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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 .
For the fiscal year ended January 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 1-11980
ANNTAYLOR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(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
8-3/4% Subordinated Notes due 2000 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 .
As of April 2, 1998, 1 share of Common Stock was outstanding.
Documents Incorporated by Reference: None
The registrant meets the conditions set forth in general
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing
this form with the reduced disclosure format.
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PART I
ITEM 1. Business
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General
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AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading
national specialty retailer of better quality women's apparel,
shoes and accessories sold primarily under the Ann Taylor brand
name. The Company believes that "Ann Taylor" is a highly
recognized national brand that defines a distinct fashion point
of view. Ann Taylor merchandise represents classic styles,
updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, weekend wear,
dresses, tops, accessories and shoes, coordinated as part of a
total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise
selection and wardrobe coordination, helping them achieve the
"Ann Taylor look" while reflecting the customers' personal
styles.
As of January 31, 1998, the Company operated 324 stores in
41 states and the District of Columbia, under the names Ann
Taylor, Ann Taylor Factory Store and Ann Taylor Loft. Of the 283
stores operated under the Ann Taylor name, approximately three-
quarters are located in regional malls and upscale specialty
retail centers, with the balance located in downtown and village
locations. These stores represent the Company's core merchandise
line. The Company believes that the customer base for its Ann
Taylor stores consists primarily of relatively affluent, fashion-
conscious women from the ages of 25 to 55, and that the majority
of its customers are working women with limited time to shop, who
are attracted to Ann Taylor by its focused merchandising and
total wardrobing strategies, personalized customer service,
efficient store layouts and continual flow of new merchandise.
In 1995, the Company began testing Ann Taylor Loft, a
separate moderate-price store concept for women who appreciate
the Ann Taylor style but are more cost conscious. Merchandise is
designed uniquely for these stores and is sold under the Ann
Taylor Loft label. As of January 31, 1998, the Company operated
27 Ann Taylor Loft stores, all located in factory outlet centers.
The Company believes that the Ann Taylor Loft concept represents
an opportunity for the Company to compete in the moderately-
priced women's apparel market. In 1998, the Company plans to
open Ann Taylor Loft stores outside the factory outlet center
environment for the first time, primarily in regional malls and
strip shopping centers.
The Company also operates 14 stores in factory outlet
centers that serve primarily as a clearance vehicle for
merchandise from both Ann Taylor and Ann Taylor Loft stores. The
Company is introducing a limited selection of original priced Ann
Taylor Loft merchandise to many of these stores as well, so that
the Company's emphasis on wardrobing can be represented in these
stores at all times.
The Company was incorporated under the laws of the state of
Delaware in 1986. All of the outstanding capital stock of the
Company, consisting of one share of common stock, is owned by
AnnTaylor Stores Corporation ("ATSC"). Ann Taylor was acquired
by ATSC in a leveraged buyout transaction in 1989.
Sourcing Acquisition
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The Company believes that procuring merchandise directly
from manufacturers improves the Company's competitive position by
providing it with greater control over pre-production processes,
resulting in greater consistency in merchandise quality and
sizing, and by reducing merchandise costs. To this end, in May
1992, the Company commenced a joint venture, known as "CAT", with
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one of its private label vendors, Cygne Designs, Inc. ("Cygne").
CAT was formed for the purpose of acting as a sourcing agent
exclusively for Ann Taylor, placing merchandise orders directly
with manufacturers. Until September 1996, the Company owned a
minority interest in CAT. In September 1996, the Company
acquired Cygne's entire interest in CAT, which became a wholly
owned subsidiary of the Company, as well as certain assets (the
"Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that Cygne used in sourcing merchandise for Ann
Taylor. The Company's sourcing division is now known as Ann
Taylor Global Sourcing ("ATGS").
In consideration for Cygne's interest in CAT and the Assets,
ATSC and the Company paid (i) 2,348,145 shares of common stock of
ATSC having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash payments for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price was subject to post-closing
adjustments based upon final determination of the value of
certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments reduced the
net cash paid for inventory and fixed assets to approximately
$227,000. The total purchase price has been allocated to the
tangible and intangible assets and liabilities of CAT and the
Division that were acquired, based on estimates of their
respective fair values. The excess of the purchase price over
the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 25
years.
Pursuant to the terms of a Stockholders Agreement entered
into at the time of the Sourcing Acquisition, ATSC registered the
sale of the shares of ATSC Common Stock issued to Cygne as part
of the consideration for the acquisition. Cygne subsequently
sold, pursuant to this registration statement, all of the shares
of ATSC Common stock issued to it by ATSC.
ITEM 2. Properties
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As of January 31, 1998, the Company operated 324 stores, all
of which were leased. The store leases typically provide for
initial terms of ten years, although some leases have shorter or
longer initial periods, and grant the Company the right to extend
the term for one or two additional five-year periods. Most of
the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's
net sales in excess of a specified threshold. Most of the leases
also require Ann Taylor to pay real estate taxes, insurance and
certain common area and maintenance costs.
Ann Taylor leases corporate offices at 142 West 57th Street
in New York City and office space at 1372 Broadway in New York
City. The Company also leases office space in New Haven,
Connecticut.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution
Services, Inc., owns its 256,000 square foot distribution center
located in Louisville, Kentucky. Nearly all Ann Taylor
merchandise is distributed to the Company's stores through this
facility. The parcel on which the Louisville distribution center
is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
ITEM 3. Legal Proceedings
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On April 26, 1996, certain alleged stockholders of ATSC
filed a purported class action lawsuit in the United States
District Court Southern District of New York, against ATSC, the
Company, certain officers and directors of the Company, Merrill
Lynch & Co., Inc. ("ML&Co.") and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The
complaint alleged causes of action under Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as amended, by
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alleging that ATSC and the other defendants engaged in a
fraudulent scheme and course of business that operated a fraud or
deceit on purchasers of ATSC's common stock during the period
commencing February 3, 1994 through May 4, 1995 due to alleged
false and misleading statements about ATSC and the Company. The
complaint sought, among other things, certification as a class
action on behalf of all purchasers of common stock during the
period commencing February 3, 1994 through May 4, 1995, the
awarding of compensatory damages to the plaintiffs and purported
members of the class, the awarding of costs, including pre-
judgment and post-judgment interest, reasonable attorneys' fees
and expert witness fees to the plaintiffs and purported members
of the class and equitable and/or injunctive relief. On March
10, 1998, the Court granted the defendants' motions to dismiss
the complaint. The Court found that the complaint failed to
state a claim upon which relief may be granted, and failed to
plead fraud with particularity and an inability to do so. The
Court's Opinion grants the plaintiffs leave to amend and re-file
the complaint within thirty days of the date of the Opinion, and
an amended complaint was filed by the plaintiffs on April 9,
1998. The Company believes that the amended complaint is without
merit and intends to continue to defend the action vigorously.
As the case is in preliminary stages, any liability that may
arise from this action cannot be predicted at this time.
