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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED).
FOR THE FISCAL YEAR ENDED JANUARY 29, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
COMMISSION FILE NO. 33-28522
ANNTAYLOR STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3499319
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
142 WEST 57TH STREET, NEW YORK, NY 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 541-3300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, THE NEW YORK STOCK EXCHANGE
$.0068 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No __.
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 15, 1994 was $342,335,184.
The number of shares of the registrant's Common Stock outstanding as of
March 15, 1994 was 21,891,130.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
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PART I
ITEM 1. BUSINESS
GENERAL
AnnTaylor Stores Corporation (the "Company"), through its wholly owned
subsidiary, AnnTaylor, Inc. ("Ann Taylor"), is a leading national specialty
retailer of better quality women's apparel, shoes and accessories sold primarily
under the Ann Taylor brand name. As of January 29, 1994, the Company operated
231 stores in 38 states and the District of Columbia.
The Company is a holding company that was incorporated under the laws of
the state of Delaware in 1988 under the name AnnTaylor Holdings, Inc. The
Company changed its name to AnnTaylor Stores Corporation in April 1991. Unless
the context indicates otherwise, all references herein to the Company include
the Company and its wholly owned subsidiary Ann Taylor.
The first Ann Taylor store was opened in New Haven, Connecticut in 1954.
Over the years, the number of stores gradually expanded and by 1981 there were
36 stores. Allied Stores Corporation ("Allied Stores") acquired the then parent
of Ann Taylor in 1981 and began a rapid expansion program for the Ann Taylor
stores, which continued after Allied Stores was acquired by the Campeau
Corporation in 1986. Ann Taylor grew significantly after 1981, with the number
of stores increasing to 119 by the end of 1988, at which time Ann Taylor was
acquired by the Company (the "Acquisition"). Since the Acquisition, the number
of stores has increased to 231.
In May 1991, the Company completed an initial public offering (the "IPO")
in which it issued and sold 6,882,395 shares of its common stock, par value
$.0068 per share (the "Common Stock"), at a price of $26.00 per share, resulting
in aggregate net proceeds of approximately $166,541,000 (after payment of
expenses of the offering by the Company). The net proceeds from the IPO were
used to repurchase certain debt securities issued by Ann Taylor in connection
with financing the Acquisition.
The Company's merchandising strategy focuses on achieving the "Ann Taylor
look," which emphasizes classic styles, updated to reflect current fashion
trends. The Company considers the Ann Taylor name a fashion brand, defining a
distinctive collection of career and casual separates, weekend wear, dresses,
tops, accessories and shoes, coordinated as part of a total wardrobing strategy.
The Company's total wardrobing strategy is reinforced by an emphasis on
customer service. Ann Taylor sales associates assist customers in merchandise
selection and wardrobe coordination, helping them achieve the Ann Taylor look
while reflecting the customers' personal styles. The Company believes that its
customer base consists primarily of relatively affluent, fashion-conscious women
from the ages of 20 to 50, and that the majority of its customers are working
women with limited time to shop who are attracted to Ann Taylor by its focused
merchandising and total wardrobing strategies, personalized customer service,
efficient store layouts and continual flow of new merchandise.
Since becoming Chairman and Chief Executive Officer in February 1992, Sally
Frame Kasaks has redirected the Company's merchandising and marketing efforts to
enhance the position of Ann Taylor as a fashion brand. The Company's strategy
has been broadened to include not only the opening of new stores in new and
existing markets, but also the expansion of existing stores and the introduction
of product line extensions and additional channels of distribution. The
principal elements of the Company's strategy include:
. Emphasis on product design and development to reinforce the exclusivity
of Ann Taylor merchandise, by expanding the Company's fabric and
merchandise design team.
. Renewed focus on consistent quality and fit, by strengthening the
production management team responsible for technical design and factory
and merchandise quality assurance.
. Development of the Company's global and direct sourcing capabilities, to
reduce costs and shorten lead times. The Company increased its
merchandise purchases through its direct sourcing joint venture, which
acts as an agent exclusively for Ann Taylor, placing orders directly with
manufacturers, from 7.3% of merchandise purchased in fiscal 1992 to 23.5%
in fiscal 1993.
. Development of a merchandise pricing structure that emphasizes consistent
everyday value rather than promotions, adding to the credibility of the
Ann Taylor brand.
. Introduction of product line extensions building on the strength of the
Ann Taylor brand name. In fall 1992, the Company increased its presence
in casual wear by introducing its own line of denim known as ATdenim,
that is now sold in all Ann Taylor stores. In fall 1993, Ann Taylor
petites were tested in the career separates and dress categories in 25
stores. By fall 1994, a broader range of Ann Taylor petites will be
carried in approximately 100 Ann Taylor stores. In fiscal 1994, the
Company plans to test an Ann Taylor signature fragrance and related
products.
. Introduction of two larger store prototypes. Most new and expanded stores
will be approximately 5,500 square feet, and, in certain premier markets,
new and expanded stores will be approximately 10,000 to 12,000 square
feet. These new store prototypes are designed to reinforce the Ann Taylor
total wardrobing concept, allow the proper presentation of Ann Taylor
product extensions, and improve customer service and ease of shopping.
. Introduction of additional channels of distribution. In fiscal 1993, the
Company introduced Ann Taylor Factory Stores which sell Ann Taylor
merchandise designed or produced specifically for the factory stores, in
addition to serving as a clearance vehicle for merchandise from Ann
Taylor stores. In fiscal 1994, the Company intends to test free standing
Ann Taylor shoe stores as an additional channel of distribution for Ann
Taylor brand footwear. The Company also views its fashion catalog, which
presently is used principally as an advertising vehicle, as a potential
future channel of distribution.
. Increased investment in more sophisticated point-of-sale and inventory
management systems, including the integration of the Company's
merchandise planning, store assortment planning, and merchandise
allocation and replenishment systems. These enhancements are designed to
enable the Company to manage its business more effectively and cost
efficiently by improving customer service and providing the ability to
better manage inventory levels.
. Construction of a 250,000 square foot national distribution center in
Louisville, Kentucky to replace, in early 1995, the Company's existing
90,000 square foot distribution facilities in Connecticut.
MERCHANDISING
Ann Taylor stores offer a distinctive collection of career and casual
separates, dresses, tops, weekend wear, shoes and accessories, consisting
primarily of exclusive Ann Taylor brand name fashions. The Company's
merchandising strategy focuses on achieving the "Ann Taylor look" which
emphasizes classic styles, updated to reflect current fashion trends. Ann Taylor
stores offer a variety of coordinated apparel and an assortment of shoes and
accessories, to enable customers to assemble complete outfits. Sales associates
are trained to assist customers in merchandise selection and wardrobe
coordination, helping them achieve the Ann Taylor look while reflecting the
customers' personal styles. The Company encourages sales associates to become
familiar with regular customers to assist these customers in finding merchandise
suited to their tastes and wardrobe needs. The Company has a liberal return
policy, which it believes is comparable to those offered by better department
stores and other specialty retail stores.
2
The following table sets forth the approximate percentage of net sales
attributable to each merchandise group for the past three years:
PERCENTAGE OF NET SALES
-------------------------------
MERCHANDISE GROUP 1993 1992 1991
- --------------------------------------------------------------- --------- --------- ---------
Separates...................................................... 31.6% 31.0% 32.2%
Dresses........................................................ 17.3 20.7 19.1
Tops........................................................... 27.4 22.2 20.2
Weekend wear................................................... 11.7 11.1 9.7
Shoes (a)...................................................... 6.0 7.2 8.6
Accessories.................................................... 6.0 7.8 10.2
--------- --------- ---------
Total 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
- ---------------
(a) Includes net sales from Ann Taylor brand footwear in 1993, 1992 and 1991
(representing 6.0%, 5.5% and 4.9% of net sales, respectively) and net sales
through leased shoe departments located in Ann Taylor stores in 1992 and
1991. Leased shoe departments were phased out of Ann Taylor stores in stages
from August 1990 through February 1, 1993. As of February 1, 1993, there
were no leased shoe departments remaining at any Ann Taylor stores. See
"Shoes" below.
A principal element of the Company's business strategy is the introduction
of product line extensions. For example, Ann Taylor shoes, which were sold in 99
Ann Taylor stores in 1992, were expanded to 126 stores in fiscal 1993 and are
expected to be in over 155 stores by fall 1994. In fall 1992, the Company
increased its presence in casual wear by introducing its own line of denim known
as ATdenim, that is now sold in all Ann Taylor stores. In fall 1993, Ann Taylor
petites were tested in the career separates and dress categories in 25 stores.
By fall 1994, a broader range of Ann Taylor petites will be carried in
approximately 100 Ann Taylor stores. In fiscal 1994, the Company also plans to
test an Ann Taylor signature fragrance and related products.
MERCHANDISE DESIGN AND PRODUCTION
Ann Taylor merchandise is developed based upon current fashion trends and
analysis of prior year sales. The Company's merchandising and product
development groups determine needs for the upcoming season, design styles to
fill those needs and arrange for the production of merchandise either through
vendors who are private label specialists or directly with a factory.
The Company is continuing to develop its capability to source its
merchandise directly with manufacturers and decrease its dependence on vendors
who are not themselves manufacturers. The Company believes that direct sourcing
improves its competitive position by reducing costs and shortening lead times.
To this end, in May 1992, the Company commenced a joint venture known as CAT
U.S., Inc. ("CAT") with Cygne Designs, Inc., which was formed for the purpose of
sourcing Ann Taylor merchandise directly with manufacturers. The Company
currently owns a 40% interest in CAT. Merchandise purchased by Ann Taylor
through CAT represented 23.5% and 7.3% of all merchandise purchased by the
Company in 1993 and 1992, respectively. The Company expects its purchases
through CAT to increase to approximately 30% of all merchandise purchased in
1994.
In 1993, the Company purchased merchandise from approximately 285 vendors,
including five vendors who each accounted for 4% or more of the Company's
merchandise purchases: CAT (23.5%), Cygne Designs, Inc. (20.0%), Parigi (5.0%),
Depeche (4.6%) and Andrea Behar (4.3%). In 1993, over 95% of the Company's
merchandise was purchased from domestic vendors. The Company's domestic
suppliers include vendors who either manufacture merchandise or supply
merchandise manufactured by others, as well as vendors that are both
manufacturers and suppliers. Consistent with the retail apparel industry as a
whole, most of the Company's domestic vendors import a large portion of their
merchandise from abroad.
The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase from any supplier, although it does have an equity
investment in CAT. The Company believes
3
it has a good relationship with its suppliers and that, as the number of stores
increases and existing stores are expanded, there will continue to be adequate
sources that will be able to produce a sufficient supply of quality goods in a
timely manner and on satisfactory economic terms.
The Company's production management department establishes the technical
specifications for all Ann Taylor merchandise, inspects and certifies factories
in which Ann Taylor merchandise is produced, conducts periodic inspections of
factories while goods are in production to identify potential problems prior to
shipment by vendors of merchandise, and upon receipt, inspects merchandise on a
test basis for uniformity of sizes and colors, as well as for overall quality of
manufacturing. In addition to Company personnel, CAT also performs in-factory
quality control inspections on behalf of the Company with respect to all
merchandise orders CAT places.
INVENTORY CONTROL AND MERCHANDISE ALLOCATION
The Company's merchandise planning and allocation department analyzes each
store's size, location, demographics, sales and inventory history to determine
the quantity of merchandise to be purchased and the allocation of merchandise to
the Company's stores. Upon receipt, merchandise is allocated in order to achieve
an emphasis that is suited to each store's customer base. Each Ann Taylor store
carries merchandise in all merchandise groups and sizes (except shoes and
petites).
Merchandise typically is sold at its original marked price for several
weeks, with the length of time varying by item. The Company reviews its
inventory levels in order to identify slow-moving merchandise and broken
assortments (items no longer in stock in a sufficient range of sizes) and uses
markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, seasonal adaptation, changes in customer
preference or if it is determined that the inventory in stock will not sell at
its currently marked price. Marked down items that are not sold after several
more weeks are generally moved to the Company's factory stores where additional
markdowns may be taken. Generally, inventory turns over approximately five times
annually.
The Company uses a centralized distribution system, under which all
merchandise is received, processed and shipped to the stores through the
Company's New Haven, Connecticut distribution facility virtually every business
day. The Company is constructing a 250,000 square foot distribution facility in
Louisville, Kentucky that will replace the Company's existing facilities by
early 1995. See "Properties" and "Management's Discussion and Analysis".
STORES
As of January 29, 1994, the Company operated 231 stores in 38 states and
the District of Columbia. The following table sets forth by state the stores
that were open as of January 29, 1994:
LOCATIONS BY STATE
NUMBER OF
STATE STORES
- --------------------------- -------------
Alabama.................... 2
Arizona.................... 3
Arkansas................... 1
California................. 38
Colorado................... 3
Connecticut................ 10
District of Columbia....... 4
Florida.................... 17
Georgia.................... 4
Hawaii..................... 1
Illinois................... 11
Indiana.................... 2
Kentucky................... 2
Louisiana.................. 4
Maryland................... 5
Massachusetts.............. 12
Michigan................... 7
Minnesota.................. 4
Mississippi................ 1
Missouri................... 5
Nebraska................... 1
Nevada..................... 1
New Hampshire.............. 2
New Jersey................. 11
New Mexico................. 1
New York................... 22
North Carolina............. 3
Ohio....................... 9
Oklahoma................... 2
Oregon..................... 1
Pennsylvania............... 12
Rhode Island............... 1
South Carolina............. 1
Tennessee.................. 5
Texas...................... 12
Utah....................... 1
Virginia................... 7
Washington................. 2
Wisconsin.................. 1
4
As of January 29, 1994, 111 stores were in regional malls, 54 stores were
in upscale specialty centers, 34 stores were in village locations, 23 stores
were in downtown locations and 9 stores were factory stores located in factory
outlet centers.
The Company selects store locations that it believes are convenient for its
customers and consistent with its upscale image. Store locations are determined
on the basis of various factors, including geographic location, demographic
studies, anchor tenants in a mall location, other specialty stores in a mall or
specialty center location or in the vicinity of a village location, and the
proximity to professional offices in a downtown or village location.
Ann Taylor stores opened prior to January 30, 1993 averaged 3,300 square
feet in size, with the exception of three stores that ranged between 10,300
square feet and 12,500 square feet. During 1992, the Company designed two new
store prototypes. The first is a store model of approximately 5,500 square feet,
on which most new and expanded stores opened in 1993 and in the future will be
based. The Company also designed a new larger store prototype of approximately
10,000 to 12,000 square feet, which is reserved for certain premier markets that
management believes can support such a store. Both new store prototypes
incorporate modified display features, fixtures and fitting rooms. The Company
believes that its new store prototypes enhance the Company's ability to
merchandise its customer offerings and reinforce its total wardrobing concept,
provide area necessary for the proper presentation of Ann Taylor shoes and other
product line extensions, and increase customer service and ease of shopping. The
typical Ann Taylor store has approximately 17% of its total square footage
allocated to stockroom and other non-selling space.
Outlet shopping is one of the fastest growing segments of the retail
apparel industry, appealing to consumers' increasing orientation to value and to
manufacturers' and retailers' desire for additional channels of distribution and
control over liquidation of their product. In 1993, the Company began testing
factory stores as an additional channel of distribution, by converting its four
then existing clearance centers to the factory store format and opening five new
factory stores in outlet malls. Ann Taylor Factory Stores sell Ann Taylor
merchandise manufactured specifically for the factory stores and having an
average initial price generally lower than the average initial price of
merchandise carried in Ann Taylor stores, as well as serve as a clearance
vehicle for merchandise from Ann Taylor stores. In 1993, approximately 36% of
all merchandise sold in Ann Taylor Factory Stores was manufactured specifically
for these stores.
EXPANSION
Ann Taylor has grown significantly since the Acquisition, with the number
of stores increasing from 119 at the beginning of 1989 to 231 at the end of
1993, and with net sales increasing from approximately $353,900,000 in 1989, to
approximately $501,600,000 in 1993. The following table sets forth certain
information regarding store openings, expansions and closings for Ann Taylor
stores ("ATS") and Ann Taylor Factory Stores ("ATO"), since the consummation of
the Acquisition in the beginning of the 1989 fiscal year:
NUMBER OF STORES
--------------------------------------------------------------------------------------
ATS ATS OPEN AT
OPEN AT OPENED EXPANDED CLOSED END
FISCAL BEGINNING OF DURING DURING DURING OF FISCAL
YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR YEAR
- ---------------------------------------- --------------- ------------- --------------- --------------- ---------
ATS ATO ATS
----------- ----------- ---------
1989.................................... 119(a) 20 1(b) 2 1 138
1990.................................... 139 29 3(b) 3 1 166
1991.................................... 170 33 0 3 3 196
1992.................................... 200 20 0 5 1 215
1993.................................... 219 8 5 12 1 222
FISCAL
YEAR
- ----------------------------------------
ATO
-----------
1989.................................... 1
1990.................................... 4
1991.................................... 4
1992.................................... 4
1993.................................... 9
- ---------------
(a) Prior to 1989, the Company did not operate any factory stores or clearance
centers.
(b) Prior to 1993, ATO stores served only as clearance centers.
5
An important aspect of the Company's business strategy is a real estate
expansion program that is designed to reach new customers through the opening of
new stores (including factory stores) and the expansion of existing stores. As
market conditions warrant and as sites become available, the Company adds
additional Ann Taylor stores or expands the size of existing stores, in major
cities and their affluent suburbs where Ann Taylor already has a presence. The
Company also opens new Ann Taylor stores in additional cities that it believes
have a sufficient concentration of its target customers. Ann Taylor Factory
Stores typically are located outside the shopping radius of Ann Taylor stores,
in outlet malls that feature factory outlet stores of other upscale brands.
Prior to 1993, the real estate expansion program focused primarily on adding new
Ann Taylor stores. The Company now views the expansion of existing stores and
the opening of factory stores as an integral part of the Company's expansion
strategy.
Once an appropriate site has been selected and a lease signed, the Company
generally requires a relatively short lead time to open a new store, with store
construction typically taking approximately three months.
