to the foregoing subsection (e), -------------- together with copies of such financing statements (none of which, except for those described in the foregoing subsection (f), shall cover any Receivable or any right --------------- related to any Receivable that is of the type described in Section 1.1) which is to be sold to the Company hereunder, ----------- and tax and judgment lien search reports from a Person satisfactory to Servicer and the Administrator showing no evidence of such liens filed against AnnTaylor; (g) A favorable opinion of Skadden, Arps, Slate, Meagher & Flom, counsel to AnnTaylor, in the form of Exhibit C and a favorable opinion of Jocelyn F.L. --------- Barandiaran, in the form of Exhibit F; --------- (h) Evidence (i) of the execution and delivery by each of the parties thereto of each of the other Transaction Documents to be executed and delivered in connection herewith and (ii) that each of the conditions precedent to the execution, delivery and effectiveness of such other Transaction Documents has been satisfied to the Company's satisfaction; (i) The Company Note in favor of AnnTaylor, duly executed by the Company; (j) A certificate from an officer of AnnTaylor to the effect that Servicer and AnnTaylor have placed on the most recent, and have taken all steps reasonably necessary to ensure that there shall be placed on subsequent, summary master control data processing reports the following legend (or the substantive equivalent thereof): "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO ANNTAYLOR FUNDING, INC. PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF JANUARY 27, 1994, AS AMENDED, BETWEEN ANNTAYLOR FUNDING, INC. AND ANNTAYLOR, INC.; AND A SECURITY INTEREST IN THE RECEIVABLES DESCRIBED HEREIN HAS BEEN GRANTED TO CLIPPER RECEIVABLES CORPORATION, PURSUANT TO A RECEIVABLES FINANCING AGREEMENT, DATED AS OF JANUARY 27, 1994, AMONG ANNTAYLOR FUNDING, INC., ANNTAYLOR, INC., CLIPPER RECEIVABLES CORPORATION, STATE STREET BOSTON CAPITAL CORPORATION, AS THE ADMINISTRATOR, AND PNC BANK, NATIONAL ASSOCIATION, AS THE RELATIONSHIP BANK; and (k) A duly executed counterpart of the Subscription Agreement from each party thereto. 4.2. Certification as to Representations and Warranties. ----------------------------------------------------- AnnTaylor, by accepting the Purchase Price related to each purchase of Receivables (and Related Rights) generated by AnnTaylor, shall be deemed to have certified that the representations and warranties contained in Article V are true --------- and correct on and as of such day, with the same effect as though made on and as of such day. -12- ARTICLE V REPRESENTATIONS AND WARRANTIES OF ANNTAYLOR In order to induce the Company to enter into this Agreement and to make purchases hereunder, AnnTaylor, in its capacity as seller under this Agreement, hereby makes the representations and warranties set forth in this Article V. --------- 5.1. Organization and Good Standing. AnnTaylor has been ------------------------------- duly organized and is validly existing as a corporation in good standing under the laws of the state of its incorporation, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. 5.2. Due Qualification. AnnTaylor is duly licensed or ------------------ qualified to do business as a foreign corporation in good standing in all jurisdictions in which (a) the ownership or lease of its property or the conduct of its business requires such licensing or qualification and (b) the failure to be so licensed or qualified has not had and will not have a Seller Material Adverse Effect. 5.3. Power and Authority; Due Authorization. AnnTaylor has -------------------------------------- (a) all necessary power, authority and legal right (i) to execute and deliver, and perform its obligations under, each Transaction Document to which it is a party, as seller, and (ii) to generate, own, sell and assign Receivables on the terms and subject to the conditions herein and therein provided; and (b) duly authorized such execution and delivery and such sale and assignment and the performance of such obligations by all necessary corporate action. 5.4. Valid Sale; Binding Obligations. Each sale of --------------------------------- Receivables and Related Rights made by AnnTaylor pursuant to this Agreement shall constitute a valid sale, transfer, and assignment thereof to the Company, enforceable against creditors of, and purchasers from, AnnTaylor; and this Agreement constitutes, and each other Transaction Document to be signed by AnnTaylor, as seller, when duly executed and delivered, will constitute, a legal, valid, and binding obligation of AnnTaylor, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights -13- generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. 5.5. No Violation. The consummation of the transactions ------------- contemplated by this Agreement and the other Transaction Documents to which AnnTaylor is a party as seller, and the fulfillment of the terms hereof or thereof will not (a) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under (i) AnnTaylor's certificate of incorporation or by- laws, or (ii) any indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument to which it is a party or by which it is bound, except where such conflict, breach or default has not had and will not have a Seller Material Adverse Effect, (b) result in the creation or imposition of any Adverse Claim upon any of its properties pursuant to the terms of any such indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument, other than the Transaction Documents, or (c) violate any law or any order, rule, or regulation applicable to it of any court or of any federal, state or foreign regulatory body, administrative agency, or other governmental instrumen- tality having jurisdiction over it or any of its properties, except where such violation has not had and will not have a Seller Material Adverse Effect. 5.6. Proceedings. There is no action, suit, proceeding or ----------- investigation pending before any court, regulatory body, arbitrator, administrative agency, or other tribunal or governmental instrumentality (a) asserting the invalidity of any Transaction Document to which AnnTaylor is a party as seller, (b) seeking to prevent the sale of Receivables to the Company or the consummation of any of the other transactions contemplated by any Transaction Document to which AnnTaylor is a party as seller, or (c) seeking any determination or ruling that could reasonably be expected to have a Seller Material Adverse Effect. 5.7. Bulk Sales Act. No transaction contemplated hereby --------------- requires compliance with any bulk sales act or similar law. 5.8. Government Approvals. Except for the filing of the -------------------- UCC financing statements referred to in Article IV, all of which, ---------- at the time required in Article IV, shall have been duly made and ---------- shall be in full force and effect, no authorization or approval or other action by, and no notice to or filing with, any govern- mental authority or regulatory body is required for AnnTaylor's due execution, delivery and performance of any Transaction Document to which it is a party, as seller. 5.9. Financial Condition. On the date hereof AnnTaylor is, ------------------- and on the date of each transfer of a new Receivable hereunder -14- (both before and after giving effect to such transfer), AnnTaylor shall be solvent. 5.10. Margin Regulations. No use of any funds acquired by ------------------ AnnTaylor under this Agreement will conflict with or contravene any of Regulations G, T, U and X promulgated by the Board of Governors of the Federal Reserve System from time to time. 5.11. Quality of Title. ---------------- (a) Each Receivable (together with the Related Security for such Receivable) which is to be sold to the Company hereunder is or shall be owned by AnnTaylor, free and clear of any Adverse Claim, except as provided herein and in the Receivables Financing Agreement. Whenever the Company makes a purchase hereunder, it shall have acquired and shall continue to have maintained a valid and perfected ownership interest (free and clear of any Adverse Claim created by AnnTaylor) in all Receivables generated by AnnTaylor and all Collections related thereto, and in AnnTaylor's entire right, title and interest in and to the Related Security with respect thereto. (b) No effective financing statement or other instrument similar in effect covering any Receivable generated by AnnTaylor or any right related to any such Receivable that is of the type described in Section 1.1 is ----------- on file in any recording office except such as may be filed in favor of the Company or AnnTaylor, as the case may be, in accordance with this Agreement or in favor of the Lender in accordance with the Receivables Financing Agreement or in favor of Bank of America National Trust and Savings Association for which AnnTaylor has delivered executed partial releases (UCC-3 statements) on or prior to the Initial Closing Date. 5.12. Accuracy of Information. No factual written ------------------------- information heretofore or contemporaneously furnished in writing (and prepared) by AnnTaylor, as seller, to the Company, the Lender or the Administrator for purposes of or in connection with any Transaction Document or any transaction contemplated hereby or thereby is, and no other such factual written information hereafter furnished (and prepared) by AnnTaylor, as seller, to the Company, the Lender, or the Administrator pursuant to or in connection with any Transaction Document will be inaccurate in any material respect (in light of the circumstances under which such information was furnished and taken as a whole together with all other information previously furnished or then being furnished) as of the date it was furnished or (except as otherwise disclosed to the Company at or prior to such time) as of the date as of which such information is dated or certified. -15- No information contained in any report delivered pursuant to Section 6.2 or in any Purchase Report shall contain any material - ----------- misstatement of fact or omitted or will omit to state any material fact necessary to make such information not materially misleading on the date as of which such information is dated or certified. 5.13. Offices. AnnTaylor's principal place of business and ------- chief executive office is located at the address set forth under AnnTaylor's signature hereto, and the offices where AnnTaylor keeps all its books, records and documents evidencing the Receivables, the related Contracts and all other agreements related to such Receivables are located at the addresses specified in Exhibit E (or at such other locations, notified to ---------- Servicer (if other than AnnTaylor) and the Administrator in accordance with Section 6.1(f), in jurisdictions where all action -------------- required by Section 7.3 has been taken and completed). ----------- 5.14. Trade Names. Except as disclosed on Schedule 5.15, ------------ ------------- AnnTaylor does not use any trade name other than its actual corporate name. From and after the date that fell five (5) years before the date hereof, AnnTaylor has not been known by any legal name other than its corporate name as of the date hereof, nor has AnnTaylor been the subject of any merger or other corporate reorganization except as disclosed on Schedule 5.14. ------------- 5.15. Taxes. AnnTaylor has filed all tax returns and ----- reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes which are not yet delinquent or are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been set aside on its books. 5.16. Compliance with Applicable Laws. AnnTaylor is in -------------------------------- compliance, in all material respects, with the requirements of all applicable laws, rules, regulations, and orders of all governmental authorities (including, without limitation, Regulation Z, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy and all other consumer laws applicable to the Receivables and related Contracts), a breach of any of which, individually or in the aggregate, would be reasonably likely to have a Seller Material Adverse Effect. 5.17. Reliance on Separate Legal Identity. AnnTaylor is ------------------------------------- aware that Lender, the Relationship Bank and the Administrator are entering into the Transaction Documents to which they are parties in reliance upon the Company's identity as a legal entity separate from AnnTaylor. -16- ARTICLE VI COVENANTS OF ANNTAYLOR 6.1. Affirmative Covenants. From the date hereof until the --------------------- first day following the Purchase and Sale Termination Date, AnnTaylor will, unless the Company, the Administrator, and the Relationship Bank shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all ----------------------------- material respects with all applicable laws, rules, regulations and orders with respect to the Receivables generated by it and the Contracts and other agreements related thereto, except where such noncompliance has not had and will not have a Seller Material Adverse Effect. (b) Preservation of Corporate Existence. Preserve ------------------------------------ and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would have a Seller Material Adverse Effect. (c) Receivables Review. (i) At any time and from ------------------ time to time during regular business hours, upon reasonable notice and in a manner designed not to unreasonably disrupt the normal business operations of AnnTaylor, permit the Company, the Collateral Agent, the Administrator and the Relationship Bank or their respective agents or representatives, (A) to examine, to audit and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in the possession or under the control of AnnTaylor relating to the Receivables generated by it, including, without limitation, the Contracts and other agreements related thereto, and (B) to visit AnnTaylor's offices and properties for the purpose of examining such materials described in the foregoing clause (A) and discussing matters relating to the ---------- Receivables generated by AnnTaylor or AnnTaylor's performance hereunder with any of the officers or employees of AnnTaylor having knowledge of such matters; and (ii) without limiting the provisions of clause (i) next above, ---------- from time to time on request of Administrator or the Relationship Bank, permit certified public accountants or other auditors acceptable to the Administrator to conduct a review of its books and records; provided, however, that, -------- ------- unless an Event of Default has occurred and is continuing, -17- AnnTaylor shall not be obligated to pay for any such reviews, which together with reviews conducted pursuant to Section 7.01(c) of the Receivables Financing Agreement, are done more frequently than three times per year by internal auditors of the Administrator or the Relationship Bank (and such expenses shall be subject to Section 14.05(a) of the Receivables Financing Agreement). (d) Keeping of Records and Books of Account. --------------------------------------------- Maintain an ability to recreate records evidencing the Receivables generated by it in the event of the destruction of the originals thereof. (e) Performance and Compliance with Receivables and ------------------------------------------------- Contracts. Timely and fully perform and comply with all --------- provisions, covenants and other promises required to be observed by it under the Contracts and all other agreements related to the Receivables. (f) Location of Records. Keep its principal place of ------------------- business and chief executive office, and the offices where it keeps its records concerning or related to Receivables, at the address(es) referred to in Exhibit E or, upon 30 ---------- days' prior written notice to the Company and the Administrator, at such other locations in jurisdictions where all action required by Section 7.3 shall have been ----------- taken and completed. (g) Credit and Collection Policies. Comply in all ------------------------------- material respects with its Credit and Collection Policy in connection with the Receivables that it generates and all Contracts related thereto. (h) Separate Corporate Existence of the Company. ---------------------------------------------- Take such actions as shall be required in order that: (i) the Company's operating expenses (other than certain organization expenses and expenses incurred in connection with the preparation, negotiation and delivery of the Transaction Documents) will not be paid by AnnTaylor; (ii) the Company's books and records will be maintained separately from those of AnnTaylor; (iii) All financial statements of AnnTaylor that are consolidated to include the Company and are used other than for internal purposes by AnnTaylor or any Affiliate thereof will contain detailed notes clearly stating that (A) all of the Company's assets are owned by the Company, and (B) the Company is a separate -18- corporate entity with creditors who have received security interests in the Company's assets; (iv) AnnTaylor will strictly observe corporate formalities in its dealing with the Company; (v) AnnTaylor shall not commingle its funds with any funds of the Company; provided that AnnTaylor and -------- the Company acknowledge that some Obligors make their payments to AnnTaylor's stores or headquarters, which in-store collections are subject to the provisions of Section 7.2(a) hereof; -------------- (vi) AnnTaylor will maintain arm's length relationships with the Company, and AnnTaylor will be compensated at market rates for any services it renders or otherwise furnishes to the Company; and (vii) AnnTaylor will not be, and will not hold itself out to be, responsible for the debts of the Company or the decisions or actions in respect of the daily business and affairs of the Company. 