-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SouzBKpI5WF/0biekE0yzM2PtItyP7N6YMYNM96sU4aA/j9BKJ6VpIqg11zF+iii 1iags4LWyP4+K5qOxs6+Xg== 0000950112-96-001042.txt : 19960409 0000950112-96-001042.hdr.sgml : 19960409 ACCESSION NUMBER: 0000950112-96-001042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960408 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAYLOR ANN STORES CORP CENTRAL INDEX KEY: 0000874214 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 133499319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10738 FILM NUMBER: 96544896 BUSINESS ADDRESS: STREET 1: 142 WEST 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR STORES CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 FEBRUARY 3, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NO. 1-10738 ANNTAYLOR STORES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3499319 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 142 WEST 57TH STREET, NEW YORK, NY 10019 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 541-3300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $.0068 PAR VALUE THE NEW YORK STOCK EXCHANGE 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 1, 1996 was $294,711,644. The number of shares of the registrant's Common Stock outstanding as of March 1, 1996 was 23,080,278. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders to be held on June 14, 1996 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company's stores offer a full range of career and casual separates, weekend wear, dresses, tops, accessories and shoes, coordinated as part of a total wardrobing strategy. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles. The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. As a result of strong consumer acceptance of this niche positioning, the Company's sales per square foot productivity and operating profit margins have historically been among the highest in the specialty apparel retailing industry. The Company has adopted a growth strategy of capitalizing on this brand recognition by introducing product extensions within its stores and entering into new channels of distribution, as well as continuing its retail store expansion program. As of February 3, 1996, the Company operated 306 stores in 40 states and the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store, Ann Taylor Loft and Ann Taylor Studio. Of the 258 stores operated under the Ann Taylor name, approximately three-quarters are located in regional malls and upscale specialty retail centers, with the balance located in downtown and village locations. These stores represent the Company's core merchandise line. The Company believes that its customer base for its Ann Taylor Stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise. In 1993, the Company converted its four existing clearance centers to Ann Taylor Factory Stores, and as of February 3, 1996, operated 22 Ann Taylor Factory Stores located in factory outlet centers. Outlet centers appeal to consumers' increasing orientation to value and to manufacturers' and retailers' desire for additional channels of distribution and control over liquidation of their product. The success of the Company's Factory Stores and consumers' continuing emphasis on value led the Company to begin testing, in 1995, Ann Taylor Loft, a separate moderate-priced store concept for customers who appreciate the Ann Taylor style but have a smaller budget for apparel, shoes and accessories. As of February 3, 1996, the Company operated 17 Ann Taylor Loft stores, also located in factory outlet centers. Merchandise manufactured for Loft stores is sold under the Ann Taylor Loft and Shoe Loft labels. Ann Taylor Loft stores also sell the Company's ATdenim and "destination" fragrance and personal care lines described below. The Company's Factory Stores serve as a clearance vehicle for both Ann Taylor and Ann Taylor Loft merchandise, in addition to selling ATdenim, the "destination" product line, and current Ann Taylor Loft merchandise. In Fall 1994, the Company began testing Ann Taylor Studio stores, a free-standing shoe and accessory store concept offering the broadest assortment of Ann Taylor shoes, as well as Ann Taylor hosiery, small leather accessories such as belts and handbags, and the Company's "destination" fragrance and personal care line. As of February 3, 1996, the Company had nine Ann Taylor Studio stores. 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. The Company was formed at the direction of Merrill Lynch Capital 1 Partners, Inc. ("ML Capital Partners"), a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), for the purpose of acquiring Ann Taylor in a leveraged buyout transaction (the "Acquisition") in 1989. As of March 1, 1996, certain limited partnerships controlled directly or indirectly by ML Capital Partners, together with certain other affiliates of ML&Co. (collectively, the "ML Entities"), owned 6,155,118 shares, or approximately 26.7%, of the outstanding Common Stock of the Company. The ML Entities have two designees on the Company's Board of Directors and, therefore, are in a position to influence management of the Company. Unless the context indicates otherwise, all references herein to the Company include the Company and its wholly owned subsidiary Ann Taylor. BUSINESS STRATEGY Under the leadership of Chairman and Chief Executive Officer, Sally Frame Kasaks, the Company has pursued growth through the extension of the Ann Taylor brand, through the successful introduction of new product lines and new channels of distribution, as well as through retail store expansion. The Company believes that product extensions support the Company's total wardrobing strategy, as well as provide existing and new customers with additional reasons to patronize Ann Taylor stores. Product extensions expanded or developed over the past three years include Ann Taylor shoes, ATdenim, Ann Taylor Petites, the "destination" fragrance and personal care line, and Ann Taylor "navy label" merchandise. Ann Taylor shoes, which were sold in 99 Ann Taylor Stores in 1992, were expanded to 188 stores by the end of Fiscal 1995, as well as to the Company's nine Ann Taylor Studio stores. In Fall 1992, the Company increased its presence in casual wear by introducing its own line of denim known as "ATdenim", now sold in all Ann Taylor stores other than Ann Taylor Studio stores. In Fall 1993, Ann Taylor Petites was tested in the career separates and dress categories in 25 Ann Taylor Stores; by the end of Fiscal 1995, a broader range of Ann Taylor Petites was carried in 171 stores. Ann Taylor Loft stores offer a full assortment of Ann Taylor Loft Petites. In Fall 1994, the Company introduced a fragrance and limited line of personal care products under the name "destination", now sold in all Ann Taylor store concepts. This product line was expanded in Fall 1995 to include hair care and bath products, and a limited collection of home environment products such as scented candles and scented sea glass. In Spring 1995, the Company began testing Ann Taylor "navy label" merchandise in the career separates and dress categories in 30 Ann Taylor Stores. Navy label merchandise is priced approximately 30% higher than core Ann Taylor label merchandise, and is intended to compete with designer bridge and diffusion lines. The navy label collection will be limited to approximately 50 Ann Taylor Stores whose customer demographics the Company believes can support the higher price points of this merchandise. New channels of distribution expanded or introduced over the past three years include the expansion of the Company's Ann Taylor Factory Store concept; the introduction of Ann Taylor Studio stores in Fall 1994; and the introduction of Ann Taylor Loft in Spring 1995. See "Business--General;-- Stores; and--Expansion". In Fall 1994, the Company sought to convert its fashion catalog, previously used primarily as an advertising vehicle, into a direct response mail order business. Although the direct response catalog had a good customer response rate to its initial mailings, the Company determined during Spring 1995 that the direct response mail order business was incompatible with the Company's current objectives for a variety of logistical, merchandising and financial reasons and returned its catalog to an advertising vehicle in Fall 1995. The Company suspended its catalog entirely in early 1996 and is presently evaluating the effectiveness of various advertising strategies. See "Business--Advertising and Promotion". Over the past three years, the Company has doubled the amount of its retail square footage, growing from 219 stores encompassing approximately 814,000 square feet at the beginning of Fiscal 1993, to 306 stores encompassing approximately 1,651,000 square feet at the end of Fiscal 1995. Of 2 this, approximately 478,000 net square feet was added in Fiscal 1995. Since 1993, the Company has updated its Ann Taylor Store prototype and also increased the size of a typical new Ann Taylor Store from approximately 3,500 square feet to approximately 6,000 square feet, to enable the Company to more effectively present its full merchandise assortment. The increase in the Company's retail store square footage also reflects the expansion or relocation during this period of 66 of the Company's most productive stores to reflect the updated store prototype design. To support the Company's growth strategy and improve operating performance, since 1992 the Company has (i) introduced an in-house product design and development department to further distinguish and reinforce the exclusivity of Ann Taylor merchandise and to improve consistency of product quality and fit; (ii) added a significant number of new associates to support the Company's efforts in merchandising, planning and production management; (iii) increased its investment in corporate infrastructure, particularly in information systems and by constructing a new 256,000 square foot distribution center, which was substantially completed in 1995; and (iv) sought to develop its own global, direct sourcing capabilities in order to reduce costs, shorten lead times and better control the quality of its merchandise, by forming, in Fiscal 1992, a sourcing joint venture with Cygne Designs, Inc. ("Cygne"), known as CAT U.S., Inc. and C.A.T. (Far East) Limited (together, "CAT"). Approximately 38% of the Company's merchandise in Fiscal 1995 was purchased through CAT. The Company has entered into an agreement in principle with Cygne, dated as of April 8, 1996, to acquire Cygne's interest in CAT and the assets of the Ann Taylor Woven Division of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). See "Business--Merchandise Design and Production; and - --CAT/Cygne Transaction" and "Management's Discussion and Analysis--Liquidity and Capital Resources; and --Recent Developments". FISCAL 1995 RESULTS The Company believes that its brand growth strategy is sound and contributed to the success of the business in Fiscal 1993 and Fiscal 1994. However, the Company also believes, in retrospect, that the introduction of multiple initiatives and acceleration of growth in Fall 1994, at a time when the Company was also expanding its infrastructure to support this growth, created a strain on the business and contributed to the Company's disappointing financial results in Fiscal 1995. During Fiscal 1994, the Company devoted substantial management time and resources to the planning, implementation and supervision of new store concepts (including the Ann Taylor Loft and Ann Taylor Studio stores), new product lines, the test of a direct response catalog business and the rapid expansion of its real estate portfolio. The move to a more vertically integrated business created an increased level of complexity in the Company's business during this period. As a result of management's focus on these initiatives and the assimilation of many new functions and people, Ann Taylor merchandise in Fiscal 1995 failed to achieve the cohesive, distinctive look that had defined the brand in the previous two years. Management believes that in 1995 its merchandise was "over-assorted" and, in some departments, appeared too "young" or "trendy". In addition, the Company experienced inconsistency in the fit of its apparel. The impact of these merchandising issues was exacerbated by the generally poor apparel retailing environment that prevailed throughout Fiscal 1995. The Company has taken a number of actions in response to its disappointing results of Fiscal 1995. In recognition of the increased vertical integration and resulting increased complexity of the business, in 1995 the Company conducted an extensive project with a nationally recognized consulting firm to improve its internal processes in the areas of inventory planning, merchandising, design and quality assurance. This project was completed by the end of 1995 and the processes developed were begun to be implemented in Fall 1995, during the planning and procurement of the Spring 1996 merchandise assortment. In the financial area, the Company is seeking to improve inventory turns by reducing inventory levels on a per square foot basis from Fiscal 1994 and 1995 levels. The Company believes that improved merchandise execution and more conservative inventory management will result in improved gross margins over Fiscal 1995 levels, by reducing the Company's markdown rate. At the end of Fiscal 1995, 3 inventory levels were $62 per square foot, or 22% lower per square foot than at the end of Fiscal 1994. The Company has also focused on improving management of operating expenses by limiting the growth of central expenses and seeking to operate its stores more efficiently. The Company also has slowed its store expansion program for Fiscal 1996, planning to undertake no more than 15 to 20 new stores or expansions in 1996, compared to 78 such projects in Fiscal 1995. See "Business--Expansion". In February 1996, the Company strengthened its executive management team by naming J. Patrick Spainhour as President and Chief Operating Officer, a newly created position, to improve execution of operations across the business and to allow Ms. Kasaks to focus more of her time on merchandise content and strategic direction. MERCHANDISE DESIGN AND PRODUCTION Ann Taylor merchandise is developed based upon current fashion trends and analysis of prior year sales. The Company's product design and development and merchandising groups determine needs for the upcoming season, design styles to fill those needs, and arrange for the production of merchandise either through the Company's CAT merchandise sourcing joint venture, or through vendors who are private label specialists, or directly with manufacturers. 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 of merchandise by vendors, and, upon receipt, inspects merchandise on a test basis for uniformity of sizes and colors, as well as for overall quality of manufacturing. The Company is continuing to develop its capability to source its merchandise directly with 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 with Cygne known as CAT, which was formed for the purpose of acting as a sourcing agent exclusively for Ann Taylor, placing merchandise orders directly with manufacturers. Merchandise purchased by Ann Taylor through CAT represented 38.3% and 36.3% of all merchandise purchased by the Company in Fiscal 1995 and 1994, respectively. The Company currently owns a 40% interest in CAT, and Cygne owns the remaining 60% of CAT. As described below, the Company has entered into an agreement in principle with Cygne to acquire Cygne's interest in CAT as well as the assets of the Ann Taylor Woven Division of Cygne that are used in sourcing merchandise for Ann Taylor. In Fiscal 1995, the Company purchased merchandise from approximately 170 vendors, including five vendors each of whom accounted for 4% or more of the Company's merchandise purchases: CAT (38.3%), Cygne (16.3%), D.S. Studio (5.3%), Parigi (4.9%), and Depeche (4.8%). In 1995, most of the Company's merchandise was purchased from domestic vendors, including CAT. However, consistent with the retail apparel industry as a whole, many of the Company's domestic vendors import a large portion of their merchandise from abroad. For example, substantially all of the merchandise purchased through CAT is manufactured outside the United States. The Company cannot predict whether any of the foreign countries in which its products are currently manufactured or any of the countries in which the Company may manufacture its products in the future will be subject to future import restrictions by the U.S. government, including the likelihood, type or effect of any trade retaliation. Trade restrictions, including increased tariffs or quotas, or both, against apparel items could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. The Company's merchandise flow may also be adversely affected by political instability in any of the countries in which its goods are manufactured, significant fluctuation in the value of the U.S. dollar against foreign currencies and restrictions on the transfer of funds. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any supplier, although it does have an equity investment in its direct 4 sourcing venture CAT. The Company believes 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 to produce a sufficient supply of quality goods in a timely manner and on satisfactory economic terms. Nevertheless, if there were an interruption or cessation of business by CAT, the Company could, as a result of the quantity of its merchandise purchased through CAT, experience a material disruption in its ability to obtain sufficient merchandise inventories until alternate merchandise supplies were secured. In addition, the Company could experience an increase in the cost of merchandise, if it were not able to obtain merchandise from replacement suppliers at prices as favorable as it has been able to obtain from CAT. See "Management's Discussion and Analysis--Liquidity and Capital Resources". As indicated above, in Fiscal 1995 the Company purchased approximately 16% of its merchandise directly from Cygne. In November 1995, Cygne disclosed that it was in violation of certain terms of the bank credit agreement that provides Cygne's principal source of working capital financing and that, as a result of such violation, the lender under that credit facility has the right to cancel the facility and to demand immediate repayment of the amounts outstanding thereunder. Cygne also disclosed that a separate trade credit facility had been suspended as a result of Cygne's failure to make payments thereunder when due. Cygne has stated that if it is unable to restore its suspended trade credit facility, maintain its present financing and credit facilities or otherwise obtain necessary working capital, it could experience a liquidity shortfall that would adversely affect its ability to finance its operations. If Cygne's operations were interrupted or discontinued, the Company could experience temporary inventory shortfalls, disruptions or delays with respect to any unfilled purchase orders then outstanding with Cygne, although the Company believes that adequate alternate sources would be available that could replace Cygne as a merchandise resource for the products that the Company typically purchases from Cygne; however, there can be no assurance that such alternate sources will be available. CAT obtains its working capital financing pursuant to a $40 million loan facility provided by the same bank that provides Cygne with its principal working capital facility. Such loan facility expires in May 1996 and there can be no assurance that CAT will be able to renew such facility. Although CAT currently is in compliance with the terms of its credit agreement, the agreement contains a cross-default provision relating to defaults under other indebtedness of CAT or Cygne. As a result of Cygne's default under its bank credit agreement, CAT's current lender presently has the right to cancel CAT's $40 million credit facility and to demand repayment of the amounts outstanding under that facility. See "Management's Discussion and Analysis--Liquidity and Capital Resources". The Company's agreement with Cygne relating to the parties' ownership of CAT provides that either Cygne or Ann Taylor may offer to purchase the other party's interest in CAT. The party that receives the offer then has the option to either accept the offer and sell its interest in CAT on the terms offered, or purchase the offering party's interest in CAT on the terms offered. There can be no assurance that if the Company were to offer to purchase Cygne's interest in CAT under this provision, that Cygne would not elect instead to purchase the Company's interest, or that if Cygne were to offer to purchase the Company's interest in CAT, that such offer would reflect the value of such interest, or that the Company would have the financial ability to purchase Cygne's interest in CAT at the offered price. If Cygne were to purchase the Company's interest in CAT, there can be no assurance that the Company would be able to continue to do business with CAT on terms having the same economic effect as its current arrangement or be able to replace CAT as a merchandise sourcing agent on similar terms. CAT/CYGNE TRANSACTION The Company and Cygne have entered into an agreement in principle, dated as of April 8, 1996 (the "CAT/Cygne Agreement"), pursuant to which the Company, through a newly formed subsidiary, will purchase all of the shares of CAT stock owned by Cygne (the "CAT Shares") and the assets (the "Assets") of the Ann Taylor Woven Division (the "Division") of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). Upon consummation of the CAT/Cygne Transaction, CAT will become an indirect wholly owned subsidiary of the Company. In addition to continuing its own sourcing activities on behalf of the Company, CAT will own the Assets of 5 the Division and will perform all sourcing functions for Ann Taylor currently performed by Cygne (the "Cygne Sourcing Business"). The aggregate consideration to be paid by the Company pursuant to the CAT/Cygne Transaction consists of (i) shares of Common Stock of the Company having a market price, based on the closing price of the Company's Common Stock for the ten trading days prior to the closing of the CAT/Cygne Transaction, of $36 million (but in no event greater than 2.5 million shares), and (ii) cash in an amount equal to the tangible net book value of the inventory and fixed assets included in the Assets, less certain assumed liabilities, currently estimated to be approximately $12.9 million. In addition, the Company will assume the obligation to make payment to the president of CAT of approximately $2.0 million becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction. The Company believes that the CAT/Cygne Transaction will mitigate supply interruption risks arising from the financial difficulties experienced by Cygne in 1995. See "Management's Discussion and Analysis--Liquidity and Capital Resources". Moreover, the CAT/Cygne Transaction furthers the Company's strategy of increasing its control over pre-production processes and production management in order to shorten lead times, improve merchandise quality and reduce costs. See "Business--Business Strategy". The Company believes that the integration of CAT's business and the Division with the Company's operations will enable CAT and the Division to share their respective strengths in different areas of pre-production processes and production management, such as CAT's system of statistical quality control and Cygne's strength in fabric development. In addition, the CAT/Cygne Transaction provides a platform for the Company to standardize its pre-production work for its other suppliers, which the Company believes will lead to greater consistency in merchandise production, product fit specifications and quality control. Finally, the Company believes that greater control over pre-production processes and production management will improve logistical coordination of the entire supply chain process, thereby reducing production cycle times and sourcing costs. The closing of the CAT/Cygne Transaction is subject to various conditions, and there can be no assurance that the CAT/Cygne Transaction will be consummated. See "Management's Discussion and Analysis--Recent Developments". INVENTORY CONTROL AND MERCHANDISE ALLOCATION The Company's merchandise planning and allocation department analyzes each store's size, location, demographics, sales and inventory history to determine the quantity of merchandise to be purchased for and the allocation of merchandise to the Company's stores. Upon receipt, merchandise is allocated in order to achieve an emphasis that is suited to each store's customer base. Merchandise typically is sold at its original marked price for several weeks, with the length of time varying by item. The Company reviews its inventory levels on an on-going basis in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation or changes in customer preference or if it is determined that the inventory will not sell at its currently marked price. Marked-down items remaining unsold are periodically moved to the Company's Factory Stores where additional markdowns may be taken. In Fiscal 1995, inventory turned 4.3 times and in Fiscal 1994, inventory turned 4.6 times. Inventory turnover is determined by dividing net cost of goods sold by the average of the cost of inventory at the beginning and end of the period. The Company uses a centralized distribution system, under which nearly all Ann Taylor merchandise is distributed to the Company's stores through its Kentucky distribution facility, other than hosiery which is shipped from the manufacturer directly to the Company's stores. Merchandise is shipped to the Company's stores nearly every business day. In Spring 1995, the Company completed construction of a 256,000 square foot distribution facility in Louisville, Kentucky that replaced the Company's former Connecticut distribution facilities. See "Properties". 6 STORES As of February 3, 1996, the Company operated 306 stores in 40 states and the District of Columbia, comprising 258 Ann Taylor Stores, 22 Ann Taylor Factory Stores, 17 Ann Taylor Loft stores, and 9 Ann Taylor Studio stores. The Company's 258 Ann Taylor Stores were distributed as follows: 126 stores were located in regional malls, 64 stores were in upscale specialty centers, 43 stores were in village locations, and 25 stores were in downtown locations. The Company's 22 Ann Taylor Factory Stores and 17 Ann Taylor Loft stores were all located in factory outlet centers. The Company's nine Ann Taylor Studio stores were located in regional malls in which there is also an Ann Taylor Store. The following table sets forth by state the stores that were open as of February 3, 1996: LOCATIONS BY STATE NUMBER NUMBER OF OF STATE STORES STATE STORES - ---------------------- ------ ---------------------- ------ Alabama............... 2 Louisiana............. 4 Arizona............... 4 Maryland.............. 6 Arkansas.............. 1 Massachusetts......... 13 California............ 52 Michigan.............. 8 Colorado.............. 4 Minnesota............. 5 Connecticut........... 11 Mississippi........... 1 Delaware.............. 1 Missouri.............. 7 District of Columbia.............. 6 Nebraska.............. 2 Nevada................ 2 Florida............... 25 New Hampshire......... 2 Georgia............... 6 New Jersey............ 13 Hawaii................ 2 New Mexico............ 2 Illinois.............. 12 New York.............. 26 Indiana............... 6 North Carolina........ 6 Kentucky.............. 2 NUMBER OF STATE STORES - ---------------------- ------ Ohio.................. 13 Oklahoma.............. 3 Oregon................ 2 Pennsylvania.......... 14 Rhode Island.......... 1 South Carolina........ 3 Tennessee............. 