In 1993, the Company opened 13 new stores (including 5 factory stores),
expanded 12 existing stores and closed one store, resulting in an increase in
the Company's total store square footage from approximately 814,000 square feet
to approximately 929,000 square feet, a net increase of approximately 115,000
square feet. Approximately 80% of this additional square footage was opened
during the second half of 1993. The Company expects to increase store square
footage by at least 200,000 square feet, or 21.5%, in 1994. The Company believes
that approximately 70% of this new square footage will be represented by new
stores, of which about half will be Ann Taylor stores and about half will be Ann
Taylor Factory Stores. The balance of the 1994 square footage increase will
result from store expansions. The Company intends to increase square footage by
approximately 200,000 square feet in each of fiscal 1995 and fiscal 1996. The
Company's ability to continue to increase store square footage will be dependent
upon general economic and business conditions affecting consumer confidence and
spending, the availability of desirable locations and the negotiation of
acceptable lease terms. See "Management's Discussion and Analysis--Liquidity and
Capital Resources" for a discussion of the restrictions on capital expenditures
in the Ann Taylor Bank Credit Agreement.
The average net construction cost to the Company of opening a new store,
after giving effect to landlord allowances, was approximately $197,000 (or $38
per square foot) in 1993, compared to $52,000 (or $18 per square foot) in 1992
and $114,000 (or $32 per square foot) in 1991. In most cases, the Company
receives allowances from landlords for the construction of new stores which
reduce the Company's construction costs. The higher per store net construction
costs in 1993 reflect the larger average store sizes, increased costs associated
with the new store prototypes and lower average landlord construction
allowances.
In 1993, 12 stores were expanded at an aggregate net construction cost to
the Company of $7,490,000, or $624,000 per store, after giving effect to
landlord allowances. Three of the 12 stores expanded in 1993 were expanded from
an average original size of approximately 3,000 square feet to the larger
"premier market" prototype. Accordingly, these stores cost more to expand than a
typical store expansion. The average gross construction cost per square foot to
expand a store is generally comparable to the gross cost per square foot of a
new store. Landlord allowances, however, are typically less for an expansion
than for a new store.
SHOES
As of January 29, 1994, Ann Taylor shoes were sold in 126 of the Company's
231 stores. The Company intends to include an Ann Taylor shoe department in each
new or expanded store, and, in 1994, plans to add shoes to approximately 20
other existing Ann Taylor stores. In addition, in 1994 the Company intends to
test free standing Ann Taylor shoe stores as an additional channel of
distribution for Ann Taylor brand footwear.
Prior to 1990, all shoes sold in Ann Taylor stores were sold in leased shoe
departments by Joan & David Helpern, Inc. ("Joan & David") pursuant to a license
agreement. In 1990, the Company
6
introduced a line of Ann Taylor brand name shoes. Beginning in August 1990, Joan
& David began a scheduled withdrawal of its leased shoe departments, vacating
additional departments every six months through the end of fiscal 1992. As of
February 1, 1993, Joan & David no longer operated leased shoe departments in any
Ann Taylor stores.
Sales through leased shoe departments totaled $8,207,000, or 1.7% of net
sales, in 1992, and $16,056,000, or 3.7% of net sales, in 1991. There were no
leased shoe department sales during fiscal 1993. Net sales in 1993, 1992 and
1991 included $29,922,000, $25,638,000, and $21,527,000, respectively, in net
sales from the Ann Taylor brand name shoe line.
Under the terms of an amended license agreement, entered into in 1990, the
Company was entitled to a fee from Joan & David equal to 14.5% of Joan & David's
annual net sales through Ann Taylor stores, which, after employee discounts,
resulted in the Company retaining an amount equal to approximately 14.4% of such
sales. Joan & David was responsible for the costs associated with operating its
shoe departments. Persons who worked in the leased shoe departments were
employees of Joan & David and received all salary, bonus and commission payments
and benefits from Joan & David.
INFORMATION SYSTEMS
The Company is increasing its investment in computer hardware, systems
applications and networks to speed customer service, to support the purchase and
allocation of merchandise and to improve operating efficiencies.
In fall 1993, the Company began the roll out of a new point of sale system
to all Ann Taylor stores. The roll out will be completed by the summer of 1994.
Upon completion, the system will allow the introduction of a number of features
that will enable the Company to manage its business more effectively and cost
efficiently. These features include on-line receipts and transfers of inventory,
which will reduce paperwork and result in more timely inventory information; the
ability to take credit card applications and account look-up in the stores,
which will both improve customer service and reduce expense; and the ability to
send advance ship notices to stores prior to their receipt of merchandise,
allowing better labor scheduling in the stores and reducing expense. The new
system will permit automated promotional tracking, providing better information
to the stores on current promotions and providing the results of these
promotions to the Company's headquarters on a more timely basis, allowing the
Company to respond more quickly and accurately to customer preferences.
During 1994, the Company will upgrade the inventory management system. This
upgrade, along with the new point of sale system, will allow full price look-up
in the stores and provide for more timely information on inventory levels and
better analysis of sales trends. The enhanced information will also allow the
Company to more fully integrate its planning and allocation system. By the end
of 1995, the Company expects to have its merchandise planning system, store
assortment planning system, merchandise allocation system and merchandise
replenishment system completely integrated, allowing the Company to respond more
quickly to individual store trends and allocate merchandise more closely aligned
with an individual store's customer base. The Company is also initiating systems
integration with its suppliers. In spring 1994, the Company's first electronic
data interchange relationship will be implemented with a hosiery supplier,
allowing quicker response to sales and maintenance of inventory levels in line
with model stock levels.
CUSTOMER CREDIT
Customers may pay for merchandise with the Ann Taylor credit card, American
Express, Visa, MasterCard, cash or check. Credit card sales were 77.9% of net
sales in 1993, 77.6% in 1992, and 79.1% in 1991. In 1993, 31.5% of net sales
were made with the Ann Taylor credit card and 46.4% were made with third-party
credit cards. Accounts written off in 1993 were $1,390,000, or 0.3% of net
sales.
Ann Taylor has offered customers its proprietary credit card since 1976.
The Company believes that the Ann Taylor credit card enhances customer loyalty
while providing the customer with additional
7
credit. At January 29, 1994, the Company had over 520,000 credit accounts that
had been used during the past 18 months.
ADVERTISING AND PROMOTION
The Company's principal advertising vehicle is its fashion catalog, which
it publishes four times per year and mails primarily to Ann Taylor credit card
holders. In 1993, the Company ran advertisements in the following national
women's fashion magazines: Elle, Vogue and Harpers Bazaar. The Company spent
$6,388,000 (1.3% of net sales) on advertising in 1993, compared to $5,509,000
(1.2% of net sales) in 1992 and $8,645,000 (2.0% of net sales) in 1991.
TRADEMARKS AND SERVICE MARKS
The Company is the owner in the United States of the trademark and service
mark "AnnTaylor". This mark is protected by several federal registrations in the
United States Patent and Trademark Office, covering clothing, shoes, jewelry and
certain other accessories, and clothing store services. The terms of these
registrations vary from ten to twenty years (expiring in 2003 and 2007), and
each is renewable indefinitely if the mark is still in use at the time of
renewal. The Company's rights in the "AnnTaylor" mark are a significant part of
the Company's business, as this mark is well-known in the women's retail apparel
industry. Accordingly, the Company intends to maintain its mark and the related
registrations. The Company is not aware of any claims of infringement or other
challenges to the Company's right to use its mark in the United States.
The Company owns registrations for the "AnnTaylor" mark for clothing in
Japan, Canada and Taiwan, and owns or has applied for registration for the
"AnnTaylor" mark for clothing and other goods in Japan and other countries as
well.
COMPETITION
The women's retail apparel industry is highly competitive. The Company
believes that the principal bases upon which it competes are fashion, quality,
value and service. The Company competes with certain departments in better
national department stores such as Neiman Marcus, Saks Fifth Avenue, Lord &
Taylor, Nordstrom and Bloomingdale's, as well as certain departments in regional
department stores, such as Macy's, Marshall Fields and Dillard's. The Company
believes that it competes with these department stores by offering a focused
merchandise selection, personalized service and convenience, as well as
exclusive Ann Taylor fashions, which distinguish its goods from the goods
carried by these department stores. Certain of the Company's product lines also
compete with other specialty retailers such as Talbots, Ralph Lauren, The
Limited, The Gap and Banana Republic. The Company believes that its focused
merchandise selection and exclusive Ann Taylor brand name fashions distinguish
it from other specialty retailers. Many of the Company's competitors are
considerably larger and have substantially greater financial, marketing and
other resources than the Company, and there is no assurance that the Company
will be able to compete successfully with them in the future.
EMPLOYEES
Store management receives compensation in the form of salaries and
performance-based bonuses. Sales associates are paid on an hourly basis plus
performance incentives. A number of programs exist that offer incentives to both
management and sales associates to increase sales and support the Company's
total wardrobing strategy. For example, certain incentive programs offer
individual associates cash awards for selling multiple wardrobe items and for
achieving individual sales goals. Other programs provide bonuses or cash awards
to all associates in a store that has achieved, for example, the highest
percentage increase in sales for a given period.
As of January 29, 1994, the Company had 3,741 employees, of whom 880 were
full-time salaried employees, 1,628 were full-time hourly employees and 1,233
were part-time hourly employees. None of the Company's employees are represented
by a labor union. The Company believes that its relationship with its employees
is good. As of January 29, 1994, approximately 90% of the Company's employees
were eligible to participate in the Company's health care benefits program.
8
ITEM 2. PROPERTIES
As of January 29, 1994, the Company had 231 stores, all of which were
leased. The leases typically provide for an initial five-to ten-year term and
grant the Company the right to extend the term for one or two additional
five-year periods. In most cases, the Company pays a minimum rent plus a
contingent rent based on the store's net sales in excess of a specified
threshold. The contingent rental payment is typically 5% of net sales in excess
of the applicable threshold. Substantially all of the leases require the Company
to pay insurance, utilities and repair and maintenance expenses and contain tax
escalation clauses. The current terms of the Company's leases, including renewal
options, expire as follows:
YEARS LEASE NUMBER OF
TERMS EXPIRE STORES
---------------- -------------
1994-1996................................. 50
1997-1999................................. 20
2000-2002................................. 20
2003 and later............................ 141
Ann Taylor leases corporate offices at 142 West 57th Street, New York,
containing approximately 71,000 square feet. The lease for these premises
expires in 2006. Ann Taylor also leases office space in New Haven, which
contains approximately 31,000 square feet. The lease for these offices expires
in 1996.
Ann Taylor leases its New Haven distribution center, which contains 78,790
square feet. The lease for this facility expires on March 31, 1995, with an
option to extend this lease for an additional three months. In early 1994, the
Company announced that it will be purchasing property in Louisville, Kentucky on
which it will construct a 250,000 square foot facility that will replace the
Company's existing distribution center facilities in Connecticut in early 1995.
See "Management's Discussion and Analysis".
ITEM 3. LEGAL PROCEEDINGS
Ann Taylor has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed and traded on the New York Stock Exchange under
the symbol ANN. The number of holders of record of Common Stock at March 15,
1994 was 440. The following table sets forth the high and low closing sales
prices for the Common Stock on the New York Stock Exchange during fiscal 1993
and fiscal 1992.
MARKET PRICE
--------------------
FISCAL YEAR 1992 HIGH LOW
--------- ---------
First quarter....................................................... $ 23 1/8 $ 16 1/2
Second quarter...................................................... 24 5/8 18 3/4
Third quarter....................................................... 24 1/4 16 3/4
Fourth quarter...................................................... 24 3/8 19 1/4
FISCAL YEAR 1993
First quarter....................................................... $ 23 1/4 $ 17 7/8
Second quarter...................................................... 27 7/8 20
Third quarter....................................................... 29 5/8 22 7/8
Fourth quarter...................................................... 28 1/4 20 7/8
The Company has never paid dividends on the Common Stock and does not
intend to pay dividends in the foreseeable future. As a holding company, the
ability of the Company to pay dividends is dependent upon the receipt of
dividends or other payments from Ann Taylor. The payment of dividends by Ann
Taylor to the Company is subject to certain restrictions under Ann Taylor's bank
credit agreement (the "Bank Credit Agreement") and the indenture relating to the
$110,000,000 principal amount AnnTaylor, Inc. 8 3/4% Subordinated Notes due 2000
(the "8 3/4% Notes"). The payment of cash dividends on the Common Stock by the
Company is also subject to certain restrictions contained in the Company's
guarantee of Ann Taylor's obligations under the Bank Credit Agreement. Any
determination to pay cash dividends in the future will be at the discretion of
the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant at that time by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information for the periods
indicated has been derived from the audited consolidated financial statements of
the Company. Such financial statements audited by Deloitte & Touche, independent
auditors, for the fiscal years 1993, 1992 and 1991 appear elsewhere in this
report. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis" and the consolidated financial statements
and notes thereto of the Company included elsewhere in this report. All
references to years are to the fiscal year of the Company, which ends on the
Saturday nearest January 31 in the following calendar year. All fiscal years for
which financial information is set forth below had 52 weeks, except 1989, which
had 53 weeks.
10
FISCAL YEARS ENDED
----------------------------------------------------------
JAN. 29, JAN. 30, FEB. 1, FEB. 2, FEB. 3,
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT DATA AND PER
SHARE DATA)
OPERATING STATEMENT INFORMATION:
Net sales, including leased shoe departments (a).... $ 501,649 $ 468,381 $ 437,711 $ 410,782 $ 353,912
Cost of sales....................................... 271,749 264,301 234,136 217,414 189,293
---------- ---------- ---------- ---------- ----------
Gross profit................................... 229,900 204,080 203,575 193,368 164,619
Selling, general and administrative expenses........ 169,371 152,072 150,842 125,872 109,598
Distribution center restructuring charge (b)........ 2,000 -- -- -- --
Amortization of goodwill (c)........................ 9,508 9,504 9,506 9,484 9,711
---------- ---------- ---------- ---------- ----------
Operating income............................... 49,021 42,504 43,227 58,012 45,310
Interest expense (d)................................ 17,696 21,273 33,958 50,081 55,858
Stockholder litigation settlement (e)............... -- 3,905 -- -- --
Other (income) expense, net......................... (194) 259 542 168 29
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary
loss................................................ 31,519 17,067 8,727 7,763 (10,577)
Income tax provision................................ 17,189 11,150 7,703 6,657 600
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary loss............. 14,330 5,917 1,024 1,106 (11,177)
Extraordinary loss (f).............................. 11,121 -- 16,835 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. 3,209 5,917 (15,811) 1,106 (11,177)
Preferred stock dividend............................ -- -- -- -- 1,000
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock... $ 3,209 $ 5,917 $ (15,811) $ 1,106 $ (12,177)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income (loss) per share before extraordinary loss... $ .66 $ .28 $ .05 $ .08 $ (.91)
Extraordinary loss per share (f).................... (.51) -- (.87) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per share......................... $ .15 $ .28 $ (.82) $ .08 $ (.91)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding
(in thousands).................................... 21,929 21,196 19,326 14,160 13,312
OPERATING INFORMATION:
Percentage increase (decrease) in total comparable
store sales (g)(h).................................. 2.3% (1.0)% (5.6)% 2.3% 14.3%
Percentage increase (decrease) in owned comparable
store sales (g)(h)(i)............................... 4.0% 0.8% (0.9)% 5.1% 16.5%
Average net sales per gross square foot (g)(j)...... $ 576 $ 600 $ 642 $ 740 $ 771
Number of stores:
Open at beginning of the period................ 219 200 170 139 119
Opened during the period....................... 13 20 33 32 21
Expanded during the period..................... 12 5 3 3 2
Closed during the period....................... 1 1 3 1 1
Open at the end of the period.................. 231 219 200 170 139
Capital expenditures................................ $ 25,062 $ 4,303 $ 10,004 $ 11,783 $ 6,146
Depreciation and amortization, including goodwill
(c)................................................. $ 18,013 $ 16,990 $ 15,709 $ 14,177 $ 14,662
Working capital turnover (k)........................ 12.1x 16.8x 12.8x 12.4x 13.0x
Inventory turnover (l).............................. 4.9x 5.3x 4.6x 4.6x 7.0x
BALANCE SHEET INFORMATION (AT END OF PERIOD):
Working capital..................................... $ 53,283 $ 29,539 $ 26,224 $ 42,234 $ 23,705
Goodwill, net (c)................................... 332,537 342,045 351,549 361,055 370,539
Total assets........................................ 513,399 487,592 491,747 510,724 493,160
Total debt.......................................... 189,000 195,474 211,917 380,362 365,787
Stockholders' equity................................ 259,271 245,298 229,464 47,483 57,532
(Footnotes on following page)
11
(Footnotes for preceding page)
(a) The phase out of leased shoe departments was completed by February 1, 1993.
(b) Relates to the relocation of the Company's distribution center, expected to be completed in early 1995, and
represents a charge of $1,100,000 principally for severance and job training benefits and $900,000 for the
write-off of the net book value of certain assets that are not expected to be used in the new facility. This
charge reduced 1993 net earnings by $.05 per share.
(c) As a result of the Acquisition, which was effective as of January 29, 1989, $380,250,000, representing the
excess of the allocated purchase price over the fair value of the Company's net assets, was recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
(d) Includes non-cash interest expense of $4,199,000, $8,581,000, $12,243,000, $18,294,000 and $13,819,000 in the
fiscal years 1993, 1992, 1991, 1990 and 1989, respectively, from accretion of original issue discount,
amortization of deferred financing costs and, in 1992, 1991 and 1990, issuance of additional 10% junior
subordinated exchange notes due 2004.
(e) Relates to the settlement in January 1993 of a stockholder class action lawsuit that was filed against the
Company and certain other defendants in October 1991.
(f) In fiscal 1993, Ann Taylor incurred an extraordinary loss of $17,244,000 ($11,121,000, or $.51 per share, net
of income tax benefit) due to debt refinancing activities. In fiscal 1991, Ann Taylor incurred an
extraordinary loss of $25,900,000 ($16,835,000, or $.87 per share, net of income tax benefit), in connection
with the repurchase of a portion of its then outstanding debt securities with proceeds from the IPO.
(g) Percentage changes in comparable store sales and average net sales per gross square foot are adjusted so that
all figures relate to a 52-week year.
(h) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if
the store was not open during the same month of the prior period. A store opened within the first two weeks
of a month is deemed to have been opened on the first day of that month and a store opened thereafter in a
month is deemed to have been opened on the first day of the next month. For example, if a store were opened
on June 8, 1992, its sales from June 8, 1992 through year-end 1992 and its sales from June 1, 1993 through
year-end 1993 would be included in determining comparable store sales for 1993, compared to 1992. In
addition, in a year with 53 weeks (such as 1989), the extra week is not included in determining comparable
store sales. For the periods previous to 1993, when a store's square footage has been increased as a result
of expansion or relocation in the same mall or specialty center, the store continues to be treated as a
comparable store. Commencing with stores expanded in fiscal 1993, any store the square footage of which is
expanded by more than 15% is treated as a new store, upon the opening of the expanded store.