6.2. Reporting Requirements. From the date hereof until ---------------------- the first day following the Purchase and Sale Termination Date, AnnTaylor will, unless the Administrator and the Relationship Bank shall otherwise consent in writing, furnish to the Company, the Administrator, and the Relationship Bank: (a) Proceedings. As soon as possible and in any ----------- event within three Business Days after AnnTaylor has knowledge thereof, written notice to the Company, the Administrator and the Relationship Bank of (i) all pending proceedings and investigations of the type described in Section 5.6 not previously disclosed to the Company and/or ----------- the Administrator and (ii) all material adverse developments that have occurred with respect to any previously disclosed proceedings and investigations; and (b) Other. Promptly, from time to time, such other ----- information, documents, records or reports respecting the Receivables or AnnTaylor's performance as seller hereunder that the Company, the Administrator or the Relationship Bank may from time to time reasonably request in order to protect the interests of the Company, the Lender, the Administrator, the Relationship Bank, or any other Affected Party under or as contemplated by the Transaction Documents. 6.3. Negative Covenants. From the date hereof until the ------------------ date following the Purchase and Sale Termination Date, AnnTaylor -19- agrees that, unless the Administrator, and the Relationship bank shall otherwise consent in writing, it shall not: (a) Sales, Liens, Etc. Except as otherwise provided ----------------- herein or in any other Transaction Document, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Receivable or related Contract or Related Security, or any interest therein, or any Collections thereon, or assign any right to receive income in respect thereof. (b) Change in Credit and Collection Policy. Make any -------------------------------------- change in the Credit and Collection Policy that would not be permitted under Section 7.04(c) of the Receivables Financing Agreement. (c) Receivables Not to be Evidenced by Promissory ------------------------------------------------ Notes. Take any action to cause or permit any Receivable ----- generated by it to become evidenced by any "instrument" (as defined in the applicable UCC), except as contemplated by Section 6.01(u) of the Receivables Financing Agreement. ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE RECEIVABLES 7.1. Rights of the Company. AnnTaylor hereby authorizes ---------------------- the Company and the Servicer (if other than AnnTaylor) or their respective designees to take any and all steps in AnnTaylor's name necessary or desirable, in their respective determination, to collect all amounts due under any and all Receivables, including, without limitation, endorsing AnnTaylor's name on checks and other instruments representing Collections and enforcing such Receivables and the provisions of the related Contracts that concern payment and/or enforcement of rights to payment. 7.2. Responsibilities of AnnTaylor. Anything herein to the ----------------------------- contrary notwithstanding: (a) Collection Procedures. AnnTaylor agrees to ---------------------- direct its respective Obligors in the billing statements to make payments of Receivables directly to a Lock-Box Account at a Lock-Box Bank. AnnTaylor further agrees to transfer any Collections that it receives (including, without limitation, in-store and headquarters payments) directly to Servicer (for deposit to the Funding Account) within two Business Days of receipt thereof, and agrees that all such -20- Collections shall be deemed to be received in trust for the Company; provided that, to the extent permitted pursuant to -------- Section 3.2, AnnTaylor may retain such Collections as a ------------ portion of the Purchase Price then payable or apply such Collections to the reduction of the outstanding balance of the Company Note. AnnTaylor agrees to pay all Deemed Collections payable pursuant to Section 3.3 or 3.4; provided ----------- --- that, notwithstanding anything to the contrary set forth therein, if requested by the Administrator or the Relationship Bank during the continuance of an Event of Default, AnnTaylor shall pay such Deemed Collections to the Servicer for deposit to the Lock-Box Account on the second Business Day following the day on which they arise. (b) AnnTaylor shall perform its obligations hereunder, and the exercise by the Company or its designee of its rights hereunder shall not relieve AnnTaylor from such obligations. (c) AnnTaylor hereby grants to Servicer (if other than AnnTaylor) an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of AnnTaylor all steps necessary or advisable to indorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by AnnTaylor or transmitted or received by the Company (whether or not from AnnTaylor) in connection with any Receivable. 7.3. Further Action Evidencing Purchases. AnnTaylor agrees ----------------------------------- that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Company may reasonably request in order to perfect, protect or more fully evidence the Receivables (and the Related Rights) purchased by the Company hereunder, or to enable the Company to exercise or enforce any of its rights hereunder or under any other Transaction Document. Without limiting the generality of the foregoing, upon the request of the Company, AnnTaylor will: (a) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate; and (b) mark the summary master control data processing records with the legend set forth in Section 4.1(j). -------------- AnnTaylor hereby authorizes the Company or its designee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Receivables (and the Related Rights) now existing or hereafter -21- generated by AnnTaylor. If AnnTaylor fails to perform any of its agreements or obligations under this Agreement, the Company or its designee may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Company or its designee incurred in connection therewith shall be payable by AnnTaylor as provided in Section 9.6. - ----------- 7.4. Application of Collections. Any payment by an Obligor -------------------------- in respect of any indebtedness owed by it to AnnTaylor in respect of any Contract shall, except as otherwise specified by such Obligor or otherwise required by contract or law, be applied first, as a Collection of any Finance Charge Receivable or - ----- Receivables of such Obligor, in the order of the age of such Finance Charge Receivables, starting with the oldest of such Finance Charge Receivables, second, to the collection of any ------ Principal Receivable or Receivables then outstanding of such Obligor in the order of the age of such Principal Receivables, starting with the oldest of such Principal Receivables, and third, to any other indebtedness of such Obligor. - ----- ARTICLE VIII INDEMNIFICATION 8.1. Indemnities by AnnTaylor. Without limiting any other ------------------------ rights which the Company may have hereunder or under applicable law, AnnTaylor hereby agrees to indemnify the Company and each of its assigns, officers, directors, employees and agents (each of the foregoing Persons being individually called a "Purchase and ------------ Sale Indemnified Party"), forthwith on demand, from and against - ---------------------- any and all damages, losses, claims, judgments, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively called "Purchase and Sale Indemnified Amounts") awarded against or ---------------------------------------- incurred by any of them arising out of or as a result of the following: (a) the transfer by AnnTaylor of an interest in any Receivable or Related Right to any Person other than the Company; (b) without duplication of amounts paid as Deemed Collections, the breach of any representation or warranty made by AnnTaylor under or in connection with this Agreement or any other Transaction Document, or any information or report delivered by AnnTaylor pursuant hereto or thereto which shall have been false or incorrect in any material respect when made or deemed made; -22- (c) the failure by AnnTaylor to comply with any applicable law, rule or regulation with respect to any Receivable generated by AnnTaylor or the related Contract, or the nonconformity of any Receivable generated by AnnTaylor or the related Contract with any such applicable law, rule or regulation; (d) the failure to vest and maintain vested in the Company an ownership interest in the Receivables generated by AnnTaylor free and clear of any Adverse Claim, other than an Adverse Claim arising solely as a result of an act of the Company, whether existing at the time of the purchase of such Receivables or at any time thereafter; (e) the failure of AnnTaylor to file with respect to itself, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables or purported Receivables generated by AnnTaylor, whether at the time of any purchase or at any subsequent time; (f) without duplication of amounts paid as Deemed Collections, any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Receivable or purported Receivable generated by AnnTaylor (including, without limitation, a defense based on such Receivables or the related Contracts not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the services related to any such Receivable or the furnishing of or failure to furnish such services; (g) any product liability claim arising out of or in connection with services that are the subject of any Receivable generated by AnnTaylor; and (h) any tax or governmental fee or charge (other than any tax excluded pursuant to clause (iii) in the proviso to ------------ the preceding sentence), all interest and penalties thereon or with respect thereto, and all out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of the Receivables generated by AnnTaylor or any Related Right connected with any such Receivables; excluding, however, (i) Purchase and Sale Indemnified Amounts to - --------- ------- the extent resulting from gross negligence or willful misconduct on the part of such Purchase and Sale Indemnified Party, (ii) any indemnification which has the effect of recourse for non-payment -23- of the Receivables to AnnTaylor (except as otherwise specifically provided under this Section 8.1) and (iii) any tax based upon or ------------ measured by net income. If for any reason the indemnification provided above in this Section 8.1 is unavailable to a Purchase and Sale Indemnified - ----------- Party or is insufficient to hold such Purchase and Sale Indemnified Party harmless, then AnnTaylor shall contribute to the amount paid or payable by such Purchase and Sale Indemnified Party to the maximum extent permitted under applicable law. ARTICLE IX MISCELLANEOUS 9.1. Amendments, etc. --------------- (a) The provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by AnnTaylor, the Company, the Administrator, the Relationship Bank and the Servicer (if other than AnnTaylor). (b) No failure or delay on the part of the Company, Servicer, AnnTaylor or any third party beneficiary in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company, Servicer, or AnnTaylor in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Company or Servicer under this Agreement shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval under this Agreement shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. 9.2. Notices, etc. All notices and other communications ------------- provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by express mail or courier or by certified mail, postage-prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, (i) if personally delivered or sent by express mail or courier or if sent by -24- certified mail, when received, and (ii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. 9.3. No Waiver; Cumulative Remedies. The remedies herein ------------------------------- provided are cumulative and not exclusive of any remedies provided by law. 9.4. Binding Effect; Assignability. This Agreement shall ------------------------------ be binding upon and inure to the benefit of the Company, AnnTaylor and its respective successors and permitted assigns. AnnTaylor may not assign its rights hereunder or any interest herein without the prior consent of the Company, the Administrator and the Relationship Bank. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the date after the Purchase and Sale Termination Date on which AnnTaylor has received payment in full for all Receivables and Related Rights conveyed pursuant to Section 1.1 hereof. The rights and remedies with respect to any - ----------- breach of any representation and warranty made by AnnTaylor pursuant to Article V and the indemnification and payment --------- provisions of Article VIII and Section 9.6 shall be continuing ------------ ----------- and shall survive any termination of this Agreement. 9.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, -------------- AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 9.6. Costs, Expenses and Taxes. In addition to the --------------------------- obligations of AnnTaylor under Article VIII and subject to any ------------ limitations agreed to in writing by any Affected Party prior to the date hereof, AnnTaylor agrees to pay on demand: (a) all reasonable costs and expenses in connection with the enforcement of this Agreement and the other Transaction Documents executed by AnnTaylor as seller; and (b) all stamp and other similar taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other Transaction Documents, and agrees to indemnify each Purchase and Sale Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. 