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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. 1-11980
ANNTAYLOR, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297083
- ------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(212) 541-3300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------------- -----------------------------------------
8-3/4% Subordinated Notes The New York Stock Exchange
due 20000
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- -----
As of March 14, 1997, 1 share of Common Stock was outstanding.
Documents Incorporated by Reference: None
The registrant meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing
this form with the reduced disclosure format.
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1
PART I
ITEM 1. Business
--------
General
- -------
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading
national specialty retailer of better quality women's apparel,
shoes and accessories sold primarily under the Ann Taylor brand
name. The Company believes that "Ann Taylor" is a highly
recognized national brand that defines a distinct fashion point
of view. Ann Taylor merchandise represents classic styles,
updated to reflect current fashion trends. The Company's stores
offer a full range of career and casual separates, weekend wear,
dresses, tops, accessories and shoes, coordinated as part of a
total wardrobing strategy. This total wardrobing strategy is
reinforced by an emphasis on customer service. Ann Taylor sales
associates are trained to assist customers in merchandise
selection and wardrobe coordination, helping them achieve the
"Ann Taylor look" while reflecting the customers' personal
styles.
The Company has sought to capitalize on the Ann Taylor brand
through the introduction of new product lines in its Ann Taylor
stores. The Company believes that product extensions support the
Company's total wardrobing strategy, and provide existing and new
customers with additional reasons to shop at Ann Taylor stores.
Product extensions expanded or developed over the last several
years include Ann Taylor shoes, ATdenim, Ann Taylor Petites, and
fragrance and personal care products.
As of February 1, 1997, the Company operated 309 stores in
41 states and the District of Columbia, under the names Ann
Taylor, Ann Taylor Factory Store, Ann Taylor Loft and Ann Taylor
Studio. Of the 259 stores operated under the Ann Taylor name,
approximately three-quarters are located in regional malls and
upscale specialty retail centers, with the balance located in
downtown and village locations. These stores represent the
Company's core merchandise line. The Company believes that the
customer base for its Ann Taylor Stores consists primarily of
relatively affluent, fashion-conscious women from the ages of 25
to 55, and that the majority of its customers are working women
with limited time to shop, who are attracted to Ann Taylor by its
focused merchandising and total wardrobing strategies,
personalized customer service, efficient store layouts and
continual flow of new merchandise.
In 1995, the Company began testing Ann Taylor Loft, a
separate moderate-price store concept for customers who
appreciate Ann Taylor style, but are more value conscious.
Merchandise is designed uniquely for these stores and is sold
under the Ann Taylor Loft and Shoe Loft labels. As of February
1, 1997, the Company operated 15 Ann Taylor Loft stores, all
located in factory outlet centers. The Company also operates 16
stores in factory outlet centers under the name Ann Taylor
Factory Store or Ann Taylor Loft, that offer both original priced
Ann Taylor Loft merchandise, as well as clearance merchandise
from Ann Taylor and Ann Taylor Loft stores. The Company believes
that the Ann Taylor Loft concept represents an opportunity for
the Company to compete in the moderately-priced women's apparel
market, and management is developing a strategic plan to
determine how best to maximize its potential in this market.
The Company also operates 10 Ann Taylor Factory Stores that
serve principally as a clearance vehicle for both Ann Taylor and
Ann Taylor Loft merchandise. All of these stores are located in
factory outlet centers.
===================================================================
2
In Fall 1994, the Company began testing Ann Taylor Studio
stores, a free-standing shoe and accessory store concept offering
the broadest assortment of Ann Taylor shoes, as well as certain
accessories also sold in Ann Taylor stores, such as hosiery,
belts, handbags, and fragrance and personal care products. By
Fall 1995, the Company had nine Ann Taylor Studio stores. The
Company did not open any new Studio stores during Fiscal 1996.
The Company has determined that the Studio stores, which have not
been profitable, are not consistent with the Company's total
wardrobing strategy, and in January 1997 the Company announced
its plans to close all nine Studio stores during Fiscal 1997.
The Company was incorporated under the laws of the State of
Delaware in 1986. All of the outstanding capital stock of the
Company, consisting of one share of common stock, is owned by
AnnTaylor Stores Corporation ("ATSC"). Ann Taylor was acquired
by ATSC in a leveraged buyout transaction (the "Acquisition") in
1989.