(i) Excludes sales from leased shoe departments.
(j) Average net sales per gross square foot is determined by dividing net sales for the period by the average of
the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein
to square feet are to gross square feet, rather than net selling space.
(k) Working capital turnover is determined by dividing net sales by the average of the amount of working capital
at the beginning and end of the period.
(l) Inventory turnover is determined by dividing net cost of goods sold (excluding costs of leased shoe
departments) by the average of the cost of inventory at the beginning and end of the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Ann Taylor has grown significantly since the Acquisition, with the number
of stores increasing from 119 at the beginning of 1989 to 231 at the end of
1993. During fiscal 1993, the Company expanded 12 stores, added 13 new stores
and closed one store, resulting in a net increase in the Company's square
footage of approximately 115,000 square feet. The Company expects to increase
square footage by at least 200,000 square feet, or 21.5%, in fiscal 1994.
Management anticipates that approximately 70% of this new square footage will be
represented by new stores, of which about half will be Ann Taylor stores and
about half will be Ann Taylor Factory Stores. The balance of the 1994 square
footage increase will result from store expansions. The Company intends to
increase square footage by approximately 200,000 square feet in each of fiscal
1995 and fiscal 1996. The Company's ability to continue to expand will be
dependent upon general economic and business conditions affecting consumer
spending, the
12
availability of desirable locations and the negotiation of acceptable lease
terms for new locations. See "Business--Expansion".
The Company's net sales do not show significant seasonal variation,
although net sales in the third and fourth quarters have traditionally been
higher than in the first and second quarters. The Company believes that its
merchandise is purchased primarily by women who are buying for their own
wardrobes rather than as gifts, and the Company typically experiences only
moderate increases in net sales during the Christmas season. As a result of
these factors, the Company has not had significant overhead and other costs
generally associated with large seasonal variations.
The following table shows the percentages of the Company's net sales and
operating income (loss) per quarter for 1993, 1992 and 1991:
FISCAL 1993 FISCAL 1992 FISCAL 1991
------------------------ ------------------------ ----------------------------
OPERATING OPERATING OPERATING
NET SALES INCOME(A) NET SALES INCOME NET SALES INCOME (LOSS)
----------- ----------- ----------- ----------- ----------- ---------------
First Quarter........................... 24.0% 24.3% 24.5% 26.6% 25.4% 39.7%
Second Quarter.......................... 24.9 25.3 24.0 19.5 23.1 26.6
Third Quarter........................... 24.3 25.2 24.6 34.6 26.0 33.8
Fourth Quarter.......................... 26.8 25.2 26.9 19.3 25.5 (0.1)
----------- ----------- ----------- ----------- ----------- ------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ----------- ------
- ---------------
(a) Excludes the $2,000,000 charge to earnings relating to the Company's
announced relocation of its distribution center.
COMPARABLE STORE SALES
The following table sets forth for the years 1993, 1992 and 1991 certain
information regarding the percentage increase (decrease) over the prior year's
sales in (i) total comparable store sales and (ii) owned comparable sales
(consisting of total comparable store sales less leased shoe department
comparable sales, which were phased out by February 1, 1993):
FISCAL 1993 FISCAL 1992 FISCAL 1991
--------------- ------------- -------------
Comparable store sales:
Owned sales.......................................... 4.0% 0.8% (0.9)%
Total................................................ 2.3 (1.0) (5.6)
The Company believes that the increase in owned comparable store sales in
1993 and 1992 was primarily due to improved customer acceptance of merchandise
offerings and, in 1992, to a higher degree of promotional activities than in
1993.
RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the historical periods indicated:
FISCAL FISCAL FISCAL
1993 1992 1991
--------- --------- ---------
Net sales, including leased shoe departments.............................. 100.0% 100.0% 100.0%
Cost of sales............................................................. 54.2 56.4 53.5
--------- --------- ---------
Gross profit (a)...................................................... 45.8 43.6 46.5
Selling, general and administrative expenses.............................. 33.8 32.5 34.5
Distribution center restructuring charge.................................. 0.4 -- --
Amortization of goodwill.................................................. 1.8 2.0 2.2
--------- --------- ---------
Operating income...................................................... 9.8 9.1 9.8
Interest expense.......................................................... 3.5 4.6 7.7
Stockholder litigation settlement......................................... -- 0.8 --
Other (income) expense, net............................................... -- -- 0.1
--------- --------- ---------
Income before income taxes and extraordinary loss......................... 6.3 3.7 2.0
Income tax provision...................................................... 3.4 2.4 1.8
--------- --------- ---------
Income before extraordinary loss.......................................... 2.9 1.3 0.2
Extraordinary loss........................................................ 2.3 -- 3.8
--------- --------- ---------
Net income (loss)..................................................... 0.6% 1.3% (3.6)%
--------- --------- ---------
--------- --------- ---------
- ---------------
(a) Gross profit margin on net sales, excluding leased shoe departments, was
44.1% in 1992 and 47.8% in 1991. Gross profit margin on leased shoe
department net sales was 14.4% in 1992 and 1991.
13
FISCAL 1993 COMPARED TO FISCAL 1992
The Company's net sales increased to $501,649,000 in 1993 from $468,381,000
in 1992, an increase of $33,268,000, or 7.1%. The increase in net sales was
attributable to the inclusion of a full year of operating results for the 20
stores opened during 1992, the opening of 13 new stores and expansion of 12
stores in 1993 and the increase in comparable store sales. The 2.3% increase in
total comparable stores sales was due primarily to customer acceptance of the
Company's merchandise offerings in 1993. The increase was partially offset by
the closing of one store in 1993. Net sales included $29,922,000 and $25,638,000
from Ann Taylor brand shoes in 1993 and 1992, respectively.
Gross profit as a percentage of net sales increased to 45.8% in 1993 from
43.6% in 1992. This increase was attributable to reduced cost of goods sold
resulting from lower markdowns associated with reduced promotional activities,
higher initial markups and the elimination of the leased shoe department which
had a substantially lower gross margin.
Selling, general and administrative expenses as a percentage of net sales
increased to 33.8% in 1993 from 32.5% in 1992. The increase was primarily
attributable to additional store tenancy and selling expenses, severance costs,
agency fees and relocation expenses, and the Company's continuing investment in
such areas as design and manufacturing, marketing and information systems.
Operating income increased to $49,021,000, or 9.8% of net sales, in 1993,
from $42,504,000, or 9.1% of net sales, in 1992. As described below, 1993
operating income was reduced by a $2,000,000, or 0.4% of net sales, charge to
earnings relating to the Company's announced relocation of its distribution
center facility from New Haven, Connecticut to Louisville, Kentucky.
Amortization of goodwill from the Acquisition was $9,508,000 in 1993 and
$9,504,000 in 1992. Operating income without giving effect to such amortization
was $58,529,000, or 11.6% of net sales, in 1993, and $52,008,000, or 11.1% of
net sales, in 1992.
In early 1994, the Company announced that it will be relocating its
distribution center from New Haven, Connecticut to Louisville, Kentucky in early
1995. The Company will construct a 250,000 square foot distribution center at a
cost of approximately $14,000,000. The relocation of the distribution center
will affect approximately 105 employees. The Company recorded a $2,000,000
pre-tax restructuring charge ($1,140,000 net of income tax benefit, or $.05 per
share) representing approximately $1,100,000 principally for severance and job
training benefits, and approximately $900,000 for the write-off of the net book
value of certain assets that are not expected to be utilized in the new
facility. The Company selected Louisville, Kentucky as the site for its new
distribution center facility because of Louisville's central location relative
to the Company's stores, which is expected to result in reduced merchandise
delivery times, the lower cost of construction in Louisville as compared to the
Northeast, and economic incentives offered by the state of Kentucky.
Interest expense was $17,696,000, including $4,199,000 of non-cash interest
expense in 1993 and $21,273,000, including $8,581,000 of non-cash interest
expense in 1992. The decrease is mostly attributable to lower interest rates
resulting principally from refinancing transactions entered into in 1993. As a
result of these refinancing transactions, the weighted average interest rate on
the Company's outstanding indebtedness at January 29, 1994 was 6.22% compared to
9.50% at January 30, 1993. After taking into account the Company's interest rate
swap agreement, all of the Company's debt obligations bear interest at variable
rates. Therefore, the Company's interest expense for fiscal 1993 is not
necessarily indicative of interest expense for future periods. See "Liquidity
and Capital Resources".
The income tax provision was $17,189,000, or 54.5% of income before income
taxes and extraordinary loss in the 1993 period compared to $11,150,000, or
65.3% of income before income taxes in 1992. The effective tax rates for both
periods were higher than the statutory rates, primarily because of non-
deductible goodwill. During fiscal 1993, the Company adopted the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Adoption of SFAS 109 did not have a material effect on the results of
operations.
14
The refinancing transactions referred to above resulted in an extraordinary
loss of $17,244,000 ($11,121,000 net of income tax benefit), attributable to
premiums paid to purchase or discharge Ann Taylor's notes, and to the write-off
of deferred financing costs associated with the early retirement of
indebtedness. See "Liquidity and Capital Resources".
As a result of the foregoing factors, the Company had net income of
$3,209,000, or 0.6% of net sales, for 1993 compared to a net income of
$5,917,000, or 1.3% of net sales for 1992.
FISCAL 1992 COMPARED TO FISCAL 1991
The Company's net sales increased to $468,381,000 in 1992 from $437,711,000
in 1991, an increase of $30,670,000, or 7.0%. The increase in net sales was
primarily attributable to the inclusion of a full year of operating results for
stores opened during 1991 and the opening of 20 new stores in 1992. The Company
operated 219 stores at the end of 1992 compared to 200 stores at the end of
1991. The increase was partially offset by the closing of one store in 1992. The
decrease of 1.0% in comparable store sales was due to the phaseout of the leased
shoe departments offset by the increase of 0.8% in owned comparable store sales
(excluding leased shoe departments). The Company believes the increase in owned
comparable store sales was primarily attributable to customer acceptance of the
Company's fall 1992 merchandise offerings and promotional activities. As a
result of the phaseout of the Joan & David leased shoe departments, aggregate
net sales contributed by Joan & David declined to $8,207,000 in 1992 from
$16,056,000 in 1991, a decrease of 48.9%. Net sales included $25,638,000 and
$21,527,000 in net sales from the Ann Taylor brand shoe line in 1992 and 1991,
respectively.
Gross profit as a percentage of net sales decreased to 43.6% in 1992 from
46.5% in 1991. This decrease was attributable primarily to increased cost of
goods sold resulting from lower initial mark ups and higher markdowns on goods
taken in response to the competitive retail environment and, in the first
quarter of 1992, poor customer acceptance of the Company's merchandise
offerings.
Selling, general and administrative expenses as a percentage of net sales
decreased to 32.5% in 1992 from 34.5% in 1991. The decrease was due to the
leveraging of central overhead expenses over a larger sales base, lower
severance payments and cost savings in other areas, offset in part by higher
tenancy and selling costs in new stores.
Operating income decreased to $42,504,000, or 9.1% of net sales, in 1992
from $43,227,000, or 9.8% of net sales, in 1991. Amortization of goodwill from
the Acquisition was $9,504,000 in 1992 and $9,506,000 in 1991. Operating income
without giving effect to such amortization was $52,008,000, or 11.1% of net
sales, in 1992 and $52,733,000, or 12.0% of net sales, in 1991.
Interest expense was $21,273,000, including $8,581,000 of non-cash interest
expense in 1992 and $33,958,000, including $12,243,000 of non-cash interest
expense in 1991. The decrease in interest expense in 1992 was attributable
primarily to lower outstanding indebtedness as a result of the repurchase of the
debt securities of Ann Taylor with the proceeds of the IPO in 1991, and was also
attributable to lower interest rates in the 1992 period.
During 1992, the Company recorded an expense of $3,905,000 to provide for
the settlement of a class action lawsuit that was filed in October 1991.
The income tax provision was $11,150,000, or 65.3% of income before income
taxes in the 1992 period compared to $7,703,000, or 88.3% of income before
income taxes and extraordinary loss in 1991. The effective rates for both
periods were higher than the statutory rate, primarily because of non-deductible
goodwill.
As a result of the foregoing factors, the Company had net income of
$5,917,000, or 1.3% of net sales, for 1992 compared to a net income before
extraordinary loss of $1,024,000 or 0.2% of net sales for 1991.
15
CHANGES IN RECEIVABLES AND INVENTORIES
Accounts receivable increased to $49,279,000 at the end of 1993 from
$43,003,000 at the end of 1992, an increase of $6,276,000, or 14.6%. This
increase was partially attributable to Ann Taylor credit card receivables, which
increased $2,285,000 to $41,176,661 in 1993, to third-party credit card
receivables (American Express, Mastercard and Visa), which increased $1,124,000
due to the timing of payments by the third-party credit card issuers and to
construction allowance receivables, which increased $1,814,000 to $3,901,000 in
1993. Ann Taylor credit card sales were 5.4% higher in the last thirteen weeks
of 1993 compared to the last thirteen weeks of 1992.
Merchandise inventories increased to $60,890,000 at the end of 1993 from
$50,307,000 at the end of 1992, an increase of $10,583,000, or 21.0%. The higher
inventory level at the end of 1993 was attributable to the purchase of inventory
for new stores that were opened in 1993, the planned square footage increases in
spring 1994, planned comparable store sales growth and the earlier receipt of
spring goods.
Accounts payable increased to $37,564,000 at the end of 1993 from
$23,779,000 at the end of 1992, an increase of $13,785,000, or 57.9%. The
increase in accounts payable is primarily due to the increase in inventory at
the end of fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from
operations and borrowings under a $55 million revolving credit facility (the
"Revolving Credit Facility") under the Bank Credit Agreement. The following sets
forth material measures of the Company's liquidity:
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash provided by operating activities..................... $ 47,322 $ 23,579 $ 40,142
Working capital........................................... $ 53,283 $ 29,539 $ 26,224
Current ratio............................................. 1.78:1 1.38:1 1.36:1
Debt to equity ratio...................................... .73:1 .80:1 .92:1
Cash provided by operating activities increased in 1993 principally as a
result of an increase in income before extraordinary loss and a decrease in
refundable income taxes. The increase in working capital in 1993 results from
the decrease in the current portion of long-term debt from $37,000,000 in 1992
to $8,757,000 in 1993, as a result of the refinancing transactions entered into
in 1993.
At January 29, 1994, the Company had $54,000,000 outstanding under the term
loan facility under the Bank Credit Agreement (the "Term Loan"). The Bank Credit
Agreement requires the Company to make scheduled semi-annual principal payments
on the Term Loan, which commenced on January 15, 1994. The Company made the
semi-annual payment of $6,000,000 in January, 1994 and an additional payment of
$20,000,000 in January 1994. The remaining scheduled payments on the Term Loan
are $8,757,000 in fiscal years 1994 and 1995, $11,676,000 in fiscal years 1996
and 1997, and $13,134,000 in fiscal year 1998. During 1992, the principal
payments made under the Company's then existing bank credit agreement totaled
$26,000,000. The Bank Credit Agreement also requires the Company to make
prepayments on the Term Loan if the Company sells certain assets or issues debt
or equity securities. Amounts borrowed under the Revolving Credit Facility
mature on January 15, 1999; however, the Company is required to reduce the
outstanding balance of the Revolving Credit Facility to $20,000,000 or less for
a 30-day period in fiscal 1994 and to $15,000,000 or less for a 30-day period
each year thereafter.
16
During 1993, the Company and Ann Taylor entered into a series of
refinancing transactions that lowered the Company's average cost of capital. The
following table summarizes these transactions.
BALANCE AT BALANCE AT
JANUARY 30, JANUARY 29,
1993 ADDITIONS REDUCTIONS 1994
----------- ----------- ------------ -----------
(IN THOUSANDS)
Previous term loan......................................... $ 96,969 -- $ (96,969) --
14 3/8% discount notes..................................... 44,069 -- (44,069) --
13 3/4% subordinated notes................................. 34,295 -- (34,295) --
10% exchange notes......................................... 14,641 -- (14,641) --
8 3/4% notes............................................... -- $ 110,000 (10,000) $ 100,000
Term loan.................................................. -- 80,000 (26,000) 54,000
Receivables facility....................................... -- 33,000 -- 33,000
Revolving credit loan...................................... 5,500 -- (3,500) 2,000
----------- ----------- ------------ -----------
$ 195,474 $ 223,000 $ (229,474) $ 189,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
In July 1993, Ann Taylor entered into a $110,000,000 (notional amount)
interest rate swap agreement. Under the agreement the Company receives a fixed
rate of 4.75% and pays a floating rate based on LIBOR, as determined in six
month intervals. This agreement lowered the effective interest rate on the 8
3/4% Notes by 125 basis points for the first semi-annual period ended January
1994. The swap agreement matures in July 1996.
During the fourth quarter of fiscal 1993, Ann Taylor entered into a
receivables financing agreement secured by Ann Taylor credit card receivables.
Initial borrowings under the receivables facility (the "Receivables Facility")
were $33,000,000.
The Company's capital expenditures totaled $25,062,000, $4,303,000, and
$10,004,000 in 1993, 1992 and 1991, respectively. Capital expenditures in 1992
were lower than in 1991 and 1993, in part because the Company slowed its new
store expansion program while it developed the new store prototypes. In
addition, the average construction allowance per store received in 1992 was
higher than amounts received in 1991 and 1993. Capital expenditures in 1993
reflect increased average net construction costs for the opening of new stores,
costs associated with the expansion of a greater number of existing stores,
lower average landlord construction allowances and costs associated with new
management information systems. The Company expects its capital expenditure
requirements to be approximately $31,000,000 in 1994, plus $14,000,000 for the
new distribution center and material handling equipment.
The Bank Credit Agreement imposes limits on the Company's ability to make
capital expenditures and, for 1994, the limit is $31,000,000, exclusive of
amounts spent for the distribution center. The actual amount of the Company's
capital expenditures will depend in part on the number of stores opened,
refurbished, and expanded and on the amount of construction allowances the
Company receives from the landlords of its new or expanded stores. See
"Business--Expansion".