6 Texas................. 17 Utah.................. 2 Vermont............... 1 Virginia.............. 9 Washington............ 3 Wisconsin............. 1 The Company selects store locations that it believes are convenient for its customers. Store locations are determined on the basis of various factors, including geographic location, demographic studies, anchor tenants in a mall location, other specialty stores in a mall or specialty center location or in the vicinity of a village location, and the proximity to professional offices in a downtown or village location. Ann Taylor Factory Stores and Ann Taylor Loft stores are generally located in factory outlet malls in which co-tenants include a significant number of nationally recognized upscale brand name retailers. Ann Taylor Stores opened prior to January 30, 1993 averaged 3,500 square feet in size, with the exception of three stores that ranged between 10,300 square feet and 12,500 square feet. During 1992, the Company designed two new store prototypes for its Ann Taylor Stores. The first is a store model of approximately 5,500 square feet, on which most new and expanded stores opened since 1993 are 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 these store formats 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, petites and other product line extensions, and improve customer service and ease of shopping. The typical Ann Taylor Store has approximately 19% of its total square footage allocated to stockroom and other non-selling space. 7 In Fall 1995, the Company opened two flagship Ann Taylor Stores, each in excess of 20,000 square feet, one on Madison Avenue in New York City, and the other on Post Street in San Francisco. These two larger stores represent the fullest assortment of Ann Taylor merchandise, and include amenities unique to these stores. The Madison Avenue store replaced the Company's former 12,500 square foot store on 57th Street in New York City. Ann Taylor Factory Stores average 6,500 square feet and are located in factory outlet centers. Outlet centers appeal to consumers' increasing orientation to value and to manufacturers' and retailers' desire for additional channels of distribution and control over liquidation of their product. Ann Taylor Factory Stores serve as a clearance vehicle for marked-down merchandise from the Company's various store concepts. Prior to the introduction of Ann Taylor Loft stores in 1995, the Company also produced merchandise specifically for sale at its Factory Stores. Ann Taylor Factory Stores now also sell full price Ann Taylor Loft merchandise, as well as certain Ann Taylor products that the Company believes represent exceptional value, such as ATdenim and the "destination" fragrance and personal care line, concurrently with and at the same price as the Ann Taylor Stores. The success of the Company's Factory Stores and consumers' continuing emphasis on value led the Company to begin testing, in 1995, a separate moderately-priced store concept under the name "Ann Taylor Loft". Ann Taylor Loft stores opened in Fiscal 1995 are approximately 10,000 square feet and are located in factory outlet centers. Although the Company generally has been satisfied with the initial results of many of its Loft stores, the Company believes it will be able to improve sales per square foot productivity of Loft stores by decreasing the average store size. The Company will continue to test the Loft concept in Fiscal 1996, with plans to open two Loft stores of between 6,000 and 7,000 square feet each, in locations that are not factory outlet centers. In Fall 1994, the Company also introduced Ann Taylor Studio stores, a free-standing shoe and accessory store concept. These stores carry the broadest selection of Ann Taylor footwear, and also offer Ann Taylor hosiery, small leather accessories such as belts and handbags, and the "destination" product line. As of February 3, 1996, the Company had nine Ann Taylor Studio stores, located in regional malls in which the Company also has an Ann Taylor Store. Ann Taylor Studio stores average approximately 1,900 square feet. The Ann Taylor Studio stores have not yet met the Company's initial profit objectives for these stores. The Company will continue to test the Ann Taylor Studio store concept, although it does not plan to open any additional Studio stores in Fiscal 1996. EXPANSION An important aspect of the Company's business strategy has been a real estate expansion program designed to reach new customers through the opening of new stores, as well as the expansion of existing stores in order to accommodate product extensions and improve customer service. The Company adds additional stores or expands the size of existing stores in markets where Ann Taylor already has a presence, as market conditions warrant and sites become available. The Company also opens new stores in additional markets that it believes have a sufficient concentration of its target customers. Prior to 1993, the Company's store expansion program focused primarily on adding new Ann Taylor Stores. Since developing the larger Ann Taylor Store prototypes in 1992, the expansion of existing Ann Taylor Stores was also made an integral part of the Company's expansion strategy. Stores expanded by more than 15% are excluded from comparable sales calculations until they have been open over one year at their expanded size. The following table sets forth certain information regarding store openings, expansions and closings for Ann Taylor Stores ("ATS"), Ann Taylor Factory Stores ("ATO"), Ann Taylor Loft stores 8 ("ATL") and Ann Taylor Studio stores ("ATA") since the consummation of the Acquisition in the beginning of 1989:
NO. STORES NO. STORES OPEN TOTAL STORES OPENED DURING NO. STORES NO. STORES AT END OF OPEN AT FISCAL YEAR EXPANDED CLOSED FISCAL YEAR BEGINNING OF --------------------- DURING DURING ----------------------------- FISCAL YEAR FISCAL YEAR(A) ATS ATO ATL ATA FISCAL YEAR(B) FISCAL YEAR(B) ATS ATO ATL ATA TOTAL - ------------------------ -------------- --- --- --- --- -------------- -------------- --- --- --- --- ----- 1989.................... 119 20 1 -- -- 2 1 138 1 -- -- 139 1990.................... 139 29 3 -- -- 3 1 166 4 -- -- 170 1991.................... 170 33 -- -- -- 3 3 196 4 -- -- 200 1992.................... 200 20 -- -- -- 5 1 215 4 -- -- 219 1993.................... 219 8 5 -- -- 12 1 222 9 -- -- 231 1994.................... 231 18 12 -- 5 25 4 236 21 -- 5 262 1995.................... 262 26 2 16 4 30 4 258 22 17 9 306
- ------------ (a) Prior to 1989, all stores operated by the Company were Ann Taylor Stores. (b) All stores expanded and all stores closed were Ann Taylor Stores, except that one store expanded in 1994 was an ATO store, and one store expanded in 1995 was an ATO store that was converted into an ATL store in connection with such expansion. The Company believes that its existing store base is a significant strategic asset of its business. Ann Taylor Stores are located in some of the most productive retail centers in the United States. The Company believes that it is one of the most sought after tenants by real estate developers because of its strong Ann Taylor brand franchise and its high sales per square foot productivity ($518 per square foot in Fiscal 1995). The Company has invested approximately $117 million in its store base since 1993; approximately 53% of its stores are either new or have been completely remodeled, as a result of an expansion or relocation, in the last three years. Since 1993, another important aspect of the Company's business strategy has been the addition of new channels of distribution through the development of new store concepts. The Company's real estate efforts support this strategy by seeking real estate sites compatible with each particular concept. In 1995, the Company opened 26 Ann Taylor Stores (including the two flagship stores referred to above), 16 Ann Taylor Loft stores, 2 Ann Taylor Factory Stores and 4 Ann Taylor Studio stores, expanded 29 existing Ann Taylor Stores, expanded one existing Factory Store that was then converted to a Loft store, and closed 4 Ann Taylor Stores. This real estate expansion program resulted in a net increase in the Company's total store square footage from approximately 1,173,000 square feet to approximately 1,651,000 square feet, a net increase of approximately 478,000 square feet, or 40.8%. Capital expenditures for the Company's Fiscal 1995 store expansion program, net of landlord construction allowances, totaled approximately $65.1 million, including expenditures for store refurbishing and store refixturing. As described above under "Business--Business Strategy", in Fiscal 1996 the Company intends to reduce the number of real estate projects under development from 1995 levels, so that management may focus on addressing the business issues that inhibited the Company's performance in Fiscal 1995. In Fiscal 1996, the Company expects to increase store square footage by approximately 75,000 square feet, or 4.5%, representing approximately 7 new Ann Taylor Stores, 2 new Ann Taylor Loft stores, one new Ann Taylor Factory Store, and the expansion of 5 existing Ann Taylor Stores. The Company expects that capital expenditures for its Fiscal 1996 store expansion program, net of landlord construction allowances, will be approximately $10 million, including expenditures for store refurbishing and store refixturing. The Company expects to evaluate its store expansion strategy for Fiscal 1997 and beyond later in 1996. Ann Taylor's bank credit agreement restricts the Company's annual capital expenditures to $25 million in Fiscal 1996 and to $32.5 million for subsequent years, subject to increase if certain conditions are satisfied. See Note 2 to the Company's Consolidated Financial Statements. 9 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". INFORMATION SYSTEMS Over the past three years, the Company has invested in computer hardware, systems applications and local and wide area networks to improve customer service, to support the planning, allocation and merchandising processes, and to improve operating efficiencies. In Spring 1994, the Company completed the roll out of a new point of sale system to all Ann Taylor stores. The new system allows the introduction of a number of features that enable the Company to manage its business more effectively and cost efficiently. Through the new system, the Company has introduced on-line acknowledgment of inventory receipts and transfers, which results in more timely inventory information and a reduction in paperwork; and advance ship notices to stores prior to their receipt of merchandise, allowing better store labor planning. The new system permits 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. This allows the Company to respond more quickly and accurately to customer preferences. During Fiscal 1995, the Company began to implement on-line entry of time and attendance information and staff scheduling, improving accuracy and reducing paperwork. Implementation of this feature should be completed during Spring 1996. During Fiscal 1994, the Company also made significant upgrades to its inventory management system. These upgrades, along with the new point of sale system, enabled the Company to introduce full price look-up and provide for more timely information on inventory levels and improved analysis of sales trends. This information will allow the Company to more fully integrate its merchandise planning and allocation systems. In Fiscal 1995, the Company continued to make significant upgrades to its inventory management system. The Company's inventory management system employs a relational database to enable the Company to analyze sales and inventory information at a high level of detail. The inventory management system is being further integrated with the Company's merchandise planning, allocation, and replenishment systems. This integration allows the Company to respond more quickly to individual store trends and make allocations of merchandise more closely aligned with an individual store's customer base. CUSTOMER CREDIT Customers may pay for merchandise with the Ann Taylor credit card, American Express, Visa, MasterCard, cash or check. Credit card sales were 77.0% of net sales in Fiscal 1995, 77.7% in Fiscal 1994 and 77.9% in Fiscal 1993. In Fiscal 1995, 24.7% of net sales were made with the Ann Taylor credit card and 52.3% were made with third-party credit cards. As of February 3, 1996, the Company's Ann Taylor credit card accounts receivable totaled $57.4 million, net of allowance for doubtful accounts. Accounts written off in Fiscal 1995 were approximately $1,475,000, or 0.2% of net sales. Ann Taylor has offered customers its proprietary credit card since 1976. The Company believes that the Ann Taylor credit card enhances customer loyalty while providing the customer with additional credit. The percentage of the Company's total sales made with its proprietary credit card has been declining over the past few years. The Company believes the declining penetration of its Ann Taylor credit card as a percentage of sales is attributable to the gain of market share by bank cards throughout the retail industry generally, as well as to the increase in the number of the Company's Ann Taylor Factory Stores and Loft stores, which experience a significantly lower penetration of sales with the Ann 10 Taylor card. At February 3, 1996, the Company had over 520,000 Ann Taylor credit card accounts that had been used during the past 18 months. ADVERTISING AND PROMOTION For many years, including 1995, the Company has relied on its Ann Taylor fashion catalog, mailed principally to Ann Taylor credit card holders, as its principal advertising vehicle. Prior to 1994, the Company also occasionally ran print advertisements in national women's fashion magazines such as Elle, Vogue and Harpers Bazaar. The Company did not run any such magazine advertisements in 1995 or 1994. In early 1996, the Company suspended its fashion catalog and is presently evaluating the effectiveness of various advertising strategies, including limited print advertisements in national women's fashion magazines and other advertising media, including various outdoor venues such as bus shelters or mass transit posters. TRADEMARKS AND SERVICE MARKS The trademarks and service marks for Ann Taylor and Ann Taylor Loft, including ATdenim and "destination", either have been registered or have trademark applications pending with the United States Patent and Trademark Office and with the registries of many foreign countries. The Company's rights in the "AnnTaylor" mark and the other marks used by it are a significant part of the Company's business, as the Company believes its marks are well known in the women's retail apparel industry. Accordingly, the Company intends to maintain its "AnnTaylor" mark and related registrations. COMPETITION The women's retail apparel industry is highly competitive. The Company's stores compete with certain departments in national or local department stores, and with other specialty store chains and independent retail stores carrying similar lines of merchandise. The Company believes that its focused merchandise selection, exclusive Ann Taylor brand name fashions, personalized service and convenience distinguish it from other specialty retailers. Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company and there is no assurance that the Company will be able to compete successfully 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 payment for selling multiple wardrobe items and for achieving individual sales goals. As of February 3, 1996, the Company had 5,962 employees, of whom 1,366 were full-time salaried employees, 1,663 were full-time hourly employees and 2,933 were part-time hourly employees working less than 30 hours per week. None of the Company's employees are represented by a labor union. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES As of February 3, 1996, the Company operated 306 stores, all of which were leased. The leases typically provide for an initial term of five to ten years and grant the Company the right to extend the term for one or two additional five-year periods. Most leases provide for additional rent based on a percentage of store sales in excess of a specified threshold in addition to or in lieu of minimum rentals, as 11 well as for the payment of certain other expenses, such as insurance, utilities and repair and maintenance expenses, and real estate taxes. The current terms of the Company's leases, including renewal options, expire as follows: FISCAL YEARS LEASE NUMBER OF TERMS EXPIRE STORES - --------------------------------- --------- 1996-1998........................ 69 1999-2001........................ 82 2002-2004........................ 82 2005 and later................... 73 Ann Taylor leases corporate offices at 142 West 57th Street, New York, containing approximately 86,700 square feet. The lease for these premises expires in 2006. The Company also leases office space in New Haven, which contains approximately 31,000 square feet. The lease for these premises expires in 1998. The Company owns its 256,000 square foot national distribution center located in Louisville, Kentucky. Construction of this facility was begun in 1994 and completed in Spring 1995. The Company's capital expenditures to build and equip the facility totaled approximately $19.0 million, of which $6.2 million was incurred in Fiscal 1995. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility, with the exception of hosiery that is shipped directly to stores by the manufacturer. The parcel on which the Louisville distribution center is located, which is owned by the Company, contains approximately 20 acres and could accommodate possible future expansion of the facility. The Louisville distribution center replaced the Company's former 78,790 square foot leased facility located in New Haven, Connecticut, the lease for which expired in September 1995. ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed and traded on the New York Stock Exchange under the symbol ANN. The number of holders of record of Common Stock at March 1, 1996 was 860. The following table sets forth the high and low closing sale prices for the Common Stock on the New York Stock Exchange during Fiscal 1995 and Fiscal 1994. MARKET PRICE -------------------------------- FISCAL YEAR 1995 HIGH LOW ------------- ------------- Fourth quarter.......................... $ 15 5/8 $ 9 1/2 Third quarter........................... 21 7/8 10 1/4 Second quarter.......................... 25 5/8 19 1/2 First quarter........................... 37 3/4 25 1/8 FISCAL YEAR 1994 Fourth quarter.......................... $ 44 1/4 $ 31 7/8 Third quarter........................... 44 35 Second quarter.......................... 41 1/8 31 1/2 First quarter........................... 36 20 7/8 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"), the indenture (the "Indenture") relating to Ann Taylor's 8 3/4% Subordinated Notes due 2000 (the "8 3/4% Notes"), and the Receivables Facility described below under "Management's Discussion and Analysis--Liquidity and Capital Resources". The payment of cash dividends on the Common Stock by the Company is also subject to certain restrictions contained in the Company's guarantee of Ann Taylor's obligations under the Bank Credit Agreement. 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. The Company's consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, and consolidated balance sheets as of February 3, 1996 and January 28, 1995, as audited by Deloitte & Touche LLP, independent auditors, appear elsewhere in this document. The information set forth below should be read in conjunction with "Management's Discussion and Analysis" and the consolidated financial statements and notes thereto of the Company included elsewhere in this document. All references to years are to the fiscal year of the Company, which ends on the Saturday nearest January 31 in the following calendar year. All fiscal years for which financial information is set forth below had 52 weeks, with the exception of 1995, which had 53 weeks. 13
FISCAL YEARS ENDED ------------------------------------------------------------ FEB. 3, JAN. 28, JAN. 29, JAN. 30, FEB. 1, 1996 1995 1994 1993 1992 ---------- ---------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT DATA AND PER SHARE DATA) OPERATING STATEMENT INFORMATION: Net sales, including leased shoe departments (a)........................ $ 731,142 $ 658,804 $501,649 $468,381 $437,711 Cost of sales.......................... 425,225 357,783 271,749 264,301 234,136 ---------- ---------- -------- -------- -------- Gross profit....................... 305,917 301,021 229,900 204,080 203,575 Selling, general and administrative expenses............................... 271,136 214,224 169,371 152,072 150,842 Distribution center restructuring charge (b)............................. -- -- 2,000 -- -- Amortization of goodwill (c)........... 9,506 9,506 9,508 9,504 9,506 ---------- ---------- -------- -------- -------- Operating income................... 25,275 77,291 49,021 42,504 43,227 Interest expense (d)................... 20,956 14,229 17,696 21,273 33,958 Stockholder litigation settlement (e).................................... -- -- -- 3,905 -- Other (income) expense, net............ 38 168 (194) 259 542 ---------- ---------- -------- -------- -------- Income before income taxes and extraordinary loss..................... 4,281 62,894 31,519 17,067 8,727 Income tax provision................... 5,157 30,274 17,189 11,150 7,703 ---------- ---------- -------- -------- -------- Income (loss) before extraordinary loss................................... (876) 32,620 14,330 5,917 1,024 Extraordinary loss (f)................. -- 868 11,121 -- 16,835 ---------- ---------- -------- -------- -------- Net income (loss).................. $ (876) $ 31,752 $ 3,209 $ 5,917 $(15,811) ---------- ---------- -------- -------- -------- ---------- ---------- -------- -------- -------- Income (loss) per share before extraordinary loss..................... $ (.04) $ 1.40 $ .66 $ .28 $ .05 Extraordinary loss per share (f)....... -- (.04) (.51) -- (.87) ---------- ---------- -------- -------- -------- Net income (loss) per share........ $ (.04) $ 1.36 $ .15 $ .28 $ (.82) ---------- ---------- -------- -------- -------- ---------- ---------- -------- -------- -------- Weighted average shares outstanding (in thousands)............................. 23,209 23,286 21,929 21,196 19,326 OPERATING INFORMATION: Percentage increase (decrease) in total comparable store sales (g)............. (8.9)% 13.7% 2.3% (1.0)% (5.6)% Percentage increase (decrease) in owned comparable store sales (g) (h)......... (8.9)% 13.7% 4.0% 0.8% (0.9)% Net sales per square foot (i).......... $ 518 $ 627 $ 576 $ 600 $ 642 Number of stores: Open at beginning of the period.... 262 231 219 200 170 Opened during the period........... 48 35 13 20 33 Expanded during the period......... 30 25 12 5 3 Closed during the period........... 4 4 1 1 3 Open at the end of the period...... 306 262 231 219 200 Total store square footage at end of period................................. 1,651,000 1,173,000 929,000 814,000 746,000 Capital expenditures................... $ 78,378 $ 61,341 $ 25,062 $ 4,303 $ 10,004 Depreciation and amortization, including goodwill (c)............... $ 28,294 $ 21,293 $ 18,013 $ 16,990 $ 15,709 Working capital turnover (j)........... 7.8x 8.5x 12.1x 16.8x 12.8x Inventory turnover (k)................. 4.3x 4.6x 4.9x 5.3x 4.6x BALANCE SHEET INFORMATION (AT END OF PERIOD): Working capital (l).................... $ 86,477 $ 102,181 $ 53,283 $ 29,539 $ 26,224 Goodwill, net (c)...................... 313,525 323,031 332,537 342,045 351,549 Total assets........................... 678,709 598,254 513,399 487,592 491,747 Total debt............................. 272,458 200,000 189,000 195,474 211,917 Stockholders' equity................... 325,688 326,112 259,271 245,298 229,464
(Footnotes on following page) 14 (Footnotes for preceding page) (a) Prior to 1990, all shoes sold in Ann Taylor Stores were "Joan & David" shoes, sold in leased shoe departments by Joan & David Helpern, Inc. ("Joan & David") pursuant to a license agreement. In 1990, the Company introduced a line of Ann Taylor brand shoes. Beginning in August 1990, Joan & David began a scheduled withdrawal of its leased shoe departments, vacating departments in groups of stores every six months through the end of Fiscal 1992. As of February 1, 1993, Joan & David no longer operated leased shoe departments in any Ann Taylor stores. Sales from leased shoe departments were $8,207,000 in Fiscal 1992 and $16,056,000 in Fiscal 1991. (b) Relates to the relocation of the Company's distribution center, completed in late Spring 1995, and represents a charge of $1,100,000 principally for severance and job training benefits and $900,000 for the write-off of the net book value of certain assets not used in the new facility. This charge reduced Fiscal 1993 net earnings by $.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 $1,004,000, $978,000, $4,199,000, $8,581,000, and $12,243,000 in Fiscal 1995, 1994, 1993, 1992 and 1991, respectively, from amortization of deferred financing costs, and in 1993, 1992 and 1991, from accretion of original issue discount and, in 1992 and 1991, from the issuance of additional 10% junior subordinated exchange notes due 2004. (e) Relates to the settlement in January 1993 of a stockholder class action lawsuit that was filed against the Company and certain other defendants in October 1991. (f) In Fiscal 1994, Ann Taylor incurred an extraordinary loss of $1,522,000 ($868,000, or $.04 per share, net of income tax benefit), in connection with the prepayment of long-term debt with the proceeds of a public sale of common stock of the Company. In Fiscal 1993, Ann Taylor incurred an extraordinary loss of $17,244,000 ($11,121,000, or $.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 Company's initial public stock offering. (g) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not open during the same month of the prior period. A store opened within the first two weeks of a month is deemed to have been opened on the first day of that month and a store opened later in a month is deemed to have been opened on the first day of the next month. For example, if a store were opened on June 8, 1994, its sales from June 8, 1994 through year-end 1994 and its sales from June 1, 1995 through year-end 1995 would be included in determining comparable store sales for 1995, compared to 1994. In addition, in a year with 53 weeks, the extra week is not included in determining comparable store sales. For periods prior to 1993, when a store's square footage was increased as a result of expansion or relocation in the same mall or specialty center, the store continued to be treated as a comparable store after the expansion. Commencing with stores expanded in Fiscal 1993, any store the square footage of which is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store. Comparable store sales for 1995 reflect a 52-week period. (h) Excludes sales from leased shoe departments for periods prior to Fiscal 1993. (i) Net sales per square foot ("sales per square foot") is determined by dividing net sales for the period by the average of the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. (j) Working capital turnover is determined by dividing net sales by the average of the amount of working capital at the beginning and end of the period. (k) Inventory turnover is determined by dividing cost of sales (excluding costs of leased shoe departments) by the average of the cost of inventory at the beginning and end of the period. (l) Includes current portion of long-term debt of $40,266,000, $0, $8,757,000, $37,000,000 and $26,000,000 in Fiscal 1995, 1994, 1993, 1992 and 1991, respectively.