9.7. Submission to Jurisdiction. EACH PARTY HERETO HEREBY -------------------------- IRREVOCABLY (a) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN, STATE OF NEW YORK, OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY TRANSACTION -25- DOCUMENT; (b) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE OR UNITED STATES FEDERAL COURT; (c) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING; (d) CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SPECIFIED IN SECTION 10.2; ------------ AND (e) TO THE EXTENT ALLOWED BY LAW, AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION ------- 10.7 SHALL AFFECT THE COMPANY'S RIGHT TO SERVE LEGAL PROCESS IN - ---- ANY OTHER MANNER PERMITTED BY LAW OR TO BRING ANY ACTION OR PROCEEDING AGAINST ANNTAYLOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS. 9.8. Waiver of Jury Trial. EACH PARTY HERETO EXPRESSLY --------------------- WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT, OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 9.9. Captions and Cross References; Incorporation by ---------------------------------------------------- Reference. The various captions (including, without limitation, - --------- the table of contents) in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. References in this Agreement to any underscored Section or Exhibit are to such Section or Exhibit of this Agreement, as the case may be. The Exhibits hereto are hereby incorporated by reference into and made a part of this Agreement. 9.10. Execution in Counterparts. This Agreement may be -------------------------- executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. 9.11. Acknowledgment and Agreement. By execution below, ----------------------------- AnnTaylor expressly acknowledges and agrees that all of the Company's rights, title, and interests in, to, and under this Agreement shall be assigned by the Company to the Lender pursuant to the Receivables Financing Agreement, and AnnTaylor consents to such assignment. Each of the parties hereto acknowledges and agrees that the Administrator, the Lender, and the Relationship Bank are third party beneficiaries of the rights of the Company arising hereunder and under the other Transaction Documents to which AnnTaylor is a party as seller. -26- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ANNTAYLOR FUNDING INC. By -------------------------------- Title: Vice President 414 Chapel Street New Haven, CT 06511 Attention: Bert A. Tieben Vice President Facsimile: (203) 865-0811 ANNTAYLOR, INC. By________________________________ Title: Senior Vice President 142 West 57th Street New York, NY 10019 Attention: Jocelyn Barandiaran, Esq. Vice President/Secretary and General Counsel Facsimile: (212) 541-3299 With a copy to: AnnTaylor, Inc. 414 Chapel Street New Haven, CT 06511 Facsimile: (203) 865-2756 Attention: Walter Parks Vice President/Financial Reporting Exhibit A ANNTAYLOR FUNDING, INC. RECEIVABLES REPORT AS OF 12/24/93 FOR Dec-93 Portfolio Information I. Outstanding Principal $________ II. Beginning Receivables Balance $________ III. New Receivables to add $________ IV. Collections to deduct $________ V. Defaulted Receivables to deduct $________ VI. +/-Other Adjustments $________ VII. Delinquent Receivables to deduct $________ VIII. Other Ineligible Receivables to deduct $________ (Not including Defaulted Receivables) IX. Aging Schedule Current Age 1 Age 2 Age 3 Age 4 Age 5 Age 6 Age 7+ EXHIBIT B to Purchase and Sale Agreement SUBORDINATED PROMISSORY NOTE (NON-NEGOTIABLE COMPANY NOTE) New York, New York January , 1994 -- FOR VALUE RECEIVED, the undersigned, ANNTAYLOR FUNDING, INC., a Delaware corporation ( the "Company"), promises to pay to ------- ANNTAYLOR, INC., a Delaware corporation ("AnnTaylor"), on the --------- terms and subject to the conditions set forth herein and in the Purchase and Sale Agreement referred to below, the sum of (i) the aggregate unpaid Purchase Price of all Receivables purchased by the Company from AnnTaylor pursuant to such Purchase and Sale Agreement, as such unpaid Purchase Price is shown in the records of Servicer plus (ii) any capitalized interest pursuant to ---- Section 4 hereof as shown on the records of AnnTaylor. - --------- 1. Purchase and Sale Agreement. This promissory note --------------------------- (this "Company Note") is the Company Note described in, and is ------------ subject to the terms and conditions set forth in, that certain Purchase and Sale Agreement of even date herewith (as the same may be amended or otherwise modified from time to time, the "Purchase and Sale Agreement"), between AnnTaylor and the --------------------------- Company. Reference is hereby made to the Purchase and Sale Agreement for a statement of certain other rights and obligations of AnnTaylor and the Company. 2. Definitions. Capitalized terms used (but not defined) ----------- herein have the meanings assigned thereto in Appendix A to the ---------- Receivables Financing Agreement dated as of even date herewith among AnnTaylor, as Servicer, the Company, Clipper Receivables Corporation, as Lender, State Street Boston Capital Corporation, as Administrator, and PNC Bank, National Association, as Relationship Bank (as may be amended or otherwise modified from time to time, the "Receivables Financing Agreement"). In ------------------------------- addition, as used herein, the following terms have the following meanings: "Bankruptcy Proceedings" has the meaning set forth ---------------------- in clause (b) of paragraph 9 hereof. ---------- ----------- "Final Maturity Date" means the second Business Day ------------------- after a demand for payment has been made by AnnTaylor, but in no event earlier than the Settlement Date immediately following the date on which one hundred twenty one (121) days have elapsed since the date the Senior Interests have been paid in full. "Interest Period" means the period from and --------------- including a Report Date (or, in the case of the first Interest Period, the date hereof) to but excluding the next Report Date. "Senior Interests" means, collectively, (i) the ---------------- aggregate unpaid principal amount of the Loans, (ii) accrued interest on the aggregate unpaid principal amount of the Loans, (iii) all fees payable pursuant to the Receivables Financing Agreement, (iv) any Indemnified Amounts, (v) unpaid Servicer's Fees, provided that AnnTaylor is not the Servicer, and (vi) -------- all other obligations of the Company that are due and payable to any Affected Party, together with all interest accruing on any such amounts after the commencement of any Bankruptcy Proceedings, notwithstanding any provision or rule of law that might restrict the rights of any Senior Interest Holder, as against the Company or anyone else, to collect such interest. "Senior Interest Holders" means, collectively, the ----------------------- Lender, the Administrator, the Relationship Bank, the other Affected Parties and the Indemnified Parties. "Subordination Provisions" means, collectively, ------------------------ clauses (a) through (l) of paragraph 9 hereof. ----------- --- ----------- 3. Interest. Subject to the Subordination Provisions set -------- forth below, the Company promises to pay interest on this Company Note as follows: (a) Prior to the Final Maturity Date, the aggregate unpaid Purchase Price from time to time outstanding during any Interest Period shall bear interest at a rate per annum equal to the Alternate Base --- ----- Rate plus 3% as in effect from time to time as determined by Servicer; and (b) From (and including) the Final Maturity Date to (but excluding) the date on which the entire aggregate unpaid Purchase Price is fully paid, the aggregate unpaid Purchase Price from time to time outstanding shall bear interest at a rate per annum --- ----- equal to the Alternate Base Rate as in effect from time to time, plus 5%, as determined by Servicer. 4. Interest Payment Dates. Subject to the ---------------------- Subordination Provisions set forth below, the Company shall pay accrued interest on this Company Note on each Settlement Date, and shall pay accrued interest on the amount of each -2- principal payment made in cash on a date other than a Settlement Date at the time of such principal payment; provided, however, that unless AnnTaylor instructs the - -------- ------- Company otherwise, such interest may be paid by means of an increase in the amount of the unpaid principal amount hereof by an amount equal to the interest being so paid. 5. Basis of Computation. Interest accrued hereunder -------------------- shall be computed for the actual number of days elapsed on the basis of a 365- or 366-day year. 6. Principal Payment Dates. Subject to the ----------------------- Subordination Provisions set forth below, payments of the principal amount of this Company Note shall be made as follows: (a) The principal amount of this Company Note shall be reduced from time to time pursuant to Sections 3.2, 3.3, 3.4 and 7.2 of the Purchase and Sale -------------- --- --- --- Agreement; and (b) The entire remaining unpaid Purchase Price of all Receivables purchased by the Company from AnnTaylor pursuant to the Purchase and Sale Agreement shall be paid on the Final Maturity Date. Subject to the Subordination Provisions set forth below, the principal amount of and accrued interest on this Company Note may be prepaid on any Business Day without premium or penalty. 7. Payments. All payments of principal and interest -------- hereunder are to be made in lawful money of the United States of America. 8. Enforcement Expenses. In addition to and not in -------------------- limitation of the foregoing, but subject to the Subordination Provisions set forth below and to any limitation imposed by applicable law, the Company agrees to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by AnnTaylor in seeking to collect any amounts payable hereunder which are not paid when due. 9. Subordination Provisions. The Company covenants ------------------------ and agrees, and AnnTaylor, by its acceptance of this Company Note, likewise covenants and agrees on behalf of itself and any holder of this Company Note, that the payment of the principal amount of and interest on this Company Note is hereby expressly subordinated in right of payment to the payment and performance of the Senior Interests to the extent - 3 - and in the manner set forth in the following clauses of this paragraph 9: - ----------- (a) No payment or other distribution of the Company's assets of any kind or character, whether in cash, securities, or other rights or property, shall be made on account of this Company Note except to the extent such payment or other distribution is permitted under the Purchase and Sale Agreement and Section 3.01 ------------ of the Receivables Financing Agreement; (b) In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar event relating to the Company, whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership proceedings, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Company or any sale of all or substantially all of the assets of the Company (such proceedings being herein collectively called "Bankruptcy Proceedings"), the ---------------------- Senior Interests shall first be paid and performed in full and in cash before AnnTaylor shall be entitled to receive and to retain any payment or distribution in respect of this Company Note. In order to implement the foregoing: (i) all payments and distributions of any kind or character in respect of this Company Note to which AnnTaylor would be entitled except for this clause ------ (b) shall be made directly to the Administrator (for the --- benefit of the Senior Interest Holders); (ii) AnnTaylor shall promptly file a claim or claims, in the form required in any Bankruptcy Proceedings, for the full outstanding amount of this Company Note, and shall use commercially reasonable efforts to cause said claim or claims to be approved and all payments and other distributions in respect thereof to be made directly to the Administrator (for the benefit of the Senior Interest Holders) until the Senior Interests shall have been paid and performed in full and in cash; and (iii) AnnTaylor hereby irrevocably agrees that the Administrator, in the name of AnnTaylor or otherwise, may demand, sue for, collect, receive and receipt for any and all such payments or distributions, and file, prove and vote or consent in any such Bankruptcy Proceedings with respect to any and all claims of AnnTaylor relating to this Company Note, in each case until the Senior Interests shall have been paid and performed in full and in cash; (c) In the event that AnnTaylor receives any payment or other distribution of any kind or character - 4 - from the Company or from any other source whatsoever, in respect of this Company Note, other than as expressly permitted by the terms of this Company Note, such payment or other distribution shall be received for the sole benefit of the Senior Interest Holders and shall be turned over by AnnTaylor to the Administrator (for the benefit of the Senior Interest Holders) forthwith. AnnTaylor will mark its books and records so as clearly to indicate that this Company Note is subordinated in accordance with the terms hereof. All payments and distributions received by the Administrator in respect of this Company Note, to the extent received in or converted into cash, may be applied by the Administrator (for the benefit of the Senior Interest Holders) first to the payment of any and all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by the Senior Interest Holders in enforcing these Subordination Provisions, or in endeavoring to collect or realize upon this Company Note, and any balance thereof shall, solely as between AnnTaylor and the Senior Interest Holders, be applied by the Administrator toward the payment of the Senior Interests; but as between the Company and its creditors, no such payments or distributions of any kind or character shall be deemed to be payments or distributions in respect of the Senior Interests; (d) Notwithstanding any payments or distributions received by the Senior Interest Holders in respect of this Company Note, while any Bankruptcy Proceedings are pending AnnTaylor shall not be subrogated to the then existing rights of the Senior Interest Holders in respect of the Senior Interests until the Senior Interests have been paid and performed in full and in cash; (e) These Subordination Provisions are intended solely for the purpose of defining the relative rights of AnnTaylor, on the one hand, and the Senior Interest Holders on the other hand. Nothing contained in these Subordination Provisions or elsewhere in this Company Note is intended to or shall impair, as between the Company, its creditors (other than the Senior Interest Holders) and AnnTaylor, the Company's obligation, which is unconditional and absolute, to pay AnnTaylor the principal of and interest on this Company Note as and when the same shall become due and payable in accordance with the terms hereof or to affect the relative rights of AnnTaylor and creditors of the Company (other than the Senior Interest Holders); - 5 - (f) AnnTaylor shall not, until the Senior Interests have been paid and performed in full and in cash, (i) cancel, waive, forgive, transfer or assign, or commence legal proceedings to enforce or collect, or subordinate to any obligation of the Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due, other than the Senior Interests, this Company Note or any rights in respect hereof (except as set forth in Section 12 hereof) or ---------- (ii) convert this Company Note into an equity interest in the Company, unless AnnTaylor shall have received the prior written consent of the Administrator and the Relationship Bank in each case; (g) AnnTaylor shall not, without the advance written consent of the Administrator and the Relationship Bank, commence, or join with any other Person in commencing, any Bankruptcy Proceedings with respect to the Company until at least one year and one day shall have passed since the Senior Interests shall have been paid and performed in full and in cash; (h) If, at any time, any payment (in whole or in part) of any Senior Interest is rescinded or must be restored or returned by a Senior Interest Holder (whether in connection with Bankruptcy Proceedings or otherwise), these Subordination Provisions shall continue to be effective or shall be reinstated, as the case may be, as though such