Dividends and distributions from Ann Taylor to the Company are restricted
by both the Bank Credit Agreement and the indenture for the 8 3/4% Notes. The
payment by the Company of cash dividends on its Common Stock is also restricted
by the Company's guarantee of obligations under the Bank Credit Agreement. See
"Market for Registrant's Common Equity and Related Stockholder Matters".
In order to finance its operations and capital requirements, including its
debt service payments, the Company expects to use internally generated funds and
funds available to it under the Revolving Credit Facility and may seek project
financing for the distribution center construction and material handling
equipment costs. The Company believes that cash flow from operations and funds
available under the
17
Revolving Credit Facility will be sufficient to enable it to meet its ongoing
cash needs for the foreseeable future.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
years ended January 29, 1994, January 30, 1993 and February 1, 1992 are included
as a part of this Report (See Item 14):
Consolidated Statements of Operations for the fiscal years ended January
29, 1994, January 30, 1993 and February 1, 1992.
Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
January 29, 1994, January 30, 1993 and February 1, 1992.
Consolidated Statements of Cash Flows for the fiscal years ended January
29, 1994, January 30, 1993 and February 1, 1992.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of January 29, 1994:
NAME AGE POSITION AND OFFICES
- ----------------------------------- ----------- ----------------------------------------------------------------------
Sally Frame Kasaks................. 49 Chairman, Chief Executive Officer and Director of the Company and Ann
Taylor
Paul E. Francis.................... 39 Executive Vice President--Finance and Administration and Director of
the Company and Ann Taylor
Bert A. Tieben (1)................. 42 Senior Vice President--Finance and Treasurer of the Company and Ann
Taylor
Joseph R. Gromek................... 47 Senior Vice President--General Merchandise Manager of the Company and
Ann Taylor
Andrea M. Weiss.................... 38 Senior Vice President, Director of Stores of the Company and Ann
Taylor
Jocelyn F.L. Barandiaran........... 33 Vice President, General Counsel and Corporate Secretary of the Company
and Ann Taylor
Gerald S. Armstrong................ 50 Director of the Company and Ann Taylor
James J. Burke, Jr................. 42 Director of the Company and Ann Taylor
Robert C. Grayson.................. 49 Director of the Company and Ann Taylor
Rochelle B. Lazarus................ 46 Director of the Company and Ann Taylor
Hanne M. Merriman.................. 52 Director of the Company and Ann Taylor
- ---------------
(1) Mr. Tieben resigned from this position effective February 4, 1994.
Each member of the Board of Directors of the Company and Ann Taylor holds
office for a three-year term and until his or her successor is elected and
qualified. Mr. Grayson and Ms. Lazarus serve as members of the audit committee
and Mr. Burke, Mr. Armstrong, Ms. Lazarus and Ms. Merriman serve as members of
the compensation committee. Directors who are employees of the Company or
Merrill Lynch Capital Partners, Inc. (the "ML Capital Partners") do not receive
any compensation for serving on either Board of Directors. Directors who are not
affiliates of ML Capital Partners or employees of the Company receive $20,000 in
compensation plus $750 for each meeting attended. Messrs. Burke and Armstrong
are employees of ML Capital Partners, a wholly owned subsidiary of Merrill Lynch
& Co., Inc. ("ML&Co."), and serve on the Board of Directors of the Company and
Ann Taylor as representatives of two indirect wholly owned subsidiaries of
ML&Co. and certain limited partnerships controlled directly or indirectly by ML
Capital Partners or ML&Co. and certain affiliates of ML&Co. (the "ML Entities").
SALLY FRAME KASAKS. Ms. Kasaks has been Chairman, Chief Executive Officer
and a Director of the Company and Ann Taylor since February 1992. From February
1989 to January 1992, she was president and chief executive officer of
Abercrombie & Fitch, a specialty retailer and a division of The Limited, Inc., a
specialty retailer. From 1985 to 1988, she was president of Talbots, a specialty
women's apparel retailer. For the six years prior to 1985, Ms. Kasaks served in
various capacities at Ann Taylor, the last two of those years as president.
PAUL E. FRANCIS. Mr. Francis has been Executive Vice President--Finance and
Administration of the Company and Ann Taylor since April 1993, and has been a
Director of the Company and Ann Taylor since consummation of the Acquisition in
February 1989. He was a vice president of ML Capital Partners from July 1987 to
April 1993 and a managing director of the Investment Banking Division of ML&Co.
from January 1993 to April 1993. From January 1990 to January 1993, he was a
director of the Investment Banking Division of ML&Co.
BERT A. TIEBEN. Mr. Tieben was Senior Vice President--Finance of the
Company and Ann Taylor from April 1993 through February 4, 1994 and had been
Treasurer of the Company and Ann Taylor
19
since February 1989. Mr. Tieben was Executive Vice President and Chief Financial
Officer of Ann Taylor from April 1988 to April 1993, and of the Company from
February 1989 to April 1993.
JOSEPH R. GROMEK. Mr. Gromek has been Senior Vice President--General
Merchandise Manager of the Company and Ann Taylor since April 1993. From January
1991 to April 1993, Mr. Gromek was vice president--ready to wear at The Limited
stores, a specialty women's apparel retailer and a division of The Limited,
Inc., a specialty retailer. From September 1987 to December 1990, he was senior
vice president/general merchandise manager--men's and shoes for Saks Fifth
Avenue, a department store.
ANDREA M. WEISS. Ms. Weiss has been Senior Vice President, Director of
Stores of the Company and Ann Taylor since July 1992. From April 1990 to July
1992, she was director of retail operations for the Walt Disney World Resort, a
division of the Walt Disney Company. From November 1987 to April 1990, she was
senior vice president--operations for the Naragansett Clothing Company, a
specialty women's apparel retailer.
JOCELYN F.L. BARANDIARAN. Ms. Barandiaran has been Vice President, General
Counsel and Corporate Secretary of the Company and Ann Taylor since May 1992.
From June 1985 to April 1992, she was a corporate mergers and acquisitions
associate with the law firm of Skadden, Arps, Slate, Meagher & Flom.
GERALD S. ARMSTRONG. Mr. Armstrong has been a Director of the Company and
Ann Taylor since consummation of the Acquisition in February 1989. He joined ML
Capital Partners as an executive vice president in November 1988. He has been a
partner in ML Capital Partners since May 1993 and a managing director of the
Investment Banking Division of ML&Co. since November 1988. Mr. Armstrong is also
a director of First USA, Inc., London Fog Corporation, Simmons Company, Beatrice
Foods Inc., Blue Bird Corporation, World Color Press, Inc. and Wherehouse
Entertainment, Inc.
JAMES J. BURKE, JR. Mr. Burke has been a Director of the Company and Ann
Taylor since the Acquisition. He joined ML Capital Partners as president and
chief executive officer in January 1987. He has been managing partner of ML
Capital Partners since May 1993, a first vice president of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since July 1988, and a
managing director of the Investment Banking Division of ML&Co. since April 1985.
Mr. Burke is also a director of Amstar Corporation, Borg-Warner Security
Corporation, London Fog Corporation, Supermarkets General Holdings Corporation,
Pathmark Stores, Inc., United Artists Theater Circuit, Inc., Wherehouse
Entertainment, Inc. and World Color Press, Inc.
ROBERT C. GRAYSON. Mr. Grayson has been a Director of the Company and Ann
Taylor since April 1992. Mr. Grayson has been president of Robert C. Grayson &
Associates, Inc., a retail marketing consulting firm, since February 1992. From
June 1985 to February 1992, Mr. Grayson was the president and chief executive
officer of Lerner New York, a specialty women's apparel retailer and a division
of The Limited, Inc., a specialty retailer.
ROCHELLE B. LAZARUS. Ms. Lazarus has been a Director of the Company and Ann
Taylor since April 1992. She has been President of Ogilvy & Mather New York
since June 1991. She was employed by Ogilvy & Mather Direct from 1987 to 1991,
serving as President for the last two of those years.
HANNE M. MERRIMAN. Ms. Merriman has been a Director of the Company and Ann
Taylor since December 1993. She has been the Principal in Hanne Merriman
Associates, retail business consultants, since January 1992, and from February
1990 to December 1990. From January 1991 to June 1992, Ms. Merriman was
president and chief operating officer of Nan Duskin, Inc., a specialty women's
apparel retailer, and from December 1988 to January 1990 was president and chief
executive officer of Honeybee, Inc. a women's apparel retail catalog business
and a division of Spiegel, Inc. Previously, Ms. Merriman served in various
capacities at Garfinckel's, a department store chain and a division of Allied
Stores Corporation, including as president of Garfinckel's from June 1981 to
August 1987. Ms. Merriman was a member of the board of directors of the Federal
Reserve Bank of Richmond, Virginia from 1984 to 1990, and served as its chairman
from December 1989 to December 1990. Ms. Merriman is also a director of USAir
Group, Inc., CIPSCO, Inc., Central Illinois Public Service Company, State Farm
Mutual Automobile Insurance Company and The Rouse Company. She is a member of
the National Women's Forum and a trustee of the American-Scandinavian
Foundation.
20
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information regarding
the annual and long-term compensation awarded or paid for each of the last three
fiscal years to these persons who were, at January 29, 1994, the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company and Ann Taylor and to one former executive officer who separated from
the Company during fiscal year 1993 (collectively, the "named executives").
Neither Ms. Kasaks nor Ms. Weiss was employed by the Company in fiscal year
1991, and neither Mr. Francis nor Mr. Gromek was employed by the Company in
fiscal years 1991 or 1992; accordingly, no information is set forth in the table
with respect to these officers for those years.
TABLE I
SUMMARY OF COMPENSATION TO CERTAIN EXECUTIVE OFFICERS
LONG TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------------------------
-------------------------------------- AWARDS OF AWARDS OF
NAME AND BONUS($) OTHER ANNUAL RESTRICTED STOCK ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY($) (A) COMPENSATION($) STOCK($) OPTIONS COMPENSATION($) (B)
- -------------------------- ----------- --------- ----------- -------------- ----------- ----------- -------------------
Sally Frame Kasaks,....... 1993 $ 650,000 $ 243,750 -- -- 30,000 $ 7,755
Chairman & Chief Executive 1992 $ 600,000 $ 150,000 -- $ 1,327,500(c) 200,000 $ 3,077
Officer 1991 -- -- -- -- -- --
Paul E. Francis,.......... 1993 $ 262,292 $ 80,167 -- -- 70,000 --
Executive Vice 1992 -- -- -- -- -- --
President--Finance & 1991 -- -- -- -- -- --
Administration
Joseph J. Gromek,......... 1993 $ 282,468 $ 64,750 $ 1,826(d) -- 30,000 $ 1,188
Senior Vice President, 1992 -- -- -- -- -- --
General Merchandise 1991 -- -- -- -- -- --
Manager
Andrea M. Weiss,.......... 1993 $ 234,600 $ 50,625 -- -- 15,000 $ 1,318
Senior Vice President, 1992 $ 120,569 $ 35,000 $ 15,576(e) -- 25,000 $ 180
Director of Stores 1991 -- -- -- -- -- --
Bert A. Tieben,........... 1993 $ 279,000 $ 52,313 $ 873,000(g) -- 10,000 $ 4,293
Senior Vice 1992 $ 279,000 -- -- -- 15,000 $ 2,486
President--Finance (f) 1991 $ 274,000 -- -- -- -- $ 2,408
Joseph J. Schumm,......... 1993 $ 309,000 $ 61,800 $ 39,375(g) -- 15,000 $ 966
President (h) 1992 $ 309,000 $ 75,000 -- -- 25,000 $ 3,499
1991 $ 209,000 -- -- -- 1,470 $ 2,599
- ---------------
(a) Bonus awards indicated for 1993 were paid pursuant to the Company's
Management Performance Compensation Plan. Bonus amounts indicated for 1992
were guaranteed bonus amounts paid to Ms. Kasaks pursuant to her Employment
Agreement (see "Employment Agreements" below); to Ms. Weiss in accordance
with the terms of her compensation arrangement upon hire by the Company, and
to Mr. Schumm at the discretion of the Board of Directors.
(b) Represents the amount of contributions made by the Company to its 401(k)
Savings Plan (for Ms. Kasaks, $4,350 in 1993; for Ms. Weiss, $875 in 1993;
for Mr. Schumm, $966 in 1993, $1,817 in 1992 and $1,490 in 1991; and for Mr.
Tieben, $3,538 in 1993, $1,732 in 1992 and $1,667 in 1991) and the cost of
group term life insurance paid by the Company on behalf of qualifying
executive officers during the years shown.
(c) Pursuant to the terms of her Employment Agreement, Ms. Kasaks was awarded
60,000 shares of restricted stock, of which 15,000 vested upon hiring,
15,000 shares vested at the end of each of fiscal years 1992 and 1993, and
15,000 shares vest at the end of fiscal year 1994, provided that Ms. Kasaks
continues in the employ of the Company, and provided further that if the
Company is sold, all restricted shares will become vested. For purposes of
the above table, the 60,000 restricted shares have been valued at $22.125
per share, which was the closing market price of the Company's Common Stock
on the New York Stock Exchange on the effective date of the grant. Ms.
Kasaks would be entitled to receive dividends on these shares
proportionately with the other holders of the Company's Common Stock, if
dividends are paid. Ms. Kasaks has received no other awards of restricted
stock from the Company.
(d) Represents reimbursement of moving expenses.
(e) Represents $11,627 for living expenses and $3,949 reimbursement for the
payment of taxes.
(f) Mr. Tieben resigned from this position effective February 4, 1994 and is
presently serving as a consultant to the Company (see "Employment
Agreements" below).
(g) Represents compensation deemed to have been received upon the exercise of
in-the-money stock options in 1993.
(h) Mr. Schumm resigned from this position effective April 6, 1993 and is
presently serving as a consultant to the Company (see "Employment
Agreements" below). Mr. Schumm served as President and Chief Operating
Officer of the Company and Ann Taylor from February 1992 to April 1993.
During fiscal year 1991, Mr. Schumm served as Executive Vice
President-Administration, General Counsel and Secretary of the Company and
Ann Taylor.
21
The following table sets forth certain information with respect to stock
options awarded during fiscal year 1993 to the executive officers named in Table
I above. These grants are also reflected in Table I. In accordance with
Securities and Exchange Commission (the "Commission") rules, the hypothetical
realizable values for each option grant are shown based on compound annual rates
of stock price appreciation of 5% and 10% from the grant date to the expiration
date. The assumed rates of appreciation are prescribed by the Commission and are
for illustration purposes only; they are not intended to predict future stock
prices, which will depend upon market conditions and the Company's future
performance and prospects.
TABLE II
STOCK OPTIONS GRANTED IN FISCAL YEAR 1993
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
% OF TOTAL # OF STOCK PRICE
OF OPTIONS APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM (B)
OPTIONS (A) EMPLOYEES IN PRICE EXPIRATION ------------------------
GRANTED FISCAL 1993 ($/SHARE) DATE 5% ($) 10% ($)
----------- ------------- --------- ---------- ----------- -----------
Sally Frame Kasaks............. 30,000 10.75% $ 20.00 2/26/03 $ 377,400 $ 956,100
Paul E. Francis................ 30,000 10.75% $ 18.125 4/06/03 $ 341,850 $ 866,550
40,000 14.34% $ 26.00 4/06/03 $ 140,800 $ 840,400
Joseph R. Gromek............... 30,000 10.75% $ 18.125 4/06/03 $ 341,850 $ 866,550
Andrea M. Weiss................ 15,000 5.38% $ 20.00 2/26/03 $ 188,700 $ 478,050
Bert A. Tieben................. 10,000 3.58% $ 20.00 2/26/03(c) $ 125,800 $ 318,700
Joseph J. Schumm............... 15,000 5.38% $ 20.00 2/26/03(c) $ 188,700 $ 478,050
- ---------------
(a) Options vest and are exercisable 20% upon grant and 20% on each anniversary
of the grant, provided that the executive continues in the employ of the
Company, and provided further that in the event of the occurrence of certain
change in control "Acceleration Events" (as defined under the Company's 1992
Stock Option Plan), all such options will become vested. Pursuant to the
respective agreement entered into in connection with the resignation of each
of Mr. Tieben and Mr. Schumm from the Company, Mr. Tieben's options became
100% vested on February 4, 1994 and Mr. Schumm's options became 100% vested
on April 6, 1993. See "Employment Agreements" below.
(b) These columns show the hypothetical realizable value of the options granted
for the ten-year term of the options, assuming that the market price of the
Common Stock subject to the options appreciates in value at the annual rate
indicated in the table, from the date of grant to the end of the option
term.
(c) Expiration date shown is the original expiration date of these options. As a
result of Mr. Tieben's and Mr. Schumm's resignations from the Company on
February 4, 1994 and April 6, 1993, respectively, the options shown for Mr.
Tieben will expire on May 4, 1994 and the options shown for Mr. Schumm
expired on July 6, 1993.
In February 1994, the Compensation Committee of the Board of Directors made
additional stock option grants to certain executives of the Company, including
certain executive officers named in Table I. The total number of options granted
to executives on such date was 677,500. These option grants were made subject to
stockholder approval of an increase in the maximum number of shares available
for grant under the Company's 1992 Stock Option Plan.
Two-thirds of the options granted to each executive are
"performance-vesting" options, and one-third of the options granted to each
executive are "time-vesting" options. The performance-vesting options become
fully exercisable upon the earliest to occur of: (i) the ninth anniversary of
the date of grant, (ii) the date on which the trading price of the Common Stock
is at least $50.75 (representing a doubling of the stock price on the date of
the grant) for the immediately preceding ten consecutive trading days, provided
that this occurs before the fifth anniversary of the grant, and (iii) the date
on which the Company's aggregate consolidated net income before extraordinary
items for four consecutive quarters after fiscal 1993 equals at least $2.13 per
share (representing a tripling of fiscal year 1993
22
net income before extraordinary items), provided that this occurs before the
fifth anniversary of the grant. If the Company achieves 80% of either of the
performance measures described in (ii) or (iii) above by the fifth anniversary
of the grant, then a portion of the options becomes exercisable, equal to 25% of
the grant plus 3 3/4% for every percentage point by which performance exceeds
80% of the measure. The time-vesting options become exercisable 25% per year on
each of the first through fourth anniversaries of the date of grant.
The following table shows the number and value of stock options exercised
by each of the executive officers named in Table I during fiscal year 1993, the
number of all vested (exercisable) and unvested (not yet exercisable) stock
options held by each such officer at the end of fiscal year 1993, and the value
of all such options that were "in the money" (i.e., the market price of the
Common Stock was greater than the exercise price of the options) at the end of
fiscal year 1993.