Sourcing Acquisition
- --------------------
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 the Company, as well as certain of the assets
of the Ann Taylor Woven Division of Cygne (the "Woven Division
Assets") 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 consideration for Cygne's interest in CAT and the Woven
Division Assets, ATSC and the Company paid (i) 2,348,145 shares
of common stock of ATSC having an aggregate value, as of the
Effective Date, of $36,000,000, (ii) $3,200,000 in cash as
payment for inventory and fixed assets and (iii) approximately
$6,500,000 in cash in settlement of open accounts payable by Ann
Taylor to Cygne for merchandise delivered by Cygne prior to the
closing. The Company also assumed certain liabilities related to
the operations of the Woven 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 to the Company of the Sourcing Acquisition has
been allocated to the tangible and intangible assets and
liabilities of CAT and the Woven 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.
Pursuant to the terms of a Stockholders Agreement entered
into at the time of the Sourcing Acquisition, ATSC registered the
sale of the shares of ATSC common stock issued to Cygne as part
of the consideration for the acquisition. Cygne subsequently
sold, pursuant to this registration statement, all of the shares
of ATSC common stock issued to it by ATSC.
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.
==================================================================
3
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. In addition, most of
the leases also require Ann Taylor to pay real estate taxes,
insurance and certain common area and maintenance costs.
Ann Taylor leases corporate offices at 142 West 57th Street
in New York City, as well as office space at 1372 Broadway in New
York City. The Company also leases office space in New Haven,
Connecticut.
The Company's wholly-owned subsidiary, AnnTaylor
Distribution Services, Inc. owns its 256,000 square foot
distribution center located in Louisville, Kentucky. Nearly all
Ann Taylor merchandise is distributed to the Company's stores
through this facility. The parcel on which the Louisville
distribution center is located comprises approximately 20 acres
and could accommodate possible future expansion of the facility.
ITEM 3. Legal Proceedings
-----------------
On April 26, 1996, certain alleged stockholders of ATSC
filed a purported class action lawsuit in the United States
District Court Southern District of New York, against ATSC, the
Company, certain officers and directors of ATSC and the Company,
Merrill Lynch & Co, Inc. ("ML&Co.") and certain affiliates of
ML&Co. (Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y.
1996)). The complaint alleges causes of action under Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934,
as amended, by alleging that ATSC and the other defendants
engaged in a fraudulent scheme and course of business that
operated a fraud or deceit on purchasers of ATSC's common stock
during the period commencing February 3, 1994 through May 4, 1995
due to alleged false and misleading statements about ATSC and the
Company. The complaint 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.
==================================================================
4
PART II
ITEM 5. Market for Registrant's
-------------------------
Common Equity and Related Stockholder Matters
- ---------------------------------------------
There is no public market for the common stock of the
Company. All of the outstanding stock of the Company, consisting
of one share of common stock, is owned by ATSC.
From time to time, the Company pays dividends to ATSC in
amounts sufficient to fund ATSC's operating expenses. Further,
in connection with the 8-1/2% Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities (the "preferred
securities") issued by ATSC's financing vehicle, AnnTaylor
Finance Trust (the "Trust"), the Company makes regular dividend
payments to ATSC in amounts sufficient to allow ATSC to pay
interest and principal on certain debentures issued to the Trust.
The payment of dividends by the Company to ATSC is subject to
certain restrictions under the Company's bank credit agreement,
the indenture relating to the Company's 8-3/4% Subordinated Notes
due 2000 and the Company's Receivables Facility. See Note 2 to
the Consolidated Financial Statements of the Company.
ITEM 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
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 the preferred securities by the 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.
==================================================================
5
Fiscal 1996 Compared to Fiscal 1995 (Continued)
- -----------------------------------------------
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.
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 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.
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6
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 11 through 27 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 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 Certificate of Incorporation of the Company, as
amended. Incorporated by reference to Exhibit 3.3 to
the Registration Statement of ATSC and Ann Taylor filed
on May 3, 1989 (Registration No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to
Exhibit 3.4 to the Registration Statement of ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
4.1 Indenture, dated as of June 15, 1993, between Ann
Taylor and Fleet Bank, N.A., as Trustee, including the
form of Subordinated Note due 2000. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form
8-K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance,
dated as of December 1, 1995, among Ann Taylor, Fleet
Bank, N.A., as Resigning Trustee, and Norwest Bank
Minnesota, N.A., the Successor Trustee. Incorporated
by reference to Exhibit 4.1.1 to the Annual Report on
Form 10-K of the Company filed on April 8, 1996.