payment had not been made; (i) Without affecting the rights and restrictions set forth in the Transaction Documents, each of the Senior Interest Holders may, from time to time, at its sole discretion, without notice to AnnTaylor, and without waiving any of its rights under these Subordination Provisions, take any or all of the following actions: (i) retain or obtain an interest in any property to secure any of the Senior Interests; (ii) retain or obtain the primary or secondary obligations of any other obligor or obligors with respect to any of the Senior Interests; (iii) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Interests, or release or compromise any obligation of any nature with respect to any of the Senior Interests; (iv) amend, supplement, amend and restate, or otherwise modify any Transaction Document; and (v) release its security interest in, or surrender, release or permit any substitution or exchange for all or any part of any rights or property securing any of the Senior Interests, - 6 - or extend or renew for one or more periods (whether or not longer than the original period), or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such rights or property; (j) AnnTaylor hereby waives: (i) notice of acceptance of these Subordination Provisions by any of the Senior Interest Holders; (ii) notice of the existence, creation, non-payment or non-performance of all or any of the Senior Interests; and (iii) all diligence in enforcement, collection or protection of, or realization upon, the Senior Interests, or any thereof, or any security therefor; (k) Each of the Senior Interest Holders may, from time to time, on the terms and subject to the conditions set forth in the Transaction Documents to which such Persons are party, but without notice to AnnTaylor, assign or transfer any or all of the Senior Interests, or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Senior Interests shall be and remain Senior Interests for the purposes of these Subordination Provisions, and every immediate and successive assignee or transferee of any of the Senior Interests or of any interest of such assignee or transferee in the Senior Interests shall be entitled to the benefits of these Subordination Provisions to the same extent as if such assignee or transferee were the assignor or transferor; and (l) These Subordination Provisions constitute a continuing offer from the holder of this Company Note to all Persons who become the holders of, or who continue to hold, Senior Interests; and these Subordination Provisions are made for the benefit of the Senior Interest Holders, and the Administrator or the Lender may proceed to enforce such provisions on behalf of each of such Persons. 10. General. No failure or delay on the part of ------- AnnTaylor in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No amendment, modification or waiver of, or consent with respect to, any provision of this Company Note shall in any event be effective unless (i) the same shall be in writing and signed and delivered by the Company and AnnTaylor and (ii) all consents required for such actions - 7 - under the Transaction Documents shall have been received by the appropriate Persons. 12. No Negotiation. This Company Note is not -------------- negotiable; provided, AnnTaylor may pledge this Company Note -------- to the agent for the benefit of the lenders under the AnnTaylor Credit Agreement. 13. Governing Law. THIS PROMISSORY NOTE SHALL BE ------------- DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 14. Captions. Paragraph captions used in this Company -------- Note are for convenience only and shall not affect the meaning or interpretation of any provision of this Company Note. ANNTAYLOR FUNDING, INC. By:___________________________ Title:________________________ Pay to the order of Bank of America National Trust and Savings Association, as Agent ANNTAYLOR, INC. By:___________________________ Title: Senior Vice President - 8 - Exhibit C January 27, 1994 The Persons Listed on Schedule I Hereto Re: Receivables Facility of AnnTaylor, Inc. and AnnTaylor Funding, Inc. ----------------------- Ladies and Gentlemen: We have acted as special counsel to AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), and AnnTaylor, Inc., a Delaware corporation ("AnnTaylor", and together with the Company, the "Credit Parties") in connection with the preparation, execution and delivery of (i) the Purchase and Sale Agreement dated as of January 27, 1994 (the "Purchase Agreement") between the Company, as purchaser and AnnTaylor, as seller, (ii) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and (iii) certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Financing Agreement. This opinion is being delivered pursuant to Section 4.1(h) of the Purchase Agreement and Section 5.01(h)(i) of the Receivables Financing Agreement. Capi- talized terms used herein and not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivables Financing Agreement. In our examination we have assumed the genuine- ness of all signatures including endorsements, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, certified or photostatic copies, and the au- thenticity of the originals of such copies. As to any facts material to this opinion which we did not indepen- The Persons listed on Schedule I hereto January 27, 1994 Page 2 dently establish or verify, we have relied upon state- ments and representations of the Credit Parties and their respective officers and other representatives and of public officials, including the facts set forth in the Company's Certificate and AnnTaylor's Certificate, each as described below. In rendering opinions set forth herein, we have examined and relied on originals or copies of the follow- ing: (a) the Receivables Financing Agreement; (b) the Purchase Agreement; (c) the Spread Account Agreement; (d) the Note; (e) the Company Note (as defined in the Purchase Agreement); (f) the Fee Letter; (g) the certificate of the Company exe- cuted by an officer of the Company dated the date hereof, a copy of which is attached as Exhibit A hereto (the "Company's Certificate"); (h) the certificate of AnnTaylor executed by an officer of AnnTaylor, dated the date hereof, a copy of which is attached as Exhibit B hereto ("AnnTaylor's Certificate"); (i) the Certificate of Incorporation and By-laws of each of the Credit Parties; (j) certain resolutions of the Board of Directors of the Company adopted by unanimous written consent on January 24, 1994; (k) certain resolutions of the Board of Directors of AnnTaylor adopted on January 19, 1994; The Persons listed on Schedule I hereto January 27, 1994 Page 3 (l) signed, unfiled copies of financing statements under the Uniform Commercial Code as in effect in the State of New York, naming (i) AnnTaylor as the debtor, the Company as secured party and the Lender as the assignee and (ii) the Company as debtor and the Lender as the secured party, which we understand and have assumed in each case will be filed within ten days of the assignment of Pool Receivables from AnnTaylor to the Company and the transfer of the security interest therein from the Company to the Lender in the offices of the Secretary of State of the State of New York and the City Register of New York County, New York (the "Filing Offic- es") (such financing statements, the "Financing State- ments"); (m) search reports provided by Lexis Document Services, (i) dated January 25, 1994 and cover- ing the period through December 17, 1993 listing financ- ing statements that name AnnTaylor as debtor and that are filed in the Secretary of State of the State of New York and (ii) dated January 24, 1994, and covering the period through December 17, 1993, listing financing statements that name the Company as debtor and that are filed in the Secretary of State of the State of New York, together with copies of such financing statements, a summary of which search reports are attached as Exhibit C hereto (the "Search Reports"); (n) a certificate from the Secretary of State of the State of Delaware as to the good standing of the Company in such jurisdiction; and (o) such other documents as we have deemed necessary or appropriate as a basis for the opin- ions set forth below. Unless otherwise indicated, references in this opinion to the "New York UCC" shall mean the Uniform Com- mercial Code as in effect on the date hereof in the State of New York. The documents listed in paragraphs (a) through (f) above shall hereinafter be referred to col- lectively as the "Documents." The Persons listed on Schedule I hereto January 27, 1994 Page 4 Members of our firm are admitted to the bar of the State of New York. We express no opinion as to the laws of any jurisdiction other than (i) the laws of the State of New York, (ii) the General Corporation Law of the State of Delaware (the "DGCL"), and (iii) the federal laws of the United States of America to the extent spe- cifically referred to herein. The opinions set forth below are subject to the following qualifications: (i) enforcement of each of the Documents and of any interests created thereby may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforce- ment is sought in equity or at law); (ii) certain of the remedial provi- sions with respect to the security including waivers with respect to the exercise of remedies against the collateral contained in each of the Documents may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the Documents, each taken as a whole, and, subject to the other qualifications and exceptions contained in this opinion, each of the Documents, each taken as a whole, together with applicable law, contains adequate provisions for the practical realization of the benefits of the security created thereby; (iii) we express no opinion as to any provision with respect to governing law to the extent that it purports to affect the choice of law governing perfection and the effect of perfection and non-perfection of the security interests. (iv) enforcement of the Documents may be subject to the terms of instruments, leases, contracts or other agreements between the Credit Parties and the other parties to such agreements, The Persons listed on Schedule I hereto January 27, 1994 Page 5 the rights of such other parties and any claims or defenses of such other parties against the Credit Parties arising under or outside such instruments, leases or contracts or other agreements; and (v) we express no opinion as to the enforceability of any rights to contribution or indemnification provided for in the Documents which are violative of the public policy underlying any law, rule or regulation (including any federal or state securities law, rule or regulation). We have assumed for the purpose of the opinions set forth herein that the assignment from AnnTaylor to the Company pursuant to the Purchase Agreement consti- tutes the sale of (and not a lien upon) the assets pur- ported to be conveyed thereby. We call to your attention that we have delivered an opinion to you on even date herewith with respect to the characterization of such assignment in the event that AnnTaylor were to become a debtor under the United States Bankruptcy Code, 11 U.S.C. Sec. 101 et. seq. (the "Bankruptcy Code"). Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: 1. The Company has been incorporated and is validly existing and is in good standing under the laws of the State of Delaware. 2. Each of the Credit Parties has the corpo- rate power and corporate authority to execute, deliver and perform all of its obligations under each of the Documents to which it is a party. The execution and delivery by each of the Credit Parties of each of the Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of each such Credit Party. Each of the Documents has been duly executed and delivered by each Credit Party which is a party thereto. The Persons listed on Schedule I hereto January 27, 1994 Page 6 3. Each of the Documents constitutes the valid and binding obligation of each Credit Party that is a party thereto enforceable against such Credit Party in accordance with its terms. 4. The execution and delivery by each of the Credit Parties of each of the Documents to which it is a party and the performance by each such Credit Party of its obligations under each such Document, each in accor- dance with its terms, do not (i) conflict with the Cer- tificate of Incorporation or By-laws of such Credit Party, (ii) constitute a violation of or a default under any Applicable Contract (as hereinafter defined) or (iii) cause the creation of any security interest or lien (other than the liens granted under, created by or per- mitted by the Documents) upon any of the property of such Credit Party pursuant to any Applicable Contracts. We do not express any opinion, however, as to whether the execution, delivery or performance by any Credit Party of any Document to which it is a party will constitute a violation of or a default under any covenant, restriction or provision with respect to financial ratios or tests or any aspect of the financial condition or results of operations of such Credit Party or the effect of any such violation or default on the opinions expressed herein. For purposes of this paragraph 4, "Applicable Contracts" means those agreements or instruments set forth on Sched- ule I to the Company's Certificate with respect to the Company and on Schedule I to AnnTaylor's Certificate with respect to AnnTaylor and which have been identified to us as all the agreements and instruments (other than the Documents) which are material to the business or finan- cial condition of the Company and AnnTaylor respectively. 5. Neither the execution, delivery or perfor- mance by any Credit Party of any of the Documents to which it is a party nor the compliance by such Credit Party with the terms and provisions thereof will contra- vene any provision of any Applicable Law (as hereinafter defined). For purposes of this paragraph 5 and para- graph 6, "Applicable Laws" means the DGCL and those laws, rules and regulations of the State of New York and of the The Persons listed on Schedule I hereto January 27, 1994 Page 7 United States of America (including, without limitation, Regulations G, U and X of the Federal Reserve Board) which, in our experience, are normally applicable to transactions of the type contemplated by the Documents and are not the subject of a specific opinion herein referring expressly to a particular law or laws. 6. No Governmental Approval (as hereinafter defined) which has not been obtained or taken and is not in full force and effect is required to authorize or is required in connection with the execution, delivery or performance of any of the Documents by any Credit Party except the filing of the Financing Statements in the Filing Offices, the filing of financing statements in the State of Connecticut and the filing of partial releases (UCC-3 statements) with respect to security interests of the Bank of America National Trust and Savings Associa- tion, as agent (the "Bank of America Release State- ments"). For the purposes of this paragraph 6, the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording or registration with, any Governmental Authori- ty pursuant to Applicable Laws, and for the purposes of this paragraph 6 and paragraph 7, the term "Governmental Authority" means any federal, New York or, to the extent relating to the DGCL, Delaware executive, legislative, judicial, administrative or regulatory body. 7. Neither the execution, delivery or perfor- mance by any Credit Party of its obligations under the Documents to which it is a party nor compliance by such Credit Party with the terms thereof will contravene any Applicable Order (as hereinafter defined) against such Credit Party. For purposes of this paragraph 7, the term "Applicable Orders" means those orders or decrees of Governmental Authorities identified on Schedule II to the Company's Certificate with respect to the Company and on Schedule II to AnnTaylor's Certificate with respect to AnnTaylor. 