TABLE III
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1993 AND FISCAL YEAR END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
# OF OPTIONS OPTIONS
SHARES $ AT END OF FISCAL AT END OF FISCAL
ACQUIRED VALUE 1993 EXERCISABLE/ 1993 EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(A)
----------- ----------- ------------------ -----------------------
Sally Frame Kasaks................. -- -- 156,000/74,000 $ 11,250/$45,000
Paul E. Francis.................... -- -- 14,000/56,000 $ 22,500/$90,000
Joseph R. Gromek................... -- -- 6,000/24,000 $ 22,500/$90,000
Andrea M. Weiss.................... -- -- 13,000/27,000 $ 5,625/$22,500
Bert A. Tieben..................... 40,000 $ 873,000 19,469/17,000 $ 176,645/$15,000
Joseph J. Schumm................... 15,000 $ 39,375 70,586/ -- $1,041,939/ --
- ---------------
(a) Calculated based on the closing market price of the Common Stock of $21.875
on January 28, 1994, the last trading day in fiscal year 1993, less the
amount required to be paid upon exercise of the option.
1989 PENSION PLAN. Ann Taylor adopted, as of July 1, 1989, a defined
benefit retirement plan for the benefit of the employees of Ann Taylor (the
"Pension Plan"). The Pension Plan is a "cash balance pension plan" intended to
qualify under Section 401(a) of the Code. An account balance is established for
each participant which is credited with a benefit equal to 3% of compensation
during each of the participant's first ten years of service, 4% of compensation
during each of the participant's next five years of service and 5% of
compensation during each of the participant's years of service in excess of
fifteen. The Code limits the compensation that may be taken into account under
the Pension Plan for any participant. Participants' accounts are credited with
interest quarterly at a rate equal to the average one-year Treasury bill rate.
Retirement benefits are determined by dividing the amount of a participant's
account by a specified actuarial factor, subject, however, to the limitation
imposed by the Code. Participants are fully vested in their accounts after
completion of five years of service. Participants receive credit for service
with Ann Taylor prior to July 11, 1989 (including service with Allied Stores
Corporation prior to the closing date of the Acquisition of Ann Taylor by the
Company) for purposes of vesting and determining the percentage of compensation
that will be credited to their accounts.
As of January 29, 1994, the credited years of service under the Pension
Plan for Ms. Kasaks was .75 years, Ms. Weiss was .25 years, Mr. Tieben was 4.5
years and Mr. Schumm (as of the date of his resignation) was 3.0 years. Neither
Mr. Francis nor Mr. Gromek were plan participants during fiscal year 1993. The
estimated monthly retirement benefit, payable as a single life annuity, that
would be payable to each of the executives named in Table I above who were
participants in the plan during fiscal year 1993, assuming retirement as of
December 31, 1993, the commencement of payments at age 65 and annual interest at
the rate of 7.0%, is as follows: Ms. Kasaks, $70; Ms. Weiss, $52; and Mr.
Tieben,
23
$1,565. These benefits would not be subject to any deduction for social security
benefits or other offset amounts. As Mr. Schumm was not vested as of his
separation date, he is not entitled to retirement benefits under the Pension
Plan.
EMPLOYMENT AGREEMENTS. Effective February 3, 1992, the Company and Ms.
Sally Frame Kasaks entered into an employment agreement (the "Employment
Agreement"), providing for Ms. Kasaks' employment as the Chairman of the Board
and Chief Executive Officer of the Company for a term of three years. Under the
terms of the Employment Agreement, Ms. Kasaks receives an annual base salary of
$600,000 as well as certain other benefits. The Employment Agreement provides
for an annual bonus of up to 50% of her annual salary based upon performance
awards to be established annually, with a minimum bonus of $150,000 in 1992 and
$75,000 in 1993. Pursuant to the Employment Agreement, on February 3, 1992, the
Company issued to Ms. Kasaks 60,000 shares of restricted common stock, of which
15,000 shares vested upon grant, 15,000 shares vested at the end of each of
fiscal 1992 and 1993, and 15,000 shares vest at the end of fiscal 1994. The
Employment Agreement also provides for the issuance to Ms. Kasaks of options to
purchase 100,000 shares of Common Stock at an exercise price per share of
$22.125 (the fair market value as of the effective date of the Employment
Agreement) and options to purchase 100,000 shares of Common Stock at an exercise
price per share of $26. One-quarter of each set of options vested at issuance,
an additional 25% vested at the end of each of fiscal 1992 and 1993, and an
additional 25% vest at the end of fiscal 1994.
The Employment Agreement provides that if the Company is sold, Ms. Kasaks
will be entitled to severance benefits of a lump sum payment equal to 24 months
salary. In addition, if the Company is sold, all of the shares of restricted
Common Stock and options to purchase Common Stock granted under the Employment
Agreement will become vested. If Ms. Kasaks is terminated without cause, she
will be entitled to severance benefits of a lump sum payment equal to the lesser
of 24 months salary or the salary payable for the remaining term of the
Employment Agreement.
In connection with Mr. Joseph J. Schumm's resignation on April 6, 1993, the
Company, Ann Taylor and Mr. Schumm entered into a Consulting and Severance
Agreement, pursuant to which Mr. Schumm is serving as a consultant to the
Company and Ann Taylor for one year. Pursuant to the agreement, Mr. Schumm
received one year of severance compensation, at his base salary in effect at the
time of resignation, plus the amount he would have been entitled to under the
Company's Management Performance Compensation Plan for the spring 1993 season as
if he had continued as an executive officer of the Company. In addition, all
stock options held by Mr. Schumm under the Company's 1989 and 1992 Stock Option
Plans became fully vested, and the expiration of all options held by him under
the Company's 1989 Stock Option Plan was extended to the tenth anniversary of
the respective date of grant of those options, in accordance with the original
term of those options.
In connection with Mr. Bert A. Tieben's resignation on February 4, 1994,
the Company and Mr. Tieben entered into a Consulting and Severance Agreement,
pursuant to which Mr. Tieben is serving as a consultant to the Company and Ann
Taylor for up to one year. Pursuant to the agreement, Mr. Tieben will receive up
to one year of severance compensation, at his base salary in effect at the time
of resignation, plus the amount he would have been entitled to under the
Company's Management Performance Compensation Plan for the fall 1993 season as
if he had continued as an executive officer of the Company. In addition, all
stock options held by Mr. Tieben under the Company's 1989 and 1992 Stock Option
Plans became fully vested on February 4, 1994.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of March 15, 1994, the ML Entities and certain affiliates held
approximately 52.3% of the outstanding Common Stock and as a result, have the
voting power to determine the composition of the Boards of Directors of Ann
Taylor and the Company and otherwise control the business and affairs of the
Company. Messrs. Armstrong and Burke, who are members of the Board of Directors
of the Company and Ann Taylor, are employees of ML Capital Partners and serve as
representatives of the ML Entities and such affiliates. Mr. Francis, who became
an executive officer of the Company and Ann
24
Taylor in April 1993 and who is a Director of the Company and Ann Taylor, was an
employee of ML Capital Partners and served as a representative of the ML
Entities and affiliates until April 1993. Messrs. Armstrong and Burke are also
members of the Compensation Committee of the Board of Directors of the Company
and Ann Taylor. The Company intends to file a registration statement on or about
March 31, 1994 relating to the proposed sale in a public offering, by the
Company of 1,000,000 shares Common Stock, and by certain ML Entities and their
affiliates of up to 4,000,000 shares of Common Stock. If the proposed public
offering is consummated, the ML Entities and their affiliates would continue to
control approximately 32.6% of the Common Stock (approximately 29.3% of the
over-allotment option granted to the underwriters of such offering is exercised
in full) and will continue to be in a position to influence the management of
the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
As of March 15, 1994, the Common Stock was held of record by 440
stockholders. The following table sets forth certain information concerning the
beneficial ownership of Common Stock by each stockholder who is known by the
Company to own beneficially in excess of 5% of the outstanding Common Stock, by
each director, by the executive officers named in Table I above, and by all
executive officers and directors as a group, as of March 15, 1994. Except as
otherwise indicated, all persons listed below have (i) sole voting power and
investment power with respect to their shares of Common Stock (including shares
issuable upon the exercise of Warrants), except to the extent that authority is
shared by spouses under applicable law, and (ii) record and beneficial ownership
with respect to their shares of Common Stock.
NUMBER OF PERCENT OF
SHARES OF COMMON
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK
- --------------------------------------------------------------------------- -------------- -----------
Merrill Lynch Capital Partners (a)(b)...................................... 8,933,013 40.7%
ML IBK Positions, Inc. (a)(c).............................................. 1,583,867 7.2%
Merchant Banking L.P. No. III (a)(c)....................................... 631,480 2.9%
KECALP Inc. (a)(d)......................................................... 324,941 1.5%
Neuberger & Berman (e)..................................................... 1,287,352 5.9%
James J. Burke, Jr. (f).................................................... 35,000 *
Gerald S. Armstrong (f)(g)................................................. 3,000 *
Rochelle B. Lazarus (h).................................................... 300 *
Robert C. Grayson.......................................................... 15,000 *
Hanne M. Merriman.......................................................... 200 *
Sally Frame Kasaks (i)..................................................... 222,000 1.0%
Paul E. Francis (f)(i)..................................................... 36,405 *
Joseph R. Gromek........................................................... 12,000 *
Andrea M. Weiss (i)........................................................ 16,129 *
Joseph J. Schumm (i)(j).................................................... 73,644 *
Bert A. Tieben (i)(j)...................................................... -- *
All executive officers and directors as a group (12 persons) (h)........... 425,678 1.9%
- ---------------
* Less than 1%
(a) Each of the ML Entities is an affiliate of Merrill Lynch. The ML Entities beneficially own an aggregate of
11,473,301 shares of Common Stock or approximately 52.3% of the outstanding Common Stock. The ML Entities
shown are deemed to have shared voting and investment power with other ML&Co. affiliates with respect to the
shares of Common Stock shown to be beneficially owned by them.
(Footnotes continued on following page)
25
(Footnotes continued from preceding page)
(b) Shares of Common Stock beneficially owned by ML Capital Partners are owned of record as follows: 5,598,309 by
Merrill Lynch Capital Appreciation Partnership No. B-II, L.P., 3,279,220 by ML Offshore LBO Partnership No.
B-II, and 55,484 by MLCP Associates L.P. No. I. ML Capital Partners is the indirect managing general partner
of Merrill Lynch Capital Appreciation Partnership No. B-II, L.P., is the indirect investment general partner
of ML Offshore LBO Partnership No. B-II, and is the general partner of MLCP Associates L.P. No. I. The
address for ML Capital Partners and each of the aforementioned recordholders is 767 Fifth Avenue, New York,
New York 10153.
(c) The address for each of ML IBK Positions, Inc., and Merchant Banking L.P. No. III is 250 Vesey Street,World
Financial Center, North Tower, New York, New York 10281.
(d) Shares of Common Stock beneficially owned by KECALP Inc. are owned of record as follows: 310,235 by Merrill
Lynch KECALP L.P. 1989, and 14,706 by Merrill Lynch KECALP L.P. 1987. KECALP Inc. is the general partner of
each of these two entities. The address for KECALP Inc. and each of the aforementioned recordholders is 250
Vesey Street, World Financial Center, North Tower, New York, New York 10281.
(e) Pursuant to a Schedule 13-G dated January 31, 1994 and filed with the Commission by Neuberger & Berman,
Neuberger & Berman has sole voting power with respect to 601,880 shares, shared voting power with respect to
525,000 shares, and shared dispositive power with respect to 1,287,352 shares. Partners of Neuberger & Berman
own 1,500 shares in their personal accounts and Neuberger & Berman disclaims beneficial ownership of those
shares. The address for Neuberger & Berman is 605 Third Avenue, New York, New York 10158.
(f) James J. Burke, Jr., Gerald S. Armstrong and Paul E. Francis are directors of the Company and Ann Taylor.
Messrs. Burke and Armstrong are officers, and until April 1993 Mr. Francis was an officer, of ML Capital
Partners and ML&Co. Messrs. Burke, Armstrong and Francis each disclaims beneficial ownership of shares
beneficially owned by the ML Entities.
(g) Shares are held by Mr. Armstrong's wife, as custodian for their children. Mr. Armstrong disclaims beneficial
ownership of these shares.
(h) Shares are held in a pension fund of which Ms. Lazarus' husband is the sole beneficiary. Ms. Lazarus has no
voting or investment power with respect to these shares.
(i) The shares listed include shares subject to options exercisable within 60 days as follows: Ms. Kasaks,
162,000 shares; Mr. Francis, 28,000 shares; Mr. Gromek, 12,000 shares; Ms. Weiss, 16,000 shares; and Mr.
Schumm, 70,586 shares; and all executive officers and directors as a group (12 persons), 303,644 shares.
(j) Mr. Schumm and Mr. Tieben resigned from their positions with the Company effective April 6, 1993 and February
4, 1994, respectively.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
TRANSACTIONS WITH ML ENTITIES
The Company paid an underwriting commission to Merrill Lynch in connection
with the IPO in fiscal 1991 and in connection with the Company's issuance and
sale of the 8 3/4% Notes in 1993. The Company also paid commissions to Merrill
Lynch in 1991 and 1993 in connection with the repurchase of indebtedness of Ann
Taylor. The Company agreed to indemnify Merrill Lynch, as underwriter, against
certain liabilities, including certain liabilities under the federal securities
laws, in connection with the IPO and the note issuance.
In January 1993, in connection with the settlement, for $4.8 million, of
the class action lawsuit known as In Re AnnTaylor Stores Securities Litigation
(No. 91 Civ. 7145 (CBM)), and consistent with the Company's indemnification
obligations referred to above, the Company, Merrill Lynch and ML&Co., among
others, entered into an agreement pursuant to which, after contribution to the
settlement by ML&Co. and the application of insurance proceeds, the Company paid
to or for the benefit of the plaintiffs $2.8 million of the above referenced
settlement amount on behalf of itself and certain other defendants, including
Merrill Lynch. The settlement was approved by the Court on May
26
25, 1993. The Company also reimbursed Merrill Lynch $128,281 for certain costs
incurred by it in connection with the class action in fiscal 1992, pursuant to
the Company's indemnification obligations.
TRANSACTION WITH DIRECTOR
Robert C. Grayson & Associates, Inc. ("RCG Associates"), a company
wholly-owned by Mr. Grayson, has been engaged as a consultant to Ann Taylor with
respect to certain real estate and other matters since August 1992. The term of
the engagement runs through July 1994 and requires payment by Ann Taylor to RCG
Associates of $8,000 per month through January 1994, and $4,000 per month for
the period February 1994 to July 1994. For fiscal 1993, RCG Associates received
aggregate fees of $96,000 pursuant to this engagement.
TAX SHARING AGREEMENT
Pursuant to a tax sharing agreement, the Company and Ann Taylor have agreed
to elect to file consolidated income tax returns for federal income tax purposes
and may elect to file such returns in states and other relevant jurisdictions
that permit such an election for income tax purposes. With respect to such
consolidated income tax returns, the tax sharing agreement generally requires
Ann Taylor to pay to the Company the entire tax shown to be due on such
consolidated returns, provided that the amount paid by Ann Taylor may not exceed
the amount of taxes that would have been owed by Ann Taylor on a stand-alone
basis.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report:
The following consolidated financial statements of the Company and the
independent auditors' report are included on pages 33 through 49 and are
filed as part of this Annual Report:
Consolidated Statements of Operations for the fiscal years ended January
29, 1994, January 30, 1993 and February 1, 1992; Consolidated Balance
Sheets as of January 29, 1994 and January 30, 1993; Consolidated
Statements of Stockholders' Equity for the fiscal years ended January
29, 1994, January 30, 1993 and February 1, 1992; Consolidated Statements
of Cash Flows for the fiscal years ended January 29, 1994, January 30,
1993 and February 1, 1992; Notes to Consolidated Financial Statements;
Independent Auditors' Report.
(b) Reports on Form 8-K
None.
(c)
Exhibits
The exhibits listed in the following exhibit index are filed as a part of
this Annual Report.
EXHIBIT NUMBER
- ---------------
3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit No.
3.1 to Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 of AnnTaylor,
Inc. filed on May 29, 1991 (Registration No. 33-28522).
3.1.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit No.
4.1 to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange
Commission (the "Commission") on August 10, 1992 (Registration No. 33-50688).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit No. 3.2 to the Quarterly Report on
Form 10-Q of the Company filed on December 17, 1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee,
including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993.
4.2 Irrevocable Trust Agreement dated as of July 29, 1993, between Ann Taylor and State Street Bank
and Trust Company, as trustee under Indenture dated as of July 15, 1989, with respect to the
Discount Notes. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Ann Taylor
on Form 10-Q for the Quarter Ended July 31, 1993 filed on September 2, 1993.
4.3 Irrevocable Trust Agreement dated as of July 29, 1993 between Ann Taylor and United States Trust
Company of New York, as trustee under Indenture dated as of July 15, 1989 with respect to the
Notes. Incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of Ann
Taylor for the Quarter Ended July 31, 1993 filed on September 2, 1993.
10.1 Form of U.S. Purchase Agreement among Merrill Lynch, Robertson, Stephens & Company, the other
U.S. Underwriters, the Selling Warrantholders and the Company, including the form of Price
Determination Agreement. Incorporated by reference to Exhibit No. 1.1 to the Registration
Statement of the Company filed on April 11, 1991 (Registration No. 33-39905).
28
EXHIBIT NUMBER
- ---------------
10.2 Form of International Purchase Agreement among Merrill Lynch International Limited, Robertson,
Stephens & Company, the other International Underwriters and the Company, including the form of
Price Determination Agreement. Incorporated by reference to Exhibit No. 1.2 to the Registration
Statement of the Company filed on April 11, 1991 (Registration No. 33-39905).
10.3 Form of Indenture entered into between Ann Taylor and United States Trust Company of New York, as
Trustee, including the form of Subordinated Note due 1999. Incorporated by reference to Exhibit
No. 4.1 to Amendment No. 1 to the Registration Statement of the Company and AnnTaylor filed on
June 21, 1989 (Registration No. 33-28522).
10.4 Form of Indenture entered into between Ann Taylor and State Street Bank and Trust Company of
Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National
Association, as Trustee, including the form of Senior Subordinated Discount Note due 1999.
Incorporated by reference to Exhibit No. 4.2 to Amendment No. 1 to the Registration Statement
of the Company and Ann Taylor filed on June 21, 1989 (Registration No. 33-28522).