The Company is also a party to routine litigation incident
to its business. Although the amount of any liability that
could arise with respect to these actions cannot be accurately
predicted, in the opinion of the Company, any such liability will
not have a material adverse effect on the financial position,
results of operations and liquidity of the Company.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related
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Stockholder Matters
--------------------
There is no public market for the common stock of the
Company. All of the outstanding stock of the Company, consisting
of one share of common stock, is owned by ATSC.
From time to time, the Company pays dividends to ATSC in
amounts sufficient to fund ATSC's operating expenses. Further,
in connection with the 8-1/2% Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities (the "preferred
securities") issued by ATSC's financing vehicle, AnnTaylor
Finance Trust (the "Trust"), the Company makes regular dividend
payments to ATSC in amounts sufficient to allow ATSC to pay
interest on certain debentures issued to the Trust. The payment
of dividends by Ann Taylor to ATSC is subject to certain
restrictions under the Company's bank credit agreement, the
indenture relating to the Company's 8-3/4% Subordinated Notes due
2000 and the receivables facility. See Note 2 to the
Consolidated Financial Statements of the Company.
ITEM 7. Management's Discussion and Analysis of Financial Condition
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and Results of Operations
-------------------------
Fiscal 1997 Compared to Fiscal 1996
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The Company's net sales decreased to $781,028,000 in Fiscal
1997 from $798,117,000 in Fiscal 1996, a decrease of $17,089,000,
or 2.1%. Comparable store sales for Fiscal 1997 decreased 5.5%
compared to Fiscal 1996. Management believes that the decreases
were primarily attributable to lower customer acceptance of
certain of the Company's merchandise offerings and, to a lesser
extent, planned decreases in promotional inventory for certain
periods during the year.
Gross profit as a percentage of net sales increased to 47.3%
in 1997 from 44.4% in 1996. This increase was primarily
attributable to benefits achieved by the Company's sourcing
division.
Selling, general and administrative expenses were
$308,232,000, or 39.5% of net sales, in 1997, compared to
$291,027,000, or 36.5% of net sales, in 1996. The increase in
selling, general and administrative expenses as a percentage of
net sales was primarily attributable to increased tenancy expense
related to increased retail square footage, investments in
certain strategic initiatives, such as marketing and enhanced
merchandising information systems, and decreased leverage on
fixed expenses due to lower sales in 1997.
Operating income increased to $50,000,000, or 6.4% of net
sales, in 1997 from $46,461,000, or 5.8% of net sales, in 1996.
Operating income in 1996 was reduced by $3,500,000, or 0.4% of
net sales, representing the estimated costs of the Company's
obligations under the former Chairperson's employment contract
following her resignation in August 1996, and by a one-time
charge of $3,600,000, or 0.4% of net sales, relating to the
planned closing of all nine Ann Taylor Studio shoe stores
announced in January 1997. Amortization of goodwill was
$11,040,000, or 1.4% of net sales, in 1997 compared to
$10,086,000, or 1.3% of net sales, in 1996. Operating income
without giving effect to such amortization was $61,040,000, or
7.8% of net sales, in 1997 and $56,547,000, or 7.1% of net
sales, in 1996.
Interest expense was $19,989,000 in 1997 compared to
$24,416,000 in 1996. The decrease in interest expense was
primarily attributable to a decrease in the Company's outstanding
long-term debt, resulting in part from the prepayment in July
1997 of a $24,500,000 term loan referred to below, and to greater
interest income earned on cash on hand. The weighted average
interest rate on the Company's outstanding indebtedness at
January 31, 1998 was 8.59% compared to 8.63% at February 1, 1997.
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The income tax provision was $17,466,000, or 59.3% of income
before income taxes and extraordinary loss, in the 1997 period
compared to $12,975,000, or 60.0% of income before income taxes,
in 1996. The effective tax rates for both periods were higher
than the statutory rates, primarily as a result of non-deductible
goodwill expense.
On July 2, 1997, the Company used available cash to prepay
the outstanding balance of a $24,500,000 term loan due September
1998. This loan repayment resulted in an extraordinary charge to
earnings in Fiscal 1997 of $173,000, net of income tax benefit.
As a result of the foregoing factors, the Company had net
income of $11,824,000, or 1.5% of net sales, for 1997, compared
to net income of $8,667,000, or 1.1% of net sales, for 1996.
ITEM 8. Financial Statements and Supplementary Data
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The following consolidated financial statements of the
Company for the years ended January 31, 1998, February 1, 1997
and February 3, 1996 are included as a part of this Report (See
Item 14):
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996.
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997.
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996.
Notes to Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
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and Financial Disclosures
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None.
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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(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 12 through 29 and are filed as part of this Annual
Report:
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996;
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997; Consolidated Statements of Cash Flows for
the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996; Notes to Consolidated Financial Statements;
Independent Auditors' Report.
(b) Reports on Form 8-K
The Company filed a report with the Commission on Form 8-K
dated March 12, 1998 with respect to the dismissal of the
purported class action lawsuit against ATSC, Ann Taylor,
certain officers and directors of ATSC and Ann Taylor, ML&Co.
and certain affiliates of ML&Co. Additionally the Form 8-K
reported on an Amendment to ATSC's amended and restated
1992 Stock Option and Restricted Stock and Unit Award Plan.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual
Report.
Exhibit
Number
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3.1 Certificate of Incorporation of the Company, as
amended. Incorporated by reference to Exhibit 3.3 to
the Registration Statement of ATSC and Ann Taylor filed
on May 3, 1989 (Registration No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to
Exhibit 3.4 to the Registration Statement of ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
4.1 Indenture, dated as of June 15, 1993, between Ann
Taylor and Fleet Bank, N.A., as Trustee, including the
form of Subordinated Note due 2000. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form
8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance,
dated as of December 1, 1995, among Ann Taylor, Fleet
Bank, N.A., as Resigning Trustee, and Norwest Bank
Minnesota, N.A., the Successor Trustee. Incorporated
by reference to Exhibit 4.1.1 to the Annual Report on
Form 10-K of the Company filed on April 8, 1996.
10.1 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.
10.1.1 First Amendment to Amended and Restated Credit
Agreement, dated as of January 4, 1996, among Ann
Taylor, Bank of America, Fleet Bank, National
Association, as Co-Agents, the financial institutions
from time to time party thereto, BA Securities, Inc.,
as Arranger, and Bank of America, as Agent.
Incorporated by reference to Exhibit 10.2.1 to the
Annual Report on Form 10-K of ATSC filed on April 8,
1996.
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Exhibit
Number
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10.1.2 Second Amendment to the Amended and Restated Credit
Agreement, dated as of April 9, 1996 among Ann Taylor,
Bank of America and Fleet Bank, National Association,
as Co-Agents, the financial institutions from time to
time party thereto, BA Securities Inc. as Arranger, and
Bank of America as Agent. Incorporated by reference to
Exhibit 10.1 on Form 10-Q of ATSC for the Quarter ended
August 3, 1996 filed on September 16, 1996.
10.2 Amended and Restated Guaranty, dated as of September
29, 1995, made by ATSC 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.