8. The provisions of the Purchase Agreement are effective to create, in favor of the Company, a valid The Persons listed on Schedule I hereto January 27, 1994 Page 8 security interest (as such term is defined in Section 1- 201 of the New York UCC) in that portion of the Pool Receivables of AnnTaylor constituting accounts (as such term is defined in Section 9-106 of the New York UCC) (the "Accounts Property"), and the proceeds thereof. We call to your attention that the term security interest as defined in Section 1-201 of the New York UCC includes the sale of accounts. We express no opinion with respect to the nature or extent of the obligations being secured by the security interest granted to the Company. 9. While there is no case law precisely on point and the issue is not free from doubt, based upon our review of relevant case law authority in New York, including Stathos v. Murphy, 26 App. Div. 2d 500, 276 ----------------- N.Y. Supp. 2d 727, aff'd 19 N.Y.2d 883, 281 N.Y. Supp. 2d 81 (1967), and the principles set forth in Restatement of -------------- Contracts 2d (1981), the provisions of the Purchase - ------------ Agreement are effective to create, in favor of the Compa- ny, a valid interest under the common law of the State of New York in that portion (if any) of the Pool Receivables of AnnTaylor constituting general intangibles (as such term is defined in Section 9-106 of the New York UCC) (the "General Intangibles Property," and together with the Accounts Property, the "Receivables Property") that is enforceable against subsequent creditors of or pur- chasers from AnnTaylor. We note, however, that unless the Obligor in respect of a Pool Receivable has received notice of such sale, bona fide payments made by such Obligor to AnnTaylor or to a subsequent assignee of such Pool Receivable as to which the Obligor has received notice of such assignment will discharge such Obligor's obligations to the extent of such payment, and such payment will be recoverable only from AnnTaylor or such assignee. The opinions expressed in paragraphs 8 and 9 are subject to the following qualifications: (a) we have assumed that the Receivables Property exists and that AnnTaylor has sufficient rights in the Receivables Property for the interest of the The Persons listed on Schedule I hereto January 27, 1994 Page 9 Company to attach, and we express no opinion as to the nature or extent of any of AnnTaylor's rights in or title to any Receivables Property; (b) we call to your attention that Sec- tion 552 of the Bankruptcy Code limits the extent to which property acquired by a debtor after the commence- ment of a case under the Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (c) we call to your attention that the security interest of the Company in proceeds of the Accounts Property is limited to the extent set forth in Section 9-306 of the New York UCC and to property of a type subject to the New York UCC; (d) we have assumed that there are no agreements between AnnTaylor and any account debtor prohibiting, restricting or conditioning the assignment of any portion of the Receivables Property; (e) we call to your attention that the interest of the Company in the Receivables Property may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (f) we express no opinion regarding the interest of the Company in any of the Receivables Proper- ty consisting of claims against any government or gov- ernmental agency (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); and (g) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Company in and to such underlying property. The Persons listed on Schedule I hereto January 27, 1994 Page 10 10. The provisions of the Receivables Financ- ing Agreement are effective to create, in favor of the Lender, as security for the obligations of the Company described in Section 9.01 thereof, a valid security interest in that portion of the Pool Receivables consti- tuting accounts or general intangibles (as each such term is defined in Section 9-106 of the New York UCC) (the "Receivables Collateral"), and the proceeds thereof. The opinions expressed in paragraph 10 are sub- ject to the qualifications to opinion paragraphs 8 and 9 set forth above and to the following qualifications: (a) we have assumed that the Receivables Collateral exists and the Company has sufficient rights in the Receivables Collateral for the security interest of the Lender to attach, and, except to the extent set forth in opinion paragraphs 8 and 9 above, we express no opinion as to the nature or extent of the Company's rights in or title to any Receivables Collateral; (b) we call to your attention that Sec- tion 552 of the Bankruptcy Code limits the extent to which property acquired by a debtor after the commence- ment of a case under the Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case; (c) we call to your attention that the security interest of the Lender in proceeds is limited to the extent set forth in Section 9-306 of the New York UCC and to property of a type subject to the New York UCC; (d) we call to your attention that the security interest of the Lender may be subject to the rights of account debtors, claims and defenses of account debtors and the terms of agreements with account debtors; (e) we express no opinion regarding the security interest of the Lender in any of the Receivables Collateral consisting of claims against any government or The Persons listed on Schedule I hereto January 27, 1994 Page 11 governmental agency (including, without limitation, the United States of America or any state thereof or any agency or department of the United States of America or any state thereof); and (f) in the case of any account or general intangible which is itself secured by other property, we express no opinion with respect to the rights of the Lender in and to such underlying property. 11. The Financing Statements are in appropri- ate form for filing in each of the Filing Offices under the New York UCC. 12. The security interest in favor of the Company in the Accounts Property described in the Financ- ing Statements naming AnnTaylor as debtor (the "Article 9 Filing Property") will be perfected upon the filing of such Financing Statements in the respective Filing Offic- es, and no other security interest of any other transfer- ee of AnnTaylor is equal or prior to the security inter- est of the Company in such Article 9 Filing Property. 13. If the chief executive office of the Company is located in the State of New York for the purposes of the New York UCC, the security interest in favor of the Lender in the Receivables Collateral de- scribed in the Financing Statements naming the Company as debtor (the "Article 9 Filing Collateral") will be per- fected upon the filing of such Financing Statements in the respective Filing Offices, and no other security interest of any other transferee from the Company is equal or prior to the security interest of the Lender in such Article 9 Filing Collateral. The opinions expressed in paragraphs 11, 12 and 13 are subject to the qualifications to opinion para- graphs 8, 9 and 10 set forth above and to the following qualifications: (a) we have assumed based upon AnnTaylor's Certificate that, for the purposes of the New York UCC, The Persons listed on Schedule I hereto January 27, 1994 Page 12 the chief executive office of AnnTaylor as of the date of filing of the Financing Statements is located in New York County in the State of New York; (b) we have assumed based upon the Company's Certificate that, for the purposes of the New York UCC, the chief executive office of the Company as of the date of filing of the Financing Statements is located either in New York County in the State of New York or in the State of Connecticut, and we express no opinion with respect to the perfection or priority of the security interest of the Lender in the Receivables Collateral to the extent that the chief executive office of the Company is located in the State of Connecticut; (c) we call to your attention that the perfec- tion and the effect of perfection and nonperfection of the security interest of the Company in the Article 9 Filing Property and the security interest of the Lender in the Article 9 Filing Collateral may be governed by laws other than those of the New York UCC to the extent that the chief executive office of either AnnTaylor or the Company respectively is or becomes located in a jurisdiction other than New York; (d) we call to your attention that (i) the perfection of the security interest of the Company as to the Article 9 Filing Property and the Lender as to the Article 9 Filing Collateral will be terminated as to any such property acquired by AnnTaylor or the Company re- spectively more than four months after AnnTaylor or the Company respectively changes its name, identity, or corporate structure so as to make the applicable Financ- ing Statements seriously misleading unless new appropri- ate financing statements indicating the new name, identi- ty or corporate structure of AnnTaylor or the Company, as the case may be, are properly filed before the expiration of such four months, and (ii) the New York UCC requires the filing of continuation statements within the period of six months prior to the expiration of five years from the date of the filing of the original Financing State- ments or the filing of any continuation statements in The Persons listed on Schedule I hereto January 27, 1994 Page 13 order to maintain the effectiveness of the original Financing Statements; (e) we express no opinion with respect to any of the Accounts Property consisting of accounts or gener- al intangibles arising from or relating to the sale of farm products by a farmer, consumer goods in the hands of AnnTaylor, crops growing or to be gown, timber to be cut or minerals or the like (including oil and gas) or ac- counts subject to subsection 5 of Section 9-103 of the New York UCC; (f) we express no opinion with respect to any of the Receivables Collateral consisting of accounts or general intangibles arising from or relating to the sale of farm products by a farmer, consumer goods in the hands of the Company, crops growing or to be grown, timber to be cut or minerals or the like (including oil and gas) or accounts subject to subsection 5 of Section 9-103 of the New York UCC; (g) we express no opinion as to the priority of the security interest of the Company in the Article 9 Filing Property or the Lender in the Article 9 Filing Collateral against: (i) any liens, claims or other interests that arise by operation of law and do not require any filing or possession in order to take priori- ty over security interests perfected through the filing of a financing statement; (ii) any lien, claim or encum- brance in favor of the United States of America or any state, or any agency or instrumentality of any of them or any other governmental entity (including, without limita- tion, federal tax liens, liens arising under the Employee Retirement Income Security Act of 1974, as amended, or claims given priority pursuant to 31 U.S.C. Sec. 3713); (iii) a lien creditor who attached or levied prior to the perfection of the security interest of the Company or the Lender, as the case may be; (iv) a lien creditor with respect to future advances to the extent set forth in Section 9-301(4) of the New York UCC; (v) another secured creditor with respect to any future advances to the extent set forth in Section 9-312(7) of the New York UCC; The Persons listed on Schedule I hereto January 27, 1994 Page 14 (vi) a security interest perfected under the laws of another jurisdiction to the extent that either AnnTaylor or the Company had its chief executive office in such jurisdiction within four months prior to the date of the perfection of the security interest of the Company or the Lender, as the case may be; (vii) a security interest perfected without filing any financing statement pursuant to Section 9-302(1) of the New York UCC; (viii) a secu- rity interest perfected by filing a financing statement naming AnnTaylor or the Company as debtor using a trade name, fictitious name or previous name; (ix) the holder of a perfected "purchase money security interest" as such term is defined in Section 9-107 of the New York UCC; (x) another secured party with a perfected security interest in other property of AnnTaylor or the Company to the extent the Pool Receivables are proceeds of such other creditor's collateral; (xi) any person who has en- tered into a subordination or intercreditor agreement with the Company with respect to the Accounts Property or with the Lender with respect to the Receivables Collat- eral; (xii) any claim for wages, salary or other compen- sation; (xiii) a purchaser of accounts purchased as part of the sale of the business out of which they arose; (xiv) an assignment of accounts for purposes of collec- tion only or a transfer of a single account; (xv) any claim arising out of tort or any surety who is subrogated to the rights of AnnTaylor or the Company, as the case may be; or (xvi) the security interest of a creditor who filed a financing statement based on a prior or incorrect location of the chief executive office of AnnTaylor or the Company to the extent such other financing statement would be effective under Section 9-401(2) or (3) of the New York UCC; (h) we have assumed that (i) all financing statements presented for filing prior to the effective date of the applicable search report in which each of AnnTaylor and the Company is named as debtor have been properly filed, indexed and recorded with the Secretary of State of the State of New York and are identified in the appropriate Search Report and (ii) no financing statements naming AnnTaylor or the Company as debtor were The Persons listed on Schedule I hereto January 27, 1994 Page 15 filed with Secretary of State of the State of New York between the effective date of the Search Reports and the date of the filing of the applicable Financing Statements in such Filing Office; and we call to your attention that we did not review any search report with respect to any financing statements naming AnnTaylor or the Company as debtor filed with the City Register of New York County, New York; and (i) we have assumed that the Bank of America Release Statements will be filed on or prior to the date of the filing of the Financing Statements. 14. No registration of AnnTaylor or the Compa- ny under the Investment Company Act of 1940, as amended, is required in connection with the initial assignment under the Purchase Agreement or the initial borrowing under the Receivables Financing Agreement, respectively. In rendering the foregoing opinions, we have assumed, with your consent, that: (a) AnnTaylor has been incorporated in the State of Delaware and is validly existing and in good standing under the laws of all jurisdictions in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary; (b) the execution, delivery and perfor- mance of each Credit Party's obligations under the Documents to which it is a party does not and will not conflict with, contravene, violate or constitute a default under (i) any lease, indenture, instrument or other agreement to which such Credit Party or its property is subject (other than the Applicable Contracts, as to which we make no such assumption), (ii) any rule, law or regulation to which such Credit Party is subject (other than Applicable Laws, as to which we make no such assumption), or (iii) any judicial or administrative order or decree of The Persons listed on Schedule I hereto January 27, 1994 Page 16 any governmental authority (other than Applicable Orders, as to which we make no such assumption); and (c) no authorization, consent or other approval of, notice to or filing with any court, governmental authority or regulatory body (other than Governmental Approvals, as to which we make no such assumption) is required to authorize or is required in connection with the execution, deliv- ery or performance by any Credit Party of any Docu- ment to which it is a party or the transactions contemplated thereby. Our opinions are also subject to the following assumptions and qualifications: (a) we have assumed each of the Documents constitutes the legal, valid and binding obligation of each party to such Document (other than the Credit Parties) enforceable against such party in accordance with its terms; and (b) we express no opinion as to the effect on the opinions expressed herein of (i) the compliance or noncompliance of the Administrator, the Relationship Bank, the Collateral Agent, the Credit Bank, the Liquidity Bank, the Lock-Box Bank, the Lender or any other party (other than the Credit Parties) to the Documents with any state, federal or other laws or regulations applicable to them or (ii) the legal or regulatory status or the nature of the business of any such Person. This opinion is being furnished only to you and is solely for your benefit and is not to be used, quoted, relied upon or otherwise referred to by any other Person or for any other purpose without our prior written con- sent. Very truly yours, SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02201 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Standard & Poor's Ratings Group 25 Broadway New York, New York 10004 Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 Exhibit A to Opinion of Special Counsel to AnnTaylor Funding, Inc. ------------------------------------------ Officer's Certificate --------------------- I, Jocelyn F.L. Barandiaran, am Corporate Secretary of AnnTaylor Funding, Inc., a Delaware corpora- tion ("Funding"). I understand that pursuant to Section 5.01(h)(i) of that certain Receivables Financing Agree- ment, dated as of January 27, 1994 (the "Receivables Fi- nancing Agreement"), among Funding, AnnTaylor, Inc. ("AnnTaylor") as servicer, Clipper Receivables Corpora- tion, State Street Boston Capital Corporation and PNC Bank, National Association, Skadden, Arps, Slate, Meagher & Flom is rendering an opinion (the "Opinion"). Defined terms used herein but not otherwise defined shall have the meaning set forth in Appendix A to the Receivables Financing Agreement. I further understand that Skadden, Arps, Slate, Meagher & Flom is relying on this certifi- cate and the statements made herein in rendering the Opinion. With regard to the foregoing, on behalf of Funding, I certify that: 1. The chief executive office of Funding is located at either 142 West 57th Street, New York, New York 10019 or 414 Chapel Street, New Haven, Connecticut 06511. 2. Set forth on Schedule I hereto are all of the agreements and instruments (other than the Transac- tion Documents) to which Funding is a party which are material to the business or financial condition of Fund- ing. 3. Set forth on Schedule II hereto are all of the orders, judgments and decrees of any governmental authority which are material to the business or property of Funding. 4. Funding holds no stock in any company. 5. Funding is engaged in the business set forth in the Transaction Documents. The value of all securities owned by Funding does not exceed 10% of the value of Funding's total assets. 6. Funding does not directly or indirectly own or operate facilities used for the generation, trans- mission or distribution of electric energy for sale or facilities used for the distribution at retail of natural or manufactured gas for heat, light or power and Funding does not own any interest in any company which owns or operates such facilities. 7. Neither Funding nor any of its subsidiaries is a person providing railroad transportation for compen- sation (a "rail carrier") or a person controlled by or affiliated with a rail carrier or a person providing sleeping car transportation for compensation (a "sleeping car carrier") or a corporation organzied to provide transportation by rail carrier or sleeping car carrier. IN WITNESS WHEREOF, I have executed this cer- tificate this day of January 1994. ---- By: -------------------------------------- Name: Jocelyn F.L. Barandiaran Title: Corporate Secretary 2 Schedule I Applicable Contracts -------------------- None 3 Schedule II Applicable Orders ----------------- None 4 Exhibit B to Opinion of Special Counsel to AnnTaylor, Inc. ---------------------------------- Officer's Certificate --------------------- I, Jocelyn F.L. Barandiaran, am Vice President, General Counsel and Corporate Secretary of AnnTaylor, Inc., a Delaware corporation ("AnnTaylor"). I understand that pursuant to (i) Section 5.01(h)(i) of that certain Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among AnnTaylor Funding, Inc. ("Funding"), AnnTaylor, as ser- vicer, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank, National Associ- ation and (ii) Section 4.1(h) of that certain Purchase and Sale Agreement, dated as of January 27, 1994 between Funding and AnnTaylor, Skadden, Arps, Slate, Meagher & Flom is rendering an opinion (the "Opinion"). Defined terms used herein but not otherwise defined shall have the meaning set forth in Appendix A to the Receivables Financing Agreement. I further understand that Skadden, Arps, Slate, Meagher & Flom is relying on this certifi- cate and the statements made herein in rendering the Opinion. With regard to the foregoing, on behalf of AnnTaylor, I certify that: 1. The chief executive office of AnnTaylor is located at 142 West 57th Street, New York, New York 10019. 2. Set forth on Schedule I hereto are all of the agreements and instruments (other than the Transac- tion Documents) to which AnnTaylor is a party which are material to the business or financial condition of AnnTaylor. 3. Set forth on Schedule II hereto are all of the orders, judgments and decrees of any governmental authority which are material to the business or property of AnnTaylor. 4. AnnTaylor holds no stock in any company other than the stock represented by the certificates set forth on Schedule III hereto; none of such stock is trad- ed on a national securities exchange. 5. AnnTaylor is primarily engaged in the business described in Schedule IV. The value of all securities owned by AnnTaylor (excluding those referred to in paragraph 4 above) does not exceed 10% of the value of AnnTaylor's total assets. 6. AnnTaylor does not directly or indirectly own or operate facilities used for the generation, trans- mission or distribution of electric energy for sale or facilities used for the distribution at retail of natural or manufactured gas for heat, light or power and AnnTaylor does not own any interest in any company which owns or operates such facilities. 7. Neither AnnTaylor nor any of its subsid- iaries is a person providing railroad transportation for compensation (a "rail carrier") or a person controlled by or affiliated with a rail carrier or a person providing sleeping car transportation for compensation (a "sleeping car carrier") or a corporation organzied to provide transportation by rail carrier or sleeping car carrier. 2 IN WITNESS WHEREOF, I have executed this cer- tificate this day of January 1994. ---- By: -------------------------------------- Name: Jocelyn F.L. Barandiaran Title: Vice President, General Counsel and Corporate Secretary 3 Schedule I Applicable Contracts -------------------- 1. Indenture, dated as of July 15, 1989, between AnnTaylor and United States Trust Company of New York, as Trustee, together with the Certificate of Satisfaction and Dis- charge in favor of AnnTaylor as of July 29, 1993 by such Trustee. 2. Indenture, dated as of July 15, 1989, between AnnTaylor and State Street Bank and Trust Company of Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National Association, as Trustee, together with the Certificate of Satisfaction and Discharge in favor of AnnTaylor as of July 29, 1993 by such Trustee. 3. Credit Agreement, dated as of June 28, 1993, among AnnTaylor, Bank of America, Bank of Montreal and the other financial institutions party thereto, as amended by Amendment No. 1 to Credit Agreement dated as August 10, 1993, Amendment No. 2 to Credit Agreement dated as Sep- tember 30, 1993, Amendment No. 3 to Credit Agreement dated as December 23, 1993, and Amendment No. 4 and Consent to Credit Agreement dated as January 24, 1994. 4. Security and Pledge Agreement, dated as of June 28, 1993, made by AnnTaylor in favor of Bank of America, as Agent, as modified by Amendment No. 4 and Consent to Credit Agreement dated as January 24, 1994. 5. Trademark Assignment, dated as of June 28, 1993, made by AnnTaylor with Bank of America, as Agent. 6. Tax Sharing Agreement, dated as of July 12, 1989, between the Company and AnnTaylor Stores Corporation ("ATSC"). 7. Agreement, dated as of July 13, 1993, among Cygne De- signs, Inc., Cygne Design F.E. Limited, CAT US Inc., C.A.T. (Far East) Limited and AnnTaylor. 8. Stock Purchase Agreement, dated as of July 13, 1993, between Cleveland Investment Limited and AnnTaylor. 9. Agreement, dated as of June 14, 1989, and the Trademark License Agreement, effective as of January 1, 1990, among Allied Stores Corporation, AnnTaylor and ATSC. 4 10. Indenture, dated as of June 15, 1993, between AnnTaylor and Fleet Bank, N.A., as Trustee. 11. Employment Agreement, effective as of February 3, 1992, between AnnTaylor, AnnTaylor Stores Corporation and Sally Frame Kasaks. 12. Lease, dated as of March 17, 1989, between Carven Associ- ates and AnnTaylor concerning the West 57th Street head- quarters, as amended by the First Amendment thereto dated as of November 14, 1990, the Second Amendment thereto dated as of February 28, 1993, the Third Amendment there- to dated as of June 24, 1993, and the letter agreement dated as of October 1, 1993. 13. Lease, dated December 1, 1985, between Hamilton Realty Co. and AnnTaylor (as successor in interest to ASC Stores III, Inc.) concerning the New Haven distribution center, as amended by the letter agreement dated March 22, 1993, and the letter agreement dated July 26, 1993. 14. Lease, dated June 12, 1986, between SMR 85-1 Limited Partnership and AnnTaylor (as successor in interest to ASC Stores III, Inc.) concerning the New Haven offices, as amended by the Amendment to Lease dated December 7, 1987 and the Second Amendment to Lease dated December 10, 1992. 5 Schedule II Applicable Orders ----------------- None 6 Schedule III Stock Certificates ------------------ Company Certificate Nos. No. of Shares - ------- ---------------- ------------- AnnTaylor Travel, Inc.1 1 1 CAT U.S. Inc.1 1 and 11 4,000 C.A.T. (Far East) Limited1 5 and 8 60,000 AnnTaylor Funding, Inc.1 1 100 - -------------------- 1 Pledged to Bank of America pursuant to the Security and Pledge Agreement, dated as of June 28, 1993. 7 Schedule IV Description of Business ----------------------- AnnTaylor is primarily engaged in the business of the retail sale of women's apparel, shoes and accessories. 8 EXHIBIT D to Purchase and Sale Agreement STOCK SUBSCRIPTION AGREEMENT ---------------------------- This Stock Subscription Agreement (as amended or modified from time to time, this "Agreement") is entered into as of --------- January 24, 1994 among ANNTAYLOR FUNDING, INC., a Delaware corporation ("Issuer") and ANNTAYLOR, INC., a Delaware ------ corporation ("AnnTaylor"). --------- R E C I T A L S A. Issuer is organized under the laws of the State of Delaware for the purpose of purchasing accounts receivable (and certain related rights) of AnnTaylor. B. (i) Issuer and AnnTaylor will enter into a Purchase and Sale Agreement (the "Purchase and Sale Agreement") pursuant to ---------------------------- which AnnTaylor will sell all of the Receivables (and certain related rights) generated by it (other than Receivables being used to purchase Shares (as defined below) hereunder) to Issuer, and (ii) Issuer, AnnTaylor, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank, National Association will enter into a Receivables Financing Agreement ("Receivables Financing Agreement"), in connection with which, -------------------------------- Issuer will grant to Lender a security interest in the Receivables referred to in clause (i) and the Receivables being ---------- contributed to Issuer hereunder. The term "Receivables" and the other capitalized terms used (but not otherwise defined) herein shall have the meanings set forth in the Receivables Financing Agreement (when executed). C. Issuer desires to sell all the shares of its capital stock to AnnTaylor, and AnnTaylor desires to purchase such shares, on the terms set forth in this Agreement. NOW, THEREFORE, Issuer and AnnTaylor agree as follows: 1. Purchase and Sale of Capital Stock. ---------------------------------- (a) On the Closing Date, Issuer shall sell to AnnTaylor, and AnnTaylor shall purchase from Issuer, 100 shares of common stock, $1.00 par value, of Issuer (such aggregate number of shares and common stock herein called the "Shares" and ------ "Common Stock," respectively). ------------ (b) The purchase price for the Shares will consist of an aggregate of $100. 2. Closing. ------- The closing of the purchase and sale of the Shares hereunder (the "Closing") shall be held at the offices of ------- AnnTaylor in New York, New York on January 24, 1994 (the "Closing ------- Date"). On the Closing Date, Issuer shall deliver to AnnTaylor a - ---- certificate registered in AnnTaylor's name representing the number of Shares to be purchased by AnnTaylor against delivery to Issuer by AnnTaylor of the purchase price set forth in Section ------- 1(b). - ---- 3. Representations and Warranties of Issuer. Issuer ---------------------------------------- represents and warrants to AnnTaylor as follows: (a) Issuer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to carry on its business as proposed to be conducted. (b) Issuer has all requisite legal and corporate power to enter into this Agreement, to issue the Shares and to perform its other obligations under the terms of this Agreement. (c) The authorized capital stock of Issuer as of the date hereof and as of the Closing Date is 100 shares. The Shares have been duly authorized and, when issued, and upon receipt of the purchase price thereof, will be validly issued, fully paid and nonassessable. (d) Issuer has taken all corporate action necessary for its authorization, execution, and delivery of, and its performance under, this Agreement. (e) This Agreement constitutes a legal, valid and binding obligation of Issuer, enforceable against Issuer in accordance with its terms, except that enforceability may be limited by (i) bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law. 4. Representations and Warranties of AnnTaylor. ------------------------------------------- AnnTaylor represents and warrants to Issuer as follows: (a) AnnTaylor is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, - 2 - and has all requisite corporate power and authority to carry on its business as conducted on the date hereof. (b) AnnTaylor has taken all actions required for its authorization, execution, and delivery of, and its performance under, this Agreement. (c) This Agreement constitutes a valid and binding obligation of AnnTaylor, enforceable against AnnTaylor in accordance with its terms, except that enforceability may be limited by (i) bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law. (d) AnnTaylor is purchasing the Shares for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof; and AnnTaylor has no current intention of selling, granting a participation in, or otherwise distributing, the same. (e) AnnTaylor understands that the Shares have not been registered under the Securities Act of 1933, as amended, or under any other Federal or state law, and that Issuer does not contemplate such a registration. (f) AnnTaylor has such knowledge, sophistication and experience in financial and business matters that it is capable of evaluating the merits and risks of the transactions contemplated by this Agreement, and has made such investigations in connection herewith as have been deemed necessary or desirable to make such evaluation. 5. Conditions to AnnTaylor's Obligations at the -------------------------------------------------- Closing. - ------- AnnTaylor's obligation to purchase the Shares at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) The representations and warranties made by Issuer herein shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date; and Issuer shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date and all documents incident thereto shall be satisfactory in form and content to AnnTaylor and its counsel. (b) Issuer shall have filed the Certificate of Incorporation, in the form attached hereto as Exhibit A with the --------- - 3 - Delaware Secretary of State and adopted the By-laws in the form attached hereto as Exhibit B. --------- (c) The purchase of the Shares by AnnTaylor hereunder shall be legally permitted by all laws and regulations to which AnnTaylor or Issuer are subject. 6. Conditions to Issuer's Obligations at the Closing. ------------------------------------------------- Issuer's obligation to sell and issue the Shares at the Closing is subject to the fulfillment to Issuer's satisfaction on or prior to the Closing Date of the following conditions: (a) The representations and warranties made by AnnTaylor herein shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of the same date; and AnnTaylor shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date and all documents incident thereto shall be satisfactory in form and content to Issuer and its counsel. (b) The purchase of the Shares by AnnTaylor hereunder shall be legally permitted by all laws and regulations to which AnnTaylor or Issuer are subject. (c) AnnTaylor shall have delivered the purchase price for the Shares to be purchased by it hereunder, by conveyance to Issuer of the amount of the Receivables set forth in Section 1(b) (which conveyance shall be pursuant to ------------- instruments reasonably satisfactory to Issuer). 7. Restrictions on Transfer; Legend. -------------------------------- 7.1 Legend. Each certificate representing the Shares ------ shall be endorsed with the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR ANY SUCCESSOR RULE OR OTHER EXEMPTION FROM REGISTRATION UNDER THE ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCK SUBSCRIPTION AGREEMENT DATED AS OF JANUARY 24, 1994, BETWEEN ANNTAYLOR, INC. AND ANNTAYLOR FUNDING, INC. (THE "COMPANY"), A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE VOTED, TRANSFERRED, SOLD, ASSIGNED, - 4 - PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH VOTING, TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF SUCH AGREEMENT. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY ALL OF THE PROVISIONS OF SUCH AGREEMENT. 7.2 Registration of Transfers. Issuer need not --------------------------- register a transfer of any Shares unless the conditions specified in the foregoing legend are satisfied. Issuer shall also instruct its transfer agent, if any, not to register the transfer of any Shares unless the conditions specified in the foregoing legend are satisfied. 8. Agreement to Vote. ----------------- (a) AnnTaylor hereby agrees and covenants to vote all of the shares of Common Stock now or hereafter owned by it at a meeting of stockholders of Issuer, or by written consent in lieu of any such meeting, to cause to be elected to, and maintained on, Issuer's board of directors at all times one individual who meets the requirements of an "Independent Director" as defined in the Issuer's certificate of incorporation as in effect on the date hereof. AnnTaylor hereby further agrees and covenants that in the event the Independent Director resigns or otherwise ceases to be a director of Issuer, AnnTaylor will vote all of the shares of Common Stock then owned by it, whether beneficially or otherwise, as is necessary at a meeting of stockholders of Issuer, or by written consent in lieu of any such meeting, to select and cause to be elected a replacement Independent Director who meets all of the qualifications of an Independent Director as set forth in the Issuer's certificate of incorporation. (b) AnnTaylor (for itself and its successors and assigns) hereby acknowledges and agrees that any decision to approve or otherwise cause the commencement of a voluntary case or other proceeding with respect to the Issuer under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law, or the appointment of or taking possession by, a receiver, liquidator, assignee, trustee, custodian, or other similar official for the Issuer shall be approved in writing by the Independent Director prior to the making thereof, and the Independent Director shall owe a fiduciary duty to the Issuer (and its creditors) and not to the stockholders of Issuer in respect of any such decision. (c) AnnTaylor hereby agrees and covenants to maintain a separate corporate existence from the Issuer including, without limitation, doing all things with respect to itself of the type set forth in Section 7.02 of the Receivables Financing Agreement. - 5 - 9. General Restrictions on Transfer and Issuance. --------------------------------------------- No Shares or any interest therein shall be validly sold, assigned, pledged, encumbered, awarded, confirmed, or otherwise transferred, for consideration or otherwise, whether voluntarily, involuntarily, or by operation of law, and no purported transferee shall be recognized as a shareholder of Issuer for any purpose whatsoever unless and until the holders of all of the other Shares, the Lender, the Administrator and the Relationship Bank have filed with the secretary of Issuer their written consents to such transfer; provided that the Shares may -------- be pledged to Bank of America National Trust and Savings Association as Agent pursuant to documents relating to the AnnTaylor Credit Agreement. A transfer or attempt to transfer subject to the provisions of this Agreement shall be deemed to occur whenever any interest in Common Stock is transferred or is attempted to be transferred, voluntarily, involuntarily, or by operation of law, irrespective of whether any change in the record ownership of any shares of Common Stock occurs. 10. Successors and Assigns. ---------------------- Each party agrees that it will not assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any right or obligation under this Agreement except in connection with a transfer of Shares in compliance with the terms and conditions hereof or otherwise in accordance with the terms hereof. Any purported assignment, transfer, or delegation in violation of this Section shall be null and void ab initio. Subject to the foregoing -- ------ limits on assignment and delegation and except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legatees, executors, administrators, assignees and legal successors. Any transferee of any shares of Common Stock or any interest hereunder shall take its interest subject to the terms and conditions hereof and shall, upon request of any party hereto, execute a counterpart of this Agreement. The parties intend that each of the Lender, the Administrator and the Relationship Bank be third party beneficiaries to this Agreement. 11. Amendments and Waivers. ---------------------- Any term hereof may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Issuer, the Lender, AnnTaylor, the Administrator and the Relationship Bank. Any amendment or - 6 - waiver so effected shall be binding upon Issuer and AnnTaylor. Sections 7, 8, 9 and 10 of this Agreement and any requirement in - ---------- - - -- this Section 11 for the consent of the Lender, the Administrator ---------- or the Relationship Bank shall be null and void and of no further effect unless the Issuer and AnnTaylor shall have entered into both the Purchase and Sale Agreement and the Receivables Financing Agreement on or prior to February 15, 1994. 12. Further Acts. ------------ Each party agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the provisions of this Agreement. 13. Counterparts. ------------ This Agreement may be executed in any number of counterparts, all of such counterparts together to be deemed one instrument. 14. Notices. ------- Any and all notices, acceptances, statements and other communications provided for herein shall be in writing, delivered personally, by telefacsimile or certified mail, return receipt requested. 15. Governing Law. ------------- This Agreement shall be construed in accordance with and be governed by the internal laws of the State of Delaware. 16. Severability of this Agreement. ------------------------------ In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. - 7 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. THE ISSUER: ANNTAYLOR FUNDING, INC., a Delaware corporation By: ___________________________________ Name: Bert A. Tieben Title: Vice President THE PURCHASER: ANNTAYLOR, INC., a Delaware corporation By: ______________________________________ Name: Bert A. Tieben Title: Senior Vice President EXHIBIT A CERTIFICATE OF INCORPORATION EXHIBIT B BY-LAWS Exhibit E List of Offices Where Records Are Kept --------------------- AnnTaylor, Inc. - --------------- Chief place of business and chief executive office: 142 West 57th Street New York, New York 10019 location of books and records, etc: 142 West 57th Street New York, New York 10019 414 Chapel Street New Haven, Connecticut 06511 9 Exhibit F January 27, 1994 The Persons Listed on Schedule I Hereto Dear Sirs and Madams: I am Vice President, General Counsel and Corpo- rate Secretary of AnnTaylor, Inc., a Delaware corporation ("AnnTaylor"). I am delivering this opinion in connec- tion with the preparation, execution and delivery of (i) the Purchase and Sale Agreement dated as of January 27, 1994 (the "Purchase Agreement") between AnnTaylor Funding, Inc., a Delaware corporation (the "Company"), as purchaser and AnnTaylor, as seller, (ii) the Receivables Financing Agreement, dated as of January 27, 1994 (the "Receivables Financing Agreement"), among the Company, Clipper Receivables Corporation (the "Lender"), AnnTaylor, as Servicer, State Street Boston Capital Corporation (the "Administrator"), and PNC Bank, National Association (the "Relationship Bank"), and (iii) certain other agreements, instruments and documents related to the Purchase Agreement and the Receivables Fi- nancing Agreement. This opinion is being delivered pursuant to Section 4.1(h) of the Purchase Agreement and Section 5.01(h)(i) of the Receivables Financing Agree- ment. Capitalized terms used herein and not otherwise defined herein shall have the same meanings herein as set forth in Appendix A to the Receivables Financing Agree- ment. In this connection, I have examined and am familiar with originals or copies, certified or otherwise identified to my satisfaction, of (i) the Receivables Financing Agreement; (ii) the Purchase Agreement; (iii) the Certificate of Incorporation and Bylaws of AnnTaylor, as presently in effect; and (iv) resolutions of the Board of Directors of AnnTaylor relating to the Receivables Financing Agreement and the Purchase Agree- ment. I have also examined and am familiar with origi- nals or copies, certified or otherwise identified to my January 27, 1994 Page 2 satisfaction, of such records of AnnTaylor and such agreements, certificates of public officials, certifi- cates of officers or representatives of AnnTaylor and others, and such other documents, certificates and corpo- rate or other records as I have deemed necessary or appropriate as a basis for the opinions set forth below. In my examination, I have assumed the genuiness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies. As to any facts material to this opinion which I did not independently establish or verify, I have relied upon certificates, statements and representations of officers and other representatives of AnnTaylor and others. I am admitted to the Bar of the State of New York and express no opinion as to the laws of any juris- diction except the General Corporation Law of the State of Delaware and the laws of the United States of America to the extent specifically referred to herein. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: (i) AnnTaylor is a corporation duly incor- porated, validly existing and in good standing under the laws of the State of Delaware. (ii) AnnTaylor is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts busi- ness of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on AnnTaylor. January 27, 1994 Page 3 This opinion is being furnished by me as Vice President, General Counsel and Corporate Secretary of AnnTaylor to you solely for your benefit, and is not to be used or relied upon by any other person without my express prior written consent. Very truly yours, SCHEDULE I Clipper Receivables Corporation P.O. Box 4024 Boston, Massachusetts 02101 State Street Boston Capital Corporation 225 Franklin Street Boston, Massachusetts 02110 PNC Bank, National Association Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Moody's Investors Service 99 Church Street New York, New York 10007 Standard & Poors Corporation 26 Broadway, 15th Floor New York, New York 10004 SCHEDULE 5.14 to the Purchase Agreement --------------------------------------- Trade Names ----------- AnnTaylor, Inc. - --------------- CAC XIII, Inc. ASC Stores III, Inc. AnnTaylor Factory Stores On February 8, 1989, AnnTaylor Acquisition Corp., a Dela- ware corporation merged with and into AnnTaylor, Inc. with AnnTaylor, Inc. being the surviving corporation. 10 Schedule 2 SUBORDINATED PROMISSORY NOTE (NON-NEGOTIABLE COMPANY NOTE) New York, New York January 27, 1994 FOR VALUE RECEIVED, the undersigned, ANNTAYLOR FUNDING, INC., a Delaware corporation (the "Company"), promises to pay to ------- ANNTAYLOR, INC., a Delaware corporation ("AnnTaylor"), on the --------- terms and subject to the conditions set forth herein and in the Purchase and Sale Agreement referred to below, the sum of (i) the aggregate unpaid Purchase Price of all Receivables purchased by the Company from AnnTaylor pursuant to such Purchase and Sale Agreement, as such unpaid Purchase Price is shown in the records of Servicer plus (ii) any capitalized interest pursuant to ---- Section 4 hereof as shown on the records of AnnTaylor. - --------- 1. Purchase and Sale Agreement. This promissory note --------------------------- (this "Company Note") is the Company Note described in, and is ------------ subject to the terms and conditions set forth in, that certain Purchase and Sale Agreement of even date herewith (as the same may be amended or otherwise modified from time to time, the "Purchase and Sale Agreement"), between AnnTaylor and the --------------------------- Company. Reference is hereby made to the Purchase and Sale Agreement for a statement of certain other rights and obligations of AnnTaylor and the Company. 