10.1 Amended and Restated Credit Agreement, dated as of
September 29, 1995, among Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of
America"), and Fleet Bank, National Association, as Co-
Agents, the financial institutions from time to time
party thereto, BA Securities, Inc., as Arranger, and
Bank of America, as Agent. Incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of
Ann Taylor filed on October 17, 1995.
10.1.1 First Amendment to Amended and Restated Credit
Agreement, dated as of January 4, 1996, among Ann
Taylor, Bank of America, Fleet Bank, National
Association, as Co-Agents, the financial institutions
from time to time party thereto, BA Securities, Inc.,
as Arranger, and Bank of America, as Agent.
Incorporated by reference to Exhibit 10.2.1 to the
Annual Report on Form 10-K of ATSC filed on April 8,
1996.
10.1.2 Second Amendment to the Amended and Restated Credit
Agreement, dated as of April 9, 1996 among Ann Taylor,
Bank of America and Fleet Bank, National Association,
as Co-Agents, the financial institutions from time to
time party thereto, BA Securities Inc. as Arranger, and
Bank of America as Agent. Incorporated by reference to
Exhibit 10.1 on Form 10-Q of ATSC for the Quarter ended
August 3, 1996 filed on September 16, 1996.
======================================================================
7
Exhibit Number
--------------
10.2 Amended and Restated Guaranty, dated as of September
29, 1995, made by ATSC in favor of Bank of America, as
Agent. Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K of Ann Taylor filed on
October 17, 1995.
10.3 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by Ann Taylor in
favor of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.4 Amended and Restated Security and Pledge Agreement,
dated as of September 29, 1995, made by ATSC in favor
of Bank of America, as Agent. Incorporated by
reference to Exhibit 10.5 to the Current Report on Form
8-K of Ann Taylor filed on October 17, 1995.
10.5 Trademark Security Agreement, dated as of September 29,
1995, made by Ann Taylor in favor of Bank of America,
as Agent. Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of Ann Taylor filed on
October 17, 1995.
10.6 1989 Stock Option Plan. Incorporated by reference to
Exhibit 10.18 to the Registration Statement of ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
10.6.1 Amendment to 1989 Stock Option Plan. Incorporated by
reference to Exhibit 10.15.1 to the Annual Report on
Form 10-K of ATSC filed on April 30, 1993.
10.7 Lease, dated as of March 17, 1989, between Carven
Associates and Ann Taylor concerning the West 57th
Street headquarters. Incorporated by reference to
Exhibit 10.21 to the Registration Statement of ATSC and
Ann Taylor filed on May 3, 1989 (Registration No. 33-
28522).
10.7.1 First Amendment to Lease, dated as of November 14,
1990, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.1 to the
Registration Statement of ATSC filed on April 11, 1991
(Registration No. 33-39905).
10.7.2 Second Amendment to Lease, dated as of February 28,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.2 to the
Annual Report on Form 10-K of ATSC filed on April 29,
1993.
10.7.3 Extension and Amendment to Lease dated as of October 1,
1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.11 to the Form
10-Q of Ann Taylor for the Quarter ended October 30,
1993 filed on November 26, 1993.
10.7.4 Modification of Amendment and Extension to Lease, dated
as of April 14, 1994 between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit 10.15.4
to the Annual Report on Form 10-K of ATSC filed on
April 28, 1995.
10.7.5 Fifth Amendment to Lease, dated as of March 14, 1995,
between Carven Associates and Ann Taylor. Incorporated
by reference to Exhibit 10.15.5 to the Annual Report on
Form 10-K of ATSC filed on April 28, 1995.
10.8 Tax Sharing Agreement, dated as of July 13, 1989,
between ATSC and Ann Taylor. Incorporated by reference
to Exhibit 10.24 to Amendment No. 2 to the Registration
Statement of ATSC and Ann Taylor filed on July 13, 1989
(Registration No. 33-28522).
10.9 Employment Agreement dated as of February 1, 1994
between ATSC and Sally Frame Kasaks. Incorporated by
reference to Exhibit 10.8 to the Form 10-Q of ATSC for
the Quarter ended October 29, 1994 filed on December 9,
1994.
10.10 Employment Agreement dated February 16, 1996 between
ATSC and J. Patrick Spainhour. Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form
10-K of ATSC filed on April 8, 1996.
10.10.1 Amendment to the Employment Agreement, dated August 23,
1996, between ATSC and J. Patrick Spainhour.
Incorporated by reference to Exhibit 10.11.1 to the
Annual Report on Form 10-K of ATSC filed on May 1, 1997.
10.11 Employment Agreement dated November 25, 1996 between
ATSC and Patricia DeRosa. Incorporated by reference to
Exhibit 10.3 to Form 10-Q of Ann Taylor for the Quarter
ended November 2, 1996 filed on December 17, 1996.
=====================================================================
8
Exhibit Number
- --------------
10.12 Employment Agreement dated September 20, 1996 between
Ann Taylor and Dwight F. Meyer. Incorporated by
reference to Exhibit 10.4 to the Form 10-Q of Ann
Taylor for the Quarter ended November 2, 1996 filed on
December 17, 1996.
10.13 Separation Agreement dated January 24, 1997 between Ann
Taylor and Paul E. Francis. Incorporated by reference
to Exhibit 10.14 to the Annual Report on Form 10-K of
ATSC filed on May 1, 1997.
10.14 The AnnTaylor Stores Corporation 1992 Stock Option and
Restricted Stock and Unit Award Plan, Amended and
Restated as of February 23, 1994 (the "1992 Option
Plan"). Incorporated by reference to Exhibit 10.15 to
the Annual Report on Form 10-K of ATSC filed on May 1,
1997.
10.15 Amended and Restated Management Performance
Compensation Plan as approved by stockholders of ATSC
on June 1, 1994. Incorporated by reference to Exhibit
10.22.1 to the Annual Report on Form 10-K of ATSC filed
on April 28, 1995.
10.15.1 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
ATSC filed on April 28, 1995.
10.16 Associate Stock Purchase Plan. Incorporated by
reference to Exhibit 10.31 to the Form 10-Q of ATSC for
the Quarter Ended October 31, 1992 filed on December
15, 1992.
10.17 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.
10.18 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.
10.19 Amended and Restated Receivables Financing Agreement
dated October 31, 1995, among AnnTaylor Funding, Inc.,
Ann Taylor, Market Street Capital Corp. and PNC Bank,
National Association. Incorporated by reference to
Exhibit 10.31.4 to the Form 10-Q of ATSC for the
Quarter ended October 28, 1995 filed on December 8,
1995.
10.19.1 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 ATSC for the Quarter ended November
2, 1996 filed on December 17, 1996.
10.20 Purchase and Sale Agreement dated as of January 27,
1994 between Ann Taylor and AnnTaylor Funding, Inc.
Incorporated by reference to Exhibit 10.29 to the
Annual Report on Form 10-K of ATSC filed on March 31,
1994.
10.21 AnnTaylor Stores Corporation Deferred Compensation
Plan. Incorporated by reference to Exhibit 10.33 to
the Annual Report on Form 10-K of ATSC filed on April
28, 1995.
10.21.1 Amendment to the AnnTaylor Stores Corporation Deferred
Compensation Plan as approved by the Board of Directors
on August 11, 1995. Incorporated by reference to
Exhibit 10.33.1 to the Form 10-Q of ATSC for the
Quarter Ended July 29, 1995 filed on September 11,
1995.
10.22 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.
======================================================================
9
Exhibit Number
- --------------
10.23 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.
10.24 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.
10.24.1 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.
10.24.2 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.
10.24.3 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.
10.25 Stock and Asset Purchase Agreement, dated as of June 7,
1996, by and among ATSC, Ann Taylor, Cygne and Cygne
Group (F.E.) Limited. Incorporated by reference to
Exhibit 2 to the Registrants' Current Report on Form 8-K
filed on June 10, 1996.
10.25.1 Amendment to Stock and Asset Purchase Agreement, dated
as of August 27, 1996, by and among ATSC, Ann Taylor,
Cygne and Cygne Group (F.E.) Limited. Incorporated by
reference to Exhibit 3 to the Registrants' Current
Report on Form 8-K filed on August 30, 1996.
10.25.2 Stockholders Agreement, dated as of September 20, 1996,
among ATSC, Cygne and Cygne Group (F.E.) Limited, a
Hong Kong corporation and wholly owned subsidiary of
Cygne. Incorporated by reference to Exhibit 10.26.2 to
the Annual Report on Form 10-K of ATSC filed on May 1, 1997.
10.25.3 Consulting Agreement, dated as of September 20, 1996,
by and between ATSC, Cygne and Mr. Bernard M. Manuel.
Incorporated by reference to Exhibit 10.26.3 to the
Annual Report on Form 10-K of ATSC filed on May 1, 1997.
10.25.4 Consulting Agreement, dated as of September 20, 1996,
by and between ATSC, Cygne and Mr. Irving Benson.
Incorporated by reference to Exhibit 10.26.4 to the
Annual Report on Form 10-K of ATSC filed on May 1, 1997.
27 Financial Data Schedule.
======================================================================
10
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANNTAYLOR, INC.
By: /s/ J. Patrick Spainhour
------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: 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 Executive May 1, 1997
- ------------------------ Officer and Director --------------
J. Patrick Spainhour
/s/ PATRICIA DEROSA President and Chief Operating May 1, 1997
- ------------------------ Officer and Director --------------
Patricia DeRosa
/s/ WALTER J. PARKS Senior Vice President - May 1, 1997
- ------------------------ Chief Financial Officer --------------
Walter J. Parks
/s/ JAMES M. SMITH Vice President and Controller May 1, 1997
- ------------------------ Principal Accounting Officer -------------
James M. Smith
/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
==========================================================================
11
ANNTAYLOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report.............................. 12
Consolidated Financial Statements:
Consolidated Statements of Operations for the
fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995.............. 13
Consolidated Balance Sheets as of February 1, 1997
and February 3, 1996.............................. 14
Consolidated Statements of Cash Flows for the fiscal
years ended February 1, 1997, February 3, 1996
and January 28, 1995.............................. 15
Notes to Consolidated Financial Statements............ 16
=======================================================================
12
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholder of
ANNTAYLOR, INC.:
We have audited the accompanying consolidated financial
statements of AnnTaylor, Inc. and its subsidiaries, listed in the
accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of the Company and its subsidiaries at 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
=====================================================================
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995
Fiscal Years Ended
-----------------------------
Feb. 1, Feb. 3, Jan. 28,
1997 1996 1995
------- ------- ---------
(in thousands)
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
======= ======= =======
See accompanying notes to consolidated financial statements.
============================================================================
14
ANNTAYLOR, INC.
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 STOCKHOLDER'S 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
Stockholder's equity
Common stock, $1.00 par value; 1,000
shares authorized; 1 share issued
and outstanding........................... 1 1
Additional paid-in capital.................. 443,952 311,567
Retained earnings........................... 22,787 14,120
------- -------
Total stockholder's equity.............. 466,740 325,688
------- -------
Total liabilities and stockholder's
equity................................ $688,139 $678,709
======= =======
See accompanying notes to consolidated financial statements.
========================================================================
15
ANNTAYLOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995
Fiscal Years Ended
---------------------------------
Feb. 1, Feb. 3, Jan. 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)
Parent company contribution............... 96,194 384 34,791
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
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.
===============================================================================
16
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading
national specialty retailer of better quality women's apparel,
shoes and accessories sold principally under the Ann Taylor brand
name.
All of the outstanding capital stock of the Company,
consisting of one share of common stock, is owned by AnnTaylor
Stores Corporation ("ATSC").
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts
of the Company and its subsidiaries. All intercompany accounts
have been eliminated in consolidation.
Certain Fiscal 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.
======================================================================
17
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Deferred Financing Costs
- ------------------------
Deferred financing costs are being amortized using the
interest method over the term of the related debt. Accumulated
amortization at 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
ATSC is being amortized on a straight-line basis over 40 years.
Goodwill relating to the 1996 Sourcing Acquisition (see Note 8)
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.
Pursuant to a Tax Sharing Agreement, ATSC and the Company
have agreed to elect to file consolidated income tax returns for
federal income tax purposes and may elect to file such returns in
states and other relevant jurisdictions that permit such an
election, for income tax purposes. With respect to such
consolidated income tax returns, the Tax Sharing Agreement
generally requires the company to pay to ATSC the entire tax
shown to be due on such consolidated returns, provided that the
amount paid by the Company shall not exceed the amount of taxes
that would have been owed by the Company on a stand-alone basis.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
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.
=====================================================================
18
ANNTAYLOR, INC.
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
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair 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 the Company's outstanding common
stock held by ATSC and a security interest in certain assets of
the Company, excluding inventory and accounts receivable. In
addition, the Bank Credit Agreement contains financial and other
covenants, including limitations on indebtedness, liens and
investments, restrictions on dividends or other distributions to
stockholders, and maintaining certain financial ratios and
specified levels of net worth. The Bank Credit Agreement also
provides for, among other things, an annual limitation on capital
expenditures of $25,000,000 in Fiscal 1996 and $32,500,000 in
Fiscal 1997 and beyond, subject to increase if certain conditions
are satisfied.
=====================================================================
19
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Long-Term Debt (Continued)
--------------------------
Since the fourth quarter of Fiscal 1993, the Company sells
its proprietary credit card accounts receivable to AnnTaylor
Funding, Inc., a wholly owned subsidiary of the Company, that
uses the receivables to secure borrowings of up to $40,000,000,
based on its eligible accounts receivable, under a receivables
financing facility (the "Receivables Facility"). 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, the Company 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, the Company 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, the Company 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, the Company 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 8, 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.
======================================================================
20
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Preferred Securities
--------------------
In April and May of Fiscal 1996, ATSC completed the sale of
an aggregate of $100,625,000 of 8-1/2% Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities (the "preferred
securities") issued by its financing vehicle, AnnTaylor Finance
Trust, a Delaware business trust (the "Trust"). The preferred
securities have a liquidation preference of $50 per security
($100,625,000 in the aggregate) and are convertible at the option
of the holders thereof into ATSC's common stock at a conversion
rate of 2.545 shares of common stock for each preferred security
(equivalent to $19.65 per share of common stock, which
represented a 20% premium to the $16.375 closing price of the
common stock on the New York Stock Exchange at the date of the
execution of the purchase agreement relating to the sale of the
preferred securities). The sole assets of the Trust are
$103,700,000 of 8-1/2% Convertible Subordinated Debentures of ATSC
maturing on April 15, 2016. A total of 2,012,500 preferred
securities were issued, and are convertible into an aggregate of
5,121,812 shares of common stock. ATSC received net proceeds of
$95,984,000 in connection with the sale of the preferred
securities, of which $94,000,000 was applied to reduce
outstanding borrowings under the Company's revolving credit
facility, without a permanent reduction of the commitment
thereunder.
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.
===================================================================
21
ANNTAYLOR, INC.
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, ATSC, Ann Taylor, certain officers and
directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.")
and certain affiliates of ML&Co. have been named as defendants in
a purported class action lawsuit filed by certain alleged
stockholders alleging that ATSC and the other defendants engaged
in a fraudulent scheme and course of business that operated a
fraud or deceit on purchasers of ATSC's common stock. 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.
=====================================================================
22
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies (Continued)
-----------------------------------------
Other
- -----
The Company is currently under tax examination by the
Internal Revenue Service ("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
6. Extraordinary Item
------------------
On May 18, 1994, ATSC completed a public offering of
1,000,000 shares of common stock (the "ATSC 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 ATSC Offering payable by ATSC). As
required by the Company's then-existing bank credit agreement,
$30,000,000 of the net proceeds of the ATSC 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 ATSC
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).
The ATSC Offering was consummated concurrently with the
public offering and sale of 4,075,000 shares of ATSC's common
stock held by certain affiliates of ML&Co. (the "Selling
Stockholders"). ATSC did not receive any of the proceeds of the
shares sold by the Selling Stockholders.
7. 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.
Resignation of Chairman and Chief Executive Officer
- ----------------------------------------------------
Effective August 23, 1996, the then Chairman and Chief
Executive Officer and Director of the ATSC 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 ATSC.
====================================================================
23
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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 ATSC's outstanding common stock. Two of
the members of the Board of Directors of the Company and ATSC
serve as representatives of ML&Co. and its affiliates. As a
result, ML&Co. and such affiliates are in a position to influence
the management of the Company and ATSC.
In Fiscal 1996, ATSC paid approximately $1,207,500 to ML&Co.
and Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill
Lynch") in connection with their services as placement agents for
the sale of the preferred securities of AnnTaylor Finance Trust
(see Note 3). ATSC agreed to indemnify ML& Co. and Merrill
Lynch, as placement agents, against certain liabilities,
including certain liabilities under the federal securities law,
in connection with the sale of the preferred securities.
In Fiscal 1994, ATSC paid underwriting commissions of
approximately $1,027,000 to Merrill Lynch in connection with the
ATSC Offering (see Note 6). ATSC agreed to indemnify Merrill
Lynch, as underwriter, against certain liabilities, including
certain liabilities under the federal securities law, in
connection with the ATSC 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 ATSC,
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 the Company's direct sourcing functions,
including those previously provided by the Division, under the
name AnnTaylor Global Sourcing, Inc. For financial reporting
purposes, the transaction has been accounted for as of the
Effective Date under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16,
"Accounting for Business Combinations".
In consideration for Cygne's interest in CAT and the Assets,
ATSC and the Company paid (i) 2,348,145 shares of common stock of
ATSC having an aggregate value, as of the Effective Date, of
$36,000,000, (ii) $3,200,000 in cash as payment for inventory and
fixed assets and (iii) approximately $6,500,000 in cash in
settlement of open accounts payable by Ann Taylor to Cygne for
merchandise delivered by Cygne prior to the closing. The Company
also assumed certain liabilities related to the operations of the
Division. The purchase price 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.
===================================================================
24
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Certain Relationships and Related Transactions (Continued)
-----------------------------------------------------------
Sourcing Acquisition (Continued)
- --------------------------------
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
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 ATSC's common stock................. (36,000)
-------
Cash paid $ 227
=======
9. Stock Options Plans
-------------------
ATSC accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25, under which no
compensation costs have been recognized for stock option awards.
Had compensation costs of option awards been determined under a
fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ATSC would have been required to prepare a fair
value model for such options and record such amount in the
financial statements as compensation expense. Proforma net
income (loss) for Fiscal 1996 and Fiscal 1995 after taking into
account such expense would have been $8.2 million and $(1.1)
million, respectively. ATSC arrived at the fair value of each
stock grant at the date of grant by using the Black Scholes
option pricing model with the following weighted average
assumptions used for grants for the fiscal years ended 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.
====================================================================
25
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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
-------------------------------------
February 1, February 3, January 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
------------------------------------
February 1, February 3, January 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
====== ===== ======
============================================================================
26
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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.
11. Retirement Plans
----------------
Savings Plan. The Company maintains a defined contribution
401(k) savings plan for substantially all full-time employees.
Participants may contribute to the plan an aggregate of up to 10%
of their annual earnings. The Company makes a matching
contribution of 50% with respect to the first 3% of each
participant's annual earnings contributed to the plan. The
Company's contributions to the plan for Fiscal 1996, Fiscal 1995
and Fiscal 1994 were $390,000, $337,000 and $333,000,
respectively.
Pension Plan. Substantially all full-time employees of the
Company 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 the Company. The Company's funding policy
for the plan is to contribute annually the amount necessary to
provide for benefits based on accrued service and projected pay
increases. Plan assets consist primarily of cash, equity and
fixed income securities.
==================================================================
27
ANNTAYLOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Retirement Plans (Continued)
----------------------------
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":
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%
12. Stockholder's Equity
--------------------
The following summarizes the changes in stockholder's equity
during Fiscal 1996, Fiscal 1995 and Fiscal 1994:
Retained
Addi- Earnings Total
tional Accum- Stock-
Common Paid-in ulated holder's
Stock Capital Deficit) Equity
----- ------- ------- --------
(in thousands)
Balance at January 29, 1994.... $ 1 $276,026 $(16,756) $259,271
Net income..................... --- --- 31,752 31,752
Parent company contributions... --- 35,089 --- 35,089
--- ------- ------ -------
Balance at January 28, 1995...... 1 311,115 14,996 326,112
Net loss....................... --- --- (876) (876)
Parent company contributions... --- 452 --- 452
--- ------- ------ -------
Balance at February 3, 1996...... 1 311,567 14,120 325,688
Net income..................... --- --- 8,667 8,667
Parent company contributions... --- 132,385 --- 132,385
--- ------- ------ -------
Balance at February 1, 1997...... $ 1 $443,952 $ 22,787 $466,740
=== ======= ======= =======