10.3 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.
10.4 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 10.5 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.5 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.
10.6 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.18 to the Registration Statement of ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
10.6.1 Amendment to 1989 Stock Option Plan. Incorporated by
reference to Exhibit 10.15.1 to the Annual Report on
Form 10-K of ATSC filed on April 30, 1993.
10.7 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 ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
10.7.1 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 ATSC filed on April 11, 1991
(Registration No. 33-39905).
10.7.2 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 ATSC filed on April 29,
1993.
10.7.3 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.
10.7.4 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 ATSC filed on
April 28, 1995.
10.7.5 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 ATSC filed on April 28, 1995.
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Exhibit
Number
--------
10.7.6 Sixth Amendment to Lease, dated as of January 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.6 to
the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.7.7 Seventh Amendment to Lease, dated as of June 5, 1996,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.7 to
the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.7.8 Eighth Amendment to Lease, undated, between Pacific
Metropolitan Corporation and Ann Taylor. Incorporated
by reference to Exhibit 10.8.8 to the Annual Report on
Form 10-K of ATSC filed on April 30, 1998.
10.7.9 Ninth Amendment to Lease, dated as of May 13, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.9 to
the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.7.10 Tenth Amendment to Lease, dated as of May 21, 1997,
between Pacific Metropolitan Corporation and Ann
Taylor. Incorporated by reference to Exhibit 10.8.10
to the Annual Report on Form 10-K of ATSC filed on
April 30, 1998.
10.8 Tax Sharing Agreement, dated as of July 13, 1989,
between ATSC and Ann Taylor. Incorporated by reference
to Exhibit 10.24 to Amendment No. 2 to the Registration
Statement of ATSC and Ann Taylor filed on July 13, 1989
(Registration No. 33-28522).
10.9 Employment Agreement dated as of February 1, 1994
between ATSC and Sally Frame Kasaks. Incorporated by
reference to Exhibit 10.8 to the Form 10-Q of ATSC for
the Quarter ended October 29, 1994 filed on December 9,
1994.
10.10 Employment Agreement dated February 16, 1996 between
ATSC and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form
10-K of ATSC filed on April 8, 1996.
10.10.1 Amendment to the Employment Agreement, dated August 23,
1996, between ATSC and J. Patrick Spainhour.
Incorporated by reference to Exhibit 10.11.1 to the
Annual Report on Form 10-K of ATSC filed on May 1,
1997.
10.11 Employment Agreement dated November 25, 1996 between
ATSC and Patricia DeRosa. Incorporated by reference to
Exhibit 10.3 to Form 10-Q of Ann Taylor for the Quarter
ended November 2, 1996 filed on December 17, 1996.
10.12 Employment Agreement dated September 20, 1996 between
Ann Taylor and Dwight F. Meyer. Incorporated by
reference to Exhibit 10.4 to the Form 10-Q of Ann
Taylor for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.13 Separation Agreement dated January 24, 1997 between Ann
Taylor and Paul E. Francis. Incorporated by reference
to Exhibit 10.14 to the Annual Report on Form 10-K of
ATSC filed on May 1, 1997.
10.14 Separation Agreement dated July 15, 1997 between Ann
Taylor and Barry Shapiro. Incorporated by reference to
Exhibit 10.16 to the Annual Report on Form 10-K of ATSC
filed on April 30, 1998.
10.15 The AnnTaylor Stores Corporation 1992 Stock Option and
Restricted Stock and Unit Award Plan, Amended and
Restated as of February 23, 1994 (the "1992 Option
Plan"). Incorporated by reference to Exhibit 10.15 to
the Annual Report on Form 10-K of ATSC filed on May 1,
1997.
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Exhibit
Number
- --------
10.15.1 Amendment to the AnnTaylor Stores Corporation Amended
and Restated 1992 Stock Option and Restricted Stock and
Unit Award Plan, as approved by stockholders on June
18, 1997. Incorporated by reference to Exhibit 10.15.1
to the Form 10-Q of ATSC for the Quarter Ended August
2, 1997 filed on September 12, 1997.
10.15.2 Amendment to the AnnTaylor Stores Corporation Amended
and Restricted 1992 Stock Option and Restricted Stock
and Unit Award Plan dated as of January 16, 1998.
Incorporated by reference to Exhibit 10 on the Current
Report on Form 8-K of ATSC filed on March 12, 1998.
10.16 AnnTaylor Stores Corporation Amended and Restated
Management Performance Compensation Plan, as approved
by stockholders on June 18, 1997. Incorporated by
reference to Exhibit 10.16 to the Form 10-Q of ATSC for
the Quarter Ended August 2, 1997 filed on September 12,
1997.
10.16.1 Amendment to the AnnTaylor Stores Corporation Amended
and Restated Management Performance Compensation Plan
dated as of March 12, 1998. Incorporated by reference
to Exhibit 10.17.1 to the Annual Report of ATSC filed
on April 30, 1998.
10.17 Associate Stock Purchase Plan. Incorporated by
reference to Exhibit 10.31 to the Form 10-Q of ATSC for
the Quarter Ended October 31, 1992 filed on December
15, 1992.
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 ATSC for the
Quarter ended October 28, 1995 filed on December 8,
1995.
10.18.1 First Amendment to the Amended and Restated Receivables
Financing Agreement, dated as of November 1, 1996,
among AnnTaylor Funding, Inc., Ann Taylor, Market
Street Capital Corp. and PNC Bank, National
Association. Incorporated by reference to Exhibit 10.5
to the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.19 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 ATSC 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 ATSC 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 ATSC 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.
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Exhibit
Number
-------
10.23 Amended and Restated Credit Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.6 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.23.1 Promissory Note dated September 20, 1996 from AnnTaylor
Global Sourcing, Inc. to the Hongkong and Shanghai
Banking Corporation Limited, New York Branch.
Incorporated by reference to Exhibit 10.7 to Form 10-Q
of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.23.2 Amended and Restated Security Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.8 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.23.3 Letter of Negative Pledge, dated as of September 20,
1996 from AnnTaylor Global Sourcing, Inc. to the
Hongkong and Shanghai Banking Corporation Limited.
Incorporated by reference to Exhibit 10.9 to the Form
10-Q of Ann Taylor for the Quarter ended November 2,
1996 filed on December 17, 1996.
10.23.4 First Amendment to the Amended and Restated Credit
Agreement, dated as of April 11, 1997, between
AnnTaylor Global Sourcing, Inc. and the Hongkong and
Shanghai Banking Corporation Limited. Incorporated by
reference to Exhibit 10.25.4 to the Form 10-Q of ATSC
for the Quarter Ended August 2, 1997 filed on September
12, 1997.
10.23.5 Second Amendment to the Amended and Restated Credit
Agreement, dated as of July 29, 1997, between AnnTaylor
Global Sourcing, Inc. and the Hongkong and Shanghai
Banking Corporation Limited. Incorporated by reference
to Exhibit 10.25.5 to the Form 10-Q of ATSC for the
Quarter Ended August 2, 1997 filed on September 12,
1997.
10.23.6 Notification of extension of termination date of the
Amended and Restated Credit Agreement, dated as of
September 20, 1996 between AnnTaylor Global Sourcing,
Inc. and the HongKong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.25.6
to the Form 10-Q of ATSC for the Quarter Ended November
1, 1997 filed on December 16, 1997.
10.24 Stock and Asset Purchase Agreement, dated as of June 7,
1996, by and among ATSC, Ann Taylor, Cygne and Cygne
Group (F.E.) Limited. Incorporated by reference to
Exhibit 2 to the Registrants' Current Report on Form 8-
K filed on June 10, 1996.
10.24.1 Amendment to Stock and Asset Purchase Agreement, dated
as of August 27, 1996, by and among ATSC, Ann Taylor,
Cygne and Cygne Group (F.E.) Limited. Incorporated by
reference to Exhibit 3 to the Registrants' Current
Report on Form 8-K filed on August 30, 1996.
10.24.2 Stockholders Agreement, dated as of September 20, 1996,
among ATSC, Cygne and Cygne Group (F.E.) Limited, a
Hong Kong corporation and wholly owned subsidiary of
Cygne. Incorporated by reference to Exhibit 10.26.2 to
the Annual Report on Form 10-K of ATSC filed on May 1,
1997.
10.24.3 Consulting Agreement, dated as of September 20, 1996,
by and between ATSC, Cygne and Mr. Bernard M. Manuel.
Incorporated by reference to Exhibit 10.26.3 to the
Annual Report on Form 10-K of ATSC filed on May 1,
1997.
10.24.4 Consulting Agreement, dated as of September 20, 1996,
by and between ATSC, Cygne and Mr. Irving Benson.
Incorporated by reference to Exhibit 10.26.4 to the
Annual Report on Form 10-K of ATSC filed on May 1,
1997.
27 Financial Data Schedule.
=====================================================================
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, INC.
By: /s/ J. Patrick Spainhour
-------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: April 29, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ J. Patrick Spainhour Chairman and Chief Executive April 29, 1998
- ------------------------ Officer and Director
J. Patrick Spainhour
/s/ Patricia DeRosa President and Chief Operating April 29, 1998
- ------------------------ Officer and Director
Patricia DeRosa
/s/ Walter J. Parks Senior Vice President - April 29, 1998
- ------------------------ Chief Financial Officer
Walter J. Parks and Treasurer
/s/ James M. Smith Vice President and Controller April 29, 1998
- ------------------------ Principal Accounting Officer
James M. Smith
/s/ Gerald S. Armstrong Director April 29, 1998
- -----------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director April 29, 1998
- ------------------------
James J. Burke, Jr
/s/ Robert C. Grayson Director April 29, 1998
- ------------------------
Robert C. Grayson
/s/ Rochelle B. Lazarus Director April 29, 1998
- -------------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director April 29, 1998
- --------------------------
Hanne M. Merriman
==============================================================================
ANNTAYLOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report....................................... 13
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and
February 3, 1996.............................................. 14
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997............................................... 15
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996... 16
Notes to Consolidated Financial Statements........................ 17
=============================================================================
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
ANNTAYLOR, INC.:
We have audited the accompanying consolidated financial
statements of AnnTaylor, Inc. and its subsidiaries, listed in the
accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of the Company and its subsidiaries at January 31, 1998 and
February 1, 1997, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
January 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 19, 1998
=========================================================================
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
Fiscal Years Ended
-----------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ---------
(in thousands)
Net sales............................... $781,028 $798,117 $731,142
Cost of sales........................... 411,756 443,443 425,225
------- ------- -------
Gross profit............................ 369,272 354,674 305,917
Selling, general and administrative
expenses.............................. 308,232 291,027 271,136
Studio shoe stores closing expense...... --- 3,600 ---
Employment contract separation expense.. --- 3,500 ---
Amortization of goodwill................ 11,040 10,086 9,506
------- ------- -------
Operating income........................ 50,000 46,461 25,275
Interest expense........................ 19,989 24,416 20,956
Other expense, net...................... 548 403 38
------- ------- -------
Income before income taxes and
extraordinary loss................... 29,463 21,642 4,281
Income tax provision.................... 17,466 12,975 5,157
------- ------- -------
Income (loss) before extraordinary loss. 11,997 8,667 (876)
Extraordinary loss (net of income
tax benefit of $130,000).............. 173 --- ---
------- ------- -------
Net income (loss).................... $ 11,824 $ 8,667 $ (876)
======= ======= =======
See accompanying notes to consolidated financial statements.
==============================================================================
ANNTAYLOR, INC.
CONSOLIDATED BALANCE SHEETS
January 31, 1998 and February 1, 1997
January 31, February 1,
1998 1997
----------- ----------
ASSETS (in thousands)
Current assets
Cash and cash equivalents........................... $ 31,369 $ 7,025
Accounts receivable, net............................ 60,211 63,605
Merchandise inventories............................. 97,234 100,237
Prepaid expenses and other current assets........... 21,291 25,653
------- -------
Total current assets............................ 210,105 196,520
Property and equipment, net.......................... 139,610 143,433
Goodwill, net........................................ 330,739 341,779
Deferred financing costs, net........................ 1,258 2,743
Other assets......................................... 1,949 3,664
------- -------
Total assets.................................... $683,661 $688,139
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.................................... $ 38,185 $ 34,341
Accrued tenancy..................................... 6,727 6,827
Gift certificates redeemable........................ 5,935 4,903
Accrued expenses.................................... 35,958 31,312
Current portion of long-term debt................... 1,119 287
------- -------
Total current liabilities....................... 87,924 77,670
Long-term debt....................................... 105,157 130,905
Deferred income taxes................................ --- 4,872
Other liabilities.................................... 10,082 7,952
Commitments and contingencies
Stockholder's equity
Common stock, $1.00 par value; 1,000
shares authorized; 1 share issued
and outstanding................................... 1 1
Additional paid-in capital.......................... 445,886 443,952
Retained earnings................................... 34,611 22,787
------- -------
Total stockholder's equity...................... 480,498 466,740
------- -------
Total liabilities and stockholder's equity...... $683,661 $688,139
======= =======
See accompanying notes to consolidated financial statements.
============================================================================
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
Fiscal Years Ended
---------------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- -------- --------
(in thousands)
Operating activities:
Net income (loss)..................... $ 11,824 $ 8,667 $ (876)
Adjustments to reconcile
net income (loss) to net cash
provided by operating activities:
Extraordinary loss................ 303 --- ---
Equity earnings in CAT............ --- (1,402) (1,646)
Provision for loss on
accounts receivable............. 1,795 1,803 1,280
Depreciation and amortization..... 27,803 26,208 18,788
Amortization of goodwill.......... 11,040 10,086 9,506
Amortization of deferred
compensation.................... 1,065 191 68
Non-cash interest................. 1,419 1,574 1,004
Deferred income taxes............. (2,687) (985) 3,150
Loss on disposal of property
and equipment................... 248 3,209 1,143
Change in assets and liabilities
net of effects from
purchase of AnnTaylor
Global Sourcing:
Decrease (increase)
in receivables......... 1,599 4,987 (10,464)
Decrease (increase) in
merchandise inventories.. 3,003 9,342 (8,980)
Decrease (increase) in
prepaid expenses and
other current assets..... 1,894 247 (12,951)
Decrease in other
non-current assets
and liabilities, net...... 2,861 738 429
Increase in accounts
payable and accrued
liabilities................. 9,422 2,867 6,925
------- ------- -------
Net cash provided by operating
activities.......................... 71,589 67,532 7,376
======= ======= =======
Investing activities:
Purchases of property and equipment... (22,945) (16,107) (78,378)
Purchase of AnnTaylor Global Sourcing --- (227) ---
------- ------- -------
Net cash used by investing
activities.......................... (22,945) (16,334) (78,378)
------- ------- -------
Financing activities:
Borrowings (repayments) under
revolving credit facility......... --- (101,000) 37,000
Parent company contribution........... 869 96,194 384
Proceeds from (repayment of) term loan (24,500) --- 24,500
Term loan prepayment penalty.......... (184) --- ---
Proceeds from (payments of) mortgage.. (416) (266) 6,958
Borrowings (repayments) under
receivables facility............... --- (40,000) 4,000
Payment of financing costs............ (69) (384) (2,108)
------- ------- -------
Net cash provided by (used by)
financing activities................ (24,300) (45,456) 70,734
------ ------- -------
Net increase (decrease) in cash......... 24,344 5,742 (268)
Cash, beginning of year................. 7,025 1,283 1,551
------ ------- -------
Cash, end of year....................... $ 31,369 $ 7,025 $ 1,283
======== ======== ========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year
for interest........................ $ 19,251 $ 22,689 $ 19,607
======= ======== ========
Cash paid during the
year for income taxes............... $ 17,220 $ 8,990 $ 6,886
======= ======== ========
See accompanying notes to consolidated financial statements.
=========================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- ------------------------------------------------
AnnTaylor, Inc. (the "Company" or "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.
All of the outstanding capital stock of the Company,
consisting of one share of common stock, is owned by AnnTaylor
Stores Corporation ("ATSC").
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts
of the Company and its subsidiaries. All intercompany accounts
have been eliminated in consolidation.
Certain Fiscal 1996 and 1995 amounts have been reclassified
to conform to the Fiscal 1997 presentation.
Fiscal Year
- -----------
The Company follows the standard fiscal year of the retail
industry, which is a 52 or 53 week period ending on the Saturday
closest to January 31 of the following calendar year. The fiscal
year ended February 3, 1996 included 53 weeks. The other fiscal
years presented included 52 weeks.
Finance Service Charge Income
- -----------------------------
Income from finance service charges relating to customer
receivables, which is deducted from selling, general and
administrative expenses, amounted to $8,568,000 for Fiscal 1997,
$9,024,000 for Fiscal 1996 and $8,328,000 for Fiscal 1995.
Merchandise Inventories
- -----------------------
Merchandise inventories are accounted for by the retail
inventory method and are stated at the lower of cost (first-in,
first-out method) or market. The majority of the Company's
inventory represents finished goods available for sale.
Property and Equipment
- -----------------------
Property and equipment are recorded at cost. The Company
capitalized interest costs of approximately $1,300,000 in Fiscal
1995. Depreciation and amortization are computed on a straight-
line basis over the estimated useful lives of the assets (3 to 40
years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
- -------------------------------------------------------------
Deferred Financing Costs
- ------------------------
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at January 31, 1998 and February 1, 1997 was
$4,427,000 and $3,534,000, respectively.
Goodwill
- --------
Goodwill relating to the 1989 acquisition of Ann Taylor by
ATSC is being amortized on a straight-line basis over 40 years.
Goodwill relating to the 1996 Sourcing Acquisition (see Note 9)
is being amortized on a straight-line basis over 25 years.
Accumulated amortization at January 31, 1998 and February 1, 1997
was $87,851,000 and $76,811,000, respectively. On an annual
basis, the Company compares the carrying value of its goodwill to
an estimate of the Company's fair value to evaluate the
reasonableness of the carrying value and remaining amortization
period. Fair value is computed using projections of future cash
flows.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which requires an asset and liability method
of accounting for deferred income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Pursuant to a Tax Sharing Agreement, ATSC and the Company
have agreed to elect to file consolidated income tax returns for
federal income tax purposes and may elect to file such returns in
states and other relevant jurisdictions that permit such an
election, for income tax purposes. With respect to such
consolidated income tax returns, the Tax Sharing Agreement
generally requires the Company to pay to ATSC the entire tax
shown to be due on such consolidated returns, provided that the
amount paid by the Company shall not exceed the amount of taxes
that would have been owed by the Company on a stand-alone basis.
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.
=======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
- -------------------------------------------------------------
Recent Accounting Pronouncements
- ----------------------------------
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which requires that components
of comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements;
and Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related
disclosures about its products, services, major customers and the
material countries in which the entity holds assets and reports
revenues. In February 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure about Pensions and Other Postretirement
Benefits", which revises disclosures, but does not change the
measurement or recognition of these plans. Management is
currently evaluating the impact of these standards and believes
their adoption will not impact the Company's consolidated
financial position, results of operations or cash flows, and any
impact will be limited to the form and content of its
disclosures. All of these statements are effective for fiscal
years beginning after December 15, 1997.
2. Long-Term Debt
- -------------------
The following table summarizes long-term debt outstanding at
January 31, 1998 and February 1, 1997:
January 31, 1998 February 1, 1997
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Senior Debt:
Term loan...................... $ --- $ --- $ 24,500 $ 24,500
Mortgage....................... 6,276 6,276 6,692 6,692
8-3/4% Notes.................... 100,000 100,500 100,000 97,750
------- ------- ------- -------
Total debt............. 106,276 106,776 131,192 128,942
Less current portion............ 1,119 1,119 287 287
------- ------- ------- -------
Total long-term debt... $105,157 $105,657 $130,905 $128,655
======= ======= ======= =======
In accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", the Company determined the
estimated fair value of its financial instruments using quoted
market information, as available. As judgment is involved, the
estimates are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
=======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (Continued)
- --------------------------------
Ann Taylor's Bank Credit Agreement originally provided,
among other things, for a $25,000,000 term loan and a
$125,000,000 revolving credit facility. As described below, in
January 1996, the Company prepaid a portion of the term loan and
reduced the revolving credit facility to $122,000,000. On July
2, 1997, the Company used available cash to prepay $24,500,000,
the outstanding balance of the term loan. The maturity date of
the revolving credit facility is July 29, 1998; however, the
Company is required to reduce the outstanding loan balance under
the revolving credit facility to $50,000,000 or less for thirty
consecutive days during Fiscal 1996 and in each fiscal year
thereafter. The maximum amount that may be borrowed under the
revolving credit facility is reduced by the amount of commercial
and standby letters of credit outstanding under the Bank Credit
Agreement. At January 31, 1998 and February 1, 1997, Ann Taylor
had outstanding commercial and standby letters of credit under
the Bank Credit Agreement of $33,000,000 and $12,000,000,
respectively. At January 31, 1998 the amount available under the
revolving credit facility was $89,000,000.
The amounts outstanding under the revolving credit facility
bear interest at a rate equal to, at the Company's option, the
Bank of America (1) Base Rate, or (2) Eurodollar Rate plus 0.75%.
In addition, Ann Taylor is required to pay the lenders a
quarterly commitment fee of 0.25% per annum of the unused
revolving loan commitment.
Under the terms of the Bank Credit Agreement, Bank of
America obtained a pledge of Ann Taylor's outstanding common
stock held by ATSC and a security interest in certain assets of
Ann Taylor, excluding inventory and accounts receivable. In
addition, the Bank Credit Agreement contains financial and other
covenants, including limitations on indebtedness, liens and
investments, restrictions on dividends or other distributions to
stockholders, and requirements to maintain 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 $32,500,000 in Fiscal 1997
and beyond, subject to increase if certain conditions are
satisfied.
Ann Taylor sells its proprietary credit card accounts
receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary
of the Company, that uses the receivables to secure borrowings of
up to $40,000,000, based on its eligible accounts receivable,
under a receivables financing facility (the "Receivables
Facility"). As of January 31, 1998, there were no borrowings
outstanding under the Receivables Facility. AnnTaylor Funding,
Inc. had total assets of approximately $50,440,000 at January 31,
1998, all of which are subject to the security interest of the
lender under the Receivables Facility. The Receivables Facility
matures in May 1998.
In connection with the Sourcing Acquisition discussed in
Note 9, the Hongkong and Shanghai Banking Corporation entered
into an Amended and Restated Credit Agreement with AnnTaylor
Global Sourcing, Inc. ("ATGS", formerly known as CAT US Inc.
("CAT") and now a wholly owned subsidiary of Ann Taylor),
continuing the $40,000,000 credit facility of ATGS's predecessor.
On July 29, 1997, ATGS amended its credit facility with the
HKSBC, increasing the commitment available to $50,000,000. The
facility is available principally for the issuance of letters of
credit; cash borrowings under the facility are limited to a
maximum of $5,000,000. Such credit facility matures on July 29,
1998 and contains financial and other covenants. As of January
31, 1998 and February 1, 1997, commercial and standby letters of
credit outstanding under this facility totaled $25,102,000 and
$28,189,000, respectively, and there were no borrowings
outstanding under this facility.
==================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (Continued)
- --------------------------------
As noted above, the Company's Bank Credit Agreement,
Receivables Facility and HKSBC Agreement mature in May and July
1998. The Company is currently negotiating to obtain new
financing and anticipates new arrangements will be in place in
the second quarter of Fiscal 1998.
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 January 31,
1998 was $100,000,000.
In July 1993, Ann Taylor entered into a $110,000,000
(notional amount) interest rate swap agreement, which had the
effect of converting the Company's interest obligations on the
8-3/4% Notes to a variable rate. Under the agreement, the Company
received a fixed rate of 4.75% and paid a floating rate based on
LIBOR, as determined in six month intervals. The swap agreement
matured in July 1996. Net receipts or payments under the
agreement were recognized as adjustments to interest expense.
The Company and its wholly owned subsidiary AnnTaylor
Distribution Services, Inc. are parties to 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 $130,000. Pursuant to the requirements of the Bank
Credit Agreement, in January 1996, the Company applied one-half
of the proceeds of the mortgage to reduce the amount available
under the revolving credit facility, thereby reducing the
revolving credit facility by $3,000,000, and prepaid a portion of
the term loan.
The aggregate principal payments of all long-term
obligations are as follows:
Fiscal Year (in thousands)
----------
1998................................... $ 1,119
1999................................... 1,206
2000................................... 101,300
2001................................... 1,401
2002................................... 1,250
-------
Total............................... $106,276
=======
3. Preferred Securities
- -------------------------
In April and May of Fiscal 1996, ATSC completed the sale of
an aggregate of $100,625,000 of 8-1/2% Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities (the "preferred
securities") issued by its financing vehicle, AnnTaylor Finance
Trust, a Delaware business trust (the "Trust"). The preferred
securities have a liquidation preference of $50 per security
($100,625,000 in the aggregate) and are convertible at the option
of the holders thereof into ATSC's common stock at a conversion
rate of 2.545 shares of common stock for each preferred security
(equivalent to $19.65 per share of common stock, which
represented a 20% premium to the $16.375 closing price of the
common stock on the New York Stock Exchange at the date of the
execution of the purchase agreement relating to the sale of the
====================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Preferred Securities (Continued)
- -------------------------------------
preferred securities. The sole assets of the Trust are
$103,700,000 of 8-1/2% Convertible Subordinated Debentures
of ATSC maturing on April 15, 2016. A total of
2,012,500 preferred securities were issued, and are convertible
into an aggregate of 5,121,812 shares of ATSC's common stock.
ATSC received net proceeds of $95,984,000 in connection with the
sale of the preferred securities, of which $94,000,000 was
applied to reduce outstanding borrowings under the Company's
revolving credit facility.
4. Allowance for Doubtful Accounts
- ------------------------------------
A summary of activity in the allowance for doubtful accounts
for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996 is as follows:
Fiscal Years Ended
-----------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- -------- -------
(in thousands)
Balance at beginning of year.......... $ 811 $ 736 $ 931
Provision for loss on
accounts receivable................. 1,795 1,803 1,280
Accounts written off.................. (1,794) (1,728) (1,475)
------ ------ ------
Balance at end of year................ $ 812 $ 811 $ 736
====== ====== ======
5. Commitments and Contingencies
- ----------------------------------
Rental Commitments
- ------------------
Ann Taylor occupies its retail stores and administrative
facilities under operating leases, most of which are non-
cancelable. Some leases contain renewal options for periods
ranging from one to ten years under substantially the same terms
and conditions as the original leases. Most of the store leases
require Ann Taylor to pay a specified minimum rent, plus a
contingent rent based on a percentage of the store's net sales in
excess of a specified threshold. In addition, most of the leases
require Ann Taylor to pay real estate taxes, insurance and
certain common area and maintenance costs in addition to the
future minimum lease payments shown below.
Future minimum lease payments under non-cancelable operating
leases at January 31, 1998 are as follows:
Fiscal Year (in thousands)
1998................................. $68,663
1999................................. 67,537
2000................................. 65,491
2001................................. 62,446
2002................................. 59,515
2003 and thereafter.................. 251,998
-------
Total........................... $575,650
=======
==========================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies (continued)
- ----------------------------------------------
Rent expense for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996 was as follows:
Fiscal Years Ended
----------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
------- ------- -------
(in thousands)
Minimum rent................ $59,495 $55,571 $47,132
Percentage rent............. 1,671 2,433 3,090
------ ------ ------
Total.................. $61,166 $58,004 $50,222
====== ====== ======
Litigation
- ----------
The Company has been named as a defendant in several legal
actions arising from its normal business activities. Although
the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of
the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or
liquidity of the Company.
In addition, ATSC, Ann Taylor, certain officers and
directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.")
and certain affiliates of ML&Co. have been named as defendants in
a purported class action lawsuit filed by certain alleged
stockholders alleging that ATSC and the other defendants engaged
in a fraudulent scheme and course of business that operated a
fraud or deceit on purchasers of ATSC's common stock. On March
10, 1998, the Court issued an Opinion dismissing the complaint.
The Court's Opinion granted the plaintiffs leave to amend and re-
file the complaint within thirty days of the date of the Opinion,
and an amended complaint was filed by the plaintiffs on April 9,
1998. The Company believes that the amended complaint is without
merit and intends to defend the action vigorously. As the case
is in preliminary stages, any liability that may arise from this
action cannot be predicted at this time.
Other
- -----
The Internal Revenue Service (the "IRS") examination of ATSC
has recently been concluded. The IRS has made an assessment,
which ATSC has paid, that is not material to ATSC's or the
Company's consolidated financial condition, operating results or
liquidity. All matters in the IRS examination are subject to
final review by the Congressional Joint Committee on Taxation.
6. Property and Equipment
- --------------------------
Property and equipment consists of the following:
Fiscal Years Ended
---------------------
Jan. 31, Feb. 1,
1998 1997
-------- -------
(in thousands)
Land and building................. $ 8,625 $ 8,603
Leasehold improvements............ 85,332 76,576
Furniture and fixtures............ 136,314 120,595
Construction in progress.......... 6,422 3,307
------- -------
236,693 209,081
Less accumulated depreciation
and amortization................ 97,083 65,648
------- -------
Net property and equipment.... $139,610 $143,433
======= =======
===========================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Extraordinary Item
- ---------------------
On July 2, 1997, the Company used available cash to prepay
$24,500,000, the outstanding balance of its term loan due
September 1998, which resulted in an extraordinary charge to
earnings in Fiscal 1997 of $173,000, net of income tax benefit.
8. Nonrecurring Charges
- -----------------------
Studio Shoe Stores Closing
- --------------------------
In connection with the planned closing of all of the
Company's Ann Taylor Studio shoe stores, announced in January
1997, the Company recorded a pre-tax charge of $3,600,000. Of
the total impairment loss, $2,500,000 represented impairment of
long-lived assets such as properties and store fixtures and
$1,100,000 pertained to lease and other related costs for these
locations until the properties are sublet.
Resignation of the Chairman and Chief Executive Officer
- -------------------------------------------------------
Effective August 23, 1996, the then Chairman and Chief
Executive Officer and Director of ATSC and Ann Taylor resigned.
In connection with this resignation, a one-time pre-tax charge of
$3,500,000 was recorded relating to the estimated costs of the
Company's obligations under the former Chairman's employment
contract with ATSC.
9. Certain Relationships and Related Transactions
- ---------------------------------------------------
Transactions with Merrill Lynch and its Affiliates
- --------------------------------------------------
At January 31, 1998, certain affiliates of ML&Co. held
approximately 24.0% of ATSC's outstanding common stock. Two of
the members of the Board of Directors of the Company and ATSC
serve as representatives of ML&Co. and its affiliates. As a
result, ML&Co. and such affiliates are in a position to influence
the management of the Company and ATSC.
In Fiscal 1996, ATSC paid approximately $1,207,500 to ML&Co.
and Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill
Lynch") in connection with their services as placement agents for
the sale of the preferred securities (see Note 3). ATSC agreed
to indemnify ML&Co. and Merrill Lynch, as placement agents,
against certain liabilities, including certain liabilities under
the federal securities law, in connection with the sale of the
preferred securities.
Sourcing Acquisition
- --------------------
In Fiscal 1995, the Company purchased approximately 16% of
its merchandise directly from Cygne Designs, Inc. ("Cygne") and
an additional 38% of its merchandise through the Company's direct
sourcing joint venture with Cygne known as CAT. On September 20,
1996 (the "Effective Date"), pursuant to the Stock and Asset
Purchase Agreement dated as of June 7, 1996, by and among ATSC,
Ann Taylor, Cygne and Cygne Group F.E. Limited (as amended, the
"Purchase Agreement"), Ann Taylor acquired the entire interest
======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Certain Relationships and Related Transactions (Continued)
- -------------------------------------------------------------
of Cygne in CAT and certain of the assets (the "Assets")
of the Ann Taylor Woven Division of Cygne (the "Division")
that were used for sourcing merchandise for Ann Taylor
(the "Sourcing Acquisition"). As a result of the Sourcing
Acquisition, CAT became an indirect wholly owned
subsidiary of the Company and now performs all of the Company's
direct sourcing functions, including those previously provided by
the Division, under the name AnnTaylor Global Sourcing, Inc. For
financial reporting purposes, the transaction has been accounted
for as of the Effective Date under the purchase method of
accounting in accordance with Accounting Principles Board Opinion
No. 16, "Accounting for Business Combinations".
In consideration for Cygne's interest in CAT and the Assets,
ATSC and the Company paid (i) 2,348,145 shares of common stock of
ATSC having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash as payment for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price was subject to post-closing
adjustments based upon final determination of the value of
certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments reduced the
net cash paid to approximately $227,000. The total purchase
price to the Company of the Sourcing Acquisition has been
allocated to the tangible and intangible assets and liabilities
of CAT and the Division that were acquired, based on estimates of
their respective fair values. The excess of the purchase price
over the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 25
years.
The following unaudited proforma consolidated data for the
Company for the fiscal year ended February 1, 1997 has been
presented to reflect the Sourcing Acquisition as if it had
occurred at the beginning of such period:
Fiscal Year Ended
February 1, 1997
------------------
Actual Proforma
(in thousands)
Net sales............................ $798,117 $798,117
Net income........................... $ 8,667 $ 11,595
The proforma data set forth above does not purport to be
indicative of the results that actually would have occurred if
the Sourcing Acquisition had occurred at the beginning of the
period presented or of results which may occur in the future.
A summary of the noncash activity that occurred in the
fiscal year ended February 1, 1997 in conjunction with the
Sourcing Acquisition is as follows:
(in thousands)
Fair value of assets acquired................ $ 4,727
Excess of purchase price over
the fair value of net assets
acquired................................... 38,340
Ann Taylor's previous investment in CAT...... (6,840)
Issuance of ATSC's common stock.............. (36,000)
-------
Cash paid.................................... $ 227
=======
=======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stock Option Plans
- ----------------------
ATSC accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards.
Had compensation costs of option awards been determined under a
fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ATSC would have been required to prepare a fair
value model for such options and record such amount in the
financial statements as compensation expense. Proforma net
income (loss) before extraordinary loss for Fiscal 1997, Fiscal
1996, and Fiscal 1995 after taking into account such expense
would have been $11.0 million, $8.2 million, and $(1.1) million,
respectively. For purposes of this calculation, ATSC arrived at
the fair value of each stock grant at the date of grant by using
the Black Scholes option pricing model with the following
weighted average assumptions used for grants for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996:
risk-free interest rate of 6.2%, 5.8%, and 7.0%, respectively;
expected life of 5.0 years, 4.3 years, and 5.0 years,
respectively; and expected volatility of 67.9%, 55.2%, and 44.8%,
respectively.
11. Income Taxes
- -----------------
The provision for income taxes for the fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996 consists
of the following:
Fiscal Years Ended
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
------- ------- --------
(in thousands)
Federal:
Current..................... $14,427 $ 9,898 $ 1,400
Deferred.................... (1,917) (802) 2,249
------ ------ ------
Total federal............ 12,510 9,096 3,649
------ ------ ------
State and local:
Current.................... 5,538 3,844 607
Deferred................... (769) (152) 901
------ ------ ------
Total state and local.... 4,769 3,692 1,508
------ ------ ------
Foreign:
Current..................... 187 187 ---
Deferred................... --- --- ---
------ ------ ------
Total foreign............ 187 187 ---
------ ------ ------
Total...................... $17,466 $12,975 $ 5,157
====== ====== ======
The reconciliation between the provision for income taxes
and the provision for income taxes at the federal statutory rate
for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996 is as follows:
Fiscal Years Ended
----------------------------
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
-------- ------- ------
(in thousands)
Income before income taxes
and extraordinary loss........ $29,463 $21,642 $ 4,281
====== ====== ======
Federal statutory rate 35% 35% 35%
====== ====== ======
Provision for income taxes
at federal statutory rate..... $10,312 $ 7,575 $ 1,498
State and local income taxes,
net of federal income
tax benefit................... 3,800 2,273 980
Non-deductible amortization
of goodwill................... 3,500 3,429 3,327
Unremitted earnings of
foreign subsidiaries.......... (314) (382) (387)
Other........................... 168 80 (261)
------ ------ ------
Provision for income taxes...... $17,466 $12,975 $ 5,157
====== ====== ======
======================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes (Continued)
- ------------------------------
The tax effects of significant items comprising the
Company's net deferred tax assets as of January 31, 1998 and
February 1, 1997 are as follows:
January 31, February 1,
1998 1997
---------- -----------
(in thousands)
Current:
Inventory.......................... $ 2,854 $ 2,070
Accrued expenses................... 4,269 7,492
Real estate........................ (1,634) (1,433)
Other.............................. --- (172)
------ ------
Total current....................... $ 5,489 $ 7,957
====== ======
Noncurrent:
Depreciation and amortization...... $(4,982) $ (6,528)
Rent expense....................... 4,364 3,328
Other.............................. 901 (1,672)
------ ------
Total noncurrent.................... $ 283 $(4,872)
====== ======
Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. U.S. federal income taxes
are provided on unremitted foreign earnings except those that are
considered permanently reinvested, which at January 31, 1998
amounted to approximately $6,775,000. However, if these earnings
were not considered permanently reinvested, under current law,
the incremental tax on such undistributed earnings would be
approximately $2,022,000.
12. Retirement Plans
- ---------------------
Savings Plan. The Company maintains a defined contribution
401(k) savings plan for substantially all full-time employees.
Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. The Company makes a matching
contribution of 50% with respect to the first 3% of each
participant's annual earnings contributed to the plan. The
Company's contributions to the plan for Fiscal 1997, Fiscal 1996
and Fiscal 1995 were $519,000, $390,000, and $337,000,
respectively.
Pension Plan. Substantially all full-time employees of the
Company are covered under a noncontributory defined benefit
pension plan. Through December 31, 1997, the pension plan was a
"cash balance pension plan". Each participant accrued a benefit
based on compensation and years of service with the Company. As
of January 1, 1998, the Plan was amended and the formula to
calculate benefits was changed. The new career average plan
formula was used to determine the funding status of the plan for
fiscal 1997. The Company'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.
===================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Retirement Plans
- ---------------------
The following table sets forth the funded status of the
Pension Plan at January 31, 1998, February 1, 1997 and February
3, 1996, in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions":
Jan. 31, Feb. 1, Feb. 3,
1998 1997 1996
------- ------- -------
(dollars in thousands)
Actuarial present value
of benefits obligation:
Accumulated benefit obligation,
including vested benefits of
$2,830,000, $2,435,000 and
$2,064,000, respectively.............. $3,820 $3,413 $2,893
===== ===== =====
Projected benefit obligation
for service rendered to date......... $3,820 $3,413 $2,893
Plan assets at fair value............... 5,128 4,745 2,537
----- ----- -----
Plan assets in excess of
projected benefit obligation
(projected benefit obligation
in excess of plan assets)....... 1,308 1,332 (356)
Unrecognized net gain................... (1,286) (802) (231)
------ ----- -----
Prepaid (accrued) pension cost.......... $ 22 $ 530 $ (587)
====== ===== =====
Net periodic pension cost for
Fiscal 1997, Fiscal 1996 and
Fiscal 1995 included the
following components:
Service cost/benefits earned
during the year....................... $ 571 $ 981 $ 681
Interest cost on projected
benefit obligation................... 250 213 185
Actual return on plan assets............ (907) (527) (104)
Net amortization and deferral........... 462 300 (132)
------ ----- -----
Net periodic pension cost.............. $ 376 $ 967 $ 630
====== ===== =====
Assumptions used to determine
the projected benefit
obligation and plan
assets were:
Discount rate........................ 7.50% 8.00% 6.75%
Rate of increase in
compensation level................. 4.00% 4.00% 4.00%
Expected long-term rate of
return on assets................. 9.00% 9.00% 9.00%
13. Stockholder's Equity
- --------------------------
The following summarizes the changes in stockholder's equity
during Fiscal 1997, Fiscal 1996 and Fiscal 1995:
Total
Additional Stock-
Common Paid-in Retained holder's
Stock Capital Earnings Equity
----- -------- ---------- -------
(in thousands)
Balance at January 28, 1995........ $ 1 $311,115 $14,996 $326,112
Net loss......................... --- --- (876) (876)
Parent company contributions..... --- 452 --- 452
--- ------- ------ -------
Balance at February 3, 1996........ 1 311,567 14,120 325,688
Net income....................... --- --- 8,667 8,667
Parent company contributions..... --- 132,385 --- 132,385
--- ------- ------ -------
Balance at February 1, 1997........ 1 443,952 22,787 466,740
Net income...................... --- --- 11,824 11,824
Parent company contributions..... --- 1,934 --- 1,934
--- ------- ------ -------
Balance at January 31, 1998........ $ 1 $445,886 $34,611 $480,498
=== ======= ====== =======
==============================================================================
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent Event
- ---------------------
Effective February 1, 1998, the Company elected to change its
method of inventory valuation from the retail method to a cost
method. The Company believes the cost method is a preferable
method for matching the cost of merchandise with the revenues
generated. The cumulative effect of this accounting change and the
effect on future financial statements resulting from this change is
not expected to be material. It is not possible to determine the
effect of the change on income in any previously reported fiscal
years.