2. Definitions. Capitalized terms used (but not defined) ----------- herein have the meanings assigned thereto in Appendix A to the ---------- Receivables Financing Agreement dated as of even date herewith among AnnTaylor, as Servicer, the Company, Clipper Receivables Corporation, as Lender, State Street Boston Capital Corporation, as Administrator, and PNC Bank, National Association, as Relationship Bank (as may be amended or otherwise modified from time to time, the "Receivables Financing Agreement"). In ------------------------------- addition, as used herein, the following terms have the following meanings: "Bankruptcy Proceedings" has the meaning set forth in ---------------------- clause (b) of paragraph 9 hereof. ---------- ----------- "Final Maturity Date" means the second Business Day ------------------- after a demand for payment has been made by AnnTaylor, but in no event earlier than the Settlement Date immediately following the date on which one hundred twenty-one (121) days have elapsed since the date the Senior Interests have been paid in full. "Interest Period" means the period from and including a --------------- Report Date (or, in the case of the first Interest Period, the date hereof) to but excluding the next Report Date. "Senior Interests" means, collectively, (i) the ---------------- aggregate unpaid principal amount of the Loans, (ii) accrued interest on the aggregate unpaid principal amount of the Loans, (iii) all fees payable pursuant to the Receivables Financing Agreement, (iv) any Indemnified Amounts, (v) unpaid Servicer's Fees, provided that AnnTaylor is not the -------- Servicer, and (vi) all other obligations of the Company that are due and payable to any Affected Party, together with all interest accruing on any such amounts after the commencement of any Bankruptcy Proceedings, notwithstanding any provision or rule of law that might restrict the rights of any Senior Interest Holder, as against the Company or anyone else, to collect such interest. "Senior Interest Holders" means, collectively, the ----------------------- Lender, the Administrator, the Relationship Bank, the other Affected Parties and the Indemnified Parties. "Subordination Provisions" means, collectively, clauses ------------------------ ------- (a) through (l) of paragraph 9 hereof. --- --- ----------- 3. Interest. Subject to the Subordination Provisions set -------- forth below, the Company promises to pay interest on this Company Note as follows: (a) Prior to the Final Maturity Date, the aggregate unpaid Purchase Price from time to time outstanding during any Interest Period shall bear interest at a rate per annum --------- equal to the Alternate Base Rate plus 3% as in effect from time to time as determined by Servicer; and (b) From (and including) the Final Maturity Date to (but excluding) the date on which the entire aggregate unpaid Purchase Price is fully paid, the aggregate unpaid Purchase Price from time to time outstanding shall bear interest at a rate per annum equal to the Alternate Base --------- Rate as in effect from time to time, plus 5%, as determined by Servicer. 4. Interest Payment Dates. Subject to the Subordination ---------------------- Provisions set forth below, the Company shall pay accrued interest on this Company Note on each Settlement Date, and shall pay accrued interest on the amount of each principal payment made in cash on a date other than a Settlement Date at the time of such principal payment; provided, however, that unless AnnTaylor -------- ------- instructs the Company otherwise, such interest may be paid by means of an increase in the amount of the unpaid principal amount hereof by an amount equal to the interest being so paid. 5. Basis of Computation. Interest accrued hereunder shall -------------------- be computed for the actual number of days elapsed on the basis of a 365- or 366-day year. 6. Principal Payment Dates. Subject to the Subordination ----------------------- Provisions set forth below, payments of the principal amount of this Company Note shall be made as follows: (a) The principal amount of this Company Note shall be reduced from time to time pursuant to Sections 3.2, 3.3, ------------- --- 3.4, and 7.2 of the Purchase and Sale Agreement; and --- --- (b) The entire remaining unpaid Purchase Price of all Receivables purchased by the Company from AnnTaylor pursuant to the Purchase and Sale Agreement shall be paid on the Final Maturity Date. Subject to the Subordination Provisions set forth below, the principal amount of and accrued interest on this Company Note may be prepaid on any Business Day without premium or penalty. 7. Payments. All payments of principal and interest -------- hereunder are to be made in lawful money of the United States of America. 8. Enforcement Expenses. In addition to and not in -------------------- limitation of the foregoing, but subject to the Subordination Provisions set forth below and to any limitation imposed by applicable law, the Company agrees to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by AnnTaylor in seeking to collect any amounts payable hereunder which are not paid when due. 9. Subordination Provisions. The Company covenants and ------------------------ agrees, and AnnTaylor, by its acceptance of this Company Note, likewise covenants and agrees on behalf of itself and any holder of this Company Note, that the payment of the principal amount of and interest on this Company Note is hereby expressly subordinated in right of payment to the payment and performance of the Senior Interests to the extent and in the manner set forth in the following clauses of this paragraph 9: ----------- (a) No payment or other distribution of the Company's assets of any kind or character, whether in cash, securities, or other rights or property, shall be made on account of this Company Note except to the extent such payment or other distribution is permitted under the Purchase and Sale Agreement and Section 3.01 of the ------------ Receivables Financing Agreement; (b) In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar event relating to the Company, whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership proceedings, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Company or any sale of all or substantially all of the assets of the Company (such proceedings being herein collectively called "Bankruptcy Proceedings"), the Senior Interests shall first ---------------------- be paid and performed in full and in cash before AnnTaylor shall be entitled to receive and to retain any payment or distribution in respect of this Company Note. In order to implement the foregoing: (i) all payments and distributions of any kind or character in respect of this Company Note to which AnnTaylor would be entitled except for this clause (b) ---------- shall be made directly to the Administrator (for the benefit of the Senior Interest Holders); (ii) AnnTaylor shall promptly file a claim or claims, in the form required in any Bankruptcy Proceedings, for the full outstanding amount of this Company Note, and shall use commercially reasonable efforts to cause said claim or claims to be approved and all payments and other distributions in respect thereof to be made directly to the Administrator (for the benefit of the Senior Interest Holders) until the Senior Interests shall have been paid and performed in full and in cash; and (iii) AnnTaylor hereby irrevocably agrees that the Administrator, in the name of AnnTaylor or otherwise, may demand, sue for, collect, receive and receipt for any and all such payments or distributions, and file, prove and vote or consent in any such Bankruptcy Proceedings with respect to any and all claims of AnnTaylor relating to this Company Note, in each case until the Senior Interests shall have been paid and performed in full and in cash; (c) In the event that AnnTaylor receives any payment or other distribution of any kind or character from the Company or from any other source whatsoever, in respect of this Company Note, other than as expressly permitted by the terms of this Company Note, such payment or other distribution shall be received for the sole benefit of the Senior Interest Holders and shall be turned over by AnnTaylor to the Administrator (for the benefit of the Senior Interest Holders) forthwith. AnnTaylor will mark its books and records so as clearly to indicate that this Company Note is subordinated in accordance with the terms hereof. All payments and distributions received by the Administrator in respect of this Company Note, to the extent received in or converted into cash, may be applied by the Administrator (for the benefit of the Senior Interest Holders) first to the payment of any and all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by the Senior Interest Holders in enforcing these Subordination Provisions, or in endeavoring to collect or realize upon this Company Note, and any balance thereof shall, solely as between AnnTaylor and the Senior Interest Holders, be applied by the Administrator toward the payment of the Senior Interests; but as between the Company and its creditors, no such payments or distributions of any kind or character shall be deemed to be payments or distributions in respect of the Senior Interests; (d) Notwithstanding any payments or distributions received by the Senior Interest Holders in respect of this Company Note, while any Bankruptcy Proceedings are pending AnnTaylor shall not be subrogated to the then existing rights of the Senior Interest Holders in respect of the Senior Interests until the Senior Interests have been paid and performed in full and in cash; (e) These Subordination Provisions are intended solely for the purpose of defining the relative rights of AnnTaylor, on the one hand, and the Senior Interest Holders, on the other hand. Nothing contained in these Subordination Provisions or elsewhere in this Company Note is intended to or shall impair, as between the Company, its creditors (other than the Senior Interest Holders) and AnnTaylor, the Company's obligation, which is unconditional and absolute, to pay AnnTaylor the principal of and interest on this Company Note as and when the same shall become due and payable in accordance with the terms hereof or to affect the relative rights of AnnTaylor and creditors of the Company (other than the Senior Interest Holders); (f) AnnTaylor shall not, until the Senior Interests have been paid and performed in full and in cash, (i) cancel, waive, forgive, transfer or assign, or commence legal proceedings to enforce or collect, or subordinate to any obligation of the Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due, other than the Senior Interests, this Company Note or any rights in respect hereof (except as set forth in Section 12 hereof) or (ii) convert this Company Note into an ---------- equity interest in the Company, unless AnnTaylor shall have received the prior written consent of the Administrator and the Relationship Bank in each case; (g) AnnTaylor shall not, without the advance written consent of the Administrator and the Relationship Bank, commence, or join with any other Person in commencing, any Bankruptcy Proceedings with respect to the Company until at least one year and one day shall have passed since the Senior Interests shall have been paid and performed in full and in cash; (h) If, at any time, any payment (in whole or in part) of any Senior Interest is rescinded or must be restored or returned by a Senior Interest Holder (whether in connection with Bankruptcy Proceedings or otherwise), these Subordination Provisions shall continue to be effective or shall be reinstated, as the case may be, as though such payment had not been made; (i) Without affecting the rights and restrictions set forth in the Transaction Documents, each of the Senior Interest Holders may, from time to time, at its sole discretion, without notice to AnnTaylor, and without waiving any of its rights under these Subordination Provisions, take any or all of the following actions: (i) retain or obtain an interest in any property to secure any of the Senior Interests; (ii) retain or obtain the primary or secondary obligations of any other obligor or obligors with respect to any of the Senior Interests; (iii) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Interests, or release or compromise any obligation of any nature with respect to any of the Senior Interests; (iv) amend, supplement, amend and restate, or otherwise modify any Transaction Document; and (v) release its security interest in, or surrender, release or permit any substitution or exchange for all or any part of any rights or property securing any of the Senior Interests, or extend or renew for one or more periods (whether or not longer than the original period), or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such rights or property; (j) AnnTaylor hereby waives: (i) notice of acceptance of these Subordination Provisions by any of the Senior Interest Holders; (ii) notice of the existence, creation, non-payment or non-performance of all or any of the Senior Interests; and (iii) all diligence in enforcement, collection or protection of, or realization upon, the Senior Interests, or any thereof, or any security therefor; (k) Each of the Senior Interest Holders may, from time to time, on the terms and subject to the conditions set forth in the Transaction Documents to which such Persons are party, but without notice to AnnTaylor, assign or transfer any or all of the Senior Interests, or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Senior Interests shall be and remain Senior Interests for the purposes of these Subordination Provisions, and every immediate and successive assignee or transferee of any of the Senior Interests or of any interest of such assignee or transferee in the Senior Interests shall be entitled to the benefits of these Subordination Provisions to the same extent as if such assignee or transferee were the assignor or transferor; and (l) These Subordination Provisions constitute a continuing offer from the holder of this Company Note to all Persons who become the holders of, or who continue to hold, Senior Interests; and these Subordination Provisions are made for the benefit of the Senior Interest Holders, and the Administrator or the Lender may proceed to enforce such provisions on behalf of each of such Persons. 10. General. No failure or delay on the part of AnnTaylor ------- in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No amendment, modification or waiver of, or consent with respect to, any provision of this Company Note shall in any event be effective unless (i) the same shall be in writing and signed and delivered by the Company and AnnTaylor and (ii) all consents required for such actions under the Transaction Documents shall have been received by the appropriate Persons. 11. No Negotiation. This Company Note is not negotiable; -------------- provided, AnnTaylor may pledge this Company Note to the agent for - -------- the benefit of the lenders under the AnnTaylor Credit Agreement. 12. Governing Law. THIS PROMISSORY NOTE SHALL BE DEEMED TO ------------- BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 13. Captions. Paragraph captions used in this Company Note -------- are for convenience only and shall not affect the meaning or interpretation of any provision of this Company Note. ANNTAYLOR FUNDING, INC. By:_______________________ Title: Vice President Pay to the order of Bank of America National Trust and Savings Association, as Agent ANNTAYLOR, INC. By:_________________________ Title: Senior Vice President Schedule 3 ANNTAYLOR, INC. CERTIFICATE I, Bert A. Tieben, Senior Vice President of ANNTAYLOR, INC., a Delaware corporation, DO HEREBY CERTIFY that: Pursuant to Section 4.1(k) of the Purchase and Sale Agreement, dated as of January 27, 1994 (as amended or otherwise modified from time to time, the "Agreement") among AnnTaylor, Inc. and AnnTaylor Funding, Inc., AnnTaylor, Inc. has marked its summary master control processing records evidencing the Pool Receivables (as defined in the Receivables Financing Agreement referred to in the Agreement) and the related Contracts (as defined in the Receivables Financing Agreement referred to in the Agreement) with the following legend: "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO ANNTAYLOR FUNDING, INC. PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF JANUARY 27, 1994, AS AMENDED, BETWEEN ANNTAYLOR FUNDING, INC. AND ANNTAYLOR, INC. AND A SECURITY INTEREST IN THE RECEIVABLES DESCRIBED HEREIN HAS BEEN GRANTED TO CLIPPER RECEIVABLES CORPORATION, PURSUANT TO A RECEIVABLES FINANCING AGREEMENT, DATED AS OF JANUARY 27, 1994, AMONG ANNTAYLOR FUNDING, INC., ANNTAYLOR, INC., CLIPPER RECEIVABLES CORPORATION, STATE STREET BOSTON CAPITAL CORPORATION, AS THE ADMINISTRATOR, AND PNC BANK, NATIONAL ASSOCIATION, AS THE RELATIONSHIP BANK." WITNESS my hand this 27th day of January, 1994. ANNTAYLOR, INC. By: /s/ Bert A. Tieben ------------------ Name: Bert A. Tieben Title: Senior Vice President EX-21 6 EXHIBIT 21 SUBSIDIARIES OF 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. EX-23 7 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, and No. 33-52389 on Form S-8 of our report dated March 25, 1994 appearing in the Annual Report on Form 10-K of AnnTaylor Stores Corporation for the year ended January 29, 1994. DELOITTE & TOUCHE New Haven, Connecticut March 30, 1994 -----END PRIVACY-ENHANCED MESSAGE-----