10.5 Form of Warrant Agreement entered into between Ann Taylor and The Connecticut Bank and Trust
Company, National Association, including the form of Warrant. Incorporated by reference to
Exhibit No. 4.3 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor
filed on June 21, 1989 (Registration No. 33-28522).
10.6 Credit Agreement, dated as of June 28, 1993, between Ann Taylor, Bank of America National Trust
and Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party
thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Ann Taylor filed on July 7, 1993.
10.6.1 Amendment No. 1 to Credit Agreement, dated as of August 10, 1993, between Ann Taylor, Bank of
America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the
financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference
to Exhibit 10.9 to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended
October 30, 1993 filed on November 26, 1993.
10.6.2 Amendment No. 2 to Credit Agreement dated as of October 6, 1993, between Ann Taylor, Bank of
America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the
financial institutions party thereto, and Bank of America, as Agent. Incorporated by reference
to Exhibit 10.10 to the Quarterly Report on Form 10-Q of AnnTaylor, Inc. for the Quarter ended
October 30, 1993 filed on November 26, 1993.
10.6.3 Amendment No. 3 to Credit Agreement dated as of December 23, 1993, between Ann Taylor, Bank of
America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the
financial institutions party thereto, and Bank of America, as Agent.
10.6.4 Amendment No. 4 to Credit Agreement dated as of January 24, 1994, between Ann Taylor, Bank of
America National Trust and Savings Association ("Bank of America"), Bank of Montreal, the
financial institutions party thereto, and Bank of America, as Agent.
10.7 Guaranty, dated as of June 28, 1993, made by the Company in favor of Bank of America, as Agent.
Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed
on July 7, 1993.
10.8 Security and Pledge Agreement, dated as of June 28, 1993, made by the Company in favor of Bank of
America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K
of Ann Taylor filed on July 7, 1993.
10.9 License Agreement, dated as of April 30, 1984, between Ann Taylor and Joan & David. Incorporated
by reference to Exhibit No. 10.14 to the Registration Statement of the Company and Ann Taylor
filed on May 3, 1989 (Registration No. 33-28522).
29
EXHIBIT NUMBER
- ---------------
10.10 Agreement, dated March 22, 1990, between Ann Taylor and Chapel Street Shoes, Inc. Incorporated by
reference to Exhibit 10.12 to the Annual Report on Form 10-K of the Company filed on April 30,
1990.
10.11 Form of Investor Stock Subscription Agreement, dated February 8, 1989, between the Company and
each of the ML Entities. Incorporated by reference to Exhibit No. 10.15 to the Registration
Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.12 1989 Stock Option Plan. Incorporated by reference to Exhibit No. 10.18 to the Registration
Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.12.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual
Report on Form 10-K of the Company filed on April 30, 1993.
10.13 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West
57th Street headquarters. Incorporated by reference to Exhibit No. 10.21 to the Registration
Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.13.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit No. 10.17.1 to the Registration Statement of the
Company filed on April 11, 1991 (Registration No. 33-39905).
10.13.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann
Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the
Company filed on April 29, 1993.
10.13.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann
Taylor Incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q of Ann
Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993.
10.14 Lease, dated December 1, 1985, between Hamilton Realty Co. and Ann Taylor concerning the New
Haven distribution center. Incorporated by reference to Exhibit No. 10.22 to the Registration
Statement of the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.14.1 Agreement, dated March 22, 1993, between Hamilton Realty Co. and Ann Taylor amending the New
Haven distribution center lease. Incorporated by reference to Exhibit No. 10.14.1 to the Annual
Report on Form 10-K of Ann Taylor filed on April 30, 1993.
10.15 Lease, dated October 1, 1988, between Dixson Associates and Ann Taylor concerning Ann Taylor's 3
East 57th Street offices and store, as amended. Incorporated by reference to Exhibit No. 10.23
to the Registration Statement of the Company and Ann Taylor dated May 3, 1989 (Registration No.
33-28522).
10.15.1 Agreement, dated April 12, 1993, between Dixson Associates and Ann Taylor amending the 3 East
57th Street lease. Incorporated by reference to Exhibit No. 10.15.1 to the Annual Report on
Form 10-K of Ann Taylor filed on April 30, 1993.
10.16 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor.
Incorporated by reference to Exhibit No. 10.24 to Amendment No. 2 to the Registration Statement
of the Company and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522).
10.17 Employment Agreement, effective as of February 3, 1992, between the Company and Sally Frame
Kasaks. Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K of the
Company filed on April 28, 1992.
10.18 The AnnTaylor Stores Corporation 1992 Stock Option Plan. Incorporated by reference to Exhibit No.
4.3 to the Company's Registration Statement on Form S-8 filed with the Commission on August 10,
1992 (Registration No. 33-50688).
30
EXHIBIT NUMBER
- ---------------
10.19 Management Performance Compensation Plan. Incorporated by reference to Exhibit 10.30 to the
Quarterly Report on Form 10-Q filed on December 15, 1992.
10.20 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Quarterly Report
on Form 10-Q filed on December 15, 1992.
10.21 Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated
Action. Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
filed on April 30, 1993.
10.22 Agreement among Defendants to the Stipulation of Settlement dated February 16, 1993 providing for
the settlement of Consolidated Action. Incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K filed on April 30, 1993.
10.23 Opinion Re Settlement Plan of Allocation and Application for Attorney's Fees and Expenses dated
May 25, 1993, In Re AnnTaylor Stores Securities Litigation. Incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 1, 1993
filed on May 28, 1993.
10.24 Consulting and Severance Agreement dated April 6, 1993 between the Company and Joseph J. Schumm.
Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K filed on
April 30, 1993.
10.25 Interest Rate Swap Agreement dated as of July 22, 1993, between AnnTaylor, Inc. and Fleet Bank of
Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form
10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
10.26 Stock Purchase Agreement, dated as of July 13, 1993, between AnnTaylor, Inc. and Cleveland
Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q
of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
10.27 Agreement, dated July 13, 1993, among Cygne Designs, Inc., Cygne Designs F.E. Limited, CAT US,
Inc., C.A.T. Far East Limited and AnnTaylor, Inc. Incorporated by reference to Exhibit 10.8 on
Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
(Confidential treatment has been granted with respect to certain portions of this Exhibit.)
10.28 Receivables Financing Agreement dated January 27, 1994, among AnnTaylor Funding, Inc., Ann
Taylor, Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank
National Association.
10.29 Purchase and Sale Agreement dated as of January 27, 1994 between AnnTaylor, Inc. and AnnTaylor
Funding, Inc.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche.
31
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ANNTAYLOR STORES CORPORATION
By: /s/ PAUL E. FRANCIS
..................................
Paul E. Francis
Executive Vice President--
Finance and Administration--
Chief Financial Officer
By: /s/ WALTER J. PARKS
..................................
Walter J. Parks
Vice President Financial Reporting--
Principal Accounting Officer
Date: March 31, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ----------------------------------------------------- -------------------------------------- -------------------
/s/ SALLY FRAME KASAKS Chairman, Chief Executive Officer and March 31, 1994
..................................................... Director
Sally Frame Kasaks
/s/ PAUL E. FRANCIS Executive Vice President-- Finance and March 31, 1994
..................................................... Administration and Director
Paul E. Francis
/s/ JAMES J. BURKE, JR. Director March 31, 1994
.....................................................
James J. Burke, Jr.
/s/ GERALD S. ARMSTRONG Director March 31, 1994
.....................................................
Gerald S. Armstrong
/s/ ROCHELLE B. LAZARUS Director March 31, 1994
.....................................................
Rochelle B. Lazarus
/s/ ROBERT C. GRAYSON Director March 31, 1994
.....................................................
Robert C. Grayson
/s/ HANNE M. MERRIMAN Director March 31, 1994
.....................................................
Hanne M. Merriman
32
ANNTAYLOR STORES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Independent Auditors' Report........................................................................... 34
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years ended January 29, 1994, January 30, 1993
and February 1, 1992.............................................................................. 35
Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993............................. 36
Consolidated Statements of Stockholders' Equity for the fiscal years ended January 29, 1994, January
30, 1993 and February 1, 1992..................................................................... 37
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994, January 30, 1993
and February 1, 1992.............................................................................. 38
Notes to Consolidated Financial Statements.......................................................... 39
33
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
ANNTAYLOR STORES CORPORATION:
We have audited the accompanying consolidated financial statements of
AnnTaylor Stores Corporation and its subsidiary, listed in the accompanying
index. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its subsidiary
at January 29, 1994 and January 30, 1993, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
January 29, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
New Haven, Connecticut
March 25, 1994
34
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND
FEBRUARY 1, 1992
FISCAL YEARS ENDED
------------------------------------------------------
JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992
---------------- ------------------ ----------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales, including leased shoe departments............ $ 501,649 $ 468,381 $ 437,711
Cost of sales........................................... 271,749 264,301 234,136
---------------- ------------------ ----------------
Gross profit............................................ 229,900 204,080 203,575
Selling, general and administrative expenses............ 169,371 152,072 150,842
Distribution center restructuring charge................ 2,000 -- --
Amortization of goodwill................................ 9,508 9,504 9,506
---------------- ------------------ ----------------
Operating income........................................ 49,021 42,504 43,227
Interest expense........................................ 17,696 21,273 33,958
Stockholder litigation settlement....................... -- 3,905 --
Other (income) expense, net............................. (194) 259 542
---------------- ------------------ ----------------
Income before income taxes and extraordinary loss....... 31,519 17,067 8,727
Income tax provision.................................... 17,189 11,150 7,703
---------------- ------------------ ----------------
Income before extraordinary loss........................ 14,330 5,917 1,024
Extraordinary loss (net of income tax benefit of
$6,123,000 and $9,065,000, respectively)................ 11,121 -- 16,835
---------------- ------------------ ----------------
Net income (loss)............................. $ 3,209 $ 5,917 $ (15,811)
---------------- ------------------ ----------------
---------------- ------------------ ----------------
Net income (loss) per share of common stock:
Income per share before extraordinary loss.............. $ .66 $ .28 $ .05
Extraordinary loss per share............................ (.51) -- (.87)
---------------- ------------------ ----------------
Net income (loss) per share................... $ .15 $ .28 $ (.82)
---------------- ------------------ ----------------
---------------- ------------------ ----------------
Weighted average shares and share equivalents
outstanding............................................. 21,929 21,196 19,326
See accompanying notes to consolidated financial statements.
35
ANNTAYLOR STORES CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 1994 AND JANUARY 30, 1993
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(IN THOUSANDS)
ASSETS
Current assets
Cash................................................................................. $ 292 $ 226
Accounts receivable, net of allowances of $787,000 and $1,006,000, respectively...... 49,279 43,003
Merchandise inventories.............................................................. 60,890 50,307
Prepaid expenses and other current assets............................................ 7,184 5,904
Refundable income taxes.............................................................. -- 5,097
Deferred income taxes................................................................ 3,750 3,500
----------- -----------
Total current assets......................................................... 121,395 108,037
Property and equipment
Leasehold improvements............................................................... 30,539 25,070
Furniture and fixtures............................................................... 37,596 28,508
Improvements in progress............................................................. 8,621 624
----------- -----------
76,756 54,202
Less accumulated depreciation and amortization....................................... 28,703 22,394
----------- -----------
Net property and equipment................................................... 48,053 31,808
Deferred financing costs, net of accumulated amortization of $643,000 and $11,917,000,
respectively........................................................................... 4,990 3,969
Goodwill, net of accumulated amortization of $47,713,000 and $38,205,000,
respectively........................................................................... 332,537 342,045
Deferred income taxes.................................................................. 1,500 --
Investment in CAT...................................................................... 2,245 88
Other assets........................................................................... 2,679 1,645
----------- -----------
Total assets................................................................. $ 513,399 $ 487,592
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................................................... $ 37,564 $ 23,779
Accrued expenses..................................................................... 21,791 17,719
Current portion of long-term debt.................................................... 8,757 37,000
----------- -----------
Total current liabilities.................................................... 68,112 78,498
Long-term debt......................................................................... 180,243 158,474
Other liabilities...................................................................... 5,773 5,322
Commitments and contingencies
Stockholders' equity
Common stock, $.0068 par value; 40,000,000 shares authorized; 21,902,811 and
21,158,468 shares issued, respectively................................................. 149 144
Additional paid-in capital........................................................... 271,810 261,820
Warrants to acquire 446,249 and 511,922 shares of common stock, respectively......... 7,378 8,341
Accumulated deficit.................................................................. (16,756) (19,965)
Note due from stockholder............................................................ -- (999)
Deferred compensation on restricted stock............................................ (119) (398)
----------- -----------
262,462 248,943
Less: Treasury stock, 450,817 and 522,521 shares, respectively,
at cost...................................................................... (3,191) (3,645)
----------- -----------
Total stockholders' equity................................................... 259,271 245,298
----------- -----------
Total liabilities and stockholders' equity................................... $ 513,399 $ 487,592
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
36
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1,
1992
(IN THOUSANDS)
TREASURY
ADDITIONAL NOTE RESTRICTED STOCK
COMMON STOCK PAID-IN WARRANTS ACCUMULATED DUE FROM STOCK ---------
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT STOCKHOLDER AWARD SHARES
--------- ----------- --------- --------- --------- ----------- ------------- ----------- ---------
Balance at February 2,
1991................. 13,093 $ 89 $ 71,391 -- -- $ (10,071) -- -- 1,996
Net loss............... -- -- -- -- -- (15,811) -- -- --
Adjustment to carrying
value of warrants.... -- -- (2,700) -- -- -- -- -- --
Adjustment to carrying
value of common stock
held by management
investors............ -- -- (98) -- -- -- -- -- --
Public stock
offering............. 6,883 47 166,494 -- -- -- -- -- --
Exercise of stock
options.............. 41 -- 280 -- -- -- -- -- --
Reclassification of
warrants............. -- -- -- 1,985 $ 32,350 -- -- -- --
Reclassification of
common stock held by
management investors. 289 2 2,416 -- -- -- $ (999) -- --
Exercise of warrants... -- -- 11,839 (1,270) (20,702) -- -- -- (1,270)
--------- ----- --------- --------- --------- ----------- ------ ----------- ---------
Balance at February 1,
1992................. 20,306 138 249,622 715 11,648 (25,882) (999) -- 726
Net income............. -- -- -- -- -- 5,917 -- -- --
Exercise of stock
options.............. 792 6 5,436 -- -- -- -- -- --
Tax benefits related to
stock options........ -- -- 3,536 -- -- -- -- -- --
Exercise of warrants... -- -- 1,892 (203) (3,307) -- -- -- (203)
Common stock issued as
restricted stock
award................ 60 -- 1,327 -- -- -- -- $ (1,327) --
Amortization of
restricted stock
award................ -- -- -- -- -- -- -- 929 --
Common stock issued as
employee stock award. -- -- 7 -- -- -- -- -- --
--------- ----- --------- --------- --------- ----------- ------ ----------- ---------
Balance at January 30,
1993................. 21,158 144 261,820 512 8,341 (19,965) (999) (398) 523
Net income............. -- -- -- -- -- 3,209 -- -- --
Exercise of stock
options.............. 745 5 6,121 -- -- -- -- -- --
Exercise of warrants... -- -- 550 (66) (963) -- -- -- (66)
Tax benefits related to
stock options........ -- -- 3,240 -- -- -- -- -- --
Common stock issued as
employee stock award. -- -- 79 -- -- -- -- -- (6)
Amortization of
restricted stock
award................ -- -- -- -- -- -- -- 279 --
Repayment of note due
from stockholder..... -- -- -- -- -- -- 999 -- --
--------- ----- --------- --------- --------- ----------- ------ ----------- ---------
Balance at January 29,
1994................. 21,903 $ 149 $ 271,810 446 $ 7,378 $ (16,756) $ 0 $ (119) 451
--------- ----- --------- --------- --------- ----------- ------ ----------- ---------
--------- ----- --------- --------- --------- ----------- ------ ----------- ---------
TOTAL
STOCKHOLDERS'
AMOUNT EQUITY
------ -----------
Balance at February 2,
1991................. $ (13,926) $ 47,483
Net loss............... -- (15,811)
Adjustment to carrying
value of warrants.... -- (2,700)
Adjustment to carrying
value of common stock
held by management
investors............ -- (98)
Public stock
offering............. -- 166,541
Exercise of stock
options.............. -- 280
Reclassification of
warrants............. -- 32,350
Reclassification of
common stock held by
management investors. -- 1,419
Exercise of warrants... 8,863 --
--------- -----------
Balance at February 1,
1992................. (5,063) 229,464
Net income............. -- 5,917
Exercise of stock
options.............. -- 5,442
Tax benefits related to
stock options........ -- 3,536
Exercise of warrants... 1,415 --
Common stock issued as
restricted stock
award................ -- --
Amortization of
restricted stock
award................ -- 929
Common stock issued as
employee stock award. 3 10
--------- -----------
Balance at January 30,
1993................. (3,645) 245,298
Net income............. -- 3,209
Exercise of stock
options.............. -- 6,126
Exercise of warrants... 413 --
Tax benefits related to
stock options........ -- 3,240
Common stock issued as
employee stock award. 41 120
Amortization of
restricted stock
award................ -- 279
Repayment of note due
from stockholder..... -- 999
--------- -----------
Balance at January 29,
1994................. $ (3,191) $ 259,271
--------- -----------
--------- -----------
See accompanying notes to consolidated financial statements.
