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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 February 1, 1997
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 1-10738
ANNTAYLOR STORES CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3499319
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 541-3300
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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
- -------------------- -----------------------------------------
Common Stock, The New York Stock Exchange
$.0068 Par Value
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes No x .
---- ---
The aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant as of March 14, 1997 was
$425,882,709.
The number of shares of the registrant's Common Stock
outstanding as of March 14, 1997 was 25,593,021.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for the
Registrant's 1997 Annual Meeting of Stockholders to be held on
June 18, 1997 are incorporated by reference into Part III.
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1
PART I
ITEM 1. Business
--------
General
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AnnTaylor Stores Corporation (the "Company"), through its
wholly owned subsidiary AnnTaylor, Inc. ("Ann Taylor"), is a
leading national specialty retailer of better quality women's
apparel, shoes and accessories sold primarily under the Ann
Taylor brand name. The Company believes that "Ann Taylor" is a
highly recognized national brand that defines a distinct fashion
point of view. Ann Taylor merchandise represents classic styles,
updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, weekend wear,
dresses, tops, accessories and shoes, coordinated as part of a
total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise
selection and wardrobe coordination, helping them achieve the
"Ann Taylor look" while reflecting the customers' personal
styles.
The Company has sought to capitalize on the Ann Taylor brand
through the introduction of new product lines in its Ann Taylor
stores. The Company believes that product extensions support the
Company's total wardrobing strategy, and provide existing and new
customers with additional reasons to shop at Ann Taylor stores.
Product extensions expanded or developed over the last several
years include Ann Taylor shoes, ATdenim, Ann Taylor Petites, and
fragrance and personal care products.
As of February 1, 1997, the Company operated 309 stores in
41 states and the District of Columbia, under the names Ann
Taylor, Ann Taylor Factory Store, Ann Taylor Loft and Ann Taylor
Studio. Of the 259 stores operated under the Ann Taylor name,
approximately three-quarters are located in regional malls and
upscale specialty retail centers, with the balance located in
downtown and village locations. These stores represent the
Company's core merchandise line. The Company believes that the
customer base for its Ann Taylor Stores consists primarily of
relatively affluent, fashion-conscious women from the ages of 25
to 55, and that the majority of its customers are working women
with limited time to shop, who are attracted to Ann Taylor by its
focused merchandising and total wardrobing strategies,
personalized customer service, efficient store layouts and
continual flow of new merchandise.
In 1995, the Company began testing Ann Taylor Loft, a
separate moderate-price store concept for customers who
appreciate Ann Taylor style, but are more value conscious.
Merchandise is designed uniquely for these stores and is sold
under the Ann Taylor Loft and Shoe Loft labels. As of February
1, 1997, the Company operated 15 Ann Taylor Loft stores, all
located in factory outlet centers. The Company also operates 16
stores in factory outlet centers under the name Ann Taylor
Factory Store or Ann Taylor Loft, that offer both original priced
Ann Taylor Loft merchandise, as well as clearance merchandise
from Ann Taylor and Ann Taylor Loft stores. The Company believes
that the Ann Taylor Loft concept represents an opportunity for
the Company to compete in the moderately-priced women's apparel
market, and management is developing a strategic plan to
determine how best to maximize its potential in this market.
The Company also operates 10 Ann Taylor Factory Stores that
serve principally as a clearance vehicle for both Ann Taylor and
Ann Taylor Loft merchandise. All of these stores are located in
factory outlet centers.
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2
In Fall 1994, the Company began testing Ann Taylor Studio
stores, a free-standing shoe and accessory store concept offering
the broadest assortment of Ann Taylor shoes, as well as certain
accessories also sold in Ann Taylor stores, such as hosiery,
belts, handbags, and fragrance and personal care products. By
Fall 1995, the Company had nine Ann Taylor Studio stores. The
Company did not open any new Studio stores during Fiscal 1996.
The Company has determined that the Studio stores, which have not
been profitable, are not consistent with the Company's total
wardrobing strategy, and in January 1997 the Company announced
its plans to close all nine Studio stores during Fiscal 1997.
The Company was incorporated under the laws of the state of
Delaware in 1988 under the name AnnTaylor Holdings, Inc. The
Company changed its name to AnnTaylor Stores Corporation in April
1991. The Company was formed at the direction of Merrill Lynch
Capital Partners, Inc. ("ML Capital Partners"), a wholly owned
subsidiary of Merrill Lynch & Co., Inc. ("ML&Co"), for the
purpose of acquiring Ann Taylor in a leveraged buyout transaction
(the "Acquisition") in 1989. As of March 14, 1997, certain
limited partnerships controlled directly or indirectly by ML
Capital Partners, together with certain other affiliates of
ML&Co. (collectively, the "ML Entities"), beneficially owned an
aggregate of 6,155,118 shares, or approximately 24.0%, of the
outstanding Common Stock of the Company. The ML Entities have
two designees on the Company's Board of Directors and, therefore,
are in a position to influence management of the Company. Unless
the context indicates otherwise, all references herein to the
Company include the Company, its wholly owned subsidiary Ann
Taylor and their respective subsidiaries.
Merchandise Design and Production
- ----------------------------------
Ann Taylor merchandise is developed by the Company's in-
house product design and development team, which designs
merchandise exclusively for the Company's stores. The Company's
merchandising group determines inventory needs for the upcoming
season, edits the assortment developed by the design team, plans
monthly merchandise flows, and arranges for the production of
merchandise either through the Company's sourcing division, or
with vendors who are private label specialists, or directly with
manufacturers.
The Company's production management and quality assurance
department establishes the technical specifications for all Ann
Taylor merchandise, inspects factories in which Ann Taylor
merchandise is produced, including periodic inspections while
goods are in production to identify potential problems prior to
shipment and, upon receipt, inspects merchandise on a test basis
for uniformity of size and color, as well as for overall quality
of manufacturing.
The Company believes that procuring merchandise directly
from manufacturers improves the Company's competitive position by
providing it with greater control over pre-production processes,
resulting in greater consistency in merchandise quality and
sizing, and by reducing merchandise costs. To this end, in May
1992, the Company commenced a joint venture, known as "CAT", with
one of its private label vendors, Cygne Designs, Inc. ("Cygne").
CAT was formed for the purpose of acting as a sourcing agent
exclusively for Ann Taylor, placing merchandise orders directly
with manufacturers. In 1995, the Company purchased approximately
38% of its merchandise through CAT and approximately 16% of its
merchandise from Cygne. Until September 1996, the Company owned
a minority interest in CAT. In September 1996, the Company
acquired Cygne's entire interest in CAT, which became a wholly
owned subsidiary of Ann Taylor, as well as certain assets of the
Ann Taylor Woven Division of Cygne that Cygne used in sourcing
merchandise for Ann Taylor (the "Sourcing Acquisition"). These
operations have been combined and are now known as "Ann Taylor
Global Sourcing" ("ATGS").
In Fiscal 1996, prior to the consummation of the Sourcing
Acquisition, the Company purchased approximately 42% and 19% of
its merchandise from CAT and Cygne, respectively. Subsequent to
the Sourcing Acquisition, the Company purchased approximately 57%
of its merchandise through ATGS. ATGS sources merchandise from
approximately 90 manufacturers and vendors. Substantially all of
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3
the merchandise purchased through ATGS is manufactured outside the
United States in over 15 different countries. The Company also
purchased merchandise from approximately 50 other vendors;
however, no single third-party vendor accounted for more than 5%
of the Company's total purchases. Although most of the Company's
third-party vendors are domestic, consistent with the retail
apparel industry as a whole, many of the Company's domestic
vendors import a large portion of their merchandise from abroad.
The Company cannot predict whether any of the foreign
countries in which its products are currently manufactured or any
of the countries in which the Company may manufacture its
products in the future will be subject to future or increased
import restrictions by the U.S. government, including the
likelihood, type or effect of any trade restriction. Trade
restrictions, including increased tariffs or quotas, against
apparel, footwear or other items sold by the Company could affect
the importation of such merchandise generally and, in that event,
could increase the cost or reduce the supply of merchandise
available to the Company and adversely affect the Company's
business, financial condition, results of operations and
liquidity. The Company's merchandise flow may also be adversely
affected by political instability in any of the countries in
which its goods are manufactured, if it affects the production or
export of merchandise from such countries; significant
fluctuation in the value of the U.S. dollar against foreign
currencies; and restrictions on the transfer of funds.
The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase merchandise from any
single supplier. The Company believes it has a good relationship
with its suppliers and that, as the number of the Company's
stores increases, there will continue to be adequate sources to
produce a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms.
Inventory Control and Merchandise Allocation
- ---------------------------------------------
The Company's merchandise planning and allocation department
analyzes each store's size, location, demographics, sales and
inventory history to determine the quantity of merchandise to be
purchased for and the allocation of merchandise to the Company's
stores. Upon receipt, merchandise is allocated in order to
achieve an emphasis that is suited to each store's customer base.
Merchandise typically is sold at its original marked price
for several weeks, with the length of time varying by item. The
Company reviews its inventory levels on an on-going basis in
order to identify slow-moving merchandise and broken assortments
(items no longer in stock in a sufficient range of sizes) and
uses markdowns to clear merchandise. Markdowns may be used if
inventory exceeds customer demand for reasons of style, seasonal
adaptation or changes in customer preference or if it is
determined that the inventory will not sell at its currently
marked price. Marked-down items remaining unsold are
periodically moved to the Company's Factory Stores where
additional markdowns may be taken. In Fiscal 1996, inventory
turned 4.7 times (excluding inventory associated with ATGS) and
in Fiscal 1995, inventory turned 4.3 times. Inventory turnover
is determined by dividing net cost of goods sold by the average
of the cost of inventory at the beginning and end of the period.
The Company uses a centralized distribution system, under
which nearly all Ann Taylor merchandise is distributed to the
Company's stores through its distribution center located in
Louisville, Kentucky. See "Properties". Merchandise is shipped
by the distribution center to the Company's stores several times
each week.
==================================================================
4
Stores
- ------
As of February 1, 1997, the Company operated 309 stores
which were distributed among 41 states and the District of
Columbia, as shown on the following table:
Locations by State
- -------------------------------------------------------------------------
Number of Number of Number of
State Stores State Stores State Stores
- ----- -------- ----- --------- ----- ---------
Alabama......... 2 Kentucky....... 2 North Carolina.... 6
Arizona......... 5 Louisiana...... 4 Ohio.............. 14
Arkansas........ 1 Maryland....... 7 Oklahoma.......... 3
California...... 54 Massachusetts.. 13 Oregon............ 2
Colorado........ 5 Michigan....... 8 Pennsylvania...... 13
Connecticut..... 9 Minnesota...... 4 Rhode Island...... 1
Delaware........ 1 Mississippi.... 1 South Carolina.... 3
District of
Columbia........ 6 Missouri....... 7 Tennessee......... 6
Florida......... 23 Nebraska....... 2 Texas............. 19
Georgia......... 6 Nevada......... 3 Utah.............. 2
Hawaii.......... 2 New Hampshire.. 2 Vermont........... 1
Illinois........ 11 New Jersey..... 14 Virginia.......... 8
Indiana......... 6 New Mexico..... 2 Washington........ 3
Kansas.......... 1 New York....... 26 Wisconsin......... 1
The Company selects store locations that it believes are
convenient for its customers. Store locations are determined on
the basis of various factors, including geographic location,
demographic studies, anchor tenants in a mall location, other
specialty stores in a mall or specialty center location or in the
vicinity of a village location, and the proximity to professional
offices in a downtown or village location. Ann Taylor Factory
Stores and Ann Taylor Loft stores are generally located in
factory outlet malls in which co-tenants include a significant
number of nationally recognized upscale brand name retailers.
Ann Taylor Stores opened prior to January 30, 1993 averaged
3,500 square feet in size, with the exception of three stores
that ranged between 10,300 square feet and 12,500 square feet.
Since 1993, the average size of new Ann Taylor Stores has been
approximately 5,900 square feet. Ann Taylor Stores to be opened
in Fiscal 1997 are expected to average approximately 4,500 square
feet. The Company believes that the increase in store size
since 1993 enhances the Company's ability to merchandise its
customer offerings and reinforce its total wardrobing concept,
provides area necessary for the proper presentation of Ann Taylor
shoes, petites and other product line extensions, and improves
customer service and ease of shopping. Ann Taylor Factory
Stores average 6,600 square feet and Ann Taylor Loft stores
average 10,900 square feet. The Company's stores typically have
approximately 19% of their total square footage allocated to
stockroom and other non-selling space.
In Fall 1995, the Company opened two flagship Ann Taylor
Stores, each in excess of 20,000 square feet, one on Madison
Avenue in New York City, and the other on Post Street in San
Francisco. These two larger stores represent the fullest
assortment of Ann Taylor merchandise, and include amenities
unique to these stores.
Expansion
- ---------
An important aspect of the Company's business strategy is a
real estate expansion program designed to reach new customers
through the opening of new stores, as well as the expansion of
existing stores in order to accommodate product extensions and
improve customer service. The Company adds additional stores, or
expands the size of existing stores, in markets where Ann Taylor
already has a presence as market conditions warrant and sites
become available. The Company also opens new stores in
additional markets that it believes have a sufficient
concentration of its target customers. Prior to 1993, the
Company's store expansion program focused primarily on adding new
Ann Taylor Stores. Since 1993, the expansion of existing Ann
Taylor Stores has been an integral part of the Company's
expansion strategy.
=================================================================
5
The following table sets forth certain information regarding
store openings, expansions and closings for Ann Taylor Stores
("ATS"), Ann Taylor Factory Stores ("ATO"), Ann Taylor Loft
Stores ("ATL") and Ann Taylor Studio Stores ("ATA") since the
consummation of the Acquisition in the beginning of 1989:
Total
Stores No. No.
Open at Stores Stores
Beginning No. Stores Opened Expanded Closed No. Stores Open
of During Fiscal Year During During at End of Fiscal Year
Fiscal Fiscal ------------------- Fiscal Fiscal --------------------------
Year Year ATS ATO ATL ATA Year(a) Year(a) ATS ATO ATL ATA Total
- ------ ---- ---- --- --- --- --- ------- ----- --- --- --- -----
1989 119 20 1 --- --- 2 1 138 1 --- --- 139
1990 139 29 3 --- --- 3 1 166 4 --- --- 170
1991 170 33 --- --- --- 3 3 196 4 --- --- 200
1992 200 20 --- --- --- 5 1 215 4 --- --- 219
1993 219 8 5 --- --- 12 1 222 9 --- --- 231
1994 231 8 12 --- 5 25 4 236 21 --- 5 262
1995 262 26 2 16 4 30 4 258 22 17 9 306
1996 306 9 1 1 --- 7 8 259 10(b) 31(b) 9 309
- --------------
(a) All stores expanded and all stores closed were Ann Taylor
Stores, except that one store expanded in 1994 was an ATO
store, and one store expanded in 1995 was an ATO store that
was converted into an ATL store in connection with such
expansion.
(b) The 16 ATO and ATL stores that sell both original price Ann
Taylor Loft merchandise, as well as clearance merchandise
from Ann Taylor Stores and Ann Taylor Loft, are classified
as ATL stores.
The Company believes that its existing store base is a
significant strategic asset of its business. Ann Taylor Stores
are located in some of the most productive retail centers in the
United States. The Company believes that it is one of the most
sought after tenants by real estate developers because of its
strong Ann Taylor brand franchise and its high average sales per
square foot productivity ($476 per square foot in Fiscal 1996).
The Company has invested approximately $127 million in its store
base since 1993; approximately 60% of its stores are either new
or have been completely remodeled, as a result of an expansion or
relocation, in the last four years.
During Fiscal 1996, the Company slowed its real estate
expansion program to enable it to more effectively consolidate
the growth that had occurred during recent years. In 1996, the
Company opened nine Ann Taylor Stores, one Ann Taylor Loft Store
and one Ann Taylor Factory Store, and expanded seven existing Ann
Taylor Stores. The Company also closed eight Ann Taylor Stores,
at the expiration of or in accordance with those stores'
respective lease terms. This real estate expansion program
resulted in a net increase in the Company's total store square
footage from approximately 1,651,000 square feet to approximately
1,705,000 square feet, a net increase of approximately 54,000
square feet, or 3.3%. In Fiscal 1997, the Company intends to
increase store gross square footage by approximately 128,000
square feet, or 7.5%, representing approximately 26 new Ann
Taylor Stores and the expansion of 11 existing Ann Taylor Stores.
Capital expenditures for the Company's Fiscal 1996 store
expansion program, net of landlord construction allowances,
totaled approximately $10.0 million, including expenditures for
store refurbishing and store refixturing. The Company expects
that capital expenditures for its Fiscal 1997 store expansion
program, net of landlord construction allowances, will be
approximately $23.0 million, including expenditures for store
refurbishing and store refixturing. The Company's bank credit
agreement provides for, among other things, an annual limitation
on capital expenditures of $25.0 million in Fiscal 1996 and $32.5
million in Fiscal 1997 and beyond, subject to increase if certain
conditions are satisfied. See Note 2 to the Company's
Consolidated Financial Statements.
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6
The Company's ability to continue to increase store square
footage will be dependent upon general economic and business
conditions affecting consumer confidence and spending, the
availability of desirable locations and the negotiation of
acceptable lease terms. See "Management's Discussion and
Analysis--Liquidity and Capital Resources".
Customer Credit
- ---------------
Customers may pay for merchandise with the Ann Taylor credit
card, American Express, Visa, MasterCard, cash or check. Credit
card sales were 77.8% of net sales in Fiscal 1996, 77.0% in
Fiscal 1995 and 77.7% in Fiscal 1994. In Fiscal 1996, 20.8% of
net sales were made with the Ann Taylor credit card, and 57.0%
were made with third-party credit cards, including 0.7% on a co-
branded Ann Taylor Visa card that the Company began testing in
Fiscal 1996. As of February 1, 1997, the Company's Ann Taylor
credit card accounts receivable totaled $54,505,000, net of
allowance for doubtful accounts. Accounts written off in Fiscal
1996 were approximately $1,729,000, or 0.2% of net sales.
Ann Taylor has offered customers its proprietary credit card
since 1976. The Company believes that the Ann Taylor credit card
enhances customer loyalty while providing the customer with
additional credit. However, the percentage of the Company's
total sales made with its proprietary credit card has been
declining over the past few years. The Company believes the
declining penetration of its Ann Taylor credit card as a
percentage of sales is attributable to the gain of market share
by bank cards throughout the retail industry generally, as well
as to the increase in the number of the Company's Ann Taylor
Factory Stores and Loft stores, which experience a significantly
lower penetration of sales with the Ann Taylor card. At February
1, 1997, the Company had over 430,000 Ann Taylor credit card
accounts that had been used during the past 18 months.
Advertising and Promotion
- -------------------------
For many years, the Company relied on its Ann Taylor
catalog, mailed principally to Ann Taylor credit card holders, as
its principal advertising vehicle. The Company has also
occasionally run print advertisements in newspapers and national
women's fashion magazines such as Elle, Vogue and Harpers Bazaar.
In early 1996, the Company suspended publication of its catalog
and ran very few print advertisements. Management is presently
evaluating its advertising, marketing and promotional strategies
and anticipates that it may increase its advertising and
marketing efforts by Fall 1997 or early Fiscal 1998.
Trademarks and Service Marks
- ----------------------------
The trademarks and service marks for Ann Taylor either have
been registered or have trademark applications pending with the
United States Patent and Trademark Office and with the registries
of many foreign countries. The Company's rights in the
"AnnTaylor" mark are a significant part of the Company's
business, as the Company believes its mark is well known in the
women's retail apparel industry. Accordingly, the Company
intends to maintain its "AnnTaylor" mark and related
registrations and vigorously protect its trademarks against
infringement.
Competition
- ------------
The women's retail apparel industry is highly competitive.
The Company's Ann Taylor Stores compete with certain departments
in national or local department stores, and with other specialty
store chains and independent retail stores carrying similar lines
of merchandise. The Company believes that its focused
merchandise selection, exclusive Ann Taylor brand fashions,
personalized service and convenience distinguish it from other
specialty retailers. Many of the Company's competitors are
considerably larger and have substantially greater financial,
marketing and other resources than the Company and there is no
assurance that the Company will be able to compete successfully
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7
with them in the future. Further, as noted above, the Company believes
that the Ann Taylor Loft concept offers the Company the opportunity to
compete in the moderately-priced women's apparel market. The
Company does not have significant prior experience in this
market, and the competitive factors described above are
applicable to this market as well. Further, existing competitors
in that market may have significantly greater brand recognition
among this customer segment than the Company.
Employees
- ----------
Store management receives compensation in the form of
salaries and performance-based bonuses. Sales associates are
paid on an hourly basis plus performance incentives. A number of
programs exist that offer incentives to both management and sales
associates to increase sales and support the Company's total
wardrobing strategy.
As of February 1, 1997, the Company had approximately 6,400
employees, of whom 1,450 were full-time salaried employees, 1,700
were full-time hourly employees and 3,250 were part-time hourly
employees working less than 30 hours per week. None of the
Company's employees are represented by a labor union. The
Company believes that its relationship with its employees is
good.
ITEM 2. Properties
-----------
As of February 1, 1997, the Company operated 309 stores, all
of which were leased. The store leases typically provide for
initial terms of ten years, although some leases have shorter or
longer initial periods, and grant the Company the right to extend
the term for one or two additional five-year periods. Most of
the store leases require Ann Taylor to pay a specified minimum
rent, plus a contingent rent based on a percentage of the store's
net sales in excess of a certain threshold. Most of the leases
also require Ann Taylor to pay real estate taxes, insurance and
certain common area and maintenance costs. The current terms of
the Company's leases, including renewal options, expire as
follows:
Fiscal Years Lease Number of
Terms Expire Stores
------------------ ---------
1997 - 1999............... 38
2000 - 2002............... 20
2003 - 2005............... 126
2006 and later............ 125
Ann Taylor leases corporate offices at 142 West 57th Street
in New York City, containing approximately 86,700 square feet,
and approximately 59,000 square feet of office space at 1372
Broadway in New York City. The leases for these premises expire
in 2006 and 2010, respectively. The Company also leases office
space in New Haven, Connecticut, containing approximately 31,000
square feet. The lease for these premises expires in 1998.
Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution
Services, Inc. owns its 256,000 square foot distribution center
located in Louisville, Kentucky. Nearly all Ann Taylor
merchandise is distributed to the Company's stores through this
facility. The parcel on which the Louisville distribution center
is located comprises approximately 20 acres and could accommodate
possible future expansion of the facility.
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8
ITEM 3. Legal Proceedings
-----------------
On April 26, 1996, certain alleged stockholders of the
Company filed a purported class action lawsuit in the United
States District Court Southern District of New York, against the
Company, Ann Taylor, certain officers and directors of the
Company and Ann Taylor, ML&Co. and certain affiliates of ML&Co.
(Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The
complaint alleges causes of action under Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as amended,
by alleging that the Company and the other defendants engaged in
a fraudulent scheme and course of business that operated a fraud
or deceit on purchasers of the Company's common stock during the
period commencing February 3, 1994 through May 4, 1995 due to
alleged false and misleading statements about the Company and Ann
Taylor. The complaint seeks, among other things, certification
as a class action on behalf of all purchasers of common stock
during the period commencing February 3, 1994 through May 4,
1995, the awarding of compensatory damages to the plaintiffs and
purported members of the class, the awarding of costs, including
pre-judgment and post-judgment interest, reasonable attorneys'
fees and expert witness fees to the plaintiffs and purported
members of the class and equitable and/or injunctive relief. The
Company believes that the complaint is without merit and intends
to defend the action vigorously. The Company and other
defendants have filed motions to dismiss the actions. These
motions are pending, and discovery in this case has been
suspended pending judicial disposition of these motions. As the
case is in preliminary stages, any liability that may arise from
this action cannot be predicted at this time.
The Company is also a party to routine litigation incident
to its business. Although the amount of any liability that
could arise with respect to these actions cannot be accurately
predicted, in the opinion of the Company, any such liability will
not have a material adverse effect on the financial position,
results of operations and liquidity of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
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9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------
Matters
-------
The Company's common stock is listed and traded on the New
York Stock Exchange under the symbol ANN. The number of holders
of record of common stock at March 14, 1997 was 777. The
following table sets forth the high and low closing sale prices
for the common stock on the New York Stock Exchange during Fiscal
1996 and Fiscal 1995.
Market Price
---------------------
High Low
---------- ---------
Fiscal Year 1996
Fourth quarter..................... $ 21-3/8 $15-3/8
Third quarter...................... 19-7/8 12
Second quarter..................... 23-1/4 12
First quarter...................... 19-1/8 11-1/8
Fiscal Year 1995
Fourth quarter..................... $ 15-5/8 $ 9-1/2
Third quarter...................... 21-7/8 10-1/4
Second quarter..................... 25-5/8 19-1/2
First quarter...................... 37-3/4 25-1/8
In Fiscal 1996, in connection with the Sourcing Acquisition,
the Company issued an aggregate of 2,348,145 shares of common
stock to Cygne (including shares issued to a wholly owned
subsidiary of Cygne) in partial consideration for the sourcing
operations purchased from Cygne. See "Management's Discussion
and Analysis -- Sourcing Acquisition". Also in Fiscal 1996, the
Company awarded to J. Patrick Spainhour, Chairman and Chief
Executive Officer of the Company, 75,000 shares of restricted
common stock pursuant to the terms of his employment agreement
with the Company, and also awarded to Patricia DeRosa, President
and Chief Operating Officer of the Company, 30,000 shares of
restricted common stock, pursuant to the terms of her employment
agreement with the Company. The Company believes that each of
the foregoing share issuances was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as
amended, in each case as a transaction by an issuer not involving
a public offering.
The Company has never paid dividends on the common stock and
does not intend to pay dividends in the foreseeable future. As a
holding company, the ability of the Company to pay dividends is
dependent upon the receipt of dividends or other payments from
Ann Taylor. The payment of dividends by Ann Taylor to the
Company is subject to certain restrictions under Ann Taylor's
Bank Credit Agreement, the indenture relating to the 8-3/4% Notes
and the Receivables Facility described below under "Management's
Discussion and Analysis--Liquidity and Capital Resources". The
payment of cash dividends on the common stock by the Company is
also subject to certain restrictions contained in the Company's
guarantee of Ann Taylor's obligations under the Bank Credit
Agreement. In addition, in connection with the preferred
securities issued by the Company's financing vehicle, AnnTaylor
Finance Trust, the payment by the Company of cash dividends on
the common stock is restricted in the event of a default by the
Company of its obligations in relation to the preferred
securities or in the event payment of dividends on the preferred
securities is deferred. Any determination to pay cash dividends
in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and
other factors deemed relevant at that time by the Company's Board
of Directors.
===================================================================
10
ITEM 6. Selected Financial Data
-----------------------
The following selected historical financial information for
the periods indicated has been derived from the audited
consolidated financial statements of the Company. The Company's
consolidated statements of operations, stockholders' equity and
cash flows for each of the three fiscal years ended February 1,
1997, February 3, 1996 and January 28, 1995, and consolidated
balance sheets as of February 1, 1997 and February 3, 1996, as
audited by Deloitte & Touche llp, independent auditors, appear
elsewhere in this document. The information set forth below
should be read in conjunction with "Management's Discussion and
Analysis" and the consolidated financial statements and notes
thereto of the Company included elsewhere in this document. All
references to years are to the fiscal year of the Company, which
ends on the Saturday nearest January 31 in the following calendar
year. All fiscal years for which financial information is set
forth below had 52 weeks, with the exception of Fiscal 1995,
which had 53 weeks.
====================================================================
11
Fiscal Years Ended
--------------------------------------------------
Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30,
1997 1996 1995 1994 1993
--------- -------- --------- -------- -------
(dollars in thousands, except per
square foot data and per share data)
Operating Statement
Information:
Net sales (a).........$ 798,117 $ 731,142 $658,804 $501,649 $468,381
Cost of sales......... 443,443 425,225 357,783 271,749 264,301
---------- --------- ------- ------- -------
Gross profit........ 354,674 305,917 301,021 229,900 204,080
Selling, general and
administrative
expenses.......... 291,027 271,136 214,224 169,371 152,072
Studio shoe stores
closing
expense (b)......... 3,600 --- --- --- ---
Employment contract
separation
expense (c)......... 3,500 --- --- --- ---
Distribution center
restructuring
charge (d).......... --- --- --- 2,000 ---
Amortization of
goodwill (e)........ 10,086 9,506 9,506 9,508 9,504
---------- --------- ------- ------- -------
Operating income.... 46,461 25,275 77,291 49,021 42,504
Interest
expense (f)......... 24,416 20,956 14,229 17,696 21,273
Stockholder
litigation
settlement (g)...... --- --- --- --- 3,905
Other (income)
expense, net........ 403 38 168 (194) 259
---------- --------- ------- ------- -------
Income before
income taxes
and extraordinary
loss................ 21,642 4,281 62,894 31,519 17,067
Income tax provision.. 12,975 5,157 30,274 17,189 11,150
---------- --------- ------- ------- --------
Income (loss) before
extraordinary loss.. 8,667 (876) 32,620 14,330 5,917
Extraordinary
loss (h)............ --- --- 868 11,121 ---
--------- --------- ------- ------- -------
Net income (loss)... $ 8,667 $ (876) $ 31,752 $ 3,209 $ 5,917
========= ========= ======= ======= =======
Income (loss)
per share
before
extraordinary
loss................ $ .36 $ (.04) $ 1.40 $ .66 $ .28
Extraordinary loss
per share (h)....... --- --- (.04) (.51) ---
--------- -------- ------- ------- -------
Net income (loss)
per share......... $ .36 $ (.04) $ 1.36 $ .15 $ .28
========= ========= ========= ======= =======
Weighted average
shares
outstanding
(in thousands)...... 24,104 23,209 23,286 21,929 21,196
Operating Information:
Percentage increase
(decrease) in
comparable store
sales (i)........... 1.8% (8.9)% 13.7% 2.3% (1.0)%
Net sales per gross
square foot (j)......$ 476 $ 518 $ 627 $ 576 $ 600
Number of stores:
Open at beginning
of the period...... 306 262 231 219 200
Opened during the
period............. 11 48 35 13 20
Expanded during the
period............. 7 30 25 12 5
Closed during the
period............. 8 4 4 1 1
Open at the end of
the period......... 309 306 262 231 219
Total store square
footage at end
of period............ 1,705,000 1,651,000 1,173,000 929,000 814,000
Capital expenditures...$ 16,107 $ 78,378 $ 61,341 $ 25,062 $ 4,303
Depreciation and
amortization,
including
goodwill (e).........$ 36,294 $ 28,294 $ 21,293 $ 18,013 $ 16,990
Working capital
turnover (k)......... 7.8x 7.8x 8.5x 12.1x 16.8x
Inventory turnover (l). 4.7x 4.3x 4.6x 4.9x 5.3x
Balance Sheet Information
(at end of period):
Working capital (m)....$ 118,850 $ 86,477 $ 102,181 $ 53,283 $ 29,539
Goodwill, net (e)...... 341,779 313,525 323,031 332,537 342,045
Total assets........... 688,139 678,709 598,254 513,399 487,592
Total debt............. 131,192 272,458 200,000 189,000 195,474
Preferred securities... 96,158 --- --- --- ---
Stockholders' equity... 370,582 325,688 326,112 259,271 245,298
(Footnotes on following page)
===========================================================================
12
(Footnotes for preceding page)
(a) Prior to 1990, all shoes sold in Ann Taylor Stores were "Joan
& David" shoes, sold in leased shoe departments by Joan &
David Helpern, Inc. ("Joan & David") pursuant to a license
agreement. In 1990, the Company introduced a line of Ann
Taylor brand shoes. As of February 1, 1993, Joan & David no
longer operated leased shoe departments in any Ann Taylor
stores. In Fiscal 1992, net sales included sales from leased
shoe departments of $8,207,000.
(b) Relates to the planned closing of the Company's nine Studio
shoe stores. The charge of $3,600,000 ($2,052,000, or $0.08
per share, net of income tax benefit) is to cover the write-
off of the net book value of the nine stores and lease and
other related costs for these locations.
(c) In connection with the resignation in August 1996 of the
former Chairperson, a one-time pre-tax charge of $3,500,000
($1,958,000, or $0.08 per share, net of related tax benefit)
was recorded relating to the estimated costs of the Company's
obligations under her employment contract with the Company.
(d) In connection with the relocation of the Company's
distribution center, completed in late Spring 1995, a charge
of $2,000,000 ($1,140,000, or $0.05 per share, net of related
tax benefit) was recorded relating to severance and job
training costs, as well as the write-off of the net book
value of certain assets.
(e) As a result of the Acquisition of Ann Taylor by the Company,
which was effective as of January 29, 1989, $380,250,000,
representing the excess of the allocated purchase price over
the fair value of the Company's net assets, was recorded as
goodwill and is being amortized on a straight-line basis over
40 years. In addition, as a result of the Sourcing
Acquisition, effective September 20, 1996, the Company
recorded goodwill of $38,430,000 that is being amortized on a
straight-line basis over 25 years.
(f) Includes non-cash interest expense of $1,574,000, $1,004,000,
$978,000, $4,199,000 and $8,581,000 in Fiscal 1996, 1995,
1994, 1993 and 1992, respectively, from amortization of
deferred financing costs, and in 1993, and 1992, from
accretion of original issue discount and, in 1992, from the
issuance of additional 10% junior subordinated exchange notes
due 2004.
(g) In connection with the settlement in January 1993 of a
stockholder class action lawsuit that was filed against the
Company and certain other defendants in October 1991, a
charge of $3,905,000 ($2,265,000, or $0.11 per share, net of
related tax benefit) was recorded.
(h) In Fiscal 1994, Ann Taylor incurred an extraordinary loss of
$1,522,000 ($868,000, or $0.04 per share, net of income tax
benefit), in connection with the prepayment of long-term debt
with the proceeds of a public sale of common stock of the
Company. In Fiscal 1993, Ann Taylor incurred an
extraordinary loss of $17,244,000 ($11,121,000, or $0.51 per
share, net of income tax benefit) due to debt refinancing
activities.
(i) Comparable store sales are calculated by excluding the net
sales of a store for any month of one period if the store was
not also open during the same month of the prior period. In
a year with 53 weeks, such as Fiscal 1995, sales in the last
week of that year are not included in determining comparable
store sales. Commencing with stores expanded in Fiscal 1993,
a store that is expanded by more than 15% is treated as a new
store for the first year following the opening of the
expanded store. Excluding sales from leased shoe
departments, comparable store sales would have been 4.0% and
0.8% for Fiscal 1993 and Fiscal 1992, respectively. See
footnote (a) above.
(j) Net sales per square foot ("sales per square foot") is
determined by dividing net sales for the period by the
average of the gross square feet at the beginning and end of
each period. Unless otherwise indicated, references herein
to square feet are to gross square feet, rather than net
selling space.
(k) Working capital turnover is determined by dividing net sales
by the average of the amount of working capital at the
beginning and end of the period.
(l) Inventory turnover is determined by dividing cost of sales
(excluding costs of leased shoe departments) by the average
of the cost of inventory at the beginning and end of the
period (excluding inventory associated with ATGS).
(m) Includes current portion of long-term debt of $287,000,
$40,266,000, $0, $8,757,000 and $37,000,000 in Fiscal 1996,
1995, 1994, 1993 and 1992, respectively.
==========================================================================
13
ITEM 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Sales Growth
- ------------
The following table sets forth certain sales and store data
for the periods indicated:
Fiscal Year Ended
------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
-------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
Net sales ($000).............. $ 798,117 $ 731,142 $ 658,804
Total net sales growth
percentage
(52 week basis.............. 10.6% 9.5% 31.3%
Comparable store sales
increase (decrease)
percentage (52 week basis).. 1.8% (8.9)% 13.7%
Net sales per average
square foot................. $ 476 $ 518 $ 627
Total store square
footage at end of period..... 1,705,000 1,651,000 1,173,000
Number of
New stores.................. 11 48 35
Expanded stores............. 7 30 25
Closed stores............... 8 4 4
Total stores open at
end of period............... 309 306 262
Since 1993, Ann Taylor Stores opened by the Company average
5,900 square feet, compared to the average store size prior to
1993 of 3,500 square feet. In addition, since 1993, the Company
has expanded 74 stores from an average size of 3,500 square feet
to an average store size of 5,900 square feet. Ann Taylor
Factory Stores average 6,600 square feet, and Ann Taylor Loft
stores average 10,900 square feet. This increase in average
store size has had, and is expected to continue to have, a
negative effect on sales per square foot. However, the Company
believes that the larger store format enhances the Company's
ability to merchandise its customer offerings and reinforces its
total wardrobing concept, provides area necessary for the proper
presentation of Ann Taylor shoes, petites and other product line
extensions, and improves customer service and ease of shopping.
Ann Taylor Stores to be opened in Fiscal 1997 are expected to
average approximately 4,500 square feet.
The Company's net sales do not show significant seasonal
variation, although net sales in the fourth quarter have
historically been moderately higher than in the other quarters.
As a result, the Company has not had significant overhead and
other costs generally associated with large seasonal variations.
Results of Operations
- ---------------------
The following table sets forth operating statement data
expressed as a percentage of net sales for the periods
indicated:
Fiscal Year
------------------------
1996 1995 1994
---- ---- ----
Net sales....................... 100.0% 100.0% 100.0%
Cost of sales................... 55.6 58.2 54.3
----- ----- -----
Gross profit................ 44.4 41.8 45.7
Selling, general and
administrative expenses....... 36.5 37.0 32.5
Studio shoe stores closing
expense....................... 0.4 --- ---
Employment contract
separation expense............ 0.4 --- ---
Amortization of goodwill........ 1.3 1.3 1.5
----- ----- -----
Operating income............ 5.8 3.5 11.7
Interest expense................ 3.1 2.9 2.2
Other expense, net.............. --- --- ---
----- ----- -----
Income before income taxes
and extraordinary loss........ 2.7 0.6 9.5
Income tax provision............ 1.6 0.7 4.6
----- ----- -----
Income (loss) before
extraordinary loss............. 1.1 (0.1) 4.9
Extraordinary loss............... --- --- 0.1
----- ----- -----
Net income (loss)............ 1.1% (0.1)% 4.8%
===== ===== =====
=====================================================================
14
Fiscal 1996 Compared to Fiscal 1995
- ------------------------------------
The Company's net sales increased to $798,117,000 in Fiscal
1996 (53 weeks) from $731,142,000 in Fiscal 1995 (52 weeks), an
increase of $66,975,000, or 9.2%. Total sales for the fifty-two
week period ended February 1, 1997 were up 10.6% compared to the
fifty-two week period ended January 27, 1996. This increase in
net sales was attributable to the inclusion of a full year of
operating results for the 48 stores opened and 30 stores expanded
during 1995, the opening of 11 new stores and the expansion of 7
stores in 1996, and to a comparable sales increase of 1.8% for
the fifty-two week period ended February 1, 1997. This sales
increase was partially offset by the closing of 8 stores in 1996.
The Company believes that the 1.8% increase in its comparable
store sales in 1996 was attributable primarily to positive
customer reaction to the Company's Fall 1996 merchandise
offerings.
Gross profit as a percentage of net sales increased to 44.4%
in 1996 from 41.8% in 1995. This increase was primarily
attributable to lower markdowns associated with decreased
promotional activities.
Selling, general and administrative expenses as a percentage
of net sales decreased to 36.5% in 1996 from 37.0% in 1995. The
decrease in selling, general and administrative expenses as a
percentage of net sales was primarily the result of increased
leverage on fixed expenses due to improved comparable store
sales.
Operating income increased to $46,461,000, or 5.8% of net
sales, in 1996 from $25,275,000, or 3.5% of net sales, in 1995.
Operating income in 1996 was reduced by $3,500,000, or 0.4% of
net sales, representing the estimated costs of the Company's
obligations under the former Chairperson's employment contract
following her resignation in August 1996, and by a one-time
charge of $3,600,000, or 0.4% of net sales, relating to the
planned closing of the nine Ann Taylor Studio shoe stores
announced in January 1997. Amortization of goodwill was
$10,086,000 in 1996 compared to $9,506,000 in 1995. Operating
income without giving effect to such amortization was
$56,547,000, or 7.1% of net sales, in 1996 and $34,781,000, or
4.8% of net sales, in 1995.
Interest expense was $24,416,000 in 1996 compared to
$20,956,000 in 1995. The increase in interest expense was
attributable to higher interest rates associated with the
issuance of 8-1/2% Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (the "preferred securities") by
the Company's financing vehicle, AnnTaylor Finance Trust,
partially offset by a decrease in the Company's long-term debt.
The weighted average interest rate on the Company's outstanding
indebtedness at February 1, 1997 was 8.80% compared to 8.26% at
February 3, 1996.
The income tax provision was $12,975,000, or 60.0% of income
before income taxes, in the 1996 period compared to $5,157,000,
or 120.5% of income before income taxes, in 1995. The effective
tax rates for both periods were higher than the statutory rates,
primarily as a result of non-deductible goodwill expense.
As a result of the foregoing factors, the Company had net
income of $8,667,000, or 1.1% of net sales, for 1996 compared to
a net loss of $876,000, or 0.1% of net sales, for 1995.
Fiscal 1995 Compared to Fiscal 1994
- -----------------------------------
The Company's net sales increased to $731,142,000 in 1995
(53 weeks) from $658,804,000 in 1994 (52 weeks), an increase of
$72,338,000, or 11.0%. Total sales for the fifty-two week period
ended January 27, 1996 were up 9.5% to $721,561,000 compared to
1994. The increase in net sales was attributable to the
inclusion of a full year of operating results for the 35 stores
opened and 25 stores expanded during 1994 and the opening of 48
new stores and the expansion of 30 stores in 1995. The sales
increase was partially offset by the closing of 4 stores in 1995
and by an 8.9% decrease in comparable store sales for the fifty-
two week period ended January 27, 1996. The Company believes
====================================================================
15
that the 8.9% decrease in its comparable store sales in 1995 was
attributable primarily to poor customer reaction to the Company's
merchandise offerings, as well as to the generally weak economic
environment for women's apparel sales that prevailed throughout
most of 1995. The Company believes that its 1995 merchandise
offerings were "over-assorted" and failed to achieve the
cohesive, distinctive look that had defined the brand in the
previous two years.
Gross profit as a percentage of net sales decreased to 41.8%
in 1995 from 45.7% in 1994. This decrease was primarily
attributable to higher markdowns associated with increased
promotional activities and, to a lesser extent, to a lower
initial mark up rate associated with merchandise manufactured for
Ann Taylor Factory Stores and Ann Taylor Loft stores, compared to
the initial mark up on merchandise manufactured for Ann Taylor
Stores.
Selling, general and administrative expenses as a percentage
of net sales increased to 37.0% in 1995 from 32.5% in 1994. The
increase in selling, general and administrative expenses as a
percentage of net sales was primarily due to higher tenancy,
store maintenance and store selling costs as a percentage of
sales as a result of both decreased comparable store sales and
lower than average sales per square foot productivity of stores
added in 1995 (approximately 73% of the increase), higher
distribution center expense relating, in part, to start-up costs
of the Company's distribution center facility in Louisville,
Kentucky (approximately 8% of the increase), additional catalog
expense relating to the Company's test of its catalog as a mail
order vehicle (approximately 7% of the increase), higher
merchandising and design expense (approximately 6% of the
increase) and higher packaging and supplies expense
(approximately 5% of the increase). The Company returned its
catalog format to principally an advertising vehicle, rather than
a mail order business, in Fall 1995 and suspended publication of
its catalog entirely in early 1996.
Operating income decreased to $25,275,000, or 3.5% of net
sales, in 1995, from $77,291,000, or 11.7% of net sales, in 1994.
Amortization of goodwill was $9,506,000 in 1995 and 1994.
Operating income without giving effect to such amortization was
$34,781,000, or 4.8% of net sales, in 1995, and $86,797,000, or
13.2% of net sales, in 1994.
Interest expense was $20,956,000 and $14,229,000 in 1995 and
1994, respectively. The increase in interest expense was
attributable to higher interest rates applicable to the Company's
debt obligations throughout most of the 1995 period and an
increase in the Company's long-term debt. The weighted average
interest rate on the Company's outstanding indebtedness at
February 3, 1996 was 8.26% compared to 8.90% at January 28, 1995.
The income tax provision was $5,157,000, or 120.5% of income
before income taxes in the 1995 period compared to $30,274,000,
or 48.1% of income before income taxes and extraordinary loss, in
1994. The effective tax rates for both periods were higher than
the statutory rates, primarily as a result of non-deductible
goodwill expense.
As a result of the foregoing factors, the Company had a net
loss of $876,000, or 0.1% of net sales, for 1995 compared to net
income of $31,752,000, or 4.8% of net sales, for 1994.
Changes in Financial Position
- -----------------------------
Accounts receivable decreased to $63,605,000 at the end of
1996 from $70,395,000 at the end of 1995, a decrease of
$6,790,000, or 9.7%. This decrease was primarily attributable to
a decrease in construction allowances receivable, which declined
$3,536,000, or 51.7%, to $3,309,000 and to a decrease in Ann
Taylor credit card receivables, which declined $2,900,000, or
5.1%, to $54,505,000 in 1996.
=================================================================
16
Merchandise inventories decreased to $100,237,000 at
February 1, 1997 from $102,685,000 at February 3, 1996, a
decrease of $2,448,000, or 2.4%. Merchandise inventories at
February 1, 1997 included approximately $13,728,000 of inventory
associated with ATGS, the Company's recently acquired sourcing
operation (see page 18). Total square footage increased to
approximately 1,705,000 square feet at February 1, 1997 from
approximately 1,651,000 square feet at February 3, 1996.
Merchandise inventory on a per square foot basis, excluding
inventory associated with ATGS, was approximately $51 at the end
of 1996, compared to approximately $62 at the end of 1995, a
decrease of approximately 19%. This decrease is a reflection of
more conservative inventory management as part of the Company's
strategy to increase inventory turns. Inventory turned 4.7 times
in 1996, excluding inventory associated with ATGS, and the
Company is planning inventory turns of at least 5.0 times in
1997. Inventory turnover is determined by dividing cost of sales
by the average of the cost of inventory at the beginning and end
of the period (excluding inventory associated with ATGS).
Accounts payable decreased to $34,341,000 at the end of 1996
from $42,909,000 at the end of 1995, a decrease of $8,568,000.
The decrease in accounts payable is primarily due to decreased
store inventory levels at the end of 1996.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of working capital are cash
flow from operations and borrowings under the Company's revolving
credit facility under the Bank Credit Agreement and the
Receivables Facility described below. The following sets forth
material measures of the Company's liquidity:
Fiscal Year
-----------------------------
1996 1995 1994
-----------------------------
(dollars in thousands)
Cash provided by
operating activities............ $ 67,532 $ 7,376 $ 17,149
Working capital................... $118,850 $86,477 $102,181
Current ratio..................... 2.53:1 1.77:1 2.55:1
Debt to equity ratio.............. .35:1 .84:1 .61:1
Cash provided by operating activities, as presented on the
consolidated statements of cash flows, increased in 1996
principally as a result of increases in earnings, noncash
charges, accounts payable and accrued liabilities, and decreases
in receivables, merchandise inventories and prepaid expenses.
Working capital increased as a result of a decrease in the
current portion of long-term debt of approximately $40,000,000
partially offset by a decrease in merchandise inventories and
receivables.
The Company's Bank Credit Agreement provides, among other
things, for a $25,000,000 term loan and a $125,000,000 revolving
credit facility. As described below, in January 1996 the Company
prepaid a portion of the term loan and reduced the revolving
credit facility to $122,000,000. The principal amount of the
term loan is payable on September 29, 1998, and the maturity date
of the revolving credit facility is July 29, 1998; however, the
Company is required to reduce the outstanding balance under the
revolving credit facility to $50,000,000 or less for thirty
consecutive days in 1996 and in each fiscal year thereafter. The
maximum amount that may be borrowed under the revolving credit
facility is reduced by the amount of commercial and standby
letters of credit outstanding under the Bank Credit Agreement.
At February 1, 1997, there were no borrowings outstanding under
the revolving credit facility and the amount available under the
facility was approximately $110,000,000. The Bank Credit
Agreement contains financial and other covenants, including
limitations on indebtedness, liens and investments, restrictions
on dividends or other distributions to stockholders, and
requirements to maintain certain financial ratios and specified
levels of net worth. The Company's ability to satisfy such
financial covenants will be dependent upon, among other things,
the Company's sales and earnings and the amount of capital
expenditures made by the Company. The Bank Credit Agreement also
provides for, among other things, an annual limitation on capital
expenditures of $32,500,000 in 1997 and beyond, subject to
increase if certain conditions are satisfied.
==================================================================
17
In April and May of 1996, the Company completed the sale of
an aggregate of $100,625,000 of preferred securities issued by
its financing vehicle, AnnTaylor Finance Trust. The preferred
securities have a liquidation preference of $50 per security and
are convertible at the option of the holders thereof into shares
of common stock of the Company at a conversion rate of 2.545
shares of common stock for each preferred security. A total of
2,012,500 preferred securities were issued, and are convertible
into an aggregate of 5,121,812 shares of common stock,
representing approximately 17% of the Company's outstanding
common stock as of February 1, 1997. The Company received net
proceeds of $95,984,000 in connection with the sale of the
preferred securities and applied $94,000,000 to reduce
outstanding borrowings under the revolving credit facility,
without a permanent reduction of the commitment thereunder.
In November 1995, Ann Taylor and its wholly owned
subsidiary, AnnTaylor Distribution Services, Inc., received the
proceeds of a $7,000,000 seven-year mortgage loan secured by the
Company's distribution center land and building in Louisville,
Kentucky. The mortgage loan bears interest at 7.5% and is
payable in monthly installments of approximately $65,000 through
December 1, 1997, and thereafter in monthly installments
sufficient to amortize the then remaining principal balance over
a period of five years. Pursuant to the requirements of the Bank
Credit Agreement, in January 1996 the Company applied one-half of
the proceeds of the mortgage to reduce the amount available under
the revolving credit facility, thereby reducing the revolving
credit facility by $3,000,000, and prepaid a portion of the term
loan.
Since the fourth quarter of Fiscal 1993, Ann Taylor sells
its proprietary credit card accounts receivable to AnnTaylor
Funding, Inc., a wholly owned subsidiary of Ann Taylor.
AnnTaylor Funding, Inc. uses the receivables to secure borrowings
of up to $40,000,000, depending upon the eligible accounts
receivable balance, under a receivables financing facility (as
amended, the "Receivables Facility"). The Receivables Facility
matures in May 1998. AnnTaylor Funding, Inc. had total assets of
approximately $55,189,000 at February 1, 1997, all of which are
subject to the security interest of the lender under the
Receivables Facility. At February 1, 1997, there were no
borrowings outstanding under the Receivables Facility.
In connection with the Sourcing Acquisition (described
below), the Hongkong and Shanghai Banking Corporation ("HKSBC")
entered into an Amended and Restated Credit Agreement (the "HKSBC
Agreement") with ATGS, continuing the $40,000,000 credit facility
of ATGS's predecessor. The facility is available principally for
the issuance of letters of credit; cash borrowings under the
facility are limited to a maximum of $8,000,000. Such credit
facility matures on July 29, 1997 and contains financial and
other covenants. As of February 1, 1997, commercial and standby
letters of credit outstanding under this facility totaled
$28,189,000 and there were no borrowings outstanding under this
facility. If this facility is not extended beyond its current
expiration, the Company believes that it has sufficient credit
available under its Bank Credit Agreement to continue to obtain
letters of credit in the normal course of business.
The Company's capital expenditures totaled $16,107,000,
$78,378,000, and $61,341,000 in 1996, 1995 and 1994,
respectively. The decrease in capital expenditures in 1996 is
due primarily to the construction of fewer new and expanded
stores compared to the prior year. The Company slowed its real
estate expansion program in 1996 to enable it to more effectively
consolidate the growth that had occurred during recent years.
The Company expects its capital expenditure requirements will be
approximately $27,000,000 in 1997, of which $23,000,000 will be
allocated to the Company's real estate expansion program. The
actual amount of the Company's capital expenditures will depend
in part on the number of stores opened, expanded and refurbished
and on the amount of construction allowances the Company receives
from the landlords of its new or expanded stores. See "Business-
- -Expansion".
Dividends and distributions from Ann Taylor to the Company
are restricted by the Bank Credit Agreement, the Receivables
Facility and the Indenture for Ann Taylor's 8-3/4% Notes.
====================================================================
18
In order to finance its operations and capital requirements,
the Company expects to use internally generated funds, trade
credit and funds available to it under the Bank Credit Agreement
and the HKSBC Agreement, as well as the Receivables Facility.
The Company typically purchases merchandise from its third-party
vendors (excluding manufacturers from whom ATGS purchases
merchandise) on terms requiring payment within 30 days or less
after the Company's receipt of the merchandise. If some or all
of the Company's third-party vendors were to demand shorter
payment terms, the Company's working capital needs would
increase. The Company believes that cash flow from operations
and funds available under the Bank Credit Agreement, the
Receivables Facility and the HKSBC Agreement are sufficient to
enable it to meet its on-going cash needs for its business, as
presently conducted, for the foreseeable future.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 specifies the computation, presentation
and disclosure requirements for basic and diluted earnings per
share. The Company expects that this statement will have no
material effect on the Company's reported earnings per share.
Sourcing Acquisition
- --------------------
In Fiscal 1995, the Company purchased approximately 16% of
its merchandise directly from Cygne Designs, Inc. ("Cygne") and
an additional 38% of its merchandise through the Company's direct
sourcing joint venture with Cygne known as CAT. On September 20,
1996 (the "Effective Date"), Ann Taylor acquired the entire
interest of Cygne in CAT and certain of the assets (the "Assets")
of the Ann Taylor Woven Division of Cygne (the "Division") that
were used for sourcing merchandise for Ann Taylor. As a result
of the Sourcing Acquisition, CAT became an indirect wholly owned
subsidiary of the Company and now performs all of Ann Taylor's
direct sourcing functions, including those previously provided by
the Division, under the name AnnTaylor Global Sourcing. The
results of operations of ATGS are included in the consolidated
financial statements of the Company since the Effective Date.
The Company believes that the Sourcing Acquisition provides
Ann Taylor with greater control over pre-production processes and
production management, which it expects will result in a variety
of operational benefits, such as greater consistency in
merchandise quality and sizing. The Company also believes that
it will recognize a net reduction in the cost of merchandise
purchased through the sourcing division (after taking into
account the cost of operating ATGS).
In consideration for Cygne's interest in CAT and the Assets,
the Company paid (i) 2,348,145 shares of common stock of the
Company having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash in payment for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price is subject to post-closing
adjustments based upon final determination of the value of
certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments are expected
to reduce the net cash paid for inventory and fixed assets to
approximately $227,000. The total purchase price has been
allocated to the tangible and intangible assets and liabilities
of CAT and the Division that were acquired, based on
preliminary estimates of their respective fair values. The
allocation of the purchase price reflected in the accompanying
Consolidated Balance Sheets may be adjusted upon final
determination of the purchase price adjustments, but
management does not believe the subsequent changes, if any, will
be significant. The excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is
being amortized on a straight-line basis over 25 years.
Pursuant to the terms of a Stockholders Agreement entered
into at the time of the Sourcing Acquisition, the Company
registered the sale of the shares of Common Stock issued to Cygne
as part of the consideration for the acquisition. Cygne
subsequently sold, pursuant to this registration statement, all
of the shares of Common Stock issued to it by the Company.
====================================================================
19
In connection with the Sourcing Acquisition, Ann Taylor
entered into two three-year consulting agreements with Cygne for
the services of Mr. Bernard Manuel, Chairman and Chief Executive
Officer of Cygne, and Mr. Irving Benson, then President of Cygne.
In November 1996, Mr. Benson resigned from his employment with
Cygne and, in accordance with the terms of the consulting
agreement relating to Mr. Benson's services, Cygne's obligations
and rights under the consulting agreement were automatically
assigned to Mr. Benson.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Sections of this Annual Report, including the preceding
Management's Discussion and Analysis of Financial Condition and
Results of Operations, contain various forward looking
statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, with respect to the financial
condition, results of operations and business of the Company.
These forward looking statements involve certain risks and
uncertainties, and no assurance can be given that any of such
matters will be realized. Actual results may differ materially
from those contemplated by such forward looking statements as a
result of, among other things, increased competition in the
retail apparel industry; failure by the Company to accurately
predict customer fashion preferences; a decline in the demand for
merchandise offered by the Company; greater costs or difficulties
than expected related to the assimilation of the sourcing
functions and employees acquired in connection with the Sourcing
Acquisition; general economic conditions that are less favorable
than expected; the inability of the Company to locate new store
sites or negotiate favorable lease terms for additional stores or
for the expansion of existing stores; a significant change in the
regulatory environment applicable to the Company's business; an
increase in the rate of import duties or export quotas with
respect to the Company's merchandise; an adverse outcome of
certain litigation described in "Legal Proceedings" that
materially and adversely affects the Company's financial
condition; or lack of sufficient customer acceptance of the Ann
Taylor Loft concept in the moderate-priced women's apparel
market.
===================================================================
20
ITEM 8. Financial Statements and Supplementary Data
-------------------------------------------
The following consolidated financial statements of the
Company for the years ended February 1, 1997, February 3, 1996
and January 28, 1995 are included as a part of this Report (See
Item 14):
Consolidated Statements of Operations for the fiscal years
ended February 1, 1997, February 3, 1996 and January 28,
1995.
Consolidated Balance Sheets as of February 1, 1997 and
February 3, 1996.
Consolidated Statements of Stockholders' Equity for the
fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995.
Consolidated Statements of Cash Flows for the fiscal years
ended February 1, 1997, February 3, 1996 and January 28,
1995.
Notes to Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosures
-------------------------
None.
=========================================================================
21
PART III
ITEM 10. Directors and Executive Officers of the Registrant
---------------------------------------------------
The information required by this item is incorporated herein
by reference to the Section entitled "Nominees for Election as
Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement for its
1997 Annual Meeting of Stockholders.
ITEM 11. Executive Compensation
----------------------
The information required by this item is incorporated herein
by reference to the Sections entitled "Compensation of
Directors", "Executive Compensation" and "Employment Contracts"
in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this item is incorporated herein
by reference to the Section entitled "Beneficial Ownership of
Common Stock" in the Company's Proxy Statement for its 1997
Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this item is incorporated herein
by reference to the Sections entitled "Compensation of Directors
and Related Matters" and "Compensation Committee Report on
Executive Compensation--Compensation Committee Interlocks and
Insider Participation" in the Company's Proxy Statement for its
1997 Annual Meeting of Stockholders.
In connection with the Sourcing Acquisition, the Company
issued to Cygne an aggregate of 2,348,145 shares of Common Stock.
See "Management's Discussion and Analysis -- Sourcing
Acquisition".
===================================================================
22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the Company
and the independent auditors' report are included on pages 27
through 46 and are filed as part of this Annual Report:
Consolidated Statements of Operations for the fiscal years
ended February 1, 1997, February 3, 1996 and January 28, 1995;
Consolidated Balance Sheets as of February 1, 1997, and
February 3, 1996; Consolidated Statements of Stockholders'
Equity for the fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995; Consolidated Statements of Cash Flows
for the fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995; Notes to Consolidated Financial
Statements; Independent Auditors' Report.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed below are filed as a part of this Annual
Report.
Exhibit Number
--------------
3.1 Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission (the
"Commission") on August 10, 1992 (Registration No. 33-
50688).
3.2 By-Laws of the Company. Incorporated by reference to
Exhibit 3.2 to the Form 10-Q of the Company for the
Quarter ended November 2, 1991 filed on December 17,
1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann
Taylor and Fleet Bank, N.A., as Trustee, including the
form of Subordinated Note due 2000. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form
8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance,
dated as of December 1, 1995, among Ann Taylor, Fleet
Bank, N.A., as Resigning Trustee, and Norwest Bank
Minnesota, N.A., the Successor Trustee. Incorporated
by reference to Exhibit 4.1.1 to the Annual Report on
Form 10-K of the Company filed on April 8, 1996.
10.1 Form of Warrant Agreement entered into between
AnnTaylor and The Connecticut Bank and Trust Company,
National Association, including the form of Warrant.
Incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to the Registration Statement of the Company and
Ann Taylor filed on June 21, 1989 (Registration No. 33-
28522).
10.2 Amended and Restated Credit Agreement, dated as of
September 29, 1995, among Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of
America"), and Fleet Bank, National Association, as Co-
Agents, the financial institutions from time to time
party thereto, BA Securities, Inc., as Arranger, and
Bank of America, as Agent. Incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of
Ann Taylor filed on October 17, 1995.
10.2.1 First Amendment to Amended and Restated Credit
Agreement, dated as of January 4, 1996, among Ann
Taylor, Bank of America, Fleet Bank, National
Association, as Co-Agents, the financial institutions
from time to time party thereto, BA Securities, Inc.,
as Arranger, and Bank of America, as Agent.
Incorporated by reference to Exhibit 10.2.1 to the
Annual Report on Form 10-K of the Company filed on
April 8, 1996.
10.2.2 Second Amendment to the Amended and Restated Credit
Agreement, dated as of April 9, 1996 among Ann Taylor,
Bank of America and Fleet Bank, National Association,
as Co-Agents, the financial institutions from time to
time party thereto, BA Securities Inc. as Arranger, and
Bank of America as Agent. Incorporated by reference to
Exhibit 10.1 on Form 10-Q of the Company for the
Quarter ended August 3, 1996 filed on September 16,
1996.
====================================================================
23
Exhibit
Number
- -------
10.3 Amended and Restated Guaranty, dated as of September
29, 1995, made by the Company in favor of Bank of
America, as Agent. Incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K of Ann
Taylor filed on October 17, 1995.
10.4 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by Ann Taylor in
favor of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.5 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by the Company in
favor of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.5 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.6 Trademark Security Agreement, dated as of September 29,
1995, made by Ann Taylor in favor of Bank of America,
as Agent. Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of Ann Taylor filed on
October 17, 1995.
10.7 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.18 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
10.7.1 Amendment to 1989 Stock Option Plan. Incorporated by
reference to Exhibit 10.15.1 to the Annual Report on
Form 10-K of the Company filed on April 30, 1993.
10.8 Lease, dated as of March 17, 1989, between Carven
Associates and Ann Taylor concerning the West 57th
Street headquarters. Incorporated by reference to
Exhibit 10.21 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989
(Registration No. 33-28522).
10.8.1 First Amendment to Lease, dated as of November 14,
1990, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.1 to the
Registration Statement of the Company filed on April
11, 1991 (Registration No. 33-39905).
10.8.2 Second Amendment to Lease, dated as of February 28,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.2 to the
Annual Report on Form 10-K of the Company filed on
April 29, 1993.
10.8.3 Extension and Amendment to Lease dated as of October 1,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.11 to the Form
10-Q of Ann Taylor for the Quarter ended October 30,
1993 filed on November 26, 1993.
10.8.4 Modification of Amendment and Extension to Lease, dated
as of April 14, 1994 between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit 10.15.4
to the Annual Report on Form 10-K of the Company filed
on April 28, 1995.
10.8.5 Fifth Amendment to Lease, dated as of March 14, 1995,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.5 to the Annual Report on
Form 10-K of the Company filed on April 28, 1995.
10.9 Tax Sharing Agreement, dated as of July 13, 1989,
between the Company and Ann Taylor. Incorporated by
reference to Exhibit 10.24 to Amendment No. 2 to the
Registration Statement of the Company and Ann Taylor
filed on July 13, 1989 (Registration No. 33-28522).
10.10 Employment Agreement dated as of February 1, 1994
between the Company and Sally Frame Kasaks.
Incorporated by reference to Exhibit 10.8 to the Form
10-Q of the Company for the Quarter ended October 29,
1994 filed on December 9, 1994.
10.11 Employment Agreement dated February 16, 1996 between
the Company and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form
10-K of the Company filed on April 8, 1996.
10.11.1Amendment to the Employment Agreement, dated August 23,
1996, between the Company and J. Patrick Spainhour.
10.12 Employment Agreement dated November 25, 1996 between
the Company and Patricia DeRosa. Incorporated by
reference to Exhibit 10.3 to Form 10-Q of AnnTaylor for
the Quarter ended November 2, 1996 filed on December
17, 1996.
====================================================================
24
Exhibit
Number
- -------
10.13 Employment Agreement dated September 20, 1996 between
Ann Taylor and Dwight F. Meyer. Incorporated by
reference to Exhibit 10.4 to the Form 10-Q of Ann
Taylor for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.14 Separation Agreement dated January 24, 1997 between Ann
Taylor and Paul E. Francis.
10.15 The AnnTaylor Stores Corporation 1992 Stock Option and
Restricted Stock and Unit Award Plan, Amended and
Restated as of February 23, 1994 (the "1992 Option
Plan").
10.16 Amended and Restated Management Performance
Compensation Plan as approved by stockholders on June
1, 1994. Incorporated by reference to Exhibit 10.22.1
to the Annual Report on Form 10-K of the Company filed
on April 28, 1995.
10.16.1 Amendment to the AnnTaylor Stores Corporation
Management Performance Compensation Plan dated as of
February 24, 1995. Incorporated by reference to
Exhibit 10.22.2 to the Annual Report on Form 10-K of
the Company filed on April 28, 1995.
10.17 Associate Stock Purchase Plan. Incorporated by
reference to Exhibit 10.31 to the Form 10-Q of the
Company for the Quarter Ended October 31, 1992 filed on
December 15, 1992.
10.18 Interest Rate Swap Agreement dated as of July 22, 1993,
between Ann Taylor and Fleet Bank of Massachusetts,
N.A. Incorporated by reference to Exhibit 10.6 to the
Form 10-Q of Ann Taylor for the Quarter ended July 31,
1993 filed on September 2, 1993.
10.19 Stock Purchase Agreement, dated as of July 13, 1993,
between Ann Taylor and Cleveland Investment, Ltd.
Incorporated by reference to Exhibit 10.7 to the Form
10-Q of Ann Taylor for the Quarter ended July 31, 1993
filed on September 2, 1993.
10.20 Amended and Restated Receivables Financing Agreement
dated October 31, 1995, among AnnTaylor Funding, Inc.,
Ann Taylor, Market Street Capital Corp. and PNC Bank,
National Association. Incorporated by reference to
Exhibit 10.31.4 to the Form 10-Q of the Company for the
Quarter ended October 28, 1995 filed on December 8,
1995.
10.20.1 First Amendment to the Amended and Restated Receivables
Financing Agreement, dated as of October 31, 1995,
among AnnTaylor Funding, Inc., Ann Taylor, Market
Street Capital Corp. and PNC Bank, National
Association. Incorporated by reference to Exhibit
10.5 to the Form 10-Q of Ann Taylor for the Quarter
ended November 2, 1996 filed on December 17, 1996.
10.21 Purchase and Sale Agreement dated as of January 27,
1994 between Ann Taylor and AnnTaylor Funding, Inc.
Incorporated by reference to Exhibit 10.29 to the
Annual Report on Form 10-K of the Company filed on
March 31, 1994.
10.22 AnnTaylor Stores Corporation Deferred Compensation
Plan. Incorporated by reference to Exhibit 10.33 to
the Annual Report on Form 10-K of the Company filed on
April 28, 1995.
10.22.1 Amendment to the AnnTaylor Stores Corporation Deferred
Compensation Plan as approved by the Board of Directors
on August 11, 1995. Incorporated by reference to
Exhibit 10.33.1 to the Form 10-Q of the Company for the
Quarter Ended July 29, 1995 filed on September 11,
1995.
10.23 Mortgage, Assignment of Rents and Leases, Security
Agreement and Fixture Financing Statement dated
November 20, 1995, between AnnTaylor Distribution
Services, Inc., as Mortgagor, and General Electric
Capital Assurance Company, as Mortgagee. Incorporated
by reference to Exhibit 10.34 to the Form 10-Q of Ann
Taylor for the Quarter ended October 28, 1995 filed on
December 8, 1995.
10.24 Promissory Note dated November 20, 1995 from Ann Taylor
and AnnTaylor Distribution Services, Inc., collectively
as Borrower, to General Electric Capital Assurance
Company, as Lender. Incorporated by reference to
Exhibit 10.35 to the Form 10-Q of Ann Taylor for the
Quarter ended October 28, 1995 filed on December 8,
1995.
===================================================================
25
Exhibit
Number
- -------
10.25 Amended and Restated Credit Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.6 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.25.1 Promissory Note dated September 20, 1996 from AnnTaylor
Global Sourcing, Inc. to the Hongkong and Shanghai
Banking Corporation Limited, New York Branch.
Incorporated by reference to Exhibit 10.7 to Form 10-Q
of Ann Taylor for the Quarter ended November 2, 1996
filed on December 17, 1996.
10.25.2 Amended and Restated Security Agreement, dated as of
September 20, 1996, between AnnTaylor Global Sourcing,
Inc. and the Hongkong and Shanghai Banking Corporation
Limited. Incorporated by reference to Exhibit 10.8 to
the Form 10-Q of Ann Taylor for the Quarter ended
November 2, 1996 filed on December 17, 1996.
10.25.3 Letter of Negative Pledge, dated as of September 20,
1996 from AnnTaylor Global Sourcing, Inc. to the
Hongkong and Shanghai Banking Corporation Limited.
Incorporated by reference to Exhibit 10.9 to the Form
10-Q of Ann Taylor for the Quarter ended November 2,
1996 filed on December 17, 1996.
10.26 Stock and Asset Purchase Agreement, dated as of June 7,
1996, by and among the Company, Ann Taylor, Cygne and
Cygne Group (F.E.) Limited. Incorporated by reference
to Exhibit 2 to the Registrants' Current Report on Form
8-K filed on June 10, 1996.
10.26.1 Amendment to Stock and Asset Purchase Agreement, dated
as of August 27, 1996, by and among the Company, Ann
Taylor, Cygne and Cygne Group (F.E.) Limited.
Incorporated by reference to Exhibit 3 to the
Registrants' Current Report on Form 8-K filed on August
30, 1996.
10.26.2 Stockholders Agreement, dated as of September 20, 1996,
among the Company, Cygne and Cygne Group (F.E.)
Limited, a Hong Kong corporation and wholly owned
subsidiary of Cygne.
10.26.3 Consulting Agreement, dated as of September 20, 1996,
by and between the Company, Cygne and Mr. Bernard M.
Manuel.
10.26.4 Consulting Agreement, dated as of September 20, 1996,
by and between the Company, Cygne and Mr. Irving
Benson.
10.27 Certificate of Trust of AnnTaylor Finance Trust.
Incorporated by reference to Exhibit 4.1 to the
Registration Statement of the Company and AnnTaylor
Finance Trust filed on June 21, 1996 (Registration 333-
06605).
10.27.1 Amended and Restated Declaration of Trust of AnnTaylor
Finance Trust, dated as of April 25, 1996 among the
Company, as Sponsor, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware
Trustee and J. Patrick Spainhour, Paul E. Francis and
Walter J. Parks, as Trustees. Incorporated by
reference to Exhibit 4.2 to the Registration Statement
of the Company and AnnTaylor Finance Trust filed on
June 21, 1996 (Registration 333-06605).
10.27.2 Indenture, dated as of April 15, 1996, among
AnnTaylor Stores Corporation and The Bank of New York,
as Trustee, including form of Preferred Securities and
form of Convertible Subordinated Debentures due 2016.
Incorporated by reference to Exhibit 4.3 to the
Registration Statement of the Company and AnnTaylor
Finance Trust filed on June 21, 1996. (Registration
No. 333-06605).
10.27.3 Amendment No. 1 to the Amended and Restated Declaration
of Trust of AnnTaylor Finance Trust, dated as of August
27, 1996, between the Company and Bank of New York, as
Trustee. Incorporated by reference to Exhibit 10.2 to
Form 10-Q of Ann Taylor for the Quarter ended August 3,
1996 filed on September 16, 1996.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
===================================================================
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANNTAYLOR STORES CORPORATION
By: /s/ J. Patrick Spainhour
------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: May 1, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ J. Patrick Spainhour Chairman and Chief May 1, 1997
- ------------------------ Executive Officer ----------------
J. Patrick Spainhour and Director
/s/ Patricia DeRosa President and Chief May 1, 1997
- ------------------------ Operating Officer -----------------
Patricia DeRosa and Director
/s/ Walter J. Parks Senior Vice President- May 1, 1997
- ------------------------ Chief Financial ------------------
Walter J. Parks Officer
/s/ James M. Smith Vice President and May 1, 1997
________________________ Controller, Principal -----------------
James M. Smith Accounting Officer
/s/ Gerald S. Armstrong Director May 1, 1997
- ------------------------- -------------------
Gerald S. Armstrong
/s/ James J. Burke, Jr. Director May 1, 1997
- ------------------------- ---------------------
James J. Burke, Jr.
/s/ Robert C. Grayson Director May 1, 1997
- ------------------------- ----------------------
Robert C. Grayson
/s/ Rochelle B. Lazarus Director May 1, 1997
- ------------------------- ------------------------
Rochelle B. Lazarus
/s/ Hanne M. Merriman Director May 1, 1997
- ------------------------- -------------------------
Hanne M. Merriman
=======================================================================
27
ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report...................................... 28
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years
ended February 1, 1997, February 3, 1996 and
January 28, 1995............................................ 29
Consolidated Balance Sheets as of February 1, 1997 and
February 3, 1996............................................ 30
Consolidated Statements of Stockholders' Equity for the
fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995........................................ 31
Consolidated Statements of Cash Flows for the fiscal years
ended February 1, 1997, February 3, 1996 and
January 28, 1995............................................ 32
Notes to Consolidated Financial Statements.................... 33
==========================================================================
28
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial
statements of AnnTaylor Stores Corporation and its subsidiaries,
listed in the accompanying index. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of the Company and its subsidiaries at February 1, 1997 and
February 3, 1996, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
February 1, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1997
===================================================================
20
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995
Fiscal Years Ended
--------------------------------------
February 1, February 3, January 28,
1997 1996 1995
------------ ----------- -----------
(in thousands, except per share amounts)
Net sales................................ $798,117 $731,142 $658,804
Cost of sales............................ 443,443 425,225 357,783
------- ------- -------
Gross profit 354,674 305,917 301,021
Selling, general and
administrative expenses............... 291,027 271,136 214,224
Studio shoe stores closing expense....... 3,600 --- ---
Employment contract separation expense... 3,500 --- ---
Amortization of goodwill................. 10,086 9,506 9,506
------- ------- -------
Operating income......................... 46,461 25,275 77,291
Interest expense......................... 24,416 20,956 14,229
Other expense, net....................... 403 38 168
------- ------- -------
Income before income taxes and
extraordinary loss.................... 21,642 4,281 62,894
Income tax provision..................... 12,975 5,157 30,274
------- ------- -------
Income (loss) before extraordinary loss.. 8,667 (876) 32,620
Extraordinary loss (net of income
tax benefit of $654,000)............... --- --- 868
------- ------- -------
Net income (loss)..................... $ 8,667 $ (876) $ 31,752
======= ======= =======
Net income (loss) per share of common stock:
Income (loss) per share before
extraordinary loss.................... $ .36 $ (.04) $ 1.40
Extraordinary loss per share............. --- --- (.04)
------- ------- -------
Net income (loss) per share........... $ .36 $ (.04) $ 1.36
======= ======= =======
See accompanying notes to consolidated financial statements.
=============================================================================
30
ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
February 1, 1997 and February 3, 1996
February 1, February 3,
1997 1996
----------- -----------
(in thousands, except per share amounts)
ASSETS
Current assets
Cash $ 7,025 $ 1,283
Accounts receivable, net 63,605 70,395
Merchandise inventories 100,237 102,685
Prepaid expenses and other current assets 25,653 24,307
------- -------
Total current assets 196,520 198,670
Property and equipment
Land and building 8,930 8,923
Leasehold improvements 76,576 73,677
Furniture and fixtures 120,268 99,548
Construction in progress 3,307 14,190
------- -------
209,081 196,338
Less accumulated depreciation
and amortization 65,648 42,443
------- -------
Net property and equipment 143,433 153,895
Goodwill, net 341,779 313,525
Deferred financing costs, net 2,743 3,933
Other assets 3,664 8,686
------- -------
Total assets $688,139 $678,709
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 34,341 $42,909
Accrued tenancy 6,827 5,675
Gift certificates redeemable 4,903 4,269
Accrued expenses 31,312 19,074
Current portion of long-term debt 287 40,266
------- -------
Total current liabilities 77,670 112,193
Long-term debt 130,905 232,192
Deferred income taxes 4,872 1,300
Other liabilities 7,952 7,336
Commitments and contingencies
Company-Obligated Mandatorily
Redeemable Convertible
Preferred Securities of Subsidiary,
AnnTaylor Finance Trust,
Holding Solely Convertible Debentures 96,158 ---
Stockholders' equity
Common stock, $.0068 par value;
40,000,000 shares authorized;
25,598,489 and 23,127,743 shares
issued, respectively 174 157
Additional paid-in capital 349,545 311,284
Warrants to acquire 2,814 and 36,605
shares of common stock, respectively 46 596
Retained earnings 22,613 14,120
Deferred compensation on restricted stock (1,590) (33)
------- -------
370,788 326,124
Treasury stock, 11,601 and 44,983
shares, respectively, at cost (206) (436)
------- -------
Total stockholders' equity 370,582 325,688
------- -------
Total liabilities and stockholders'
equity $688,139 $678,709
======= =======
See accompanying notes to consolidated financial statements.
======================================================================
31
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995
(in thousands)
Retained
Addi- Earnings Treasury
Common Stock tional Warrants Accum- Restric- Stock
-------------- Paid-in _____________ ulated ted Stock_____________
Shares Amount Capital Shares Amount Deficit) Awards Shares Amount
------ ------ ------- ------ ------ -------- ------ ------ ------
Balance at
January 29,
1994 21,903 $ 149 $271,810 446 $7,378 $(16,756) $(119) 451 $(3,191)
Net income --- --- --- --- --- 31,752 --- --- ---
Exercise of
stock options
and related
tax benefit 191 2 4,480 --- --- --- --- 3 (118)
Exercise of
warrants --- --- 3,675 (388)(6,427) --- --- (388) 2,752
Issuance of
common stock 1,000 6 30,414 --- --- --- --- --- ---
Activity
related
to common
stock issued
as employee
incentives 13 --- 335 --- --- --- (30) --- ---
------ --- ------ ---- ----- ------ --- --- -----
Balance at
January 28,
1995 23,107 157 310,714 58 951 14,996 (149) 66 (557)
Net loss --- --- --- --- --- (876) --- --- ---
Exercise of
stock options
and related
tax benefit 23 --- 405 --- --- --- --- --- (12)
Exercise of
warrants --- --- 203 (21) (355) --- --- (22) 152
Activity related
to common
stock issued
as employee
incentives (2) --- (38) --- --- --- 116 1 (19)
------ --- ------ ---- ----- ------ --- --- ----
Balance at
February 3,
1996 23,128 157 311,284 37 596 14,120 (33) 45 (436)
Net income --- --- --- --- --- 8,667 --- --- ---
Exercise of
stock options
and related
tax benefit 18 --- 216 --- --- --- --- --- ---
Exercise of
warrants --- --- 314 (34) (550) --- --- (34) 236
Issuance of
stock for
Sourcing
Acquisition 2,348 16 35,984 --- --- --- --- --- ---
Amortization
of discount
on preferred
securities --- --- --- --- --- (174) --- --- ---
Activity
related to
common stock
issued as
employee
incentives 104 1 1,747 --- --- --- (1,557) 1 (6)
------ --- ------ ---- ----- ------ ------ -- ----
Balance at
February 1,
1997 25,598 $ 174 $349,545 3 $46 $22,613 $(1,590) 12 $(206)
====== === ======= ==== ===== ====== ====== == ====
See accompanying notes to consolidated financial statements.
================================================================================
32
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995
Fiscal Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ---------- ----------
(in thousands)
Operating activities:
Net income (loss)......................... $ 8,667 $ (876) $ 31,752
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Extraordinary loss.................... --- --- 1,522
Equity earnings in CAT................ (1,402) (1,646) (1,547)
Provision for loss on
accounts receivable................. 1,803 1,280 1,727
Depreciation and amortization......... 26,208 18,788 11,787
Amortization of goodwill.............. 10,086 9,506 9,506
Amortization of deferred
compensation........................ 191 68 298
Non-cash interest..................... 1,574 1,004 978
Deferred income taxes................. (985) 3,150 ---
Loss on disposal of property
and equipment....................... 3,209 1,143 1,268
Change in assets and liabilities
net of effects from purchase
of AnnTaylor Global Sourcing:
Decrease (increase)
in receivables............... 4,987 (10,464) (13,659)
Decrease (increase) in
merchandise inventories...... 9,342 (8,980) (32,815)
Decrease (increase) in
prepaid expenses and
other current assets.......... 247 (12,951) (772)
Decrease in other non-current
assets and liabilities, net... 738 429 567
Increase in accounts payable
and accrued liabilities......... 2,867 6,925 6,537
------- ------- -------
Net cash provided by operating
activities.............................. 67,532 7,376 17,149
------- ------- -------
Investing activities:
Purchases of property and equipment... (16,107) (78,378) (61,341)
Purchase of AnnTaylor Global Sourcing..... (227) --- ---
------- ------- -------
Net cash used by investing activities..... (16,334) (78,378) (61,341)
------- ------- -------
Financing activities:
Borrowings (repayments) under
revolving credit facility............... (101,000) 37,000 64,000
Payments of long-term debt................ --- --- (56,000)
Net proceeds from issuance
of preferred securities................. 95,984 --- ---
Net proceeds from issuance
of common stock......................... --- --- 30,420
Proceeds from term loan................... --- 24,500 ---
Proceeds from (payments of) mortgage...... (266) 6,958 ---
Borrowings (repayments) under
receivables facility................... (40,000) 4,000 3,000
Proceeds from exercise of stock options... 210 384 4,371
Payment of financing costs................ (384) (2,108) (340)
------- ------- -------
Net cash provided by (used by)
financing activities.................... (45,456) 70,734 45,451
------- ------- -------
Net increase (decrease) in cash............. 5,742 (268) 1,259
Cash, beginning of year..................... 1,283 1,551 292
------- ------- -------
Cash, end of year........................... $ 7,025 $ 1,283 $ 1,551
======= ======= =======
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year
for interest............................ $ 22,689 $ 19,607 $ 13,211
======= ======= =======
Cash paid during the year
for income taxes........................ $ 8,990 $ 6,886 $ 26,242
======= ======= =======
See accompanying notes to consolidated financial statements.
=============================================================================
33
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Ann Taylor is a leading national specialty retailer of
better quality women's apparel, shoes and accessories sold
principally under the Ann Taylor brand name.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts
of AnnTaylor Stores Corporation (the "Company") and AnnTaylor,
Inc. ("Ann Taylor"). The Company has no material assets other
than the common stock of Ann Taylor and the common securities of
AnnTaylor Finance Trust and conducts no business other than the
management of Ann Taylor. All intercompany accounts have been
eliminated in consolidation.
Certain Fiscal 1995 and 1994 amounts have been reclassified
to conform to the Fiscal 1996 presentation.
Fiscal Year
- -----------
The Company follows the standard fiscal year of the retail
industry, which is a 52 or 53 week period ending on the Saturday
closest to January 31 of the following calendar year. The fiscal
year ended February 3, 1996 included 53 weeks. The other fiscal
years presented included 52 weeks.
Finance Service Charge Income
- -----------------------------
Income from finance service charges relating to customer
receivables, which is deducted from selling, general and
administrative expenses, amounted to $9,024,000 for Fiscal 1996,
$8,328,000 for Fiscal 1995 and $6,871,000 for Fiscal 1994.
Merchandise Inventories
- -----------------------
Merchandise inventories are accounted for by the retail
inventory method and are stated at the lower of cost (first-in,
first-out method) or market. The majority of the Company's
inventory represents finished goods available for sale.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. The Company
capitalized interest costs of approximately $1,300,000 in Fiscal
1995. Depreciation and amortization are computed on a straight-
line basis over the estimated useful lives of the assets (3 to 40
years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
Pre-Opening Expenses
- --------------------
Pre-opening store expenses are charged to selling, general
and administrative expenses in the period incurred.
====================================================================
34
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
-------------------------------------------------------
Deferred Financing Costs
- ------------------------
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at February 1, 1997 and February 3, 1996 was
$3,534,000 and $1,960,000, respectively.
Goodwill
- --------
Goodwill relating to the 1989 acquisition of Ann Taylor by
the Company is being amortized on a straight-line basis over 40
years. Goodwill relating to the 1996 Sourcing Acquisition (see
Note 13) is being amortized on a straight-line basis over 25
years. Accumulated amortization at February 1, 1997 and February
3, 1996 was $76,811,000 and $66,725,000, respectively. On an
annual basis, the Company compares the carrying value of its
goodwill to an estimate of the Company's fair value to evaluate
the reasonableness of the carrying value and remaining
amortization period. Fair value is computed using projections of
future cash flows.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which requires an asset and liability method
of accounting for deferred income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized, and income or expense is recorded, for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
Impairment of Long-Lived Assets
- --------------------------------
The Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
in Fiscal 1996. The implementation of SFAS 121 did not have a
material adverse effect on the consolidated financial statements
of the Company.
==================================================================
35
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt
--------------
The following summarizes long-term debt outstanding at
February 1, 1997 and February 3, 1996:
February 1, 1997 February 3, 1996
------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
Senior Debt:
Revolving credit facility..... $ --- $ --- $101,000 $101,000
Term loan..................... 24,500 24,500 24,500 24,500
Mortgage...................... 6,692 6,692 6,958 6,958
8-3/4% Notes................... 100,000 97,750 100,000 83,125
Interest rate swap agreement... --- --- --- 384
Receivables facility........... --- --- 40,000 40,000
------- ------- ------- -------
Total debt............ 131,192 128,942 272,458 255,967
Less current portion........... 287 287 40,266 40,266
------- ------- ------- -------
Total long-term debt.. $130,905 $128,655 $232,192 $215,701
======= ======= ======= =======
In accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", the Company determined the
estimated fair value of its financial instruments using quoted
market information, as available. As judgment is involved, the
estimates are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
The Company's Bank Credit Agreement provides, among other
things, for a $25,000,000 term loan and a $125,000,000 revolving
credit facility. As described below, in January 1996, the
Company prepaid a portion of the term loan and reduced the
revolving credit facility to $122,000,000. The principal amount
of the term loan is payable on September 29, 1998, and the
maturity date of the revolving credit facility is July 29, 1998;
however, the Company is required to reduce the outstanding loan
balance under the revolving credit facility to $50,000,000 or
less for thirty consecutive days during Fiscal 1996 and in each
fiscal year thereafter. The maximum amount that may be borrowed
under the revolving credit facility is reduced by the amount of
commercial and standby letters of credit outstanding under the
Bank Credit Agreement. At February 1, 1997 the amount available
under the revolving credit facility was $110,000,000.
The term loan bears interest at a rate equal to, at the
Company's option, the Bank of America National Trust and Savings
Association ("Bank of America") (1) Base Rate plus 2.50%, or (2)
Eurodollar Rate plus 3.50%, and amounts outstanding under the
revolving credit facility bear interest at a rate equal to, at
the Company's option, the Bank of America (1) Base Rate, or (2)
Eurodollar Rate plus 1.00%. In addition, Ann Taylor is required
to pay the lenders a quarterly commitment fee of 0.375% per annum
of the unused revolving loan commitment. At February 1, 1997,
the interest rate on the $24,500,000 outstanding under the term
loan was 8.938% per annum.
Under the terms of the Bank Credit Agreement, Bank of
America obtained a pledge of Ann Taylor's outstanding common
stock held by the Company and a security interest in certain
assets of Ann Taylor, excluding inventory and accounts
receivable. In addition, the Bank Credit Agreement contains
financial and other covenants, including limitations on
indebtedness, liens and investments, restrictions on dividends or
other distributions to stockholders, and maintaining certain
financial ratios and specified levels of net worth. The Bank
Credit Agreement also provides for, among other things, an annual
limitation on capital expenditures of $25,000,000 in Fiscal 1996
and $32,500,000 in Fiscal 1997 and beyond, subject to increase if
certain conditions are satisfied.
===================================================================
36
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (Continued)
--------------------------
Since the fourth quarter of Fiscal 1993, Ann Taylor sells
its proprietary credit card accounts receivable to AnnTaylor
Funding, Inc., a wholly owned subsidiary of Ann Taylor, that uses
the receivables to secure borrowings of up to $40,000,000, based
on its eligible accounts receivable, under a receivables
financing facility (the "Receivables Facility"). The Receivables
Facility matures in May 1998. As of February 1, 1997, there were
no borrowings outstanding under the Receivables Facility.
AnnTaylor Funding, Inc. had total assets of approximately
$55,189,000 at February 1, 1997, all of which are subject to the
security interest of the lender under the Receivables Facility.
On June 28, 1993, Ann Taylor issued $110,000,000 principal
amount of its 8-3/4% Subordinated Notes due 2000 ("8-3/4% Notes"). The
outstanding principal amount of these notes as of February 1,
1997 was $100,000,000.
In July 1993, Ann Taylor entered into a $110,000,000
(notional amount) interest rate swap agreement, which had the
effect of converting the Company's interest obligations on the
8-3/4% Notes to a variable rate. Under the agreement, the Company
received a fixed rate of 4.75% and paid a floating rate based on
LIBOR, as determined in six month intervals. The swap agreement
matured in July 1996. Net receipts or payments under the
agreement were recognized as adjustments to interest expense.
In November 1995, Ann Taylor and its wholly owned subsidiary
AnnTaylor Distribution Services, Inc. received the proceeds of a
$7,000,000 seven-year mortgage loan secured by the Company's
distribution center land and building in Louisville, Kentucky.
The mortgage loan bears interest at 7.5% and is payable in
monthly installments of approximately $65,000 through December 1,
1997, and thereafter in monthly installments sufficient to
amortize the then remaining principal balance over a period of
five years. Pursuant to the requirements of the Bank Credit
Agreement, in January 1996, the Company applied one-half of the
proceeds of the mortgage to reduce the amount available under the
revolving credit facility, thereby reducing the revolving credit
facility by $3,000,000, and prepaid a portion of the term loan.
The aggregate principal payments of all long-term
obligations are as follows:
Fiscal Year (in thousands)
----------
1997.................................. $ 287
1998.................................. 25,748
1999.................................. 1,206
2000.................................. 101,300
2001.................................. 1,401
2002 and thereafter................... 1,250
-------
Total............................... $131,192
=======
At February 1, 1997 and February 3, 1996, Ann Taylor had
outstanding commercial and standby letters of credit under the
Bank Credit Agreement of $12,116,000 and $7,850,000,
respectively.
In connection with the Sourcing Acquisition discussed in
Note 13, the Hongkong and Shanghai Banking Corporation entered
into an Amended and Restated Credit Agreement with AnnTaylor
Global Sourcing, Inc. ("ATGS", formerly known as CAT US Inc.
("CAT") and now a wholly owned subsidiary of Ann Taylor),
continuing the $40,000,000 credit facility of ATGS's predecessor.
The facility is available principally for the issuance of letters
of credit; cash borrowings under the facility are limited to a
maximum of $8,000,000. Such credit facility matures on July 29,
1997 and contains financial and other covenants. As of February
1, 1997, commercial and standby letters of credit outstanding
under this facility totaled $28,189,000 and there were no
borrowings outstanding under this facility.
===================================================================
37
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Preferred Securities
---------------------
In April and May of Fiscal 1996, the Company completed the
sale of an aggregate of $100,625,000 of 8-1/2% Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities (the
"preferred securities") issued by its financing vehicle,
AnnTaylor Finance Trust, a Delaware business trust (the "Trust").
The preferred securities have a liquidation preference of $50 per
security ($100,625,000 in the aggregate) and are convertible at
the option of the holders thereof into the Company's common stock
at a conversion rate of 2.545 shares of common stock for each
preferred security (equivalent to $19.65 per share of common
stock, which represented a 20% premium to the $16.375 closing
price of the common stock on the New York Stock Exchange at the
date of the execution of the purchase agreement relating to the
sale of the preferred securities). The sole assets of the Trust
are $103,700,000 of 8-1/2% Convertible Subordinated Debentures of
the Company maturing on April 15, 2016. A total of 2,012,500
preferred securities were issued, and are convertible into an
aggregate of 5,121,812 shares of common stock. The Company
received net proceeds of $95,984,000 in connection with the sale
of the preferred securities, of which $94,000,000 was applied to
reduce outstanding borrowings under Ann Taylor's revolving credit
facility, without a permanent reduction of the commitment
thereunder. The carrying value and estimated fair value of the
preferred securities at February 1, 1997 were $96,158,000 and
$107,669,000, respectively.
4. Allowance for Doubtful Accounts
-------------------------------
A summary of activity in the allowance for doubtful accounts
for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995 is as follows:
Fiscal Years Ended
-----------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
(in thousands)
Balance at beginning of year......... $ 736 $ 931 $ 787
Provision for loss on
accounts receivable............... 1,803 1,280 1,727
Accounts written off................. (1,728) (1,475) (1,583)
------ ------ ------
Balance at end of year............... $ 811 $ 736 $ 931
====== ====== ======
5. Commitments and Contingencies
-----------------------------
Rental Commitments
- ------------------
Ann Taylor occupies its retail stores and administrative
facilities under operating leases, most of which are non-
cancelable. Some leases contain renewal options for periods
ranging from one to ten years under substantially the same terms
and conditions as the original leases. Most of the store leases
require Ann Taylor to pay a specified minimum rent, plus a
contingent rent based on a percentage of the store's net sales in
excess of a certain threshold. In addition, most of the leases
require Ann Taylor to pay real estate taxes, insurance and
certain common area and maintenance costs in addition to the
future minimum lease payments shown below.
=================================================================
38
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies (Continued)
-----------------------------------------
Future minimum lease payments under non-cancelable operating
leases at February 1, 1997 are as follows:
Fiscal Year (in thousands)
------------
1997................................ $ 60,021
1998................................ 59,242
1999................................ 56,288
2000................................ 54,164
2001................................ 51,306
2002 and thereafter................. 242,431
-------
Total $523,452
=======
Rent expense for the fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995 was as follows:
Fiscal Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
(in thousands)
Minimum rent............... $55,571 $47,132 $35,382
Percentage rent............ 2,433 3,090 4,684
------ ------ ------
Total................. $58,004 $50,222 $40,066
====== ====== =======
Litigation
- ----------
The Company has been named as a defendant in several legal
actions arising from its normal business activities. Although
the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of
the Company, any such liability will not have a material adverse
effect on the financial position, results of operations or
liquidity of the Company.
In addition, the Company, Ann Taylor, certain officers and
directors of the Company and Ann Taylor, Merrill Lynch & Co.
("ML&Co.") and certain affiliates of ML&Co. have been named as
defendants in a purported class action lawsuit filed by certain
alleged stockholders alleging that the Company and the other
defendants engaged in a fraudulent scheme and course of business
that operated a fraud or deceit on purchasers of the Company's
common stock. The Company believes that the complaint is without
merit and intends to defend the action vigorously. The Company
and other defendants have filed motions to dismiss the action.
These motions are pending, and discovery in this case has been
suspended pending judicial disposition of these motions. As the
case is in preliminary stages, any liability that may arise from
this action cannot be predicted at this time.
Other
- -----
The Company is currently under tax examination by the
Internal Revenue Service (the "IRS"). Such examination is not
yet complete and no assertions or claims have yet been made by
the IRS. Management believes that the effect of any claims which
may arise as a result of the IRS audit will not have a materially
adverse effect on the consolidated financial condition, operating
results or liquidity of the Company. However, there can be no
assurance that certain claims will not be made or that the effect
of such claims will not be significant.
=======================================================================
39
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Net Income per Share
---------------------
Net income per share is calculated by dividing net income by
the total of the weighted average number of common shares and
common share equivalents outstanding during the period, assuming
the exercise of the warrants and the dilutive effect of the stock
options, computed in accordance with the treasury stock method.
Fully diluted income per share, assuming the conversion into
common stock of the preferred securities, is not presented for
the year ended February 1, 1997 due to the antidilutive effect of
the assumed conversion.
The number of shares used in the calculation for the fiscal
years ended February 1, 1997, February 3, 1996 and January 28,
1995 was as follows:
Fiscal Years Ended
------------------------------------
February 1, February 3, January 28,
1996 1995 1994
------------ ------------ -----------
(in thousands)
Common shares............ 23,981 23,067 22,687
Warrants................. 22 44 90
Stock options............ 101 98 509
------ ------ ------
24,104 23,209 23,286
====== ====== ======
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 specifies the computation, presentation
and disclosure requirements for basic and diluted earnings per
share. The Company expects that this statement will have no
material effect on earnings per share.
7. Common Stock Warrants
---------------------
At February 1, 1997, the Company had outstanding warrants to
acquire, in the aggregate, 2,814 shares of the common stock of
the Company (the "Warrants"). The Warrants, when exercised,
entitle the holders thereof to acquire such shares, subject to
adjustment, at no additional cost. The Warrants expire on July
15, 1999 and became exercisable as a result of the initial public
offering of the Company's common stock in May 1991.
8. Preferred Stock
----------------
At February 1, 1997, February 3, 1996 and January 28, 1995,
there were 2,000,000 shares of preferred stock, par value $.01,
authorized and unissued.
9. Stock Options Plans
-------------------
In 1989 and 1992, the Company established stock option
plans. 137,969 shares of common stock are reserved for issuance
under the 1989 plan and 1,456,600 shares of common stock are
reserved for issuance under the 1992 plan. Under the terms of
both plans, the exercise price of any option may not be less than
100% of the fair market value of the common stock on the date of
grant. Stock options granted prior to 1994 generally vest over a
five year period, with 20% becoming exercisable immediately upon
grant of the option and 20% per year for the next four years.
Stock options granted since 1994 generally vest either (i) over a
four year period, with 25% becoming exercisable on each of the
first four anniversaries of the grant, or (ii) in nine years with
accelerated vesting upon the achievement of specified earnings or
stock price targets within a five year period. All stock options
granted under the 1989 plan and the 1992 plan expire ten years
from the date of grant. At February 1, 1997, there were 20,327
shares under the 1989 plan and 110,157 shares under the 1992 plan
available for future grant. In addition, in Fiscal 1992 the
Company granted its then-Chairman options to purchase an
aggregate of 200,000 shares; this grant was made outside of the
option plans.
==================================================================
40
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options Plans (Continued)
-------------------------------
The Company accounts for the stock options in accordance
with Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards.
Had compensation costs of option awards been determined under a
fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company would have been required to prepare a
fair value model for such options and record such amount in the
financial statements as compensation expense. Proforma net
income and net income per share for Fiscal 1996 after taking into
account such expense would have been $8.2 million and $0.34,
respectively, and proforma net loss and net loss per share for
Fiscal 1995 would have been $1.1 million and $0.05, respectively.
The Company arrived at the fair value of each stock grant at the
date of grant by using the Black Scholes option pricing model
with the following weighted average assumptions used for grants
for the fiscal years ended February 1, 1997 and February 3, 1996:
risk-free interest rate of 5.8% and 7.0%, respectively; expected
life of 4.3 years and 5.0 years, respectively; and expected
volatility of 44.8% and 55.2%, respectively.
The following summarizes stock option transactions for the
fiscal years ended February 1, 1997, February 3, 1996 and January
28, 1995:
Weighted Number
Option Prices Average Price of Shares
-------------- ------------- ----------
Outstanding Options
January 29, 1994..... $6.80 - $26.00 $18.95 909,312
Granted............... $25.375 - $42.75 $26.73 787,500
Exercised............. $6.80 - $28.00 $15.71 (190,771)
Canceled.............. $6.80 - $28.00 $24.18 (108,035)
Outstanding Options
January 28, 1995..... $6.80 - $42.75 $23.03 1,398,006
Granted............... $12.50 - $44.125 $31.90 478,250
Exercised............. $6.80 - $22.75 $13.68 (22,611)
Canceled.............. $6.80 - $42.75 $27.64 (299,468)
Outstanding Options
February 3, 1996..... $6.80 - $44.125 $28.00 1,554,177
Granted............... $11.00 - $21.625 $17.52 463,500
Exercised............. $6.80 $ 6.80 (18,234)
Canceled.............. $11.50 - $42.75 $27.31 (335,358)
Outstanding Options
February 1, 1997..... $6.80 - $44.125 $22.69 1,664,085
At February 1, 1997, February 3, 1996 and January 28, 1995
there were exercisable 660,290 options, 586,135 options and
461,669 options, respectively, which have weighted average
exercise prices of $21.03 per share, $19.78 per share and $17.77
per share, respectively.
In 1994, the Company's 1992 stock option plan was amended
and restated to include restricted stock and unit awards. A unit
represents the right to receive the cash value of a share of
common stock on the date the restrictions on the unit lapse. On
February 23, 1994, 13,630 shares of restricted stock and 6,820
restricted units were awarded. The restrictions on these grants
lapse with respect to one-third of the shares and units awarded
on each of the first through third anniversaries of the date of
the grant. In the event a grantee terminates employment with the
Company, any restricted stock or restricted units remaining
subject to restrictions are forfeited. As of February 1, 1997,
2,688 shares of restricted stock and 1,345 restricted units were
outstanding. The resulting unearned compensation expense was
charged to stockholders' equity and is being amortized over the
applicable restricted period.
====================================================================
41
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Executive Compensation
----------------------
Effective August 23, 1996, the then-Chairman and Chief
Executive Officer and Director of the Company and its wholly
owned subsidiary, Ann Taylor, resigned from her position. See
Note 12 for a discussion of the Company's obligations under the
former Chairman's employment agreement.
Upon this resignation, the Company's then-President and
Chief Operating Officer J. Patrick Spainhour was promoted to the
position of Chairman and Chief Executive Officer. In connection
with this promotion, Mr. Spainhour was granted 75,000 shares of
restricted common stock. The resulting unearned compensation
expense of $1,171,875, based on the market value on the date of
the grant, was charged to stockholders' equity and is being
amortized over the restricted period applicable to these shares.
Additionally, as of December 9, 1996, the President and Chief
Operating Officer of the Company received a grant of 30,000
restricted shares of common stock and 20,000 restricted units of
common stock. The resulting unearned compensation expense of
$592,500, based on the market value on the date of the grant, was
charged to stockholders' equity and is being amortized over the
restricted period applicable to these shares. For the fiscal
year ended February 1, 1997, unearned compensation expense of
$174,744 was amortized.
11. Extraordinary Item
------------------
On May 18, 1994, the Company completed a public offering of
1,000,000 shares of common stock (the "Offering") at a price of
$32.00 per share, resulting in aggregate net proceeds of
$30,420,000 to the Company (after payment of underwriting
discounts and expenses of the Offering payable by the Company).
As required by the Company's then-existing bank credit agreement,
$30,000,000 of the net proceeds of the Offering were used to
reduce the amount of a term loan outstanding under that
agreement. The write-off of deferred financing costs associated
with the payment on the term loan with the proceeds of the
Offering and refinancing of long-term debt resulted in an
extraordinary loss in Fiscal 1994 of $1,522,000 ($868,000 net of
income tax benefit). Fiscal 1994 proforma income before
extraordinary loss, income before extraordinary loss per share
and weighted average shares outstanding, assuming the Offering
had occurred at the beginning of the year, would have been
$32,875,000, $1.40 and 23,536,000, respectively.
The Offering was consummated concurrently with the public
offering and sale of 4,075,000 shares of the Company's common
stock held by certain affiliates of ML&Co. (the "Selling
Stockholders"). The Company did not receive any of the proceeds
of the shares sold by the Selling Stockholders.
12. Nonrecurring Charges
--------------------
Studio Shoe Stores Closing
- --------------------------
In connection with the planned closing of the Company's nine
Ann Taylor Studio shoe stores, announced in January 1997, the
Company recorded a non-cash pre-tax charge of $3,600,000. Of the
total impairment loss, $2,500,000 represents impairment of long-
lived assets such as properties and store fixtures and $1,100,000
pertains to lease and other related costs for these locations
until the properties are sublet.
===================================================================
42
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Nonrecurring Charges (Continued)
--------------------------------
Resignation of the Chairman and Chief Executive Officer
- -------------------------------------------------------
Effective August 23, 1996, the then Chairman and Chief
Executive Officer and Director of the Company and its wholly
owned subsidiary, Ann Taylor, resigned. In connection with the
resignation, a one-time pre-tax charge of $3,500,000 was recorded
relating to the estimated costs of the Company's obligations
under the Chairman's employment contract with the Company.
13. Certain Relationships and Related Transactions
----------------------------------------------
Transactions with Merrill Lynch and its Affiliates
- --------------------------------------------------
At February 1, 1997, certain affiliates of ML&Co. held
approximately 24.0% of the Company's outstanding common stock.
Two of the members of the Board of Directors of the Company and
Ann Taylor serve as representatives of ML&Co. and its affiliates.
As a result, ML&Co. and such affiliates are in a position to
influence the management of the Company and Ann Taylor.
In Fiscal 1996, the Company paid approximately $1,207,500 to
ML&Co. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated
("Merrill Lynch") in connection with their services as placement
agents for the sale of the preferred securities (see Note 3).
The Company agreed to indemnify ML&Co. and Merrill Lynch, as
placement agents, against certain liabilities, including certain
liabilities under the federal securities law, in connection with
the sale of the preferred securities.
In Fiscal 1994, the Company paid underwriting commissions of
approximately $1,027,000 to Merrill Lynch in connection with the
Offering (see Note 11). The Company agreed to indemnify Merrill
Lynch, as underwriter, against certain liabilities, including
certain liabilities under the federal securities law, in
connection with the Offering.
Sourcing Acquisition
- --------------------
In Fiscal 1995, the Company purchased approximately 16% of
its merchandise directly from Cygne Designs, Inc. ("Cygne") and
an additional 38% of its merchandise through the Company's direct
sourcing joint venture with Cygne known as CAT. On September 20,
1996 (the "Effective Date"), pursuant to the Stock and Asset
Purchase Agreement dated as of June 7, 1996, by and among the
Company, Ann Taylor, Cygne and Cygne Group F.E. Limited (as
amended, the "Purchase Agreement"), Ann Taylor acquired the
entire interest of Cygne in CAT and certain of the assets (the
"Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that were used for sourcing merchandise for Ann
Taylor (the "Sourcing Acquisition"). As a result of the Sourcing
Acquisition, CAT became an indirect wholly owned subsidiary of
the Company and now performs all of Ann Taylor's direct sourcing
functions, including those previously provided by the Division,
under the name AnnTaylor Global Sourcing, Inc. For financial
reporting purposes, the transaction has been accounted for as of
the Effective Date under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16,
"Accounting for Business Combinations".
===================================================================
43
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Certain Relationships and Related Transactions (Continued)
-----------------------------------------------------------
In consideration for Cygne's interest in CAT and the Assets,
the Company paid (i) 2,348,145 shares of common stock of the
Company having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash as payment for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price is subject to post-closing
adjustments based upon final determination of the value of
certain of the assets purchased and liabilities assumed. As of
February 1, 1997, certain post-closing adjustments are expected
to reduce the net cash paid to approximately $227,000. The total
purchase price to the Company of the Sourcing Acquisition has
been allocated to the tangible and intangible assets and
liabilities of CAT and the Division that were acquired, based on
preliminary estimates of their respective fair values.
Accordingly, the allocation of the purchase price reflected in
the accompanying consolidated balance sheets may be adjusted upon
final determination of the purchase price adjustments.
Management does not believe the subsequent changes, if any, will
be significant. The excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is
being amortized on a straight-line basis over 25 years.
In connection with the Sourcing Acquisition, Ann Taylor
entered into two three-year consulting agreements with Cygne for
the services of Mr. Bernard Manuel, Chairman and Chief Executive
Officer of Cygne, and Mr. Irving Benson, the then-President of
Cygne. In November 1996, Mr. Benson resigned from his employment
with Cygne and, in accordance with the terms of the consulting
agreement relating to Mr. Benson's services, Cygne's obligations
and rights under the consulting agreement were automatically
assigned to Mr. Benson.
The following unaudited proforma consolidated data for the
Company for the fiscal years ended February 1, 1997 and February
3, 1996 have been presented to reflect the Sourcing Acquisition
as if it had occurred at the beginning of each such period:
Fiscal Years Ended
-----------------------------------------
February 1, 1997 February 3, 1996
------------------ -----------------
Actual Proforma Actual Proforma
------ -------- ------ --------
(in thousands, except per share amounts)
Net sales................... $798,117 $798,117 $731,142 $731,142
Net income (loss)............ 8,667 11,595 (876) 2,871
Net income (loss) per share.. 0.36 0.45 (0.04) 0.11
Weighted average shares...... 24,104 25,581 23,209 25,557
The proforma data set forth above does not purport to be
indicative of the results that actually would have occurred if
the Sourcing Acquisition had occurred at the beginning of the
periods presented or of results which may occur in the future.
A summary of the noncash activity that occurred in the
fiscal year ended February 1, 1997 in conjunction with the
Sourcing Acquisition is as follows:
(in thousands)
Fair value of assets acquired.................. $4,727
Excess of purchase price over the
fair value of net assets acquired.......... 38,340
Ann Taylor's previous investment in CAT........ (6,840)
Issuance of the Company's common stock......... (36,000)
-------
Cash paid...................................... $ 227
=======
====================================================================
44
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Income Taxes
------------
The provision for income taxes for the fiscal years ended
February 1, 1997, February 3, 1996 and January 28, 1995 consists
of the following:
Fiscal Years Ended
---------------------------
Feb. 1, Feb. 3, Jan. 28,
1997 1996 1995
------- ------- -------
(in thousands)
Federal:
Current..................... $ 9,898 $ 1,400 $22,534
Deferred.................... (802) 2,249 ---
------ ------ ------
Total federal............. 9,096 3,649 22,534
------ ------ ------
State and local:
Current..................... 3,844 607 7,740
Deferred.................... (152) 901 ---
------ ------ ------
Total state and local..... 3,692 1,508 7,740
------ ------ ------
Foreign:
Current..................... 187 --- ---
Deferred.................... --- --- ---
------ ------ ------
Total foreign............. 187 --- ---
------ ------ ------
Total....................... $12,975 $ 5,157 $30,274
====== ====== ======
The reconciliation between the provision for income taxes
and the provision for income taxes at the federal statutory rate
for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995 is as follows:
Fiscal Years Ended
---------------------------------
Feb. 1, Feb. 3, Jan. 28,
1997 1996 1995
------- ------- --------
(in thousands)
Income before income taxes
and extraordinary loss....... $21,642 $4,281 $62,894
====== ===== ======
Federal statutory rate......... 35% 35% 35%
====== ===== ======
Provision for income taxes
at federal statutory rate.... $7,575 $1,498 $22,013
State and local income
taxes, net of federal
income tax benefit.......... 2,273 980 5,031
Non-deductible amortization
of goodwill.................. 3,429 3,327 3,327
Undistributed income of
joint venture................ (382) (387) (420)
Other.......................... 80 (261) 323
------ ----- ------
Provision for income taxes.. $12,975 $5,157 $30,274
====== ===== ======
====================================================================
45
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Income Taxes (Continued)
------------------------
The tax effects of significant items comprising the
Company's net deferred tax assets as of February 1, 1997 and
February 3, 1996 are as follows:
February 1, February 3,
1997 1996
----------- -----------
(in thousands)
Current:
Inventory........................ $ 2,070 $ 1,899
Accrued expenses................. 7,492 2,188
Real estate...................... (1,433) (1,139)
Other............................ (172) 452
------ ------
Total current..................... $ 7,957 $ 3,400
====== ======
Noncurrent:
Depreciation..................... $(6,528) $(3,024)
Rent expense..................... 3,328 2,840
Other............................ (1,672) (1,116)
------ ------
Total noncurrent.................. $(4,872) $(1,300)
====== ======
Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. U.S. federal income taxes
are provided on unremitted foreign earnings except those that are
considered permanently reinvested, which at February 1, 1997
amounted to approximately $6,000,000. However, if these earnings
were not considered permanently reinvested, under current law,
the incremental tax on such undistributed earnings would be
approximately $1,800,000.
15. Retirement Plans
----------------
Savings Plan. Ann Taylor maintains a defined contribution
401(k) savings plan for substantially all full-time employees.
Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. Ann Taylor makes a matching
contribution of 50% with respect to the first 3% of each
participant's annual earnings contributed to the plan. Ann
Taylor's contributions to the plan for Fiscal 1996, Fiscal 1995
and Fiscal 1994 were $390,000, $337,000 and $333,000,
respectively.
Pension Plan. Substantially all full-time employees of Ann
Taylor are covered under a noncontributory defined benefit
pension plan. The pension plan is a "cash balance pension plan".
Each participant accrues a benefit based on compensation and
years of service with Ann Taylor. Ann Taylor's funding policy
for the plan is to contribute annually the amount necessary to
provide for benefits based on accrued service and projected pay
increases. Plan assets consist primarily of cash, equity and
fixed income securities.
The following table sets forth the funded status of the
Pension Plan at February 1, 1997, February 3, 1996 and January
28, 1995, in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions":
==================================================================
46
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Retirement Plans (Continued)
----------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
(dollars in thousands)
Actuarial present value of
benefits obligation:
Accumulated benefit obligation,
including vested benefits of
$2,147,000, $2,064,000 and
$1,500,000, respectively............. $3,413 $2,893 . $2,516
===== ===== =====
Projected benefit obligation
for service rendered to date........ $3,413 $2,893 $2,516
Plan assets at fair value.............. 4,745 2,537 2,522
----- ----- -----
Plan assets in excess of
projected benefit obligation
(projected benefit obligation
in excess of plan assets)...... 1,332 (356) 6
Unrecognized net gain.................. (802) (231) (136)
----- ----- -----
Prepaid (accrued) pension cost......... $ 530 $ (587) $ (130)
===== ===== =====
Net periodic pension cost for
Fiscal 1996, Fiscal 1995 and
Fiscal 1994 included the
following components:
Service cost/benefits earned
during the year...................... $ 981 $ 681 $ 622
Interest cost on projected
benefit obligation.................. 213 185 133
Actual loss (return) on plan assets.... (527) (104) 72
Net amortization and deferral.......... 300 (132) (285)
----- ----- -----
Net periodic pension cost.............. $ 967 $ 630 $ 542
===== ===== =====
Assumptions used to determine
the projected benefit
obligation and plan
assets were:
Discount rate....................... 8.00% 6.75% 8.50%
Rate of increase in
compensation level................ 4.00% 4.00% 5.50%
Expected long-term rate
of return on assets............... 9.00% 9.00% 8.00%
16. Quarterly Financial Data (Unaudited)
------------------------------------
Quarter
--------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amount)
Fiscal 1996
Net sales.................. $184,467 $187,862 $212,670 $213,118
Operating income........... 10,523 8,342 15,174 12,422
Net income................. 1,812 627 3,262 2,966
Net income per share....... $ .08 $ .03 $ .13 $ .12
Fiscal 1995
Net sales.................. $168,306 $183,695 $178,500 $200,641
Operating income (loss).... 12,123 (783) 8,687 5,248
Net income (loss).......... 3,491 (3,809) 686 (1,244)
Net income (loss)
per share................ $ .15 $ (.16) $ .03 $ (.05)
The sum of the quarterly per share data may not equal the
annual amounts due to changes in the weighted average shares and
share equivalents outstanding.