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION GENERAL During Fiscal 1995, the Company added 26 Ann Taylor Stores, 16 Ann Taylor Loft stores, 2 Ann Taylor Factory Stores, 4 Ann Taylor Studio stores, expanded 29 existing Ann Taylor Stores, and expanded one existing Factory Store that was then converted to a Loft store, and closed 4 Ann Taylor Stores. This real estate expansion program resulted in a net increase in the Company's retail store space of approximately 478,000 square feet, to a total of approximately 1,651,000 square feet, representing a 40.8% increase over total retail store space of approximately 1,173,000 square feet at the end of Fiscal 1994. The Company expects to increase its retail store space by approximately 75,000 square feet, or 4.5%, in Fiscal 1996. The Company's ability to continue to expand will be dependent upon general economic and business conditions affecting consumer spending, the availability of desirable locations and the negotiation of acceptable lease terms for new locations. In addition, the Bank Credit Agreement restricts the Company's annual capital expenditures to $25 million in Fiscal 1996 and to $32.5 million thereafter, subject to increase if certain conditions are satisfied. See "Business--Expansion" and Note 2 to the Company's Consolidated Financial Statements. The Company's net sales do not show significant seasonal variation, although net sales in the fourth quarter have historically been moderately higher than in the other quarters. 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 historically has experienced 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 distribution of the Company's annual net sales and operating income by quarter for Fiscal 1995, 1994 and 1993:
FISCAL 1995(A) FISCAL 1994 FISCAL 1993 ---------------------- ---------------------- ---------------------- OPERATING INCOME OPERATING OPERATING NET SALES (LOSS) NET SALES INCOME NET SALES INCOME(B) --------- --------- --------- --------- --------- --------- First Quarter............ 23.0% 48.0% 22.0% 25.3% 24.0% 24.3% Second Quarter........... 25.1 (3.1) 24.3 24.2 24.9 25.3 Third Quarter............ 24.4 34.4 25.0 25.7 24.3 25.2 Fourth Quarter........... 27.5 20.7 28.7 24.8 26.8 25.2 --------- --------- --------- --------- --------- --------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------ (a) Fiscal 1995 was a 53-week year and therefore the fourth quarter included an "extra" week. Excluding the last week of the fourth quarter, net sales in Fiscal 1995 were distributed among the first through fourth quarters as follows: 23.3%, 25.5%, 24.7% and 26.5%, respectively. (b) Excludes the $2,000,000 charge to earnings relating to the relocation of the Company's distribution center.
Sales per square foot were $518 in Fiscal 1995, $627 in Fiscal 1994 and $576 in Fiscal 1993. Since 1993, Ann Taylor Stores opened by the Company average 6,000 square feet, compared to the average store size prior to 1993 of 3,500 square feet. In addition, since 1993, the Company has expanded 66 stores from an average of 3,500 square feet to an average store size of 6,000 square feet. Ann Taylor Factory Stores average 6,500 square feet, and Ann Taylor Loft stores opened in Fiscal 1995 average 10,000 square feet in size. The increase in average store size has had, and is expected to continue to have, a negative effect on sales per square foot. In Fiscal 1995, the decrease in sales per square foot was also a result of negative comparable store sales and sales per square foot productivity of new store square footage added in Fiscal 1995 that was lower than the Company average sales per square foot. In 16 Fiscal 1994, the increase in sales per square foot was a result of positive comparable store sales, offset in part by sales per square foot productivity of new store square footage added in Fiscal 1994 that was lower than the Company average sales per square foot. RESULTS OF OPERATIONS The following table sets forth operating statement data expressed as a percentage of net sales for the historical periods indicated:
FISCAL 1995 FISCAL 1994 FISCAL 1993 ----------- ----------- ----------- Net sales....................................... 100.0% 100.0% 100.0% Cost of sales................................... 58.2 54.3 54.2 ----- ----- ----- Gross profit................................. 41.8 45.7 45.8 Selling, general and administrative expenses.... 37.0 32.5 33.8 Distribution center restructuring charge........ -- -- 0.4 Amortization of goodwill........................ 1.3 1.5 1.8 ----- ----- ----- Operating income............................. 3.5 11.7 9.8 Interest expense................................ 2.9 2.2 3.5 Other (income) expense, net (a)................. -- -- -- ----- ----- ----- Income before income taxes and extraordinary loss............................................ 0.6 9.5 6.3 Income tax provision............................ 0.7 4.6 3.4 ----- ----- ----- Income (loss) before extraordinary loss......... (0.1) 4.9 2.9 Extraordinary loss.............................. -- 0.1 2.3 ----- ----- ----- Net income (loss)............................ (0.1)% 4.8% 0.6% ----- ----- ----- ----- ----- -----
- ------------ (a) Other (income) expense, net was less than 0.1% of net sales in 1995, 1994 and 1993. FISCAL 1995 COMPARED TO FISCAL 1994 The Company's net sales increased to $731,142,000 in 1995 from $658,804,000 in 1994, an increase of $72,338,000, or 11.0%. Total sales for the fifty-two week period ended January 27, 1996 were up 9.5% to $721,561,000 compared to 1994. The increase in net sales was attributable to the inclusion of a full year of operating results for the 35 stores opened and 25 stores expanded during 1994, and the opening of 48 new stores and expansion of 30 stores in 1995. The sales increase was partially offset by the closing of 4 stores in 1995 and by a 8.9% decrease in comparable store sales for the fifty-two week period ended January 27, 1996. The Company believes that the 8.9% decrease in its comparable store sales in 1995 was attributable primarily to poor customer reaction to the Company's merchandise offerings, as well as to the generally weak economic environment for women's apparel sales that prevailed throughout most of 1995. As described above under "Business--Business Strategy", the Company believes that its 1995 merchandise offerings were "over-assorted" and failed to achieve the cohesive, distinctive look that had defined the brand in the previous two years. Gross profit as a percentage of net sales decreased to 41.8% in 1995 from 45.7% in 1994. This decrease was primarily attributable to higher markdowns associated with increased promotional activities and, to a lesser extent, to a lower initial mark up rate associated with merchandise manufactured for Ann Taylor Factory Stores and Ann Taylor Loft stores, compared to the initial mark up on merchandise manufactured for Ann Taylor Stores. 17 Selling, general and administrative expenses as a percentage of net sales increased to 37.0% in 1995 from 32.5% in 1994. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher tenancy, store maintenance and store selling costs as a percentage of sales as a result of both decreased comparable store sales and lower than average sales per square foot productivity of stores added in Fiscal 1995 (approximately 73% of the increase), higher distribution center expense relating, in part, to start-up costs of the Company's distribution center facility in Louisville, Kentucky (approximately 8% of the increase), additional catalog expense relating to the Company's test of its catalog as a mail order vehicle (approximately 7% of the increase), higher merchandising and design expense (approximately 6% of the increase) and higher packaging and supplies expense (approximately 5% of the increase). The Company returned its catalog format to principally an advertising vehicle, rather than a mail order business, in Fall 1995 and suspended publication of its catalog entirely in early 1996. Operating income decreased to $25,275,000, or 3.5% of net sales, in 1995, from $77,291,000, or 11.7% of net sales, in 1994. Amortization of goodwill from the Acquisition was $9,506,000 in 1995 and 1994. Operating income without giving effect to such amortization was $34,781,000, or 4.8% of net sales, in 1995, and $86,797,000, or 13.2% of net sales, in 1994. Interest expense was $20,956,000, including $1,004,000 of non-cash interest expense, in 1995 and $14,229,000, including $978,000 of non-cash interest expense, in 1994. The increase in interest expense is attributable to higher interest rates applicable to the Company's debt obligations throughout most of the 1995 period and the increase in the Company's long-term debt. The weighted average interest rate on the Company's outstanding indebtedness at February 3, 1996 was 8.26% compared to 8.90% at January 28, 1995. Because a substantial amount of the Company's debt bears interest at variable rates, the Company's interest expense for 1995 is not necessarily indicative of interest expense for future periods. See "Management's Discussion and Analysis--Liquidity and Capital Resources". The income tax provision was $5,157,000, or 120.5% of income before income taxes and extraordinary loss, in the 1995 period compared to $30,274,000, or 48.1% of income before income taxes and extraordinary loss, in 1994. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. As a result of the foregoing factors, the Company had a net loss of $876,000, or 0.1% of net sales, for 1995 compared to net income of $31,752,000, or 4.8% of net sales, for 1994. FISCAL 1994 COMPARED TO FISCAL 1993 The Company's net sales increased to $658,804,000 in 1994 from $501,649,000 in 1993, an increase of $157,155,000, or 31.3%. The increase in net sales was attributable to the inclusion of a full year of operating results for the 13 stores opened and 12 stores expanded during 1993, the opening of 35 new stores and expansion of 25 stores in 1994 and a 13.7% increase in comparable store sales. The 13.7% increase in comparable stores sales was due primarily to customer acceptance of the Company's merchandise offerings in 1994, including product extensions such as Ann Taylor Petites, shoes and "destination". The sales increase was partially offset by the closing of four stores in 1994. Gross profit as a percentage of net sales decreased slightly to 45.7% in 1994 from 45.8% in 1993. This decrease was attributable to increased cost of goods sold resulting from lower initial markups, offset by lower markdowns associated with reduced promotional activities. Selling, general and administrative expenses as a percentage of net sales decreased to 32.5% in 1994 from 33.8% in 1993. The decrease was primarily attributable to the leveraging of fixed four-wall 18 expenses as a result of comparable store sales growth and the leveraging of fixed central expenses over a larger sales base. Such decrease was partially offset by increased expenditures relating primarily to the Company's information systems, expansion of the Company's merchandising and product design teams, and higher catalog expenses. Operating income increased to $77,291,000, or 11.7% of net sales, in 1994, from $49,021,000, or 9.8% of net sales, in 1993. Operating income for 1993 was reduced by a $2,000,000 restructuring charge representing 0.4% of net sales. Amortization of goodwill from the Acquisition was $9,506,000 in 1994 and $9,508,000 in 1993. Operating income without giving effect to such amortization was $86,797,000, or 13.2% of net sales, in 1994, and $58,529,000, or 11.6% of net sales, in 1993. Interest expense was $14,229,000, including $978,000 of non-cash interest expense, in 1994 and $17,696,000, including $4,199,000 of non-cash interest expense, in 1993. The decrease is attributable to lower interest rates applicable to the Company's debt obligations in the 1994 period, resulting principally from refinancing transactions entered into in the Fall of 1993 and Summer of 1994 and the reduction of the Company's long-term debt with the net proceeds from a common stock offering in May 1994. After taking into account the Company's interest rate swap agreement (see Note 2 to the Company's Consolidated Financial Statements), in 1994 all of the Company's debt obligations were at variable rates of interest. The weighted average interest rate on the Company's outstanding indebtedness at January 28, 1995 was 8.90% compared to 6.22% at January 29, 1994. The income tax provision was $30,274,000, or 48.1% of income before income taxes and extraordinary loss, in the 1994 period compared to $17,189,000, or 54.5% of income before income taxes and extraordinary loss, in 1993. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. In connection with the debt refinancing activities undertaken by the Company in 1994 (see Note 9 to the Company's Consolidated Financial Statements), the Company incurred an extraordinary loss of $1,522,000 ($868,000 net of income tax benefit). The Company also incurred an extraordinary loss of $17,244,000 ($11,121,000 net of income tax benefit) in 1993 as a result of debt refinancing activities undertaken in that year. As a result of the foregoing factors, the Company had net income of $31,752,000, or 4.8% of net sales, for 1994 compared to net income of $3,209,000, or 0.6% of net sales, for 1993. CHANGES IN FINANCIAL POSITION Accounts receivable increased to $70,395,000 at the end of 1995 from $61,211,000 at the end of 1994, an increase of $9,184,000, or 15.0%. This increase was primarily attributable to an increase in Ann Taylor credit card receivables, which increased $7,709,000, or 15.5% to $57,440,000 in 1995, primarily as a result of a change in Fiscal 1995 of certain credit card terms, including a decrease in the amount of the minimum monthly payment required to be made on Ann Taylor credit card accounts. Prepaid expenses and other current assets were $12,808,000 at the end of 1995, compared to $6,601,000 at the end of 1994, an increase of $6,207,000 or 94.0%. This increase was partially attributable to increases in the purchase of components for the Company's fragrance and personal care products, prepaid fabric and prepaid store selling supplies. Prepaid tenancy costs increased to $8,099,000 at the end of 1995 from $1,355,000 at the end of 1994, an increase of $6,744,000, primarily due to the timing of payments to landlords, as a result of the inclusion of a fifty-third week in the fiscal calendar for 1995. 19 As indicated above under "Business--Merchandise Design and Production", Cygne Designs, Inc., one of the Company's principal suppliers, disclosed in November 1995 that it is in default of certain provisions of its credit agreements. The Company from time to time has made advances to Cygne in order to assist it in carrying fabric purchases made by Cygne in anticipation of the issuance by the Company of merchandise purchase orders. Advances from the Company to Cygne outstanding at February 3, 1996 totaled approximately $8 million. In the event of a default by Cygne on such Company advances, the Company believes that it would have a right of set-off to the extent of accounts payable by the Company to Cygne for merchandise purchased from Cygne. No assurances can be given that a court would uphold such right of set-off. At February 3, 1996, accounts payable to Cygne totaled approximately $5 million. Prepaid expenses and other current assets referenced above include the net amount of the Company's advances to Cygne. If the CAT/Cygne Transaction is consummated, the Company will assume the liability for these advances, and the purchase price for the assets acquired will be reduced in a like amount. Merchandise inventories increased to $102,685,000 at the end of 1995 from $93,705,000 at the end of 1994, an increase of $8,980,000, or 9.6%. Total square footage increased to approximately 1,651,000 square feet at February 3, 1996 from approximately 1,173,000 square feet at January 28, 1995. Merchandise inventory on a per square foot basis was approximately $62 at the end of Fiscal 1995, compared to approximately $80 at the end of Fiscal 1994, a decrease of approximately 22%. This decrease is a reflection of more conservative inventory management and a reduction in merchandise purchases in reaction to lower sales per square foot productivity. Accounts payable increased to $42,909,000 at the end of 1995 from $36,625,000 at the end of 1994, an increase of $6,284,000. The increase in accounts payable is primarily due to the increase in inventory at the end of 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are cash flow from operations and borrowings under the Company's revolving credit facility under the Bank Credit Agreement and the Receivables Facility described below. The following sets forth material measures of the Company's liquidity: FISCAL YEAR ------------------------------ 1995 1994 1993 ------- -------- ------- (DOLLARS IN THOUSANDS) Cash provided by operating activities........ $ 7,376 $ 17,149 $47,322 Working capital.............................. $86,477 $102,181 $53,283 Current ratio................................ 1.77:1 2.55:1 1.78:1 Debt to equity ratio......................... .84:1 .61:1 .73:1 Cash provided by operating activities decreased in 1995 principally as a result of a decrease in earnings and an increase in merchandise inventories, prepaid expenses and accounts receivable, offset by an increase in accounts payable. Working Capital decreased as a result of an increase in the current portion of long-term debt of $40,266,000 and an increase in accounts payable, offset by an increase in merchandise inventories, prepaid expenses and accounts receivable. In September 1995, the Company entered into the Bank Credit Agreement, that amended and restated the Company's then-existing bank credit agreement. The Bank Credit Agreement provides, among other things, for a $25,000,000 term loan and continuation of a $125,000,000 revolving credit facility provided for under the preceding credit agreement. As described below, the revolving credit facility was reduced to $122,000,000 in January 1996. The principal amount of the term loan is payable 20 on September 29, 1998, and the maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding balance under the revolving credit facility to $50,000,000 or less for a 30-day period in 1996 and in each fiscal year thereafter. At February 3, 1996, the Company had $101,000,000 outstanding under the revolving credit facility. The Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and requirements to maintain certain financial ratios and specified levels of net worth. The Company's ability to satisfy such financial covenants will be dependent upon, among other things, the Company's sales and earnings and the amount of capital expenditures made by the Company. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $25,000,000 in Fiscal 1996 and $32,500,000 in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied. In July 1993, in conjunction with the issuance of the 8 3/4% Notes, 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. The Company is required to pay a rate of 5.375% through the maturity of the swap agreement in July 1996. In November 1995, Ann Taylor and its wholly owned subsidiary, AnnTaylor Distribution Services, Inc. received the proceeds of a $7,000,000 seven-year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $65,000 through December 1, 1997, and thereafter in monthly installments sufficient to amortize the then remaining principal balance over a period of five years. The Bank Credit Agreement required the Company to apply one-half of the proceeds of the mortgage to reduce the amount available under the revolving credit facility and to prepay a portion of the term loan. On October 31, 1995, AnnTaylor Funding, Inc., a wholly owned subsidiary of Ann Taylor, entered into an amended and restated receivables financing agreement (the "Receivables Facility"), refinancing its then-existing receivables financing facility on substantially the same terms as the prior facility. The financial covenants in the new agreement were revised to mirror certain of the financial covenants contained in the Bank Credit Agreement. The Receivables Facility is secured by Ann Taylor credit card receivables, and AnnTaylor Funding, Inc. can borrow up to $40,000,000 under this facility based on its eligible receivables balance. As of February 3, 1996, the maximum of $40,000,000 was outstanding under this facility. The Receivables Facility matures January 1997. The Company expects to negotiate an extension of the maturity of this facility during 1996. The Company's capital expenditures totaled $78,378,000, $61,341,000, and $25,062,000 in Fiscal 1995, 1994 and 1993, respectively. The increase in capital expenditures in 1995 is due primarily to increased spending on new and expanded stores, including two flagship stores, and an increase in the number of expansions of existing stores over the prior year, offset by lower expenditures for the Kentucky distribution center compared to 1994. The Company expects its capital expenditure requirements to be approximately $11,000,000 in 1996. The actual amount of the Company's capital expenditures will depend in part on the number of stores opened, expanded and refurbished and on the amount of construction allowances the Company receives from the landlords of its new or expanded stores. See "Business--Expansion". Dividends and distributions from Ann Taylor to the Company are restricted by the Bank Credit Agreement, the Receivables Facility and the Indenture for the 8 3/4% Notes. As indicated above under "Business--Merchandise Design and Production", in Fiscal 1995 the Company purchased approximately 38% of its merchandise through its CAT sourcing joint venture. 21 CAT obtains its principal working capital financing pursuant to a $40 million loan facility provided by the same bank that provides Cygne with its principal working capital facility. Such loan facility expires in May 1996 and there can be no assurance that CAT will be able to renew such facility. Although CAT currently is in compliance with the terms of its credit agreement, the agreement contains a cross-default provision relating to defaults under other indebtedness of CAT or Cygne. As a result of Cygne's default under its bank credit agreement described above under "Business-- Merchandise Design and Production", CAT's current lender presently has the right to cancel CAT's $40 million credit facility and to demand immediate repayment of all amounts outstanding under that facility. If CAT's lender were to take such action, CAT would require alternate financing in order to meet such obligations and to continue to operate its business as presently conducted. The Company believes that such alternate financing would be available for CAT. However, if CAT's existing lender were to exercise its right to cancel CAT's facility or were not to renew such facility and CAT were unable to obtain such replacement financing, the interruption or cessation of business by CAT could have a material adverse effect on the Company. Ann Taylor has outstanding a $4 million standby letter of credit to support CAT's obligations to its principal lender. The lender has the right under certain circumstances to draw on such letter of credit to cover unpaid principal and interest owed by CAT. In order to finance its operations and capital requirements, the Company expects to use internally generated funds, trade credit and funds available to it under the Bank Credit Agreement and the Receivables Facility. The Company typically purchases merchandise from its suppliers on terms requiring payment to the suppliers within 30 days after the Company's receipt of the merchandise, or, in the case of CAT, within a shorter period after such receipt. The Company did not experience any change in trade terms with its suppliers in 1995, nor does it anticipate any changes in trade terms in the future. However, if some or all of the Company's suppliers were to demand shorter payment terms, the Company's working capital needs would increase. Subject to there being no material change in the Company's trade terms with its suppliers and CAT's ability to continue to obtain financing for its operations, the Company believes that cash flow from operations and funds available under the Bank Credit Agreement and the Receivables Facility are sufficient to enable it to meet its ongoing cash needs for its business, as presently conducted, for the foreseeable future. The Company is exploring various financing opportunities to improve its financial flexibility, including continuing to pursue financing a portion of its capital expenditures and investments through fixture and equipment lease financing arrangements, realizing greater liquidity from its Ann Taylor credit card receivables portfolio, and the possible public or private issuance of additional debt or equity securities. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and No. 123, "Accounting for Stock-Based Compensation". The Company believes that these statements will not have a material impact on the financial statements of the Company when adopted in Fiscal 1996. RECENT DEVELOPMENTS In Fiscal 1995, the Company purchased approximately 16% of its merchandise directly from Cygne and an additional 38% of its merchandise through CAT, the Company's direct sourcing joint venture which is 40% owned by the Company and 60% owned by Cygne. The Company and Cygne have entered into the CAT/Cygne Agreement pursuant to which the Company, through a newly formed subsidiary, will purchase the CAT Shares and the Cygne Sourcing Business. Upon consummation of the 22 CAT/Cygne Transaction, CAT will become an indirect wholly owned subsidiary of the Company and, in addition to continuing its own sourcing activities on behalf of the Company, will own the Assets of the Division and will perform the Cygne Sourcing Business. The aggregate consideration to be paid by the Company pursuant to the CAT/Cygne Transaction consists of (i) shares of Common Stock of the Company having a market price, based on the closing price of the Company's Common Stock for the ten trading days prior to the closing of the CAT/Cygne Transaction, of $36 million (but in no event greater than 2.5 million shares), and (ii) cash in an amount equal to the tangible net book value of the inventory and fixed assets included in the Assets, less certain assumed liabilities, currently estimated to be approximately $12.9 million. In addition, the Company will assume the obligation to make payment to the president of CAT of approximately $2.0 million becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction. As part of the CAT/Cygne Transaction, the Company will offer to hire certain Division employees, and will enter into a new employment agreement with Mr. Dwight Meyer, President of CAT. The Company will also assume the payment to Mr. Meyer of amounts due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction. In addition, in order to facilitate the integration of CAT and the Cygne Sourcing Business into the Company's operations, the Company will enter into two 3-year consulting agreements with Cygne for the services of Mr. Bernard Manuel, Chief Executive Officer of Cygne, and Mr. Irving Benson, President of Cygne, with aggregate annual payments of $450,000 for such services, pursuant to which Mr. Manuel will provide advice with regard to sourcing particularly in Hong Kong and Asia, and Mr. Benson will provide advice with regard to design, merchandising and product development. The closing of the CAT/Cygne Transaction is subject to various conditions, including (i) the negotiation and execution of definitive documentation, (ii) the consent and release of liens by each of HongKong and Shanghai Banking Corporation and certain other lenders to Cygne, (iii) the continuation of CAT's $40 million credit facility by HongKong and Shanghai Banking Corporation, its current lender, (iv) the consent of Ann Taylor's lenders under the Bank Credit Agreement, (v) the approval of the transaction by Cygne's stockholders and (vi) the consummation of an offering under Rule 144A described below by the Company with proceeds of $75 million less underwriting discounts and commissions (the "144A Offering"). It is currently anticipated that the CAT/Cygne Transaction will close in July 1996. However, there can be no assurance that the conditions to closing will be satisfied or that the CAT/Cygne Transaction will be consummated. Upon the closing of the CAT/Cygne Transaction, Cygne and the Company will enter into a stockholders agreement pursuant to which (i) the shares of Common Stock of the Company to be acquired by Cygne will not be transferable until 30 days after expiration of the lock-up period applicable to the 144A Offering (except pursuant to a pledge to Cygne's lenders), (ii) Cygne will receive shelf registration rights for the resale of such shares upon termination of the period referred to in clause (i), and (iii) Cygne will be subject to a three-year standstill agreement. The standstill agreement, among other things, (i) places certain restrictions on Cygne's ability to engage in a proxy contest, propose a change in control or otherwise seek to influence or control the Company, and (ii) limits Cygne's ability to sell more than 2% of the outstanding Common Stock of the Company in a two-week period other than pursuant to a tender offer, a class action court settlement, a pro rata dividend or other pro rata distribution to all Cygne stockholders upon liquidation of Cygne or otherwise, or pursuant to an underwritten public offering (in which certain further limits apply on sales to holders of 5% or more of the outstanding Common Stock of the Company and on sales of more than 2% of the outstanding Common Stock of the Company to any single purchaser or group of related purchasers). The Company believes that the CAT/Cygne transaction will mitigate supply interruption risks arising from the financial difficulties experienced by Cygne in 1995. Moreover, the CAT/Cygne Transaction furthers the Company's strategy of increasing its control over pre-production processes and 23 production management in order to shorten lead times, improve merchandise quality and reduce costs. See "Business--Business Strategy". The Company believes that the integration of CAT's business and the Cygne Sourcing Business with the Company's operations will enable CAT and the Cygne Sourcing Business to share their respective strengths in different areas of pre-production processes and production management, such as CAT's system of statistical quality control and Cygne's strength in fabric development. In addition, the CAT/Cygne Transaction provides a platform for the Company to standardize its pre-production work for its other suppliers, which the Company believes will lead to greater consistency in merchandise production, product fit specifications and quality control. Finally, the Company believes that greater control over pre-production processes and production management will improve logistical coordination of the entire supply chain process, thereby reducing production cycle times and sourcing costs. The Company will form AnnTaylor Finance Trust, a Delaware business trust, to offer securities not registered or required to be registered under the Securities Act of 1933. The Trust proposes to offer up to 1.5 million convertible preferred securities with a liquidation preference of $50 each and to grant the initial purchasers an option to purchase an additional 225,000 convertible preferred securities to cover over-allotments. The Company will own all of the common securities of the Trust. The securities will represent undivided beneficial ownership interests in the Trust. The assets of the Trust will consist solely of the Company's Convertible Subordinated Debentures due 2016. The convertible preferred securities will be convertible at the option of the holders thereof into Common Stock of the Company. The Company plans to use the proceeds of the offering to reduce borrowings outstanding under the revolving credit facility without reduction of the commitment thereunder. If the CAT/Cygne Transaction is consummated, Ann Taylor may reborrow funds under the revolving credit facility to fund the cash portion of the purchase price and related payments and expenses. The convertible preferred securities will be sold in the United States and outside the United States in a private placement under Rule 144A and Regulation S, respectively, and have not been and will not be registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 24 ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995. Consolidated Statements of Stockholders' Equity for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Section entitled "Nominees for Election as Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors", "Executive Compensation" and "Employment Contracts" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors and Related Matters" and "Compensation Committee Report on Executive Compensation--Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders. 26 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 31 through 48 and are filed as part of this Annual Report: Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994; Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995; Consolidated Statements of Stockholders' Equity for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994; Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994; Notes to Consolidated Financial Statements; Independent Auditors' Report. (b) Reports on Form 8-K None. (c) Exhibits The exhibits listed below are filed as a part of this Annual Report.
EXHIBIT NUMBER - -------------- 3.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission (the "Commission") on August 10, 1992 (Registration No. 33-50688). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to the Form 10-Q of the Company for the Quarter ended November 2, 1991 filed on December 17, 1991 (Registration No. 33-28522). 4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993. 4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. 10.1 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 4.3 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522). 10.2 Amended and Restated Credit Agreement, dated as of September 29, 1995, among Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), and Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.2.1 First Amendment to Amended and Restated Credit Agreement, dated as of January 4, 1996, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent.
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EXHIBIT NUMBER - -------------- 10.3 Amended and Restated Guaranty, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.4 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.5 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.6 Trademark Security Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.7 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.7.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1993. 10.8 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.8.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of the Company filed on April 11, 1991 (Registration No. 33-39905). 10.8.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company filed on April 29, 1993. 10.8.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.8.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.8.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.9 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of the Company and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.10 Employment Agreement, 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. 10.10.1 Employment Agreement dated as of February 1, 1994 between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended October 29, 1994 filed on December 9, 1994. 10.11 Employment Agreement dated February 16, 1996 between the Company and J. Patrick Spainhour. 10.12 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan Amended and Restated as of February 23, 1994. Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on June 30, 1994 (Registration No. 33-50688).