37
ANNTAYLOR STORES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1,
1992
FISCAL YEARS ENDED
-------------------------------------
JANUARY 29, JANUARY 30, FEBRUARY 1,
1994 1993 1992
----------- ----------- -----------
(IN THOUSANDS)
Operating activities:
Net income (loss)........................................................... $ 3,209 $ 5,917 $ (15,811)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Extraordinary loss..................................................... 17,244 -- 25,900
Distribution center restructuring charge............................... 2,000 -- --
Equity earnings in CAT................................................. (517) -- --
Provision for loss on accounts receivable.............................. 1,171 1,240 1,211
Depreciation and amortization.......................................... 8,505 7,486 6,203
Amortization of goodwill............................................... 9,508 9,504 9,506
Accretion of original issue discount................................... 2,864 5,726 8,893
Amortization of deferred financing costs............................... 1,335 1,524 2,140
Amortization of deferred compensation.................................. 279 929 --
Deferred income taxes.................................................. (1,750) (1,500) (1,000)
Issuance of Exchange Notes............................................. -- 1,331 1,210
Loss on disposal of property and equipment............................. 312 72 338
Decrease (increase) in receivables..................................... (7,447) (2,539) 6,606
Decrease (increase) in merchandise inventories......................... (10,583) (4,325) 3,433
Increase in prepaid expenses and other current assets.................. (1,280) (187) (1,633)
Decrease (increase) in refundable income taxes......................... 5,097 (2,078) (3,019)
Increase (decrease) in accounts payable and accrued liabilities........ 18,218 (250) (4,799)
Decrease (increase) in other non-current assets and liabilities, net... (843) 729 964
----------- ----------- -----------
Net cash provided by operating activities................................... 47,322 23,579 40,142
Investing activities:
Purchases of property and equipment......................................... (25,062) (4,303) (10,004)
Investment in CAT........................................................... (1,640) (88) --
----------- ----------- -----------
Net cash used by investing activities....................................... (26,702) (4,391) (10,004)
Financing activities:
Borrowings (repayments) under line of credit agreement...................... (3,500) 2,500 (19,000)
Increase (decrease) in bank overdrafts...................................... (2,361) (4,660) 2,267
Payments of long-term debt.................................................. (96,969) (26,000) (13,000)
Purchase of Subordinated Debt Securities.................................... (93,689) -- (166,938)
Proceeds from issuance of common stock...................................... -- -- 166,541
Net proceeds from 8 3/4% Notes.............................................. 107,387 -- --
Proceeds from Term Loan..................................................... 80,000 -- --
Proceeds from note due from Stockholder..................................... 999 -- --
Payment of 10% Junior Subordinated Notes.................................... (14,641) -- --
Payment of Term Loan........................................................ (26,000) -- --
Proceeds from Receivables Facility.......................................... 33,000 -- --
Purchase of 8 3/4% Notes.................................................... (10,225) -- --
Proceeds from exercise of stock options..................................... 9,486 8,988 280
Payment of financing costs.................................................. (4,041) -- (232)
----------- ----------- -----------
Net cash used by financing activities....................................... (20,554) (19,172) (30,082)
----------- ----------- -----------
Net increase in cash.......................................................... 66 16 56
Cash, beginning of year....................................................... 226 210 154
----------- ----------- -----------
Cash, end of year............................................................. $ 292 $ 226 $ 210
----------- ----------- -----------
----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest...................................... $ 12,664 $ 13,917 $ 22,611
----------- ----------- -----------
----------- ----------- -----------
Cash paid during the year for income taxes.................................. $ 5,114 $ 11,192 $ 4,501
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
38
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ann Taylor is a leading national specialty retailer of better quality
women's apparel, shoes and accessories sold principally under the Ann Taylor
brand name.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AnnTaylor
Stores Corporation (the "Company") and AnnTaylor, Inc. ("Ann Taylor"). The
Company has no material assets other than the common stock of Ann Taylor and
conducts no business other than the management of Ann Taylor. All intercompany
accounts have been eliminated in consolidation.
Certain fiscal 1992 and 1991 amounts have been reclassified to conform to
the fiscal 1993 presentation.
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry, which
is a 52-or 53-week period ending on the Saturday closest to January 31 of the
following calendar year.
FINANCE SERVICE CHARGE INCOME
Income from finance service charges relating to customer receivables, which
is deducted from selling, general and administrative expenses, amounted to
$6,166,000 for fiscal 1993, $5,608,000 for fiscal 1992 and $5,850,000 for fiscal
1991.
MERCHANDISE INVENTORIES
Merchandise inventories are accounted for by the retail inventory method
and are stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets (3 to 15 years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.
PRE-OPENING EXPENSES
Pre-opening store expenses are charged to selling, general and
administrative expenses in the period incurred.
LEASED SHOE DEPARTMENT SALES
Net sales include leased shoe department sales of $8,207,000 for fiscal
1992 and $16,056,000 for fiscal 1991. Leased shoe departments were phased out
beginning August 1, 1990, and the phaseout was completed by February 1, 1993.
Accordingly, there were no leased shoe department sales during fiscal 1993. The
gross profit margin on leased shoe department sales was approximately 14.4%.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the interest method over
the terms of the related debt.
GOODWILL
Goodwill is being amortized on a straight-line basis over 40 years.
39
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
Income tax expense is based on reported results of operations before income
taxes. During the first quarter of 1993, the Company adopted the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Adoption of SFAS 109 did not have a material effect on the results of
operations.
ADVERTISING EXPENSES
Advertising expense was $6,388,000 for fiscal 1993, $5,509,000 for fiscal
1992 and $8,645,000 for fiscal 1991.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares and common share equivalents
outstanding during the period and assumes the exercise of the warrants and the
dilutive effect of the stock options.
2. RESTRUCTURING
The Company recorded a $2,000,000 pre-tax restructuring charge in the
fourth quarter of 1993 in connection with the announced relocation of its
distribution center from New Haven, Connecticut to Louisville, Kentucky. The
primary components of the restructuring charge are approximately $1,100,000 for
employee related costs, principally for severance and job training benefits, and
approximately $900,000 for the write-off of the estimated net book value of
fixed assets at the time of relocation.
3. EXTRAORDINARY ITEMS
In 1993, the Company entered into a series of debt refinancing transactions
that resulted in an extraordinary loss of $17,244,000 ($11,121,000 net of income
tax benefit). The loss was attributable to the premiums paid in connection with
the purchase or discharge of Ann Taylor's 14 3/8% Senior Subordinated Discount
Notes due 1999 ("Discount Notes") and its 13 3/4% Subordinated Notes due 1999
("Notes") and the purchase of $10,000,000 principal amount of Ann Taylor's 8
3/4% Subordinated Notes due 2000 ("8 3/4% Notes"), and the write-off of deferred
financing costs.
During May 1991, the Company completed an initial public offering of its
common stock (the "IPO"). The net proceeds of the IPO were used to repurchase
outstanding Discount Notes and Notes. The repurchase and write-off of related
deferred financing costs resulted in an extraordinary loss of $25,900,000
($16,835,000 net of income tax benefit) in the second quarter of 1991.
40
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT
The following summarizes long-term debt outstanding at January 29, 1994 and
January 30, 1993:
JANUARY 29, 1994 JANUARY 30, 1993
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Senior Debt:
Term loan................................................... $ 54,000 $ 54,000 $ 96,969 $ 96,969
Revolving credit loan....................................... 2,000 2,000 5,500 5,500
14 3/8% Discount Notes, net of unamortized discount of
$6,261,000.................................................. -- -- 44,069 46,800
13 3/4% Notes, net of unamortized discount of $287,000........ -- -- 34,295 37,350
10% exchange notes............................................ -- -- 14,641 17,300
8 3/4% Notes.................................................. 100,000 102,750 -- --
Receivables facility.......................................... 33,000 33,000 -- --
----------- ----------- ----------- -----------
189,000 191,750 195,474 203,919
Less current portion.......................................... 8,757 8,757 37,000 37,000
----------- ----------- ----------- -----------
Total.................................................. $ 180,243 $ 182,993 $ 158,474 $ 166,919
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The bank credit agreement entered into on June 28, 1993 between Ann Taylor
and Bank of America, as agent for a syndicate of banks (the "Bank Credit
Agreement") provides for an $80,000,000 term loan ("Term Loan") and a
$55,000,000 revolving credit facility ("Revolving Credit Facility")
(collectively, the "Bank Loans").
The Term Loan is subject to regularly scheduled semi-annual repayments of
principal, which commenced on January 15, 1994. The Company made the semi-annual
payment of $6,000,000 in January 1994, and an additional payment of $20,000,000
which reduced the originally scheduled payments to $8,757,000 in fiscal years
1994 and 1995, $11,676,000 in fiscal years 1996 and 1997, and $13,134,000 in
fiscal year 1998.
Amounts borrowed under the Revolving Credit Facility may be repaid at any
time and are not subject to scheduled repayment prior to January 1999. The
maximum amount that may be borrowed under this facility is reduced by the amount
of commercial and standby letters of credit outstanding under the Bank Credit
Agreement. Amounts borrowed under the Revolving Credit Facility mature on
January 15, 1999; however, the Company is required to reduce the outstanding
balance of the Revolving Credit Facility to $20,000,000 or less for a 30-day
period in fiscal 1994 and to $15,000,000 or less for a 30-day period each year
thereafter. At January 29, 1994 and January 30, 1993, the amount available under
the Revolving Credit Facility was $46,150,000 and $35,320,000, respectively.
The Term Loan and the Revolving Credit Facility bear interest at a rate per
annum equal to, at the Company's option, Bank of America's (1) Base Rate plus
.875%, or (2) Eurodollar rate plus 1.875%. In addition, Ann Taylor is required
to pay Bank of America a quarterly commitment fee of .375% per annum of the
unused revolving loan commitment. At January 29, 1994, the $54,000,000
outstanding under the Term Loan bore interest at a weighted average rate of
5.13% per annum and the $2,000,000 outstanding under the Revolving Credit
Facility bore interest at the rate of 6.875% per annum.
Under the terms of the Bank Credit Agreement, Bank of America obtained a
pledge of Ann Taylor's common stock and a security interest in certain assets.
The Bank Credit Agreement requires,
41
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT--(CONTINUED)
with certain exceptions, that any net proceeds from the sale of assets and debt
or equity securities be applied to repay borrowings. In addition, the Bank
Credit Agreement contains financial and other covenants, including limitations
on indebtedness, liens, investments and capital expenditures, restrictions on
dividends or other distributions to stockholders, and maintaining certain
financial ratios and specified levels of net worth.
In the fourth quarter of 1993, Ann Taylor sold its proprietary credit card
accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary, which
used the receivables to secure borrowings under a new receivables financing
facility due 1996 (the "Receivables Facility"). As of January 29, 1994,
$33,000,000 was outstanding under the Receivables Facility. AnnTaylor Funding,
Inc. can borrow up to $40,000,000 under the Receivables Facility based on its
accounts receivable balance. The interest rate as of January 29, 1994 was 3.67%.
At January 29, 1994, AnnTaylor Funding, Inc. had total assets of approximately
$41,000,000 all of which are subject to the security interest of the lender
under the Receivables Facility.
On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8
3/4% Notes, the net proceeds of $107,387,000 of which were used in part to repay
the outstanding indebtedness under Ann Taylor's then existing bank credit
agreement. The outstanding principal amount of these notes as of January 29,
1994 was $100,000,000.
Ann Taylor's obligations with respect to the Discount Notes and Notes were
discharged on July 29, 1993 when Ann Taylor deposited with the trustees for the
Discount Notes and Notes an aggregate of $50,734,000 in irrevocable trusts. The
Discount Notes and the Notes will be redeemed with the proceeds of the trusts on
or about July 15, 1994. The aggregate carrying value of the Discount Notes and
Notes as of January 29, 1994 would have been $45,004,000.
In July 1993, Ann Taylor entered into a $110,000,000 (notional amount)
interest rate swap agreement. Under the agreement, the Company receives a fixed
rate of 4.75% and pays a floating rate based on LIBOR, as determined in six
month intervals. This agreement lowered the effective interest rate on the 8
3/4% Notes by 125 basis points for the first semi-annual period ended January
1994. The swap agreement matures in July 1996. The Company is exposed to credit
loss in the event of non-performance by the other party to the swap agreement;
however, the Company does not anticipate non-performance by the other party,
which is a major financial institution. As of January 29, 1994, the fair market
value of the swap agreement was approximately $780,000.
The aggregate principal payments of all long-term obligations for the next
five fiscal years are as follows:
(IN
FISCAL YEAR THOUSANDS)
- ------------------------------------------------------------------------------
1994........................................................................ $ 8,757
1995........................................................................ 8,757
1996........................................................................ 44,676
1997........................................................................ 11,676
1998........................................................................ 15,134
At January 29, 1994, January 30, 1993 and February 1, 1992, Ann Taylor had
outstanding commercial and standby letters of credit with Bank of America
totaling $6,850,000, $9,180,000 and $3,280,000, respectively.
42
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT--(CONTINUED)
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the
Company determined the estimated fair value of its debt instruments using quoted
market information, as available, or interest rates which are available to the
Company. As judgment is involved, the estimates are not necessarily indicative
of the amounts the Company could realize in a current market exchange.
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the allowance for doubtful accounts for the fiscal
years ended January 29, 1994, January 30, 1993 and February 1, 1992 is as
follows:
FISCAL YEARS ENDED
----------------------------------------------------
JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992
---------------- ---------------- ----------------
(IN THOUSANDS)
Balance at beginning of year......... $ 1,006 $ 899 $ 1,000
Provision for loss on accounts
receivable........................... 1,171 1,240 1,211
Accounts written off................. (1,390) (1,133) (1,312)
---------------- ---------------- ----------------
Balance at end of year............... $ 787 $ 1,006 $ 899
---------------- ---------------- ----------------
---------------- ---------------- ----------------
6. COMMITMENTS AND CONTINGENCIES
Ann Taylor occupies its retail stores, distribution center and
administrative facilities under operating leases, most of which are
non-cancellable. Some leases contain renewal options for periods ranging from
one to ten years under substantially the same terms and conditions as the
original leases. Most of the leases require Ann Taylor to pay taxes, insurance
and certain common area and maintenance costs in addition to the future minimum
lease payments shown below. Most of the store leases require Ann Taylor to pay a
specified minimum rent, plus a contingent rent based on a percentage of the
store's net sales in excess of a certain threshold.
Future minimum lease payments under non-cancellable operating leases at
January 29, 1994 are as follows:
(IN
FISCAL YEAR THOUSANDS)
- -----------
1994........................................................................ $ 30,504
1995........................................................................ 27,620
1996........................................................................ 26,054
1997........................................................................ 23,416
1998........................................................................ 21,613
1999 and thereafter......................................................... 82,242
-------------
Total.................................................................... $ 211,449
-------------
-------------
43
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Rent expense for the fiscal years ended January 29, 1994, January 30, 1993
and February 1, 1992 was as follows:
FISCAL YEARS ENDED
----------------------------------------------------
JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992
---------------- ---------------- ----------------
(IN THOUSANDS)
Minimum rent.............................................. $ 28,076 $ 24,933 $ 22,135
Percentage rent........................................... 3,343 4,217 4,423
---------------- ---------------- ----------------
Total................................................ $ 31,419 $ 29,150 $ 26,558
---------------- ---------------- ----------------
---------------- ---------------- ----------------
In January 1993, the Company and the other defendants agreed to settle the
stockholder class action lawsuit filed against them in October 1991. As a result
of the settlement, the Company was required to pay to or for the benefit of the
plaintiff class $2,800,000 (after application of the insurance proceeds). To
provide for the settlement, the Company recorded an expense of $3,905,000 ($.11
per share, net of income tax benefit), which includes certain of the legal
defense costs and other expenses associated with the suit, in its fiscal 1992
financial statements.
Ann Taylor has been named as a defendant in several legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material adverse
effect on the financial position or results of operations of the Company.
7. COMMON STOCK WARRANTS
In conjunction with the sale by Ann Taylor of the Discount Notes and Notes
on July 20, 1989, the Company sold warrants to acquire, in the aggregate,
1,985,294 shares of the common stock of the Company (the "Warrants"). The
Warrants, when exercised, entitle the holders thereof to acquire such shares,
subject to adjustment, at no additional cost. The Warrants expire on July 15,
1999 and became exercisable as a result of the IPO. During the fiscal year ended
February 1, 1992, the Company charged $2,700,000 to additional paid-in capital
with a corresponding increase to the carrying value of the Warrants.
8. PREFERRED STOCK
At January 29, 1994, January 30, 1993 and February 1, 1992, there were
2,000,000 shares of preferred stock, par value $.01, authorized and unissued.
9. STOCK OPTION PLANS
In 1989 and 1992, the Company established stock option plans. Under the
terms of both plans, the exercise price of any option may not be less than 100%
of the fair value of the common stock on the date of grant. 248,185 shares of
common stock have been reserved for issuance under the 1989 plan and 974,000
shares of common stock have been reserved for issuance under the 1992 plan. At
January 29, 1994, there were 14,373 shares under the 1989 plan and 498,500
shares under the 1992 plan available for future grant. Generally, options
granted under the plans expire ten years from the date of the grant.
44
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLANS--(CONTINUED)
Pursuant to an employment agreement with the Company, as of February 3,
1992, the Chairman of the Board and Chief Executive Officer of the Company was
granted 100,000 stock options at $22.125 per share and 100,000 stock options at
$26.00 per share.
The following summarizes stock option transactions for the fiscal years
ended January 29, 1994, January 30, 1993 and February 1, 1992:
OPTION PRICES NUMBER OF SHARES
------------------ -----------------
Outstanding Options February 2, 1991....................................... $6.80-$13.60 1,775,555
Granted.................................................................. $22.10 33,675
Exercised................................................................ $6.80 (41,112)
Cancelled................................................................ $6.80 (14,151)
-----------------
Outstanding Options February 1, 1992....................................... $6.80-$22.10 1,753,967
Granted.................................................................. $18.625-$26.00 517,500
Exercised................................................................ $6.80-$22.10 (792,210)
Cancelled................................................................ $6.80-$22.25 (17,173)
-----------------
Outstanding Options January 30, 1993....................................... $6.80-$26.00 1,462,084
Granted.................................................................. $18.125-$26.00 279,000
Exercised................................................................ $6.80-$22.25 (745,346)
Cancelled................................................................ $6.80-$22.25 (86,426)
-----------------
Outstanding Options January 29, 1994....................................... $6.80-$26.00 909,312
-----------------
-----------------
At January 29, 1994, January 30, 1993 and February 1, 1992 there were
exercisable 516,889 options, 995,407 options and 1,496,953 options,
respectively.
10. RESTRICTED STOCK AWARD
Pursuant to an employment agreement with the Company, as of February 3,
1992, the Chairman of the Board and Chief Executive Officer of the Company was
entitled to receive 60,000 shares of restricted common stock. The resulting
unearned compensation expense of $1,327,500, based on the market value on the
date of the grant, was charged to stockholders' equity and is being amortized
over the restricted period applicable to these shares.