28
EXHIBIT NUMBER - -------------- 10.13 Amended and Restated Management Performance Compensation Plan as approved by stockholders on June 1, 1994. Incorporated by reference to Exhibit 10.22.1 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.13.1 Amendment to the AnnTaylor Stores Corporation Management Performance Compensation Plan dated as of February 24, 1995. Incorporated by reference to Exhibit 10.22.2 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.14 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of the Company for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.15 Interest Rate Swap Agreement dated as of July 22, 1993, between Ann Taylor and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.16 Stock Purchase Agreement, dated as of July 13, 1993, between Ann Taylor and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.17 Agreement, dated July 13, 1993, among Cygne Designs, Inc., CAT US, Inc., C.A.T. (Far East) Limited and Ann Taylor. Incorporated by reference to Exhibit 10.8 to the 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.) 10.18 Amended and Restated Receivables Financing Agreement dated October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.31.4 to the Form 10-Q of the Company for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.19 Purchase and Sale Agreement dated as of January 27, 1994 between Ann Taylor and AnnTaylor Funding, Inc. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of the Company filed on March 31, 1994. 10.20 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.20.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the Company for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.21 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.22 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 99 Unaudited Historical and Pro Forma Combined Financial Statements
29 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/ SALLY FRAME KASAKS .................................. Sally Frame Kasaks Chairman and Chief Executive Officer Date: April 8, 1996 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 April 8, 1996 .............................................. Officer and Director Sally Frame Kasaks /S/ J. PATRICK SPAINHOUR President, Chief Operating April 8, 1996 .............................................. Officer and Director J. Patrick Spainhour /S/ PAUL E. FRANCIS Executive Vice President-- April 8, 1996 .............................................. Finance and Paul E. Francis Administration, Chief Financial Officer, and Director /S/ WALTER J. PARKS Senior Vice President-- April 8, 1996 .............................................. Finance and Principal Walter J. Parks Accounting Officer /S/ GERALD S. ARMSTRONG Director April 8, 1996 .............................................. Gerald S. Armstrong /S/ JAMES J. BURKE, JR. Director April 8, 1996 .............................................. James J. Burke, Jr. /S/ ROBERT C. GRAYSON Director April 8, 1996 .............................................. Robert C. Grayson /S/ ROCHELLE B. LAZARUS Director April 8, 1996 .............................................. Rochelle B. Lazarus /S/ HANNE M. MERRIMAN Director April 8, 1996 .............................................. Hanne M. Merriman
30 ANNTAYLOR STORES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report.............................................. 32 Consolidated Financial Statements: Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994................... 33 Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995...................................................................... 34 Consolidated Statements of Stockholders' Equity for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994............. 35 Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994................... 36 Notes to Consolidated Financial Statements............................ 37 31 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 February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York March 11, 1996 (April 8, 1996 as to Note 15) 32 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 1996,
FISCAL YEARS ENDED -------------------------------------------------------- FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994 ---------------- ---------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales..................................... $731,142 $658,804 $501,649 Cost of sales................................. 425,225 357,783 271,749 ---------------- ---------------- ---------------- Gross profit.................................. 305,917 301,021 229,900 Selling, general and administrative expenses...................................... 271,136 214,224 169,371 Distribution center restructuring charge...... -- -- 2,000 Amortization of goodwill...................... 9,506 9,506 9,508 ---------------- ---------------- ---------------- Operating income.............................. 25,275 77,291 49,021 Interest expense.............................. 20,956 14,229 17,696 Other (income) expense, net................... 38 168 (194) ---------------- ---------------- ---------------- Income before income taxes and extraordinary loss.......................................... 4,281 62,894 31,519 Income tax provision.......................... 5,157 30,274 17,189 ---------------- ---------------- ---------------- Income (loss) before extraordinary loss....... (876) 32,620 14,330 Extraordinary loss (net of income tax benefit of $654,000 and $6,123,000, respectively)... -- 868 11,121 ---------------- ---------------- ---------------- Net income (loss)....................... $ (876) $ 31,752 $ 3,209 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Net income (loss) per share of common stock: Income (loss) per share before extraordinary loss.......................................... $ (.04) $ 1.40 $ .66 Extraordinary loss per share.................. -- (.04) (.51) ---------------- ---------------- ---------------- Net income (loss) per share............. $ (.04) $ 1.36 $ .15 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Weighted average shares and share equivalents outstanding................................... 23,209 23,286 21,929
See accompanying notes to consolidated financial statements. 33 ANNTAYLOR STORES CORPORATION CONSOLIDATED BALANCE SHEETS FEBRUARY 3, 1996 AND JANUARY 28, 1995
FEBRUARY 3, JANUARY 28, 1996 1995 ----------- ----------- (IN THOUSANDS) ASSETS Current assets Cash................................................................ $ 1,283 $ 1,551 Accounts receivable, net............................................ 70,395 61,211 Merchandise inventories............................................. 102,685 93,705 Prepaid expenses and other current assets........................... 12,808 6,601 Prepaid tenancy..................................................... 8,099 1,355 Deferred income taxes............................................... 3,400 3,650 ----------- ----------- Total current assets.......................................... 198,670 168,073 Property and equipment Land and buildings.................................................. 8,923 499 Leasehold improvements.............................................. 73,677 43,370 Furniture and fixtures.............................................. 99,548 59,105 Construction in progress............................................ 14,190 24,867 ----------- ----------- 196,338 127,841 Less accumulated depreciation and amortization...................... 42,443 31,503 ----------- ----------- Net property and equipment.................................... 153,895 96,338 Goodwill, net of accumulated amortization of $66,725,000 and $57,219,000, respectively............................................. 313,525 323,031 Investment in CAT..................................................... 5,438 3,792 Deferred income taxes................................................. -- 1,600 Deferred financing costs, net of accumulated amortization of $1,960,000 and $956,000, respectively............................... 3,933 2,829 Other assets.......................................................... 3,248 2,591 ----------- ----------- Total assets.................................................. $ 678,709 $ 598,254 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.................................................... $ 42,909 $ 36,625 Accrued expenses.................................................... 29,018 29,267 Current portion of long-term debt................................... 40,266 -- ----------- ----------- Total current liabilities..................................... 112,193 65,892 Long-term debt........................................................ 232,192 200,000 Deferred income taxes................................................. 1,300 -- Other liabilities..................................................... 7,336 6,250 Commitments and contingencies Stockholders' equity Common stock, $.0068 par value; 40,000,000 shares authorized; 23,127,743 and 23,106,572 shares issued, respectively............ 157 157 Additional paid-in capital.......................................... 311,284 310,714 Warrants to acquire 36,605 and 58,412 shares of common stock, respectively..................................................... 596 951 Retained earnings................................................... 14,120 14,996 Deferred compensation on restricted stock........................... (33) (149) ----------- ----------- 326,124 326,669 Treasury stock, 44,983 and 65,843 shares, respectively, at cost........................................................ (436) (557) ----------- ----------- Total stockholders' equity.................................... 325,688 326,112 ----------- ----------- Total liabilities and stockholders' equity.................... $ 678,709 $ 598,254 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 34 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994 (IN THOUSANDS)
RETAINED EARNINGS COMMON STOCK ADDITIONAL WARRANTS (ACCUM- NOTE RESTRICTED TREASURY STOCK -------------- PAID-IN -------------- ULATED DUE FROM STOCK --------------- SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT) STOCKHOLDER AWARDS SHARES AMOUNT ------ ------ ---------- ------ ------ -------- ----------- ---------- ------ ------- Balance at January 30, 1993....... 21,158 $144 $ 261,820 512 $8,341 $(19,965) $(999) $ (398) 523 $(3,645) Net income........................ -- -- -- -- -- 3,209 -- -- -- -- Exercise of stock options......... 745 5 6,121 -- -- -- -- -- -- -- Tax benefits related to stock options........................... -- -- 3,240 -- -- -- -- -- -- -- Exercise of warrants.............. -- -- 550 (66) (963 ) -- -- -- (66) 413 Activity related to common stock issued as employee incentives.... -- -- 79 -- -- -- -- 279 (6) 41 Repayment of note due from stockholder....................... -- -- -- -- -- -- 999 -- -- -- ------ ------ ---------- ------ ------ -------- ----- ----- ------ ------- Balance at January 29, 1994....... 21,903 149 271,810 446 7,378 (16,756) -- (119) 451 (3,191) Net income........................ -- -- -- -- -- 31,752 -- -- -- -- Exercise of stock options......... 191 2 2,915 -- -- -- -- -- 3 (118) Tax benefits related to stock options........................... -- -- 1,565 -- -- -- -- -- -- -- Exercise of warrants.............. -- -- 3,675 (388) (6,427) -- -- -- (388) 2,752 Issuance of common stock.......... 1,000 6 30,414 -- -- -- -- -- -- -- Activity related to common stock issued as employee incentives.... 13 -- 335 -- -- -- -- (30) -- -- ------ ------ ---------- ------ ------ -------- ----- ----- ------ ------- Balance at January 28, 1995....... 23,107 157 310,714 58 951 14,996 -- (149) 66 (557) Net loss.......................... -- -- -- -- -- (876) -- -- -- -- Exercise of stock options......... 23 -- 320 -- -- -- -- -- -- (12) Tax benefits related to stock options........................... -- -- 85 -- -- -- -- -- -- -- Exercise of warrants.............. -- -- 203 (21) (355 ) -- -- -- (22) 152 Activity related to common stock issued as employee incentives.... (2) -- (38) -- -- -- -- 116 1 (19) ------ ------ ---------- ------ ------ -------- ----- ----- ------ ------- Balance at February 3, 1996....... 23,128 $157 $ 311,284 37 $ 596 $ 14,120 $ -- $ (33) 45 $ (436) ------ ------ ---------- ------ ------ -------- ----- ----- ------ ------- ------ ------ ---------- ------ ------ -------- ----- ----- ------ -------
See accompanying notes to consolidated financial statements. 35 ANNTAYLOR STORES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
FISCAL YEARS ENDED ----------------------------------------- FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) Operating activities: Net income (loss)......................................... $ (876) $ 31,752 $ 3,209 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss.................................... -- 1,522 17,244 Distribution center restructuring charge.............. -- -- 2,000 Equity earnings in CAT................................ (1,646) (1,547) (517) Provision for loss on accounts receivable............. 1,280 1,727 1,171 Depreciation and amortization......................... 18,788 11,787 8,505 Amortization of goodwill.............................. 9,506 9,506 9,508 Amortization of deferred compensation................. 68 298 279 Non-cash interest..................................... 1,004 978 4,199 Deferred income taxes................................. 3,150 -- (1,750) Loss on disposal of property and equipment............ 1,143 1,268 312 Increase in receivables............................... (10,464) (13,659) (7,447) Increase in merchandise inventories................... (8,980) (32,815) (10,583) Increase in prepaid expenses and other current assets.............................................. (12,951) (772) (1,280) Decrease in refundable income taxes................... -- -- 5,097 Increase in accounts payable and accrued liabilities......................................... 6,925 6,537 18,218 Decrease (increase) in other non-current assets and liabilities, net.................................... 429 567 (843) ----------- ----------- ----------- Net cash provided by operating activities................. 7,376 17,149 47,322 ----------- ----------- ----------- Investing activities: Purchases of property and equipment....................... (78,378) (61,341) (25,062) Investment in CAT......................................... -- -- (1,640) ----------- ----------- ----------- Net cash used by investing activities..................... (78,378) (61,341) (26,702) ----------- ----------- ----------- Financing activities: Borrowings (repayments) under revolving credit facility... 37,000 64,000 (3,500) Decrease in bank overdrafts............................... -- -- (2,361) Payments of long-term debt................................ (542) (56,000) (137,610) Purchase of Subordinated Debt Securities.................. -- -- (93,689) Net proceeds from issuance of common stock................ -- 30,420 -- Net proceeds from 8 3/4% Notes............................ -- -- 107,387 Proceeds from term loan................................... 25,000 -- 80,000 Proceeds from note due from stockholder................... -- -- 999 Proceeds from mortgage.................................... 7,000 -- -- Proceeds from Receivables Facility........................ 4,000 3,000 33,000 Purchase of 8 3/4% Notes.................................. -- -- (10,225) Proceeds from exercise of stock options................... 384 4,371 9,486 Payment of financing costs................................ (2,108) (340) (4,041) ----------- ----------- ----------- Net cash provided by (used by) financing activities....... 70,734 45,451 (20,554) ----------- ----------- ----------- Net increase (decrease) in cash............................ (268) 1,259 66 Cash, beginning of year.................................... 1,551 292 226 ----------- ----------- ----------- Cash, end of year.......................................... $ 1,283 $ 1,551 $ 292 ----------- ----------- ----------- ----------- ----------- ----------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest.................... $ 19,607 $ 13,211 $ 12,664 ----------- ----------- ----------- ----------- ----------- ----------- Cash paid during the year for income taxes................ $ 6,886 $ 26,242 $ 5,114 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 36 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 1994 and 1993 amounts have been reclassified to conform to the Fiscal 1995 presentation. FISCAL YEAR The Company follows the standard fiscal year of the retail industry, which is a 52-or 53-week period ending on the Saturday closest to January 31 of the following calendar year. The fiscal year ended February 3, 1996 included 53 weeks. FINANCE SERVICE CHARGE INCOME Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $8,328,000 for Fiscal 1995, $6,871,000 for Fiscal 1994, and $6,166,000 for Fiscal 1993. 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. The Company capitalized interest costs of approximately $1,300,000 and $500,000 in Fiscal 1995 and Fiscal 1994, respectively. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter. PRE-OPENING EXPENSES Pre-opening store expenses are charged to selling, general and administrative expenses in the period incurred. 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. On an annual basis the Company compares the carrying value of its goodwill to an estimate of the Company's fair value to evaluate the reasonableness of the carrying value and remaining amortization period. Fair value is computed using projections of future cash flows. 37 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) The Financial Accounting Standards Board issued in March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company believes this statement will not have a material impact on the financial statements of the Company when adopted in Fiscal 1996. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. NET INCOME PER SHARE Net income per share is calculated by dividing net income 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. LONG-TERM DEBT The following summarizes long-term debt outstanding at February 3, 1996 and January 28, 1995:
FEBRUARY 3, 1996 JANUARY 28, 1995 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) Senior Debt: Revolving credit facility...................... $101,000 $ 101,000 $ 64,000 $ 64,000 Term loan...................................... 24,500 24,500 -- -- Mortgage....................................... 6,958 6,958 -- -- 8 3/4% Notes..................................... 100,000 83,125 100,000 97,000 Interest rate swap agreement..................... -- 384 -- 4,125 Receivables facility............................. 40,000 40,000 36,000 36,000 -------- ---------- -------- ---------- Total debt................................. 272,458 255,967 200,000 201,125 Less current portion............................. 40,266 40,266 -- -- -------- ---------- -------- ---------- Total long-term debt....................... $232,192 $ 215,701 $200,000 $ 201,125 -------- ---------- -------- ---------- -------- ---------- -------- ----------
In September 1995, Ann Taylor entered into an amended and restated credit agreement (the "Bank Credit Agreement") to replace its then-existing bank credit agreement. The Bank Credit Agreement provides, among other things, for a $25,000,000 term loan and continuation of a 38 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. LONG-TERM DEBT--(CONTINUED) $125,000,000 revolving credit facility provided for under the preceding credit agreement. As described below, the revolving credit facility was reduced to $122,000,000 in January 1996. The principal amount of the term loan is payable on September 29, 1998, and the maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding loan balance under the revolving credit facility to $50,000,000 or less for thirty consecutive days during Fiscal 1996 and in each fiscal year thereafter. The maximum amount that may be borrowed under the revolving credit facility is reduced by the amount of commercial and standby letters of credit outstanding. At February 3, 1996 the amount available under the revolving credit facility was $13,150,000. The term loan bears interest at a rate equal to, at the Company's option, the Bank of America National Trust and Savings Association ("Bank of America") (1) Base Rate plus 2.50%, or (2) Eurodollar Rate plus 3.50%, and amounts outstanding under the revolving credit facility bear interest at a rate equal to, at the Company's option, the Bank of America (1) Base Rate plus .75%, or (2) Eurodollar Rate plus 1.75%. In addition, Ann Taylor is required to pay Bank of America a quarterly commitment fee of 0.375% per annum of the unused revolving loan commitment. At February 3, 1996, the $101,000,000 outstanding under the revolving credit facility bore interest at the weighted average rate of 7.46% per annum and the $24,500,000 outstanding under the term loan bore interest at 8.875% per annum. Under the terms of the Bank Credit Agreement, Bank of America obtained a pledge of Ann Taylor's outstanding common stock held by the Company and a security interest in certain assets of the Company, excluding inventory and accounts receivable. In addition, the Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and maintaining certain financial ratios and specified levels of net worth. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $25,000,000 in Fiscal 1996 and $32,500,000 in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied. Since the fourth quarter of 1993, Ann Taylor sells its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary of Ann Taylor, which uses the receivables to secure borrowings under a receivables financing facility due January 1997. In October 1995, AnnTaylor Funding, Inc. entered into an amended and restated receivables financing agreement (the "Receivables Facility"), refinancing its then existing receivables financing facility on substantially the same terms as the prior facility. AnnTaylor Funding, Inc. can borrow up to $40,000,000 under the Receivables Facility based on its eligible accounts receivable balance. As of February 3, 1996, $40,000,000 was outstanding under the Receivables Facility. The interest rate under this facility as of February 3, 1996 was 7.0%. At February 3, 1996, AnnTaylor Funding, Inc. had total assets of approximately $58,091,000 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% Subordinated Notes due 2000 ("8 3/4% Notes"). The outstanding principal amount of these notes as of February 3, 1996 was $100,000,000. In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement, which had the effect of converting the Company's interest obligations on the 8 3/4% Notes to a variable rate. Under the agreement, the Company receives a fixed rate of 4.75% and pays a floating rate based on LIBOR, as determined in six month intervals. The swap agreement matures in July 1996. 39 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. LONG-TERM DEBT--(CONTINUED) Ann Taylor is currently receiving a fixed rate of 4.75% and paying a rate of 5.375%. Net receipts or payments under the agreement are recognized as an adjustment to interest expense. In November 1995, Ann Taylor and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. received the proceeds of a $7,000,000 seven-year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $65,000 through December 1, 1997, and thereafter in monthly installments sufficient to amortize the then remaining principal balance over a period of five years. The Bank Credit Agreement required the Company to reduce the commitment under the revolving credit facility and term loan by one-half the proceeds from the mortgage. The aggregate principal payments of all long-term obligations are as follows: FISCAL YEAR (IN THOUSANDS) - ---------- 1996......................................... $ 40,266 1997......................................... 287 1998......................................... 125,809 1999......................................... 333 2000......................................... 100,359 2001 and thereafter.......................... 5,404 -------------- Total..................................... $272,458 -------------- -------------- At February 3, 1996 and January 28, 1995, Ann Taylor had outstanding commercial and standby letters of credit under its credit facilities with Bank of America totaling $7,850,000 and $6,430,000, respectively. 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 and interest rate swap using quoted market information, as available. As judgment is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of activity in the allowance for doubtful accounts for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 is as follows: FISCAL YEARS ENDED ---------------------------------------------------- FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994 ---------------- ---------------- ---------------- (IN THOUSANDS) Balance at beginning of year....................... $ 931 $ 787 $ 1,006 Provision for loss on accounts receivable...... 1,280 1,727 1,171 Accounts written off....... (1,475) (1,583) (1,390) ------- ------- ------- Balance at end of year..... $ 736 $ 931 $ 787 ------- ------- ------- ------- ------- ------- 40 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. COMMITMENTS AND CONTINGENCIES RENTAL COMMITMENTS Ann Taylor occupies its retail stores and administrative facilities under operating leases, most of which are non-cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the leases require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. 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-cancelable operating leases at February 3, 1996 are as follows: FISCAL YEAR (IN THOUSANDS) - ----------- 1996........................................... $ 54,592 1997........................................... 53,745 1998........................................... 52,041 1999........................................... 49,500 2000........................................... 46,389 2001 and thereafter............................ 240,858 -------------- Total....................................... $497,125 -------------- -------------- Rent expense for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 was as follows: FISCAL YEARS ENDED ---------------------------------------------------- FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994 ---------------- ---------------- ---------------- (IN THOUSANDS) Minimum rent........... $ 47,132 $ 35,382 $ 28,076 Percentage rent........ 3,090 4,684 3,343 -------- -------- -------- Total.............. $ 50,222 $ 40,066 $ 31,419 -------- -------- -------- -------- -------- -------- DEPENDENCY ON CERTAIN SUPPLIERS In 1995, the Company purchased 38.3% and 16.3% of its merchandise from CAT U.S., Inc. ("CAT") and Cygne Designs, Inc. ("Cygne"), respectively (See Note 11 and Note 15). CAT is a joint venture formed by the Company with Cygne for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. As of February 3, 1996, the Company owned a 40% interest in CAT. CAT has a loan facility in place with the same bank as Cygne and, although CAT has represented that it is in compliance with the terms of its credit agreement, the agreement contains a cross-default provision relating to defaults under other indebtedness of CAT or Cygne. Currently, Cygne is in default of its credit agreement and CAT's lender has the right to cancel its $40 million credit facility with CAT and demand repayment of all amounts outstanding under the facility. Should the lender exercise such right and if CAT was unable to obtain alternative financing, the interruption or cessation of business by CAT could have a material adverse effect on the consolidated financial statements of the Company in an amount not presently determinable. 41 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. COMMITMENTS AND CONTINGENCIES--(CONTINUED) In addition, Ann Taylor has outstanding a $4 million standby letter of credit to support CAT's obligations to its lender under the above mentioned credit facility. While the Company has made significant purchases of merchandise from Cygne in 1995, management believes that, if Cygne were to experience problems in fulfilling its merchandise commitments, alternative sources of product could be obtained and such interruption would not have a material adverse effect on the consolidated financial statements of the Company. Additionally, three other sources accounted for approximately 15% of the Company's 1995 purchases. Management of the Company believes that if these sources of product were interrupted, alternative sources could be obtained without a material adverse effect on the consolidated financial statements of the Company. LITIGATION 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 consolidated financial statements of the Company. 5. COMMON STOCK WARRANTS At February 3, 1996, the Company had outstanding warrants to acquire, in the aggregate, 36,605 shares of the common stock of the Company (the "Warrants"). The Warrants, when exercised, entitle the holders thereof to acquire such shares, subject to adjustment, at no additional cost. The Warrants expire on July 15, 1999 and became exercisable as a result of the initial public offering of the Company's common stock in May 1991. 6. PREFERRED STOCK At February 3, 1996, January 28, 1995 and January 29, 1994, there were 2,000,000 shares of preferred stock, par value $.01, authorized and unissued. 7. 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 market value of the common stock on the date of grant. 156,203 shares of common stock are reserved for issuance under the 1989 plan and 1,456,600 shares of common stock are reserved for issuance under the 1992 plan. At February 3, 1996, there were 19,357 shares under the 1989 plan and 239,269 shares under the 1992 plan available for future grant. Generally, options granted under the plans expire ten years from the date of the grant. 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. 42 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. STOCK OPTION PLANS--(CONTINUED) The following summarizes stock option transactions for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994: OPTION PRICES NUMBER OF SHARES --------------- ---------------- 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) Canceled................................ $6.80-$22.25 (86,426) ---------------- Outstanding Options January 29, 1994...... $6.80-$26.00 909,312 Granted................................. $25.375-$42.75 787,500 Exercised............................... $6.80-$28.00 (190,771) Canceled................................ $6.80-$28.00 (108,035) ---------------- Outstanding Options January 28, 1995...... $6.80-$42.75 1,398,006 Granted................................. $12.50-$44.125 478,250 Exercised............................... $6.80-$22.75 (22,611) Canceled................................ $6.80-$42.75 (299,468) ---------------- Outstanding Options February 3, 1996...... $6.80-$44.125 1,554,177 ---------------- ---------------- At February 3, 1996, January 28, 1995 and January 29, 1994 there were exercisable 586,135 options, 461,669 options and 516,889 options, respectively. In 1994, the Company's 1992 stock option plan was amended and restated to include restricted stock and unit awards. On February 23, 1994, 13,630 shares of restricted stock and 6,820 restricted units were awarded. The restrictions on these grants lapse with respect to one-third of the shares and units awarded on each of the first through third anniversaries of the date of the grant. In the event a grantee terminates employment with the Company, any restricted stock or restricted units remaining subject to restrictions are forfeited. As of February 3, 1996, 6,643 shares of restricted stock and 3,324 restricted units were outstanding. The resulting unearned compensation expense was charged to stockholders' equity and is being amortized over the applicable restricted period. The Financial Accounting Standards Board issued in October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires companies to either (i) expense the fair value of stock-based awards on the date of grant or (ii) follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations, the existing accounting rules, provided that proforma disclosures are made of net income and earnings per share determined as if the fair value method under SFAS 123 had been adopted. Under APB 25, the Company currently does not recognize compensation expense for its stock options plans as the exercise price equals the market price of the underlying stock on the date of grant. Additionally, the measurement of compensation expense required by SFAS 123 for restricted stock is consistent with practice under APB 25, expensing the fair value at the date of grant over the vesting period. The Company expects to elect to continue to account for stock-based compensation in accordance with APB 25, and accordingly, this statement will have no effect on the financial statements of the Company when adopted in fiscal 1996. 8. EXECUTIVE COMPENSATION As of February 3, 1992, the Chairman of the Board and Chief Executive Officer of the Company received 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 was amortized over the restricted period applicable to these shares. As of January 28, 1995, unearned compensation expense was fully amortized. 43 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. EXECUTIVE COMPENSATION--(CONTINUED) Effective February 1, 1994, the Company and the Chairman and Chief Executive Officer of the Company entered into a new employment agreement (the "1994 Agreement"). Pursuant to the 1994 Agreement, the Company advanced the Chairman and Chief Executive Officer the sum of $500,000, which bears interest at the rate of 7.32% per annum compounded semi-annually. All principal and accrued interest on the loan is due January 31, 1999, or otherwise forgiven if the Chairman and Chief Executive Officer fulfills the requirements of the 1994 Agreement. 9. EXTRAORDINARY ITEMS On May 18, 1994, the Company completed a public offering of 1,000,000 shares of common stock (the "Offering") at a price of $32.00 per share, resulting in aggregate net proceeds of $30,420,000 (after payment of underwriting discounts and expenses of the Offering payable by the Company). As required by the Company's then-existing bank credit agreement, $30,000,000 of the net proceeds of the Offering were used to reduce the amount of a term loan outstanding under that agreement. The write-off of deferred financing costs associated with the payment on the term loan with the proceeds of the Offering and refinancing of long-term debt resulted in an extraordinary loss of $1,522,000 ($868,000 net of income tax benefit). Pro forma income before extraordinary loss, income before extraordinary loss per share and weighted average shares outstanding, assuming the Offering had occurred at the beginning of the year, would have been $32,875,000, $1.40 and 23,536,000, respectively. The Offering was consummated concurrently with the public offering and sale by certain affiliates of Merrill Lynch & Co., Inc. ("ML&Co.") (the "Selling Stockholders") of 4,075,000 shares of the Company's common stock held by them. The Company did not receive any of the proceeds of the shares sold by the Selling Stockholders. 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 its 8 3/4% Notes and the write-off of deferred financing costs. 10. 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. The relocation was completed by late spring 1995. 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES At February 3, 1996, certain affiliates of ML&Co. held approximately 26.7% of the outstanding common stock. Two of the members of the Board of Directors of the Company and Ann Taylor serve as representatives of ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a position to influence the management of Ann Taylor and the Company. The Company paid commissions aggregating approximately $2,692,000 to Merrill Lynch in 1993 in connection with the issuance of the 8 3/4% Notes, and repurchases of Discount Notes, Notes and 8 3/4% 44 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--(CONTINUED) Notes. In 1994, the Company also paid underwriting commissions of approximately $1,027,000 to Merrill Lynch in connection with the Offering. The Company agreed to indemnify Merrill Lynch, as underwriter, against certain liabilities, including certain liabilities under the federal securities law, in connection with the Offering. TRANSACTIONS WITH CAT As previously discussed in Note 4, in May 1992, the Company commenced a joint venture known as CAT which was formed for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. As of February 3, 1996, the Company owned a 40% interest in CAT which is being accounted for under the equity method of accounting. The Company's agreement with Cygne relating to the parties' ownership of CAT provides that, at any time after July 1, 1995, either Cygne or Ann Taylor may offer to purchase the other party's interest in CAT. Merchandise purchased by Ann Taylor through CAT was $167,000,000 or 38.3%, and $142,429,000, or 36.3%, of all merchandise purchased by the Company in 1995 and 1994, respectively. Accounts payable to CAT in the ordinary course of business was approximately $17,800,000 and $4,800,000 as of February 3, 1996 and January 28, 1995, respectively. 12. INCOME TAXES The provision for income taxes for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 consists of the following:
FISCAL YEARS ENDED ----------------------------------------- FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) Federal: Current................................... $ 1,400 $22,534 $13,739 Deferred.................................. 2,249 -- (1,150) ----------- ----------- ----------- Total federal......................... 3,649 22,534 12,589 ----------- ----------- ----------- State and local: Current................................... 607 7,740 5,200 Deferred.................................. 901 -- (600) ----------- ----------- ----------- Total state and local................. 1,508 7,740 4,600 ----------- ----------- ----------- Total..................................... $ 5,157 $30,274 $17,189 ----------- ----------- ----------- ----------- ----------- -----------
The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 is as follows:
FISCAL YEARS ENDED ----------------------------------------- FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) Income before income taxes and extraordinary loss................... $ 4,281 $62,894 $31,519 ----------- ----------- ----------- ----------- ----------- ----------- Federal statutory rate...................... 35% 35% 35% ----------- ----------- ----------- ----------- ----------- ----------- Provision for income taxes at federal statutory rate............................ $ 1,498 $22,013 $11,032 State and local income taxes, net of federal income tax benefit.......................... 980 5,031 2,990 Non-deductible amortization of goodwill..... 3,327 3,327 3,328 Undistributed income of joint venture....... (387) (420) Other....................................... (261) 323 (161) ----------- ----------- ----------- Provision for income taxes.............. $ 5,157 $30,274 $17,189 ----------- ----------- ----------- ----------- ----------- -----------
45 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. INCOME TAXES--(CONTINUED) The tax effects of significant items comprising the Company's net deferred tax assets as of February 3, 1996 and January 28, 1995 are as follows: FEBRUARY 3, JANUARY 28, 1996 1995 ----------- ----------- (IN THOUSANDS) Current: Inventory.......................... $ 1,899 $ 1,464 Accrued expenses................... 2,188 1,524 Real estate........................ (1,139) (762) Restructuring...................... -- 700 Other.............................. 452 724 ----------- ----------- Total current........................ $ 3,400 $ 3,650 ----------- ----------- ----------- ----------- Noncurrent: Depreciation....................... $(3,024) $ 340 Rent expense....................... 2,840 2,052 Other.............................. (1,116) (792) ----------- ----------- Total noncurrent..................... $(1,300) $ 1,600 ----------- ----------- ----------- ----------- 13. RETIREMENT PLANS SAVINGS PLAN. Ann Taylor maintains 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 1995, Fiscal 1994 and Fiscal 1993 were $337,000, $333,000 and $199,000, respectively. PENSION PLAN. Substantially all employees of Ann Taylor are covered under a noncontributory defined benefit pension plan. 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 February 3, 1996, January 28, 1995 and January 29, 1994, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions":
FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Actuarial present value of benefits obligation: Accumulated benefit obligation, including vested benefits of $2,064,000, $1,500,000 and $1,056,000, respectively... $ 2,893 $ 2,516 $ 2,401 ----------- ----------- ----------- ----------- ----------- ----------- Projected benefit obligation for service rendered to date....................................................... $ 2,893 $ 2,516 $ 2,401 Plan assets at fair value.................................. 2,537 2,522 2,344 ----------- ----------- ----------- Plan assets in excess of projected benefit obligation (projected benefit obligation in excess of plan assets).................................................... (356) 6 (57) Unrecognized net gain...................................... (231) (136) (58) ----------- ----------- ----------- Accrued pension cost....................................... $ (587) $ (130) $ (115) ----------- ----------- ----------- ----------- ----------- -----------
46 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. RETIREMENT PLANS--(CONTINUED)
FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Net periodic pension cost for fiscal 1995, 1994 and 1993 included the following components: Service cost/benefits earned during the year............... $ 681 $ 622 $ 680 Interest cost on projected benefit obligation.............. 185 133 117 Actual loss (return) on plan assets........................ (104) 72 (124) Net amortization and deferral.............................. (132) (285) (36) ----------- ----------- ----------- Net periodic pension cost.................................. $ 630 $ 542 $ 637 ----------- ----------- ----------- ----------- ----------- ----------- Assumptions used to determine the projected benefit obligation and plan assets were: Discount rate.......................................... 6.75% 8.50% 7.00% Rate of increase in compensation level................. 4.00% 5.50% 4.00% Expected long-term rate of return on assets............ 9.00% 8.00% 8.00%
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER -------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL 1995 Net sales........................................ $168,306 $183,695 $178,500 $200,641 Operating income (loss).......................... 12,123 (783) 8,687 5,248 Net income (loss)................................ 3,491 (3,809) 686 (1,244) Net income (loss) per share...................... $ .15 $ (.16) $ .03 $ (.05) FISCAL 1994 Net sales........................................ $145,283 $159,936 $164,632 $188,953 Operating income................................. 19,530 18,733 19,853 19,175 Income before extraordinary loss................. 8,060 7,923 8,284 8,353 Extraordinary loss............................... -- (868) -- -- Net income....................................... 8,060 7,055 8,284 8,353 Income per share before extraordinary loss....... $ .36 $ .34 $ .35 $ .35 Extraordinary loss per share..................... -- (.04) -- -- -------- -------- -------- -------- Net income per share............................. $ .36 $ .30 $ .35 $ .35 -------- -------- -------- -------- -------- -------- -------- --------
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. 15. SUBSEQUENT EVENT The Company and Cygne have entered into an agreement in principle dated as of April 8, 1996 (the "CAT/Cygne Agreement"), pursuant to which the Company, through a newly formed subsidiary, will purchase all of the shares of CAT stock owned by Cygne (the "CAT Shares") and the assets (the "Assets") of the Ann Taylor Woven Division (the "Division") of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). Upon consummation of the CAT/Cygne Transaction, CAT will become an indirect wholly owned subsidiary of the Company. In 47 ANNTAYLOR STORES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. SUBSEQUENT EVENT--(CONTINUED) addition to continuing its own sourcing activities on behalf of the Company, CAT will own the Assets of the Division and will perform all sourcing functions for Ann Taylor currently performed by Cygne . The aggregate consideration to be paid by the Company pursuant to the CAT/Cygne Transaction consists of (i) shares of Common Stock of the Company having a market price, based on the closing price of the Company's Common Stock for the ten trading days prior to the closing of the CAT/Cygne Transaction, of $36,000,000 (but in no event greater than 2,500,000 shares), and (ii) cash in an amount equal to the tangible net book value of the inventory and fixed assets included in the Assets, less certain assumed liabilities, currently estimated to be approximately $12,900,000. In addition, the Company will assume the obligation to make payment to the president of CAT of approximately $2.0 million becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction. The closing of the CAT/Cygne Transaction is subject to various conditions, and there can be no assurance that the CAT/Cygne Transaction will be consummated. 48 INDEX TO EXHIBITS
EXHIBITS - --------- 3.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission (the "Commission") on August 10, 1992 (Registration No. 33-50688). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 to the Form 10-Q of the Company for the Quarter ended November 2, 1991 filed on December 17, 1991 (Registration No. 33-28522). 4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993. 4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. 10.1 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 4.3 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522). 10.2 Amended and Restated Credit Agreement, dated as of September 29, 1995, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.2.1 First Amendment to Amended and Restated Credit Agreement, dated as of January 4, 1996, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. 10.3 Amended and Restated Guaranty, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.4 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.5 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by the Company in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.6 Trademark Security Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.7 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.7.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of the Company filed on April 30, 1993. 10.8 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 10.8.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of
49
EXHIBITS - --------- the Company filed on April 11, 1991 (Registration No. 33-39905). 10.8.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company filed on April 29, 1993. 10.8.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.8.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.8.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.9 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of the Company and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.10 Employment Agreement, 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. 10.10.1 Employment Agreement dated as of February 1, 1994 between the Company and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of the Company for the Quarter ended October 29, 1994 filed on December 9, 1994. 10.11 Employment Agreement dated February 16, 1996 between the Company and J. Patrick Spainhour. 10.12 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994. Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on June 30, 1994 (Registration No. 33-50688). 10.13 Amended and Restated Management Performance Compensation Plan as approved by stockholders on June 1, 1994. Incorporated by reference to Exhibit 10.22.1 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.13.1 Amendment to the Management Performance Compensation Plan dated as of February 24, 1995. Incorporated by reference to Exhibit 10.22.2 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.14 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of the Company for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.15 Interest Rate Swap Agreement dated as of July 22, 1993, between Ann Taylor and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.16 Stock Purchase Agreement, dated as of July 13, 1993, between Ann Taylor and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. 10.17 Agreement, dated July 13, 1993, among Cygne Designs, Inc., CAT US, Inc., C.A.T. (Far East) Limited and Ann Taylor. Incorporated by reference to Exhibit 10.8 to the 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.) 10.18 Amended and Restated Receivables Financing Agreement dated October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.31.4 to the Form 10-Q of the Company for the Quarter ended October 28, 1995 filed on December 8, 1995.
50
EXHIBITS - --------- 10.19 Purchase and Sale Agreement dated as of January 27, 1994 between Ann Taylor and AnnTaylor Funding, Inc. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of the Company filed on March 31, 1994. 10.20 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of the Company filed on April 28, 1995. 10.20.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of the Company for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.21 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.22 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 99 Unaudited Historical and Pro Forma Combined Financial Statements.
51 EX-4.1.1 2 EXHIBIT 4.1.1 INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, dated as of December 1, 1995, among AnnTaylor, Inc., a corporation duly organized and existing under the laws of the State of Delaware, having its principal office at 414 Chapel Street, New Haven, Connecticut 06511, (the "Company"), Fleet Bank, National Association, a national banking association duly organized under the laws of the United States of America and having its principal corporate trust office at One Constitution Plaza, Hartford, Connecticut 06115 (the "Resigning Trustee") and Norwest Bank Minnesota, National Association, a national banking association, having its principal corporate trust office at Sixth and Marquette, Minneapolis, Minnesota (the "Successor Trustee"). RECITALS -------- A. There are presently issued and outstanding $100,000,000 of the Company's 8 3/4% Subordinated Notes due 2000 issued under Indenture, dated as of June 15, 1993 (the "Indenture"), between the Company and the Resigning Trustee. B. The Resigning Trustee wishes to resign as Trustee, Registrar and Paying Agent under the Indenture; the Company wishes to appoint the Successor Trustee to succeed the Resigning Trustee as Trustee, Registrar and Paying Agent under the Indenture; and the Successor Trustee wishes to accept appointment as Trustee, Registrar and Paying Agent under the Indenture. NOW THEREFORE, the Company, the Resigning Trustee and the Successor Trustee agree as follows: ARTICLE ONE THE RESIGNING TRUSTEE Section 101. Pursuant to Section 609 of the Indenture, the Resigning Trustee - ----------- hereby notifies the Company that the Resigning Trustee has resigned as Trustee, Registrar and Paying Agent under the Indenture. Section 102. The Resigning Trustee hereby represents and warrants to the - ----------- Successor Trustee that: (a) To the best of the knowledge of the Responsible Officers of the Resigning Trustee assigned to its Corporate Trust Department, no Event of Default has occurred under the Indenture as of the date hereof; (b) No covenant or condition contained in the Indenture has been waived by the Resigning Trustee or by the Holders of the percentage in aggregate principal amount of the Securities required by the indentures to effect any such waiver; (c) The Indenture has not been amended or modified, except by this instrument; and (d) There is no action, suit or proceeding pending or, to the best of the knowledge of the Responsible Officers of the Resigning Trustee assigned to its Corporate Trust Department, threatened against the Resigning Trustee before any court or governmental authority arising out of any action or omission by the Resigning Trustee as Trustee under the Indenture. (e) It will indemnify the Successor Trustee and save the Successor Trustee harmless from and against, any and all costs, claims, liabilities, losses or damage whatsoever (including the reasonable fees, expenses and disbursements of counsel) which the Successor Trustee may suffer or incur as the result of its accepting appointment as successor trustee under the Indenture arising out of the acts or omissions of the Resigning Trustee while acting as trustee under the Indenture. Section 103. The Resigning Trustee hereby assigns, transfers, delivers and - ----------- confirms to the Successor Trustee all right, title and interest of the Resigning Trustee in and to the trust under the Indenture and all the rights, powers and trusts of the Trustee, Registrar and Paying Agent under the Indenture. The Resigning Trustee shall execute and deliver such further instruments and shall do such other things as the Successor Trustee may reasonably require so as to more fully and certainly vest and confirm in the Successor Trustee all the rights, trusts and powers hereby assigned, transferred, delivered and confirmed to the Successor Trustee. ARTICLE TWO THE COMPANY Section 201. The Secretary of the Company attesting to the execution of this - ----------- Instrument by the Company hereby certifies that annexed hereto marked Exhibit A is a copy of the Board Resolutions duly adopted by the Board of Directors of the Company, and in full force and effect on the date hereof authorizing certain officers of the Company to, among other things: (a) accept the Resigning Trustee's resignation as Trustee, Registrar and Paying Agent under the Indenture; (b) appoint the Successor Trustee as Trustee, Registrar and Paying Agent under the Indenture; and (c) execute and deliver such agreements and other instruments as may be necessary or desirable to effectuate the succession of the Successor Trustee as Trustee, Registrar and Paying Agent under the Indenture. Section 202. The Company hereby accepts the resignation of the Resigning - ----------- Trustee and appoints the Successor Trustee as Trustee, Registrar and Paying Agent under the Indenture and confirms to the Successor Trustee all the Rights, trusts and powers hereby assigned, transferred, delivered and confirmed to the Successor Trustee. Section 203. The Company hereby represents and warrants to the Successor - ----------- Trustee that: (a) To the best of its knowledge, no Event of Default has occurred under the Indenture as of the date hereof; and (b) The Indenture has not been amended or modified, except by this instrument. ARTICLE THREE THE SUCCESSOR TRUSTEE Section 301. The Successor Trustee hereby represents and warrants to the - ----------- Resigning Trustee and to the Company that the Successor Trustee is qualified and eligible under the provisions of Section 608 of the Indenture. Section 302. The Successor Trustee represents to the Resigning Trustee that it - ----------- will promptly notify the Resigning Trustee in writing of any action or claim, the outcome of which would make the indemnity provided for in Section 102 (e) operative and upon such notice the Resigning Trustee shall then have the right to elect to provide its own defense to any such action. Section 303. The Successor Trustee hereby accepts its appointment as Trustee, - ----------- Registrar and Paying Agent under the Indenture and shall hereby be vested with all the rights, powers, trusts and duties of the Trustee, Registrar and Paying Agent under the Indenture. ARTICLE FOUR MISCELLANEOUS Section 401. Except as otherwise expressly provided or unless the context - ----------- otherwise requires, all terms used herein which are defined in the Indenture shall have the meaning assigned in the Indenture. Section 402. This Instrument and the resignation, appointment and acceptance - ----------- effected hereby shall be effective as of the opening of business on the date first above written upon the execution and delivery hereof by each of the parties hereto. Section 403. Notwithstanding the resignation of the Resigning Trustee effected - ----------- hereby, the Company shall remain obligated under Section 607 of the Indenture to compensate, reimburse and indemnify the Resigning Trustee in connection with its trusteeship under the Indenture. Section 404. This Instrument shall be governed by and constructed in accordance - ----------- with the laws of the jurisdiction which govern the Indenture and its construction. Section 405. This Instrument may be executed in any number of counterparts each - ----------- of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereby have caused this Instrument of Resignation, Appointment and Acceptance to be duly executed and their respective seals to be affixed hereunto and duly attested all as of the day and year first above written. AnnTaylor, Inc. Attest: /s/ Jocelyn Barandiaran By: /s/ Walter J. Parks ---------------------------- ------------------------------------- Secretary Title: Sr. VP-Finance Fleet Bank, National Association, as Resigning Trustee Attest: /s/ Laurie Melody Casasanta By: /s/ Francis S. Kimball ---------------------------- ------------------------------------- Title: Vice President Norwest Bank Minnesota, National Association, as Successor Trustee Attest: /s/ Mary E. Traynor By: /s/ Raymond B. Haverstock ---------------------------- ------------------------------------- Title: Vice President EX-10.2.1 3 Exhibit 10.2.1 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This First Amendment to the Amended and Restated Credit Agreement (this "Amendment") is entered into as of January 4, 1996 among ANNTAYLOR, --------- INC., a Delaware corporation (the "Borrower"), the various financial -------- institutions named on the signature pages hereto (the "Lenders") and BANK ------- OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent. WHEREAS, the Borrower, the Lenders, the Co-Agents named therein, BA Securities, Inc. as Arranger and the Agent are party to that certain Amended and Restated Credit Agreement dated as of September 29, 1995 (as from time to time amended, the "Credit Agreement"); and ---------------- WHEREAS, the Borrower and the Lenders have agreed to make certain changes to the Credit Agreement on the terms and subject to the conditions set forth herein; NOW THEREFORE, the parties hereto hereby agree as follows: Section 1. Defined Terms. Unless otherwise defined in this ------------- Amendment, defined terms used herein shall have the meanings assigned to such terms in the Credit Agreement. Section 2. Amendments to Credit Agreement. ------------------------------ (a) No Change of Term Loan Provisions. Clause (g) of --------------------------------- ---------- Section 2.01 of the Credit Agreement is hereby amended to read as ------------ follows: "(g) No Change of Term Loan Provisions. Not --------------------------------- with-standing any other provision of this Agreement, without the written consent of each Term Loan Lender affected thereby, no modification of this Agreement shall increase any Term Loan Commitment, extend the maturity date of the Term Loans, reduce the principal of, or rate of interest on, the Term Loans, change the method of allocation between the Revolving Loan Commitments and the Term Loan Commitments of any mandatory prepayment pursuant to Section 2.05(b) or change the provisions --------------- of this Section 2.01 or Section 2.05(c)." ------------ --------------- (b) Change to Mandatory Commitment Reductions; Mandatory ---------------------------------------------------- Prepayments. Clause (i) of Section 2.05(b) is hereby amended to read ----------- ---------- --------------- as follows: "(i) In the event that the Borrower and/or any Restricted Subsidiary shall consummate the Distribution 1 the Agent has received the following: Center Financing or the Lease Financing, an amount equal to 50% of the greater of (x) the net cash proceeds of such transaction and (y) the principal amount of Indebtedness (as reflected on the Borrower's balance sheet) incurred by the Borrower and/or such Restricted Subsidiary in such transaction, shall be applied as follows:" Section 3. Representations and Warranties. ------------------------------ The Borrower represents and warrants that: (a) the execution and delivery of this Amendment (i) have been duly authorized by all necessary corporate action; and (ii) do not violate any Requirement of Law nor conflict with or result in the breach of any Contractual Obligation binding on the Borrower; and (b) after giving effect to this Amendment, the representations and warranties of the Borrower contained in Article V --------- of the Credit Agreement (except for representations and warranties relating to a particular point in time) and in each other Loan Document are true and correct in all material respects as if made on and as of the date of this Amendment and no Potential Event of Default or Event of Default has occurred and is continuing. Section 4. Effectiveness. ------------- (a) This Amendment shall become effective as of the date first above written (i) when the Agent has received counterparts hereof executed by the Borrower, the Term Lenders, the Requisite Lenders and the Agent and signed by AnnTaylor Stores Corporation as a consenting party; and (ii) when, concurrently herewith, the Borrower shall have complied with all the requirements of Sections 2.05(b) and (c) of the Credit Agreement, as amended hereby with respect to the proceeds of the Distribution Center Financing. (b) Upon the effectiveness of this Amendment (i) 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 and (ii) each reference in each other Loan Document to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. 2 (c) Except as specifically amended above, the Credit Agreement shall remain in full force and effect. (d) 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 Documents, nor constitute a waiver of any provision of any of the Loan Documents. Section 5. Miscellaneous. ------------- (a) 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. (b) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. ANNTAYLOR, INC., as Borrower By: /s/ Paul Francis --------------------------- Title: Executive Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Dietmar Schiel --------------------------- Title: Vice President 3 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ John Pocalyko -------------------------- Title: Vice President BANQUE INDOSUEZ By: /s/ Kathrun Briger Andrew Marshak ------------------- --------------- Title: Sr. Vice President Vice President FLEET BANK, NATIONAL ASSOCIATION By: /s/ Christopher DelSignore -------------------------- Title: Asst. Vice President FLEET NATIONAL BANK OF MASSACHUSETTS (formerly known as Shawmut Bank, N.A.) By: /s/ Linda H. Thomas ------------------------- Title: Director INDOSUEZ CAPITAL FUNDING II, LIMITED By: Indosuez Capital as Portfolio Advisor By: /s/ Andrew Marshak ------------------------- Title: Authorized Signatory LTCB TRUST COMPANY By: /s/ Rene O. LeBlanc ----------------------------- Title: Senior Vice President 4 PNC BANK, NATIONAL ASSOCIATION By: /s/ Mark Williams ---------------------------- Title: Consenting Party: ANNTAYLOR STORES CORPORATION By /s/ Paul Francis ------------------------- 5 EX-10.11 4 Exhibit 10.11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement"), dated as of February 16, 1996, effective as of February 19, 1996 (the "Starting Date") between ANNTAYLOR STORES CORPORATION, a Delaware corporation (the "Company"), and J. PATRICK SPAINHOUR (the "Executive"). WHEREAS, the Company desires to provide for the services and employment of the Executive with the Company and the Executive wishes to provide such services and to become employed by the Company, all in accordance with the terms and conditions provided herein. NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to become employed by and to serve the Company, on the terms and conditions set forth herein. 2. Term. The initial term of employment of the Executive by the Company hereunder will commence effective as of the Starting Date, and such initial term will end 36 months thereafter unless further extended or sooner terminated as hereinafter provided. Commencing on the third anniversary date of the Starting Date, and on each anniversary date of the Starting Date thereafter (each date, an "Anniversary Date"), the term of the Executive's employment shall automatically be extended for one additional year unless not later than six months prior to such Anniversary Date, either party shall have given notice (a "Nonrenewal Notice") to the other party that it does not wish to extend this Agreement. References hereinafter to the "Term" of this Agreement shall refer to both the initial term and any extended term of the Agreement hereunder. Notwithstanding expiration of the Term or other provisions that survive by their intent, the provisions of Sections 3(b), 9 and 10 hereof shall continue in effect. 3. Nature of Performance. (a) Position and Duties. The Executive shall serve as President and Chief Operating Officer of the Company and shall have such responsibilities, duties and authority consistent with such positions as may from time to time be determined by the Board of Directors of the Company (the "Board"). The Executive shall report directly to the Chairman and Chief Executive 1 Officer. Initially, the following officers and executives of the Company shall report directly to the Executive who shall have the responsibility of overseeing, coordinating and directing their performance: Chief Financial Officer and Executive Vice President of Strategic Planning (which includes indirect reporting through such officer of Investor Relations, Legal Services and Credit Services), Senior Vice President Information Services, Distribution Services and Logistics, Senior Vice President Real Estate, Store Planning and Design, Senior Vice President Human Resources and executives in charge of Sourcing and Quality Assurance. The Executive shall devote substantially all of his working time and effects to the business and affairs of the Company; provided that, this Agreement shall not be interpreted to prohibit the Executive from making passive investments, engaging in charitable activities or, subject to prior approval of the Board (which approval shall not be unreasonably withheld), serving on the board of directors of any other corporation. The Company shall also use its best efforts to appoint and elect Executive as a member of the Company's Board of Directors at the earliest possible date. Such appointment and election shall be to that Class of Directors which shall be subject to election by the stockholders of the Company at the latest possible time consistent with Company's Certificate of Incorporation and Bylaws. (b) Indemnification. To the fullest extent permitted by law and the Company's certificate of incorporation and by-laws, the Company shall indemnify the Executive for all amounts (including, without limitation, judgments, fines, settlement payments, losses, damages, costs and expenses (including reasonable attorneys' fees)) incurred or paid by the Executive in connection with any action, proceeding, suit or investigation arising out of or relating to the performance by the Executive of services for, or acting as a fiduciary of any employee benefit plans, programs or arrangements of the Company or as a director, officer or employee of, the Company or any subsidiary thereof. Following the Term, the Company shall continue to indemnify the Executive with respect to such services performed during the Term, to the same extent as the Company indemnifies its officers, directors, employees and fiduciaries, as applicable. Executive shall be provided director and officer liability insurance coverage by the Company on the same terms and conditions as that being provided to any other director and officer of the Company from time to time during the Term hereof. 4. Place of Performance. In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company in the City of New York or at such other principal executive office in the New York City Metropolitan Area as the Company may hereafter maintain, except for required travel on the Company's business. The Company is aware that Executive maintains his principal residence and his family resides in Columbus, Mississippi. The Company has been advised by Executive that he intends to continue to maintain such residence which will require 2 Executive to commute at Executive's sole cost and expense between the Company's headquarters and his residence in Mississippi on a regular basis to which the Company has no objection. 5. Compensation and Related Matters. (a) Annual Compensation. (i) Base Salary. During the period of the Executive's employment hereunder, the Company shall pay to the Executive an annual base salary at a rate not less than $525,000, such salary to be paid in conformity with the Company's policies relating to salaried employees. This salary may be (but is not required to be) increased from time to time, subject to and in accordance with the annual executive performance review procedures of the Company and, if so increased, shall not thereafter be decreased during the Term of this Agreement. Compensation of the Executive by salary payments shall not be deemed exclusive and shall not prevent the Executive from participating in any other compensation or benefit plan of the Company. The salary payments (including any increased salary payments) hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay the Executive's salary hereunder. (ii) Annual Bonus. During the period of Executive's employment hereunder, the Executive shall be eligible to participate in the Company's annual bonus plan as in effect from time to time, and shall be entitled to receive such amounts (a "Bonus") as may be authorized, declared and paid by the Company pursuant to the terms of such plan; provided that, notwithstanding any contrary provisions of such bonus plan, unless the Executive's employment is terminated by the Company for Cause (as defined in Section 6(c) hereof) or by the Executive other than for Good Reason, as defined in Section 6(d)(1) hereof), the Executive shall be entitled to receive any Bonus paid with respect to any bonus period completed on or prior to the Date of Termination or, in the case a Nonrenewal Notice is given by the Company, through the scheduled expiration date of the Term (even if the Executive terminates his employment prior to such scheduled expiration date for Good Reason under Section 6(d)(1)(v) hereof). The Company currently maintains a Management Performance Compensation Plan (the "Performance Plan") pursuant to which it pays performance bonus compensation to certain of its 3 executives and employees. It is agreed that Executive shall participate in the Performance Plan effective as of the Starting Date. Executive's Performance Percentage (as that term is defined in the Performance Plan) shall be established at 40% during the first year of participation under the Performance Plan and thereafter the Performance Percentage shall be determined as provided in the Performance Plan. Notwithstanding the foregoing, the minimum bonus to be paid to Executive under the Performance Plan or otherwise for the fiscal year ending February 1, 1997 shall be $200,000, provided Executive's employment hereunder during such period has not been terminated by the Company for Cause or by the Executive without Good Reason. (b) Stock Options. The Executive will be granted a time vested Non-Qualified Stock Option to acquire one hundred thousand (100,000) shares of the Company's Common Stock (the "Option Shares") under the Company's 1992 Stock Option and Restricted Stock and Unit Award Plan (the "Option Plan") with an exercise price equal to the fair market value (as defined and determined as of the Starting Date under the Option Plan) of the Common Stock. The Option shall vest 50% on the first anniversary date of the grant and 50% on the second anniversary date of the grant and shall be subject to accelerated vesting and termination in accordance with the terms of the Option Plan. The Executive shall be eligible to receive additional options under the Option Plan or other and additional option plans as may be adopted by the Company during the term hereof, taking into account, among other things, Executive's performance and position with the Company. (c) Other Benefits. During the period of Executive's employment hereunder, the Executive shall continue to be entitled to participate in all other employee benefit plans, programs and arrangements of the Company, as now or hereinafter in effect, which are applicable to the Company's employees generally or to its executive officers, as the case may be, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements; provided, the Company shall waive or cause to be waived the one year waiting period after commencement of employment applicable to its life insurance and group accident insurance programs and any other program where such waiver will not be a violation of any Federal or state law or regulation . During the period of Executive's employment hereunder, the Executive shall be entitled to participate in and receive any fringe benefits or perquisites which may become available to the Company's executive employees. Without limiting the generality of the foregoing, the Company shall provide the Executive with financial planning and tax preparation services on a tax-free basis. (e) Vacations and Other Leaves. The Executive shall be 4 entitled to an aggregate paid vacation of not less than four (4) weeks for each twelve (12) month period of the Term hereof. Payment for any accrued and unused vacation time at the time of termination of this Agreement shall be in accordance with the Company's policies at the time of such termination. Any such vacation taken shall be coordinated with the Chairman so as not to adversely impact the performance of the Company. The Executive shall be entitled to paid holidays and personal leave days in accordance with the Company policy covering executive employees. (f) Expenses. During the period of the Executive's employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by the Executive in performing services hereunder, including all expenses of travel and accommodations while away from home on business or at the request of and in the service of the Company; provided that, such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. It is understood and agreed by Executive that such reimbursement shall not cover expenses and costs incurred by him in connection with his commuting from his principal residence as described in Section 4 of this Agreement. (g) Services Furnished. The Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties hereunder. (h) Legal Fees. The Company shall pay directly or reimburse the Executive for any legal fees incurred by the Executive in connection with the negotiation and preparation of the Agreement; provided that, such payment or reimbursement shall not exceed $5,000. (6) Termination. The Executive's employment hereunder may be terminated without breach of this Agreement only under the following circumstances: (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full time basis for the entire period of six (6) consecutive months, and within thirty (30) days after written Notice of Termination (as defined below) is given (which may occur before or after the end of such six (6) month period) shall not have returned to the performance of his duties hereunder on a full- 5 time basis, the Executive's employment hereunder shall terminate for "Disability." (c) Cause. The Company may terminate the Executive's employment hereunder for "Cause". For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive's conviction for the commission of any act or acts constituting a felony under the laws of the United States or any state thereof, (ii) action by the Executive toward the Company involving dishonesty (other than good faith expense account disputes), (iii) the Executive's refusal to abide by or follow written directions of the Board or the Chairman, (iv) the Executive's gross nonfeasance which does not cease within ten (10) business days after notice regarding such nonfeasance has been given to the Executive by the Company or (v) failure of the Executive to comply with the provisions of Section 9 (prior to a cessation of employment following a Change in Control of the Company) or 10 of this Agreement, or other willful conduct by the Executive which is intended to have and does have a material adverse impact on the Company. (d) Termination by the Executive. (1) The Executive may terminate his employment hereunder for "Good Reason". For purposes of this Agreement, the Executive shall have "Good Reason" to terminate his employment hereunder (i) upon a failure by the Company to comply with any material provision of this Agreement which has not been cured within ten (10) business days after notice of such noncompliance has been given by the Executive to the Company, (ii) upon action by the Company resulting in a diminution of the Executive's title or authority, (iii) upon the Company's relocation of the Executive's principal place of employment outside of the New York City Metropolitan Area, (iv) one year after a "Change in Control of the Company" (as defined in paragraph (d)(2) below) or (v) at any time following the expiration of ninety (90) days following the Company's issuance of a Nonrenewal Notice. The Executive may terminate his employment voluntarily without Good Reason upon at least six months' prior notice to the Company. (2) For purposes of this Agreement, a "Change in Control of the Company" will be deemed to have occurred if: (A) any "person", as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than (1) the Company, (2) Merrill Lynch & Co. or any affiliate thereof, 6 which for purposes of this Agreement shall include Stonington Partners Inc. and its affiliates (collectively, "ML"), (3) any trustee or other fiduciary holding securities under an employee benefit plan of the company, or (4) any corporation owned, directly or indirectly, by the stockholders of the Company (in substantially the same proportion as their ownership of Shares ) (a "Person") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities (not including in the securities beneficially owned by such Person securities acquired directly from ML representing in excess of 15% of the combined voting power of the Company's then outstanding voting securities but including any such securities acquired directly from ML representing up to 15% of such combined voting power); (B) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (A), (C) or (D) of this Section 6(d)(2)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (C) the stockholders of the company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger 7 or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner (as defined in (A) above), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person securities acquired directly from ML representing in excess of 15% of the combined voting power of the Company's then outstanding voting securities but including any such securities acquired directly from ML representing up to 15% of such combined voting power); or (D) the stockholders of the Company approve a plan of complete liquidation of the company or an agreement for the sale or disposition by the company of all or substantially all of the Company's assets (or any transaction having a similar effect). (e) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination under Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision to indicated. (f) Date of Termination. "Date of Termination" shall mean (I) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to Subsection (b) above, the date which is the later of thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period) or the end of the six (6) consecutive month period referred to in Subsection (b) above, and (iii) if the Executive's employment is terminated pursuant to subsection (c) or (d) above, the date specified in the Notice of Termination; provided that, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is 8 finally determined, either by mutual written agreement of the parties or by a binding and final arbitration award. 7. Compensation Upon Termination or During Disability. (a) Disability. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his full salary at the rate then in effect for such period and other applicable benefits provided to active employees until his employment is terminated pursuant to Section 6(b) hereof. Subject to the provisions of Section 9 hereof, in the event the Executive's employment is terminated pursuant to Section 6(b) hereof, then (i) as soon as practicable thereafter, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under Sections 5(a) and (b) hereof and shall pay to the Executive, in accordance with the terms of the applicable plan or program, all other unpaid amounts to which Executive is then entitled under any compensation or benefit plan or program of the Company (collectively, "Accrued Obligations"); and (ii) following the Date of Termination and for a period of twelve (12) months thereafter (the "Severance Period"), the Company shall pay the Executive monthly an amount equal to (x) the quotient of (A) the sum of (1) the Executive's annual base salary at the rate in effect as of the Date of Termination and (2) the average of the annual bonuses, or in the case of the first year hereof (if the Date of Termination occurs in such year) the guaranteed minimum bonus, earned by the Executive in the three fiscal years of the Company ended immediately prior to the Date of Termination, divided by (B) the number twelve (12) (such quotient being referred to herein as the "Severance Payments"), minus (y) any amounts payable to the Executive during such month as a disability benefit under a Company paid plan. (b) Death. If the Executive's employment is terminated by his death, the Company shall pay to the person(s) or entity set forth in Section 11(b) hereof the Accrued Obligations and the Severance Payments at the time(s) set forth in Sections 7(a)(i) and 7 (a)(ii) hereof. (c) Termination for Cause; Voluntary Termination Without Good Reason. If the Executive's employment is terminated by the Company for 9 Cause or voluntarily by the Executive for other than Good Reason (including by reason of the expiration of the Term of this Agreement as a result of a Nonrenewal Notice having been given by the Executive), the Company shall pay the Accrued Obligations to the Executive at the time(s) set forth in Section 7(a)(i) hereof and the Company shall have no further obligations to the Executive under this Agreement. (d) Termination Without Cause; Termination for Good Reason; Nonrenewal. If (i) the Company shall terminate the Executive's employment other than for Disability pursuant to Section 6(b) or for Cause, (ii) the Executive shall terminate his employment for Good Reason or (iii) the Term of this Agreement expires as a result of a Nonrenewal Notice having been provided by the Company, then, subject to the provisions of Section 9 hereof: (1) the Company shall pay the Accrued Obligations to the Executive at the time(s) set forth in Section 7(a)(i) hereof; (2) the Company shall pay to the Executive the Severance Payments as defined in Section 7(a)(ii) hereof for the longer of the remaining Term of this Agreement and the Severance Period; (3) the Executive shall continue to be provided with the same medical and life insurance coverage as existed immediately prior to the applicable Notice of Termination or Notice of Nonrenewal, as the case may be, such coverage to continue as long as Executive is receiving Severance Payments; and (4) the Executive shall be provided with outplacement services commensurate with his position. 8. Change in Control. In the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment, whether such payments or benefits are received pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person (all such payments and benefits being hereinafter called "Total Payments"), would be subject (in whole or part), to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Executive such additional 10 amounts (the "Gross-Up Payment") as may be necessary to place the Executive in the same after-tax position as if no portion of the Total Payments had been subject to the Excise Tax. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to the reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence of which cannot be determined at the time of the Gross- Up Payment, the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect of such excess) at the time that the amount of such excess if finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 9. Nonsolicitation; Noncompete (a) Subject to (c) below, during the period of Executive's employment, during the period he is receiving Severance Payments hereunder and, in the case where the Executive's employment is terminated for Cause or Executive voluntarily terminates his employment without Good Reason, for a period of twelve (12) months following such termination, the Executive shall not initiate discussions (of a non-isolated nature) with any person who is then an executive employee of the Company (i.e., director level or above) with the intent of soliciting or inducing such person to leave his or her employment, with a view toward joining the Executive in the pursuit of any business activity (whether or not such activity involves engaging or participating in a Competitive Business (as defined below). Notwithstanding any other provision of this Agreement to the contrary, in the event Executive fails to comply with the preceding sentence, all rights of the Executive and his surviving spouse or other beneficiary hereunder to any future Severance Payments and continuing life insurance and medical coverage shall be forfeited; provided that, the foregoing shall not apply if such failure of compliance commences following a cessation of employment following a Change in Control of the Company. (b) Subject to (c) below, as long as Executive receives Severance Payments, or in the case where the Executive's employment is 11 terminated for Cause or Executive voluntarily terminates his employment without Good Reason, for a period of twelve (12) months following such termination, Executive shall not, without the prior written consent of the Company (which consent shall not be unreasonably withheld), engage or participate in any business which is "in competition" (as defined below) with the business of the Company or any of its 50% or more owned affiliates (such business being referred to herein as a "Competitive Business"). Notwithstanding any other provision of this Agreement to the contrary, in the event the Executive fails to comply with the preceding sentence, all rights of the Executive and his surviving spouse or other beneficiary hereunder to any future Severance Payments and continuing life insurance and medical coverage shall be forfeited; provided that, the foregoing shall not apply if such failure of compliance commences following a cessation of employment following a Change in Control of the Company. (c) In the event of a violation of paragraphs 9(a) or 9(b) hereof, the remedies of the Company shall be limited to (i) if such violation occurs during the period of Executive's employment hereunder, termination of the Executive for Cause and the associated rights of the Company specified herein resulting therefrom and (ii) regardless of when such violation occurs, forfeiture by the Executive of the payments and benefits set forth in paragraphs (a) and (b) above if and to the extent provided in such paragraphs and (iii) the right to seek injunctive relief in accordance with and to the extent provided in Section 16 hereof; provided, such injunctive relief may only be sought for competitive activity under paragraph (b) above if such activity occurs during employment or after Executive's dismissal for Cause or Executive voluntarily terminates his employment without Good Reason. (d) For purposes hereof, a business will be "in competition" with the business of the Company or its 50% or more owned affiliates only if (i) the Company's business with which the other business competes accounted for 20% or more of the Company's consolidated revenues as of the end of its most recently completed fiscal year prior to the Date of Termination, and (ii) the entity (including all 50% or more owned affiliates) through which the other business is or will be operated maintains a "woman's apparel" business which generated at least $50 million in revenues during the entity's most recently completed fiscal year ended prior to the date the Executive commences (or proposes to commence) to engage or participate in the other business. For purposes hereof, "woman's apparel" shall consist of dresses, jackets, pants, skirts, blouses, sweaters and T-shirts. (e) Notwithstanding the foregoing, the Executive's engaging in the following activities shall not be construed as engaging or participating in a Competitive Business: (i) investment banking; (ii) passive ownership of less than 12 2% of any class of securities of a public company; (iii) engaging or participating in noncompetitive businesses of an entity which also operates a business which is "in competition" with the business of the Company or its affiliates; (iv) serving as an outside director of an entity which operates a business which is "in competition" with the business of the Company or its affiliates, so long as such business did not account for 10% or more of the consolidated revenues of such entity as of the end of its most recently completed fiscal year prior to the date Executive commences ( or proposes to commence) serving as a outside director; (v) engaging in a business involving licensing arrangements so long as such business is not an in-house arrangement for any entity "in competition" with the business of the Company or its affiliates; (vi) affiliation with an advertising agency; and (vii) after cessation of employment, engaging or participating in the "wholesale" side of the woman's apparel business, which for purposes hereof shall mean the design, manufacture and sale of piece goods and woman's apparel to unrelated third parties, provided that if the entity for which Executive so engages or participates (including its affiliates) also conducts a retail woman's apparel business , then effective upon Executive's engaging or participating in such business, all continuing life insurance and medical coverage provided by the Company shall cease and all Severance Payments shall cease except for amounts representing the excess (if any) of Executive's annual base salary hereunder (at the rate in effect as of the Date of Termination) over the Executive's base salary received from such entity and its affiliates, which amounts shall continue to be paid by the Company for the remainder of the Severance Period. The exceptions contained in subparagraph (vii) above and subparagraph (iii) above to the extent covered by subparagraph (vii) shall not be applicable if Executive's cessation of employment is voluntary by Executive without Good Reason and his new engagement or participation involves "wholesale" operations which include or also conduct retail sales of woman's apparel other than factory outlet or discount stores to liquidate unsold woman's apparel of such wholesale operations. 10. Protection of Confidential Information (a) Executive acknowledges that his employment by the Company will, throughout the Term of this Agreement, involve his obtaining knowledge of confidential information regarding the business and affairs of the Company. In recognition of the foregoing, the Executive covenants and agrees: (i) that, except in compliance with legal process, he will keep secret all confidential matters of the Company which are not otherwise in the public domain and will not be intentionally disclose them to anyone outside of the Company, wherever located (other than to a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by Executive of his duties as an executive officer of the Company), either during or 13 after the Term, except with the prior written consent of the Board or a person authorized thereby; and (ii) that he will deliver promptly to the Company on termination of his employment, or at any other time the Company may so request, all memoranda, notes, records, customer lists, reports and other documents (and all copies thereof) relating to the business of the Company which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control. (b) Notwithstanding the provisions of Section 16 of this Agreement, if the Executive commits a breach of the provisions of paragraphs 10(a)(i) or 10(a)(ii), the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 11. Successors; Binding Agreement (a) Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation by the Executive (except by Will or by operation of the laws of intestate succession) or by the Company, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise), to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal 14 representatives, executors, administrators, successors, heirs, distributes, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 12. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, address as follows: If to the Company: AnnTaylor Stores Corporation 142 West 57th Street New York, New York 10019 Attn: General Counsel With a copy to: Stuart N. Alperin, Esq. Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 If to the Executive: J. Patrick Spainhour 114 Scarlet Drive Columbus, Mississippi 39701 With a copy to: Leon I. Jacobson, Esq. Jacobson & Mermelstein, P.C. 52 Vanderbilt Avenue New York, New York 10017 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effectively only upon receipt. 15 13. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Executive and such officer of the company as may be specifically designated by the Board. No Waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions ate the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the state of New York without regard to its conflicts of law principles. 14. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in one or more counterparts and by facsimile signature each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York City in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction; provided that, the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Section 9 of the Agreement during the period of Executive's employment or following Executive's termination of employment for Cause or the voluntary termination of employment by Executive without Good Reason or of Section 10 of this Agreement at any time, and the Executive hereby consents that such restraining order or injunction may be granted without the necessity of the Company's posting any bond; and further provided that, the Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall pay directly or reimburse the Executive for any legal fees incurred by Executive in connection with any arbitration related to the last proviso of the preceding sentence and any other arbitration in which he prevails. 17. Entire Agreement. This Agreement sets forth the entire 16 agreement of the parties hereto in respect of the subject matter contained herein and supersedes any and all other prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. ANNTAYLOR STORES CORPORATION By: /s/ Sally Frame Kasaks ------------------------------- Name: Sally Frame Kasaks Title: Chairman and Chief Executive Officer EXECUTIVE /s/ J. Patrick Spainhour ----------------------------- J. Patrick Spainhour 17 EX-21 5 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. ANNTAYLOR DISTRIBUTION SERVICES, INC., a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. ANNTAYLOR LOFT, INC. a Delaware corporation and wholly owned subsidiary of AnnTaylor, Inc. EX-23 6 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ANNTAYLOR STORES CORPORATION: We consent to the incorporation by reference in AnnTaylor Stores Corporation's Registration Statements No. 33-31505 on Form S-8, No. 33-50688 on Form S-8, No. 33-52389 on Form S-8, and No. 33-55629 on Form S-8 of our report dated March 11, 1996, (April 8, 1996 as to Note 15) appearing in the Annual Report on Form 10-K of AnnTaylor Stores Corporation for the year ended February 3, 1996. DELOITTE & TOUCHE LLP NEW YORK, NEW YORK APRIL 8, 1996 EX-27 7 FINANCIAL DISCLOSURE SCHEDULE
5 This schedule contains summary of financial information extracted from the condensed consolidated statements of operations and condensed consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 0000874214 ANN TAYLOR STORES CORP. 1,000 12-MOS FEB-03-1996 FEB-03-1996 1,283 0 71,131 736 102,685 198,670 196,338 42,443 678,709 112,193 0 0 0 157 325,531 678,700 731,142 731,142 425,225 425,225 280,680 0 20,956 4,281 5,157 0 0 0 0 (876) 0 (0.04)
EX-99 8 EXHIBIT 99 UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL STATEMENTS The following Unaudited Historical and Pro Forma Combined Financial Statements give effect to the acquisition (the "CAT/Cygne Transaction") of the remaining 60% interest of CAT U.S., Inc. ("CAT") and the AnnTaylor Woven Division of Cygne Design, Inc. ("Division") (collectively, the "Acquired Businesses") by an indirect wholly owned subsidiary of AnnTaylor Stores Corporation (the "Company") under the "purchase" method of accounting. Cygne Designs, Inc. owns the Division and a 60% interest in CAT. These Unaudited Historical and Pro Forma Combined Financial Statements are presented for illustrative purposes only, and therefore are not necessarily indicative of the operating results and financial position that might have been achieved had the CAT/Cygne Transaction occurred as of an earlier date, nor are they necessarily indicative of operating results and financial position that may occur in the future. An Unaudited Historical and Pro Forma Combined Balance Sheet is provided as of February 3, 1996, giving effect to the CAT/Cygne Transaction as though it had been consummated on that date. Unaudited Historical and Pro Forma Combined Statements of Operations are provided for the fiscal year ended February 3, 1996, giving effect to the CAT/Cygne Transaction as though it had occurred at the beginning of such year. The historical fiscal year ended February 3, 1996 information has been derived from the audited financial statements of the Company. The data at and for the fiscal year ended February 3, 1996 for the Acquired Businesses have been derived from the unaudited financial statements which, in the opinion of the management of the Acquired Businesses, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited year. ANN TAYLOR STORES CORPORATION AND ACQUIRED COMPANIES UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION BALANCE SHEETS FEBRUARY 3, 1996 (IN THOUSANDS)
HISTORICAL PRO FORMA ----------------------- -------------------------- ACQUIRED COMPANY BUSINESSES ADJUSTMENTS COMBINED -------- ----------- ----------- -------- ASSETS Current Assets Cash and cash equivalents.................. $ 1,283 $ 200 $ -- $ 1,483 Accounts receivable, net................... 70,395 22,284 (22,007)(a) 70,672 Inventories................................ 102,685 21,728 3,985(b) 128,398 Prepaid and other current assets........... 24,307 291 (3,262)(a) 21,336 -------- ----------- ----------- -------- Total current assets................. 198,670 44,503 (21,284) 221,889 Property and equipment, net.................. 153,895 4,315 -- 158,210 Other assets................................. 12,619 187 (5,438)(c) 7,368 Goodwill, net................................ 313,525 -- 37,788(d) 351,313 -------- ----------- ----------- -------- Total assets................................. $678,709 49,005 11,066 738,780 -------- ----------- ----------- -------- -------- ----------- ----------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt.......... $ 40,266 $ 1,576 $ -- $ 41,842 Accounts payable........................... 42,909 21,090 (17,284)(a) 46,715 Accrued expenses........................... 29,018 2,105 1,000(e) 32,123 -------- ----------- ----------- -------- Total current liabilities............ 112,193 24,771 (16,284) 120,680 Long-term debt............................... 232,192 684 14,900(f) 247,776 Other liabilities............................ 8,636 -- 8,636 Stockholders' equity Common stock............................... 157 -- 14(g) 171 Additional paid in capital................. 311,284 -- 35,986(g) 347,270 Retained earnings and other items.......... 14,247 23,550 (23,550)(g) 14,247 -------- ----------- ----------- -------- Total stockholders' equity........... 325,688 23,550 12,450 361,688 -------- ----------- ----------- -------- Total liabilities and stockholders' equity... $678,709 $49,005 $ 11,066 $738,780 -------- ----------- ----------- -------- -------- ----------- ----------- --------
See notes to unaudited historical and pro forma combined financial information. 2 ANN TAYLOR STORES CORPORATION AND ACQUIRED COMPANIES UNAUDITED HISTORICAL AND PRO FORMA STATEMENTS OF OPERATIONS FISCAL YEAR ENDED FEBRUARY 3, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ---------------------- PRO FORMA ACQUIRED ----------------------------- COMPANY BUSINESSES ADJUSTMENTS COMBINED -------- ---------- ----------- -------- Net sales.................................. $731,142 $ 231,385 $ (231,385)(h) $731,142 Cost of sales.............................. 425,225 204,236 (214,749)(h)(i)(j) 414,712 -------- ---------- ----------- -------- Gross profit............................... 305,917 27,149 (16,636) 316,430 Selling, general and administrative expenses................................... 271,136 17,387 (17,387)(j) 271,136 Amortization of goodwill................... 9,506 -- 1,512(k) 11,018 -------- ---------- ----------- -------- Operating income........................... 25,275 9,762 (761) 34,276 Interest expense........................... 20,956 1,088 750(i) 22,794 Other (income) expense, net................ 38 -- 1,646(l) 1,684 -------- ---------- ----------- -------- Income before income taxes................. 4,281 8,674 (3,157) 9,798 Income tax provision....................... 5,157 2,637 (329)(l)(m) 7,465 -------- ---------- ----------- -------- Net income (loss).......................... $ (876) $ 6,037 $ (2,828) $ 2,333 -------- ---------- ----------- -------- -------- ---------- ----------- -------- Net income (loss) per share................ $ (0.04) $ 0.09 -------- -------- -------- --------
See notes to unaudited historical and pro forma combined financial information. 3 NOTES TO UNAUDITED HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The Unaudited Historical and Pro Forma Combined Financial Statements are presented for illustrative purposes only, giving effect to the acquisition of the Acquired Businesses by the Company accounted for as a "Purchase", as such term is used under generally accepted accounting principles. The Acquired Businesses' information includes the acquisition by the Company of CAT and the Division. Certain amounts reported in the Acquired Business' historical financial information have been reclassified to conform with the Company presentations in the Unaudited Historical and Pro Forma Combined Balance Sheets and Statements of Operations. The Unaudited Historical and Pro Forma Financial Statements giving effect to the acquisition of the Acquired Businesses by the Company have been prepared assuming the Company elected to treat the transaction as a stock acquisition, which will provide no step up in basis for income tax purposes. NOTE 2--ACCOUNTING PERIOD The pro forma periods for the fiscal year ended February 3, 1996 are the historical financial reporting periods of both the Company and the Acquired Businesses. The Company and the Acquired Businesses have historically reported a 52- or 53-week reporting period. NOTE 3--PURCHASE PRICE DETERMINATION The purchase price of $50.9 million was computed assuming (i) the issuance of 2,117,647 shares of common stock of the Company at a price of $17.00 per share, (ii) cash consideration of $12.9 million, and (iii) the assumption of the obligation to make payment to the president of CAT of approximately $2.0 million becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction. The cash portion of the purchase price (including the obligation to the president of CAT) will be provided by additional bank borrowings, assumed to be approximately $14.9 million at 8% per annum. The aggregate purchase price includes an amount payable to an executive of CAT pursuant to his employment contract, which requires a payment to him based on the value of the shares of CAT being transferred. NOTE 4--PRO FORMA ADJUSTMENTS The following items were recorded as adjustments to effect the combination of the Company and the Acquired Businesses. 4(a) Adjustments recorded to reflect (i) the elimination of amounts due to/from the Company and the Acquired Businesses, and (ii) the elimination of advances made to the Division. 4(b) Adjustments to reduce the inventories of CAT and the Division to the current fair value, and the elimination of advances made to the Division. 4(c) The elimination of the investment account on the Company's books for the 40% interest in CAT. 4(d) Adjustment recorded to reflect the creation of goodwill representing the excess of purchase price over net assets acquired which results in a $37.7 million adjustment, based on management's estimate and without the performance of any due diligence procedures. Accordingly, such estimate of goodwill is preliminary and subject to change. At this time, the Company has not attributed any value to intangible assets other than goodwill.
4 NOTES TO UNAUDITED HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--PRO FORMA ADJUSTMENTS--(CONTINUED) 4(e) Adjustment to record a liability for an estimate of fees related to the CAT/Cygne Transaction.
4(f) Adjustments to reflect a portion of the purchase price expected to be financed through additional bank borrowings. 4(g) Common stock, additional paid-in capital and retained earnings have been adjusted to eliminate the equity balances of the Acquired Businesses and reflect the common stock and additional paid-in capital for the issuance of 2,117,647 million shares of common stock of the Company at an assumed price of $17.00 per share. 4(h) To eliminate sales previously recorded by the Acquired Businesses against the cost of sales previously recorded by the Company. Cost of sales is reduced by the reclassification of certain expenses discussed in Notes 4(i) and 4(j). 4(i) To reclassify interest expense from cost of sales as reported in the Acquired Businesses' historical financial information to interest expense, to conform with the Company's presentations. 4(j) Historically, the Acquired Businesses have classified certain expenses as selling, general and administrative expenses. An adjustment has been recorded to reclassify certain expenses, such as costs of design and procurement, to cost of sales. 4(k) Adjusted to reflect the charge relating to the amortization of goodwill, which represents the excess of purchase price over net assets acquired. Such goodwill will be amortized over a 25 year life. 4(l) The elimination of the equity in earnings of 40% of the net income of CAT by the Company and the related income tax expense. 4(m) The income tax provision represents the assumed effective tax rate for the Acquired Businesses assuming (i) approximately 50% of the Acquired Businesses' income is foreign source and not subject to U.S. taxation until repatriation and (ii) amortized goodwill is not deductible.
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