45
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES
The provision for income taxes for the fiscal years ended January 29, 1994,
January 30, 1993 and February 1, 1992 consists of the following:
FISCAL YEARS ENDED
----------------------------------------------------
JANUARY 29, 1994 JANUARY 30, 1993 FEBRUARY 1, 1992
---------------- ---------------- ----------------
(IN THOUSANDS)
Federal:
Current............................ $ 14,339 $ 9,300 $ 6,203
Deferred........................... (1,750) (1,500) (1,000)
State and Local...................... 4,600 3,350 2,500
---------------- ---------------- ----------------
Total.............................. $ 17,189 $ 11,150 $ 7,703
---------------- ---------------- ----------------
---------------- ---------------- ----------------
The reconciliation between the provision for income taxes and the provision
for income taxes at the federal statutory rate for the fiscal years ended
January 29, 1994, January 30, 1993 and February 1, 1992 is as follows:
FISCAL YEARS ENDED
-------------------------------------
JANUARY 29, JANUARY 30, FEBRUARY 1,
1994 1993 1992
----------- ----------- -----------
(IN THOUSANDS)
Income before income taxes and extraordinary loss........................ $ 31,519 $ 17,067 $ 8,727
----------- ----------- -----------
----------- ----------- -----------
Federal statutory rate................................................... 35% 34% 34%
----------- ----------- -----------
----------- ----------- -----------
Provision for income taxes at federal statutory rate..................... $ 11,032 $ 5,803 $ 2,967
State and local income taxes, net of federal income tax benefit.......... 2,990 2,211 1,650
Non-deductible amortization of goodwill.................................. 3,328 3,232 3,232
Other.................................................................... (161) (96) (146)
----------- ----------- -----------
Provision for income taxes.......................................... $ 17,189 $ 11,150 $ 7,703
----------- ----------- -----------
----------- ----------- -----------
The tax effects of significant items comprising the Company's deferred tax
asset as of January 29, 1994 are as follows:
(IN
DEFERRED TAX ASSETS: THOUSANDS)
Current:
Inventory........................................................................ $ 981
Accrued expenses................................................................. 1,288
Restructuring.................................................................... 700
Other............................................................................ 781
-------------
Total current...................................................................... $ 3,750
-------------
-------------
Noncurrent:
Depreciation..................................................................... $ 125
Rent expense..................................................................... 1,375
-------------
Total noncurrent................................................................... $ 1,500
-------------
-------------
For 1992 deferred income tax benefits have been provided for temporary
differences which result from recording certain transactions in different years
for income tax purposes than for financial
46
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES--(CONTINUED)
reporting purposes. Such transactions principally relate to merchandise
inventories, accounts receivable, fixed assets and accrued expenses.
12. RETIREMENT PLANS
SAVINGS PLAN. During 1989, Ann Taylor adopted a defined contribution 401(k)
savings plan for substantially all employees. Participants may contribute to the
plan an aggregate of up to 10% of their annual earnings. Ann Taylor makes a
matching contribution of 50%, with respect to the first 3% of each participant's
annual earnings contributed to the plan. Ann Taylor's contributions to the plan
for fiscal 1993, fiscal 1992 and fiscal 1991 were $199,000, $111,000 and
$111,000, respectively.
PENSION PLAN. Substantially all employees of Ann Taylor are covered under a
noncontributory defined benefit pension plan established during 1989. The
pension plan is a "cash balance pension plan". An account balance is established
for each participant which is credited with a benefit based on compensation and
years of service with Ann Taylor. Ann Taylor's funding policy for the plan is to
contribute annually the amount necessary to provide for benefits based on
accrued service and projected pay increases. Plan assets consist primarily of
cash, equity and fixed income securities.
The following table sets forth the funded status of the Pension Plan at
January 29, 1994, January 30, 1993 and February 1, 1992, in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions":
JANUARY 29, JANUARY 30, FEBRUARY 1,
1994 1993 1992
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Actuarial present value of benefits obligation:
Accumulated benefit obligation, including vested benefits of $1,056,000,
$702,000 and $411,000, respectively..................................... $ 2,401 $ 1,832 $ 997
------------ ------------ ------------
------------ ------------ ------------
Projected benefit obligation for service rendered to date............... $ 2,401 $ 1,832 $ 997
Plan assets at fair value............................................... 2,344 1,847 855
------------ ------------ ------------
Plan assets in excess of projected benefit obligation (projected benefit
obligation in excess of plan assets).................................... (57) 15 (142)
Unrecognized net gain................................................... (58) -- --
------------ ------------ ------------
Prepaid (accrued) pension cost.......................................... $ (115) $ 15 $ (142)
------------ ------------ ------------
------------ ------------ ------------
Net periodic pension cost for fiscal 1993, 1992 and 1991 included the
following components:
Service cost/benefits earned during the year............................ $ 680 $ 521 $ 372
Interest cost on projected benefit obligation........................... 117 100 61
Actual return on plan assets............................................ (124) (100) (76)
Net amortization and deferral........................................... (36) 9 30
------------ ------------ ------------
Net periodic pension cost............................................... $ 637 $ 530 $ 387
------------ ------------ ------------
------------ ------------ ------------
Assumptions used in the development of pension cost and accrual were:
Discount rate...................................................... 7.0% 7.0% 9.0%
Rate of increase in compensation level............................. 4.0% 4.0% 6.0%
Expected long-term rate of return on assets........................ 8.0% 9.0% 10.0%
47
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY FINANCIAL DATA--(UNAUDITED)
QUARTER
--------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FISCAL 1993
Net sales..................................................... $ 120,175 $ 124,837 $ 122,025 $ 134,612
Operating income.............................................. 12,410 12,929 12,850 10,832
Income before extraordinary loss.............................. 3,290 3,630 4,321 3,089
Extraordinary loss............................................ -- (10,496) -- (625)
Net income (loss)............................................. 3,290 (6,866) 4,321 2,464
Income per share before extraordinary loss.................... $ .15 $ .16 $ .20 $ .14
Extraordinary loss per share.................................. -- (.47) -- (.03)
Net income (loss) per share................................... $ .15 $ (.31) $ .20 $ .11
FISCAL 1992
Net sales..................................................... $ 114,739 $ 112,492 $ 115,274 $ 125,876
Operating income.............................................. 11,304 8,301 14,718 8,181
Net income (loss)............................................. 2,138 624 4,265 (1,110)
Net income (loss) per share................................... $ .10 $ .03 $ .20 $ (.05)
The sum of the quarterly per share data may not equal the annual amounts
due to changes in the weighted average shares and share equivalents outstanding.
The early retirement of indebtedness in the fourth quarter of 1993 led to
an extraordinary pre-tax charge to earnings of $1,096,000 ($625,000 net of
income tax benefit). The Company also recorded a $2,000,000 pre-tax
restructuring charge in the fourth quarter of 1993 for the relocation of its
distribution center from New Haven, Connecticut to Louisville, Kentucky in early
1995.
The net loss in the fourth quarter of 1992 was primarily due to the
stockholder litigation settlement of $3,386,000.
14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES
At January 29, 1994, certain affiliates of Merrill Lynch & Co., Inc.
("ML&Co.") held approximately 52% of the outstanding common stock and, as a
result, have the voting power to determine the composition of the Board of
Directors of the Company and otherwise control the business and affairs of Ann
Taylor and the Company. Two of the members of the Boards of Directors of the
Company and Ann Taylor are officers of Merrill Lynch Capital Partners, Inc. ("ML
Capital Partners") and serve as representatives of certain limited partnerships
controlled directly or indirectly by ML Capital Partners, together with certain
other affiliates of ML&Co. See Note 15.
The Company paid an underwriting commission of approximately $3,357,000 to
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") in
connection with the IPO. In addition, the Company paid a commission of
approximately $599,000 to Merrill Lynch in connection with the repurchase of the
subordinated debt securities with the proceeds from the IPO.
In January 1993, in connection with the settlement of the class action
lawsuit, the Company, Merrill Lynch and ML&Co., among others, entered into an
agreement pursuant to which ML&Co.
48
ANNTAYLOR STORES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--(CONTINUED)
paid $750,000 and the Company paid the balance of the settlement to or for the
benefit of the plaintiffs. The Company also reimbursed Merrill Lynch $128,000
for certain costs incurred by it in connection with the class action in fiscal
1992, pursuant to the Company's indemnification obligations.
The Company paid commissions aggregating approximately $2,692,000 to
Merrill Lynch in connection with the issuance of the 8 3/4% Notes, and
repurchases of Discount Notes, Notes and 8 3/4% Notes.
TRANSACTIONS WITH CAT
The Company commenced a joint venture known as CAT U.S., Inc. ("CAT") with
Cygne Designs, Inc., which was formed for the purpose of sourcing Ann Taylor
merchandise directly with manufacturers. As of January 29, 1994, the Company
owned a 40% interest in CAT which is being accounted for under the equity method
of accounting, an increase of 20% from January 30, 1993. CAT places orders
directly with manufacturers exclusively as agent for Ann Taylor. Merchandise
purchased by Ann Taylor through CAT was $67,202,000 or 23.5%, and $19,091,000,
or 7.3%, of all merchandise purchased by the Company in 1993 and 1992,
respectively. Accounts payable to CAT in the ordinary course of business was
approximately $3,100,000 as of January 29, 1994.
15. SUBSEQUENT EVENTS
The Company intends to file a registration statement for a sale of its
common stock in the first quarter of 1994. 1,000,000 shares will be sold by the
Company and 4,000,000 shares are expected to be sold by certain stockholders of
the Company affiliated with ML&Co.
49
INDEX TO EXHIBITS
EXHIBITS
- ---------
3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit No. 3.1 to
Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 of AnnTaylor, Inc. filed on
May 29, 1991 (Registration No. 33-28522).
3.1.1 Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit No. 4.1 to
the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission
(the "Commission") on August 10, 1992 (Registration No. 33-50688).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit No. 3.2 to the Quarterly Report on Form
10-Q of the Company filed on December 17, 1991 (Registration No. 33-28522).
4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the
form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K of Ann Taylor filed on July 7, 1993.
4.2 Irrevocable Trust Agreement dated as of July 29, 1993, between Ann Taylor and State Street Bank and
Trust Company, as trustee under Indenture dated as of July 15, 1989, with respect to the Discount
Notes. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Ann Taylor on Form 10-Q for
the Quarter Ended July 31, 1993 filed on September 2, 1993.
4.3 Irrevocable Trust Agreement dated as of July 29, 1993 between Ann Taylor and United States Trust Company
of New York, as trustee under Indenture dated as of July 15, 1989 with respect to the Notes.
Incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of Ann Taylor for the
Quarter Ended July 31, 1993 filed on September 2, 1993.
10.1 Form of U.S. Purchase Agreement among Merrill Lynch, Robertson, Stephens & Company, the other U.S.
Underwriters, the Selling Warrantholders and the Company, including the form of Price Determination
Agreement. Incorporated by reference to Exhibit No. 1.1 to the Registration Statement of the Company
filed on April 11, 1991 (Registration No. 33-39905).
10.2 Form of International Purchase Agreement among Merrill Lynch International Limited, Robertson, Stephens
& Company, the other International Underwriters and the Company, including the form of Price
Determination Agreement. Incorporated by reference to Exhibit No. 1.2 to the Registration Statement of
the Company filed on April 11, 1991 (Registration No. 33-39905).
10.3 Form of Indenture entered into between Ann Taylor and United States Trust Company of New York, as
Trustee, including the form of Subordinated Note due 1999. Incorporated by reference to Exhibit No.
4.1 to Amendment No. 1 to the Registration Statement of the Company and AnnTaylor filed on June 21,
1989 (Registration No. 33-28522).
10.4 Form of Indenture entered into between Ann Taylor and State Street Bank and Trust Company of
Connecticut, as successor trustee to The Connecticut Bank and Trust Company, National Association, as
Trustee, including the form of Senior Subordinated Discount Note due 1999. Incorporated by reference
to Exhibit No. 4.2 to Amendment No. 1 to the Registration Statement of the Company and Ann Taylor
filed on June 21, 1989 (Registration No. 33-28522).
10.5 Form of Warrant Agreement entered into between Ann Taylor and The Connecticut Bank and Trust Company,
National Association, including the form of Warrant. Incorporated by reference to Exhibit No. 4.3 to
Amendment No. 1 to the Registration Statement of the Company and Ann Taylor filed on June 21, 1989
(Registration No. 33-28522).
10.6 Credit Agreement, dated as of June 28, 1993, between Ann Taylor, Bank of America National Trust and
Savings Association ("Bank of America"), Bank of Montreal, the financial institutions party thereto,
and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of Ann Taylor filed on July 7, 1993.
INDEX TO EXHIBITS
EXHIBITS
- ---------
10.6.1 Amendment No. 1 to Credit Agreement, dated as of August 10, 1993, between Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial
institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.9
to the Quarterly Report on Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on
November 26, 1993.
10.6.2 Amendment No. 2 to Credit Agreement dated as of October 6, 1993, between Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial
institutions party thereto, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.10
to the Quarterly Report on Form 10-Q of AnnTaylor, Inc. for the Quarter ended October 30, 1993 filed
on November 26, 1993.
10.6.3 Amendment No. 3 to Credit Agreement dated as of December 23, 1993, between Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial
institutions party thereto, and Bank of America, as Agent.
10.6.4 Amendment No. 4 to Credit Agreement dated as of January 24, 1994, between Ann Taylor, Bank of America
National Trust and Savings Association ("Bank of America"), Bank of Montreal, the financial
institutions party thereto, and Bank of America, as Agent.
10.7 Guaranty, dated as of June 28, 1993, made by the Company in favor of Bank of America, as Agent.
Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on
July 7, 1993.
10.8 Security and Pledge Agreement, dated as of June 28, 1993, made by the Company in favor of Bank of
America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann
Taylor filed on July 7, 1993.
10.9 License Agreement, dated as of April 30, 1984, between Ann Taylor and Joan & David. Incorporated by
reference to Exhibit No. 10.14 to the Registration Statement of the Company and Ann Taylor filed on
May 3, 1989 (Registration No. 33-28522).
10.10 Agreement, dated March 22, 1990, between Ann Taylor and Chapel Street Shoes, Inc. Incorporated by
reference to Exhibit 10.12 to the Annual Report on Form 10-K of the Company filed on April 30, 1990.
10.11 Form of Investor Stock Subscription Agreement, dated February 8, 1989, between the Company and each of
the ML Entities. Incorporated by reference to Exhibit No. 10.15 to the Registration Statement of the
Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.12 1989 Stock Option Plan. Incorporated by reference to Exhibit No. 10.18 to the Registration Statement of
the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.12.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report
on Form 10-K of the Company filed on April 30, 1993.
10.13 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th
Street headquarters. Incorporated by reference to Exhibit No. 10.21 to the Registration Statement of
the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.13.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit No. 10.17.1 to the Registration Statement of the Company filed on
April 11, 1991 (Registration No. 33-39905).
10.13.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor.
Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of the Company filed on
April 29, 1993.
10.13.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor
Incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q of Ann Taylor for the
Quarter ended October 30, 1993 filed on November 26, 1993.
INDEX TO EXHIBITS
EXHIBITS
- ---------
10.14 Lease, dated December 1, 1985, between Hamilton Realty Co. and Ann Taylor concerning the New Haven
distribution center. Incorporated by reference to Exhibit No. 10.22 to the Registration Statement of
the Company and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
10.14.1 Agreement, dated March 22, 1993, between Hamilton Realty Co. and Ann Taylor amending the New Haven
distribution center lease. Incorporated by reference to Exhibit No. 10.14.1 to the Annual Report on
Form 10-K of Ann Taylor filed on April 30, 1993.
10.15 Lease, dated October 1, 1988, between Dixson Associates and Ann Taylor concerning Ann Taylor's 3 East
57th Street offices and store, as amended. Incorporated by reference to Exhibit No. 10.23 to the
Registration Statement of the Company and Ann Taylor dated May 3, 1989 (Registration No. 33-28522).
10.15.1 Agreement, dated April 12, 1993, between Dixson Associates and Ann Taylor amending the 3 East 57th
Street lease. Incorporated by reference to Exhibit No. 10.15.1 to the Annual Report on Form 10-K of
Ann Taylor filed on April 30, 1993.
10.16 Tax Sharing Agreement, dated as of July 13, 1989, between the Company and Ann Taylor. Incorporated by
reference to Exhibit No. 10.24 to Amendment No. 2 to the Registration Statement of the Company and Ann
Taylor filed on July 13, 1989 (Registration No. 33-28522).
10.17 Employment Agreement, effective as of February 3, 1992, between the Company and Sally Frame Kasaks.
Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K of the Company filed on
April 28, 1992.
10.18 The AnnTaylor Stores Corporation 1992 Stock Option Plan. Incorporated by reference to Exhibit No. 4.3 to
the Company's Registration Statement on Form S-8 filed with the Commission on August 10, 1992
(Registration No. 33-50688).
10.19 Management Performance Compensation Plan. Incorporated by reference to Exhibit 10.30 to the Quarterly
Report on Form 10-Q filed on December 15, 1992.
10.20 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Quarterly Report on
Form 10-Q filed on December 15, 1992.
10.21 Stipulation of Settlement dated February 16, 1993 providing for the settlement of Consolidated Action.
Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on April
30, 1993.
10.22 Agreement among Defendants to the Stipulation of Settlement dated February 16, 1993 providing for the
settlement of Consolidated Action. Incorporated by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K filed on April 30, 1993.
10.23 Opinion Re Settlement Plan of Allocation and Application for Attorney's Fees and Expenses dated May 25,
1993, In Re AnnTaylor Stores Securities Litigation. Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended May 1, 1993 filed on May 28, 1993.
10.24 Consulting and Severance Agreement dated April 6, 1993 between the Company and Joseph J. Schumm.
Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K filed on April
30, 1993.
10.25 Interest Rate Swap Agreement dated as of July 22, 1993, between AnnTaylor, Inc. and Fleet Bank of
Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q of
Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
10.26 Stock Purchase Agreement, dated as of July 13, 1993, between AnnTaylor, Inc. and Cleveland Investment,
Ltd. Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q of Ann Taylor for
the Quarter ended July 31, 1993 filed on September 2, 1993.
10.27 Agreement, dated July 13, 1993, among Cygne Designs, Inc., Cygne Designs F.E. Limited, CAT US, Inc.,
C.A.T. Far East Limited and AnnTaylor, Inc. Incorporated by reference to Exhibit 10.8 on Form 10-Q of
Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. (Confidential treatment has
been granted with respect to certain portions of this Exhibit.)
INDEX TO EXHIBITS
EXHIBITS
- ---------
10.28 Receivables Financing Agreement dated January 27, 1994, among AnnTaylor Funding, Inc., Ann Taylor,
Clipper Receivables Corporation, State Street Boston Capital Corporation and PNC Bank National
Association.
10.29 Purchase and Sale Agreement dated as of January 27, 1994 between AnnTaylor, Inc. and AnnTaylor Funding,
Inc.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche.