ITEM 1. Business
General
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold primarily under the Ann Taylor brand name. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company's stores offer a full range of career and casual separates, weekend wear, dresses, tops, accessories and shoes, coordinated as part of a total wardrobing strategy. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles.
The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. As a result of strong consumer acceptance of this niche positioning, the Company's sales per square foot productivity and operating profit margins have historically been among the highest in the specialty apparel retailing industry. The Company has adopted a growth strategy of capitalizing on this brand recognition by introducing product extensions within its stores and entering into new channels of distribution, as well as continuing its retail store expansion program.
As of February 3, 1996, the Company operated 306 stores in 40 states and the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store, Ann Taylor Loft and Ann Taylor Studio. Of the 258 stores operated under the Ann Taylor name, approximately three-quarters are located in regional malls and upscale specialty retail centers, with the balance located in downtown and village locations. These stores represent the Company's core merchandise line. The Company believes that its customer base for its Ann Taylor Stores consists primarily of relatively affluent, fashion-conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise.
In 1993, the Company converted its four existing clearance centers to Ann Taylor Factory Stores, and as of February 3, 1996, operated 22 Ann Taylor Factory Stores located in factory outlet centers. Outlet centers appeal to consumers' increasing orientation to value and to manufacturers' and retailers' desire for additional channels of distribution and control over liquidation of their product. The success of the Company's Factory Stores and consumers' continuing emphasis on value led the Company to begin testing, in 1995, Ann Taylor Loft, a separate moderate-priced store concept for customers who appreciate the Ann Taylor style but have a smaller budget for apparel, shoes and accessories. As of February 3, 1996, the Company operated 17 Ann Taylor Loft stores, also located in factory outlet centers. Merchandise manufactured for Loft stores is sold under the Ann Taylor Loft and Shoe Loft labels. Ann Taylor Loft stores also sell the Company's ATdenim and "destination" fragrance and personal care lines described below. The Company's Factory Stores serve as a clearance vehicle for both Ann Taylor and Ann Taylor Loft merchandise, in addition to selling ATdenim, the "destination" product line, and current Ann Taylor Loft merchandise.
In Fall 1994, the Company began testing Ann Taylor Studio stores, a free-standing shoe and accessory store concept offering the broadest assortment of Ann Taylor shoes, as well as Ann Taylor hosiery, small leather accessories such as belts and handbags, and the Company's "destination" fragrance and personal care line. As of February 3, 1996, the Company had nine Ann Taylor Studio stores.
All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Ann Taylor was acquired by ATSC in a leveraged buyout transaction (the "Acquisition") in 1989.
Business Strategy
Under the leadership of Chairman and Chief Executive Officer, Sally Frame Kasaks, the Company has pursued growth through the extension of the Ann Taylor brand, through the successful introduction of new product lines and new channels of distribution, as well as through retail store expansion.
The Company believes that product extensions support the Company's total wardrobing strategy, as well as provide existing and new customers with additional reasons to patronize Ann Taylor stores. Product extensions expanded or developed over the past three years include Ann Taylor shoes, ATdenim, Ann Taylor Petites, the "destination" fragrance and personal care line, and Ann Taylor "navy label" merchandise.
Ann Taylor shoes, which were sold in 99 Ann Taylor Stores in 1992, were expanded to 188 stores by the end of Fiscal 1995, as well as to the Company's nine Ann Taylor Studio stores. In Fall 1992, the Company increased its presence in casual wear by introducing its own line of denim known as "ATdenim", now sold in all Ann Taylor stores other than Ann Taylor Studio stores. In Fall 1993, Ann Taylor Petites was tested in the career separates and dress categories in 25 Ann Taylor Stores; by the end of Fiscal 1995, a broader range of Ann Taylor Petites was carried in 171 stores. Ann Taylor Loft stores offer a full assortment of Ann Taylor Loft Petites. In Fall 1994, the Company introduced a fragrance and limited line of personal care products under the name "destination", now sold in all Ann Taylor store concepts. This product line was expanded in Fall 1995 to include hair care and bath products, and a limited collection of home environment products such as scented candles and scented sea glass. In Spring 1995, the Company began testing Ann Taylor "navy label" merchandise in the career separates and dress categories in 30 Ann Taylor Stores. Navy label merchandise is priced approximately 30% higher than core Ann Taylor label merchandise, and is intended to compete with designer bridge and diffusion lines. The navy label collection will be limited to approximately 50 Ann Taylor Stores whose customer demographics the Company believes can support the higher price points of this merchandise.
New channels of distribution expanded or introduced over the past three years include the expansion of the Company's Ann Taylor Factory Store concept; the introduction of Ann Taylor Studio stores in Fall 1994; and the introduction of Ann Taylor Loft in Spring 1995, described above.
In Fall 1994, the Company sought to convert its fashion catalog, previously used primarily as an advertising vehicle, into a direct response mail order business. Although the direct response catalog had a good customer response rate to its initial mailings, the Company determined during Spring 1995 that the direct response mail order business was incompatible with the Company's current objectives for a variety of logistical, merchandising and financial reasons and returned its catalog to an advertising vehicle in Fall 1995. The Company suspended its catalog entirely in early 1996 and is presently evaluating the effectiveness of various advertising strategies.
Over the past three years, the Company has doubled the amount of its retail square footage, growing from 219 stores encompassing approximately 814,000 square feet at the beginning of Fiscal 1993, to 306 stores encompassing approximately 1,651,000 square feet at the end of Fiscal 1995. Of this, approximately 478,000 net square feet was added in Fiscal 1995. Since 1993, the Company has updated its Ann Taylor Store prototype and also increased the size of a typical new Ann Taylor Store from approximately 3,500 square feet to approximately 6,000 square feet, to enable the Company to more effectively present its full merchandise assortment. The increase in the Company's retail store square footage also reflects the expansion or relocation during this period of 66 of the Company's most productive stores to reflect the updated store prototype design.
To support the Company's growth strategy and improve operating performance, since 1992 the Company has (i) introduced an in-house product design and development department to further distinguish and reinforce the exclusivity of Ann Taylor merchandise and to improve consistency of product quality and fit; (ii) added a significant number of new associates to support the Company's efforts in merchandising, planning and production management; (iii) increased its investment in corporate infrastructure, particularly in information systems and by constructing a new 256,000 square foot distribution center, which was substantially completed in 1995; and (iv) sought to develop its own global, direct sourcing capabilities in order to reduce costs, shorten lead times and better control the quality of its merchandise, by forming, in Fiscal 1992, a sourcing joint venture with Cygne Designs, Inc. ("Cygne"), known as CAT U.S., Inc. and C.A.T. (Far East) Limited (together "CAT"). Approximately 38% of the Company's merchandise in Fiscal 1995 was purchased through CAT. ATSC has entered into an agreement in principle with Cygne, dated as of April 8, 1996, to acquire Cygne's interest in CAT and the assets of the Ann Taylor Woven Division of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). See "CAT/Cygne Transaction and Other Recent Developments".
Fiscal 1995 Results
The Company believes that its brand growth strategy is sound and contributed to the success of the business in Fiscal 1993 and Fiscal 1994. However, the Company also believes, in retrospect, that the introduction of multiple initiatives and acceleration of growth in Fall 1994, at a time when the Company was also expanding its infrastructure to support this growth, created a strain on the business and contributed to the Company's disappointing financial results in Fiscal 1995. During Fiscal 1994, the Company devoted substantial management time and resources to the planning, implementation and supervision of new store concepts (including the Ann Taylor Loft and Ann Taylor Studio stores), new product lines, the test of a direct response catalog business and the rapid expansion of its real estate portfolio. The move to a more vertically integrated business created an increased level of complexity in the Company's business during this period. As a result of management's focus on these initiatives and the assimilation of many new functions and people, Ann Taylor merchandise in Fiscal 1995 failed to achieve the cohesive, distinctive look that had defined the brand in the previous two years. Management believes that in 1995 its merchandise was "over-assorted" and, in some departments, appeared too "young" or "trendy". In addition, the Company experienced inconsistency in the fit of its apparel. The impact of these merchandising issues was exacerbated by the generally poor apparel retailing environment that prevailed throughout Fiscal 1995.
The Company has taken a number of actions in response to its disappointing results of Fiscal 1995. In recognition of the increased vertical integration and resulting increased complexity of the business, in 1995 the Company conducted an extensive project with a nationally recognized consulting firm to improve its internal processes in the areas of inventory planning, merchandising, design and quality assurance. This project was completed by the end of 1995 and the processes developed were begun to be implemented in Fall 1995, during the planning and procurement of the Spring 1996 merchandise assortment.
In the financial area, the Company is seeking to improve inventory turns by reducing inventory levels on a per square foot basis from Fiscal 1994 and 1995 levels. The Company believes that improved merchandise execution and more conservative inventory management will result in improved gross margins over Fiscal 1995 levels, by reducing the Company's markdown rate. At the end of Fiscal 1995, inventory levels were $62 per square foot, or 22% lower per square foot than at the end of Fiscal 1994. The Company has also focused on improving management of operating expenses by limiting the growth of central expenses and seeking to operate its stores more efficiently. The Company also has slowed its store expansion program for Fiscal 1996, planning to undertake no more than 15 to 20 new stores or expansions in 1996, compared to 78 such projects in Fiscal 1995.
In February 1996, the Company strengthened its executive management team by naming J. Patrick Spainhour as President and Chief Operating Officer, a newly created position, to improve execution of operations across the business and to allow Ms. Kasaks to focus more of her time on merchandise content and strategic direction.
CAT/Cygne Transaction and Other Recent Developments
ATSC and Cygne have entered into an agreement in principle, dated as of April 8, 1996, pursuant to which ATSC, through a newly formed subsidiary, will purchase all of the shares of CAT stock owned by Cygne and the assets (the "Assets") of the Ann Taylor Woven Division (the "Division") of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). Upon consummation of the CAT/Cygne Transaction, CAT will become an indirect wholly owned subsidiary of ATSC. In addition to continuing its own sourcing activities on behalf of the Company, CAT will own the Assets of the Division and will perform all sourcing functions for Ann Taylor currently performed by Cygne. The aggregate consideration to be paid by ATSC pursuant to the CAT/Cygne Transaction consists of (i) shares of Common Stock of ATSC having a market price, based on the closing price of ATSC's Common Stock for the ten trading days prior to the closing of the CAT/Cygne Transaction, of $36 million (but in no event greater than 2.5 million shares), and (ii) cash in an amount equal to the tangible net book value of the inventory and fixed assets included in the Assets, less certain assumed liabilities, currently estimated to be approximately $12.9 million. In addition, ATSC will assume the obligation to make payment to the president of CAT of approximately $2.0 million becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction.
The Company believes that the CAT/Cygne Transaction will mitigate supply interruption risks arising from the financial difficulties experienced by Cygne in 1995. Moreover, the CAT/Cygne Transaction furthers the Company's strategy of increasing its control over pre-production processes and production management in order to shorten lead times, improve merchandise quality and reduce costs. The Company believes that the integration of CAT's business and the Division with the Company's operations will enable CAT and the Division to share their respective strengths in different areas of pre-production processes and production management, such as CAT's system of statistical quality control and Cygne's strength in fabric development. In addition, the CAT/Cygne Transaction provides a platform for the Company to standardize its pre-production work for its other suppliers, which the Company believes will lead to greater consistency in merchandise production, product fit specifications and quality control. Finally, the Company believes that greater control over pre-production processes and production management will improve logistical coordination of the entire supply chain process, thereby reducing production cycle times and sourcing costs.
The closing of the CAT/Cygne Transaction is subject to various conditions, including (i) the negotiation and execution of definitive documentation, (ii) the consent and release of liens by each of HongKong and Shanghai Banking Corporation and certain other lenders to Cygne, (iii) the continuation of CAT's $40 million credit facility by HongKong and Shanghai Banking Corporation, its current lender, (iv) the consent of Ann Taylor's lenders under the Bank Credit Agreement, (v) the approval of the transaction by Cygne's stockholders and (vi) the consummation of an offering under Rule 144A described below by ATSC with proceeds of $75 million less underwriting discounts and commissions (the "144A Offering'). It is currently anticipated that the CAT/Cygne Transaction will close in July 1996. However, there can be no assurance that the conditions to closing will be satisfied or that the CAT/Cygne Transaction will be consummated.
ATSC will form AnnTaylor Finance Trust (the "Trust"), a Delaware business trust, to offer securities not registered or required to be registered under the Securities Act of 1993. The Trust proposes to offer up to 1.5 million convertible preferred securities with a liquidation preference of $50 each and to grant the initial purchasers an option to purchase an additional 225,000 convertible preferred securities to cover over-allotments. ATSC will own all of the common securities of the Trust. The securities will represent undivided beneficial ownership interests in the Trust. The assets of the Trust will consist solely of ATSC's Convertible Subordinated Debentures due 2016. The convertible preferred securities will be convertible at the options of the holders thereof into ATSC common stock. ATSC plans to use the proceeds of the offering to reduce borrowings outstanding under the Company's revolving credit facility, without reduction of the commitment thereunder. If the CAT/Cygne Transaction is consummated, the Company may reborrow funds under the revolving credit facility to fund the cash portion of the purchase price and related payments and expenses. The convertible preferred securities will be sold in the United States and outside the United States in a private placement under Rule 144A and Regulation S, respectively, and have not been and will not be registered under the Securities Act of 1993, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
ITEM 2.
ITEM 2. Properties
As of February 3, 1996, the Company operated 306 stores, all of which were leased. The leases typically provide for an initial term of five to ten years and grant the Company the right to extend the term for one or two additional five-year periods. Most leases provide for additional rent based on a percentage of store sales in excess of a specified threshold in addition to or in lieu of minimum rentals, as well as for the payment of certain other expenses, such as insurance, utilities and repair and maintenance expenses, and real estate taxes.
Ann Taylor leases corporate offices at 142 West 57th Street, New York, and office space in New Haven, Connecticut.
The Company owns its 256,000 square foot national distribution center located in Louisville, Kentucky. Construction of this facility was begun in 1994 and completed in Spring 1995. The Company's capital expenditures to build and equip the facility totaled approximately $19.0 million, of which $6.2 million was incurred in Fiscal 1995. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility, with the exception of hosiery that is shipped directly to stores by the manufacturer. The parcel on which the Louisville distribution center is located, which is owned by the Company, contains approximately 20 acres and could accommodate possible future expansion of the facility. The Louisville distribution center replaced the Company's former 78,790 square foot leased facility located in New Haven, Connecticut, the lease for which expired in September 1995.
ITEM 3.
ITEM 3. Legal Proceedings
The Company is a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position or results of operations of the Company.
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PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no public market for the common stock of the Company. All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by ATSC.
The payment of dividends by the Company to ATSC is subject to certain restrictions under the Company's bank credit agreement, the indenture relating to the Company's 8-3/4% Subordinated Notes due 2000 and the Company's Receivables Facility. See Note 2 to the Consolidated Financial Statements of the Company.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal 1995 Compared to Fiscal 1994
The Company's net sales increased to $731,142,000 in 1995 from $658,804,000 in 1994, an increase of $72,338,000, or 11.0%. Total sales for the fifty-two week period ended January 27, 1996 were up 9.5% to $721,561,000 compared to 1994. The increase in net sales was attributable to the inclusion of a full year of operating results for the 35 stores opened and 25 stores expanded during 1994, and the opening of 48 new stores and expansion of 30 stores in 1995. The sales increase was partially offset by the closing of 4 stores in 1995 and by a 8.9% decrease in comparable store sales for the fifty-two week period ended January 27, 1996. The Company believes that the 8.9% decrease in its comparable store sales in 1995 was attributable primarily to poor customer reaction to the Company's merchandise offerings, as well as to the generally weak economic environment for women's apparel sales that prevailed throughout most of 1995. As described above under "Business -- Business Strategy", the Company believes that its 1995 merchandise offerings were "over-assorted" and failed to achieve the cohesive, distinctive look that had defined the brand in the previous two years.
Gross profit as a percentage of net sales decreased to 41.8% in 1995 from 45.7% in 1994. This decrease was primarily attributable to higher markdowns associated with increased promotional activities and, to a lesser extent, to a lower initial mark up rate associated with merchandise manufactured for Ann Taylor Factory Stores and Ann Taylor Loft stores, compared to the initial mark up on merchandise manufactured for Ann Taylor Stores.
Selling, general and administrative expenses as a percentage of net sales increased to 37.0% in 1995 from 32.5% in 1994. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher tenancy, store maintenance and store selling costs as a percentage of sales as a result of both decreased comparable store sales and lower than average sales per square foot productivity of stores added in Fiscal 1995 (approximately 73% of the increase), higher distribution center expense relating, in part, to start-up costs of the Company's distribution center facility in Louisville, Kentucky (approximately 8% of the increase), additional catalog expense relating to the Company's test of its catalog as a mail order vehicle (approximately 7% of the increase), higher merchandising and design expense (approximately 6% of the increase) and higher packaging and supplies expense (approximately 5% of the increase). The Company returned its catalog format to principally an advertising vehicle, rather than a mail order business, in Fall 1995 and suspended publication of its catalog entirely in early 1996.
Operating income decreased to $25,275,000, or 3.5% of net sales, in 1995, from $77,291,000, or 11.7% of net sales, in 1994. Amortization of goodwill from the acquisition of the Company by ATSC was $9,506,000 in 1995 and 1994. Operating income without giving effect to such amortization was $34,781,000, or 4.8% of net sales, in 1995, and $86,797,000, or 13.2% of net sales, in 1994.
Interest expense was $20,956,000, including $1,004,000 of non-cash interest expense, in 1995 and $14,229,000, including $978,000 of non-cash interest expense, in 1994. The increase in interest expense is attributable to higher interest rates applicable to the Company's debt obligations throughout most of the 1995 period and the increase in the Company's long-term debt. The weighted average interest rate on the Company's outstanding indebtedness at February 3, 1996 was 8.26% compared to 8.90% at January 28, 1995. Because a substantial amount of the Company's debt bears interest at variable rates, the Company's interest expense for 1995 is not necessarily indicative of interest expense for future periods.
The income tax provision was $5,157,000, or 120.5% of income before income taxes and extraordinary loss, in the 1995 period compared to $30,274,000, or 48.1% of income before income taxes and extraordinary loss, in 1994. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense.
As a result of the foregoing factors, the Company had a net loss of $876,000, or 0.1% of net sales, for 1995 compared to net income of $31,752,000, or 4.8% of net sales, for 1994.
ITEM 8.
ITEM 8. Financial Statement and Supplementary Data
The following consolidated financial statements of the Company for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995. Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
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PART IV
ITEM 14.
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 13 through 27 and are filed as part of this Annual Report:
Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994; Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995; Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994; Notes to Consolidated Financial Statements; Independent Auditors' Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed below are filed as a part of this Annual Report.
Exhibit Number - --------------
3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit 3.3 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522).
3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.4 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522).
4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8- K of Ann Taylor filed on July 7, 1993.
4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. Incorporated by reference to Exhibit 4.1.1 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996.
10.1 Amended and Restated Credit Agreement, dated as of September 29, 1995, among Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), and Fleet Bank, National Association, as Co- Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995.
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Exhibit Number - --------------
10.1.1 First Amendment to Amended and Restated Credit Agreement, dated as of January 4, 1996, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996.
10.2 Amended and Restated Guaranty, dated as of September 29, 1995, made by ATSC in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995.
10.3 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995.
10.4 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by ATSC in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995.
10.5 Trademark Security Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995.
10.6 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522).
10.6.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of ATSC filed on April 30, 1993.
10.7 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522).
10.7.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of ATSC filed on April 11, 1991 (Registration No. 33-39905).
10.7.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of ATSC filed on April 29, 1993.
10.7.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993.
10.7.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
10.7.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
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Exhibit Number - ---------------
10.8 Tax Sharing Agreement, dated as of July 13, 1989, between ATSC and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of ATSC and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522).
10.9 Employment Agreement, effective as of February 3, 1992, between ATSC and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K of ATSC filed on April 28, 1992.
10.9.1 Employment Agreement dated as of February 1, 1994 between ATSC and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of ATSC for the Quarter ended October 29, 1994 filed on December 9, 1994.
10.10 Employment Agreement dated February 16, 1996 between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996.
10.11 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994. Incorporated by reference to ATSC's Registration Statement on Form S-8 filed with the Commission on June 30, 1994 (Registration No. 33-50688).
10.12 Amended and Restated Management Performance Compensation Plan as approved by stockholders of ATSC on June 1, 1994. Incorporated by reference to Exhibit 10.22.1 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
10.12.1 Amendment to the AnnTaylor Stores Corporation Management Performance Compensation Plan dated as of February 24, 1995. Incorporated by reference to Exhibit 10.22.2 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
10.13 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of ATSC for the Quarter Ended October 31, 1992 filed on December 15, 1992.
10.14 Interest Rate Swap Agreement dated as of July 22, 1993, between Ann Taylor and Fleet Bank of Massachusetts, N.A. Incorporated by reference to Exhibit 10.6 to the Form 10- Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
10.15 Stock Purchase Agreement, dated as of July 13, 1993, between Ann Taylor and Cleveland Investment, Ltd. Incorporated by reference to Exhibit 10.7 to the Form 10- Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993.
10.16 Agreement, dated July 13, 1993, among Cygne Designs, Inc., CAT US, Inc., C.A.T. (Far East) Limited and Ann Taylor. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of Ann Taylor for the Quarter ended July 31, 1993 filed on September 2, 1993. (Confidential treatment has been granted with respect to certain portions of this Exhibit.)
10.17 Amended and Restated Receivables Financing Agreement dated October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.31.4 to the Form 10-Q of ATSC for the Quarter ended October 28, 1995 filed on December 8, 1995.
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Exhibit Number - --------------
10.18 Purchase and Sale Agreement dated as of January 27, 1994 between Ann Taylor and AnnTaylor Funding, Inc. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of ATSC filed on March 31, 1994.
10.19 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995.
10.19.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of ATSC for the Quarter Ended July 29, 1995 filed on September 11, 1995.
10.20 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995.
10.21 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. ===================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANNTAYLOR, INC.
By: /s/ SALLY FRAME KASAKS -------------------------- Sally Frame Kasaks Chairman and Chief Executive Officer
Date: April 9, 1996 ----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date ---------- ------ -----
/s/ SALLY FRAME KASAKS Chairman, Chief Executive April 9, 1996 - ---------------------- Officer and Director -------------- Sally Frame Kasaks
/s/ J. PATRICK SPAINHOUR President,Chief Operating April 9, 1996 - ------------------------ Officer and Director --------------- J. Patrick Spainhour
/s/ PAUL E. FRANCIS Executive Vice President April 9, 1996 - ------------------------ Finance and Administration -------------- Paul E. Francis Chief Financial Officer, and Director
/s/ WALTER J. PARKS Senior Vice President - April 9, 1996 - ------------------------ Finance and Principal -------------- Walter J. Parks Accounting Officer
/s/ GERALD S. ARMSTRONG Director April 9, 1996 - ------------------------ -------------- Gerald S. Armstrong
/s/ JAMES J. BURKE, JR. Director April 9, 1996 - ------------------------ -------------- James J. Burke, Jr.
/s/ ROBERT C. GRAYSON Director April 9, 1996 - ------------------------- -------------- Robert C. Grayson
/s/ ROCHELLE B. LAZARUS Director April 9, 1996 - ----------------------- ------------- Rochelle B. Lazarus
/s/ HANNE M. MERRIMAN Director April 9, 1996 - ----------------------- -------------- Hanne M. Merriman
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ANNTAYLOR, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report................................ 14
Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994...................................... 15
Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995.......................................... 16
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994...................................... 17
Notes to Consolidated Financial Statements................ 18
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INDEPENDENT AUDITORS' REPORT
To the Stockholder of AnnTaylor, INC.:
We have audited the accompanying consolidated financial statements of AnnTaylor, Inc. and its subsidiaries, listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York March 11, 1996 (April 9, 1996 as to Note 11)
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ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
Fiscal Years Ended February 3, January 28, January 29, 1996 1995 1994 ----------- ------------ ------------ (in thousands)
Net sales $731,142 $658,804 $501,649 Cost of sales 425,225 357,783 271,749 ------- ------- -------
Gross profit 305,917 301,021 229,900
Selling, general and administrative expenses 271,136 214,224 169,371 Distribution center restructuring charge --- --- 2,000 Amortization of goodwill 9,506 9,506 9,508 ------- ------- -------
Operating income 25,275 77,291 49,021
Interest expense 20,956 14,229 17,696 Other (income) expense, net 38 168 (194) ------- ------- -------
Income before income taxes and extraordinary loss 4,281 62,894 31,519 Income tax provision 5,157 30,274 17,189 ------- ------- -------
Income (loss) before extraordinary loss (876) 32,620 14,330
Extraordinary loss (net of income tax benefit of $654,000 and $6,123,000, respectively) --- 868 11,121 ------- ------- -------
Net income (loss) $ (876) $ 31,752 $ 3,209 ======== ======= =======
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC. CONSOLIDATED BALANCE SHEETS February 3, 1996 and January 28, 1995
February 3, January 28, 1996 1995 ----------- ----------- (in thousands) ASSETS Current assets Cash $ 1,283 $ 1,551 Accounts receivable, net 70,395 61,211 Merchandise inventories 102,685 93,705 Prepaid expenses and other current assets 12,808 6,601 Prepaid tenancy 8,099 1,355 Deferred income taxes 3,400 3,650 ------- ------- Total current assets 198,670 168,073
Property and equipment Land and buildings 8,923 499 Leasehold improvements 73,677 43,370 Furniture and fixtures 99,548 59,105 Construction in progress 14,190 24,867 ------- ------- 196,338 127,841 Less accumulated depreciation and amortization 42,443 31,503 ------- ------- Net property and equipment 153,895 96,338 Goodwill, net of accumulated amortization of $66,725,000 and $57,219,000, respectively 313,525 323,031 Investment in CAT 5,438 3,792 Deferred income taxes --- 1,600 Deferred financing costs, net of accumulated amortization of $1,960,000 and $956,000, respectively 3,933 2,829 Other assets 3,248 2,591 ------- ------- Total assets $678,709 $598,254 ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable $ 42,909 $ 36,625 Accrued expenses 29,018 29,267 Current portion of long-term debt 40,266 --- ------- ------- Total current liabilities 112,193 65,892 Long-term debt 232,192 200,000 Deferred income taxes 1,300 --- Other liabilities 7,336 6,250 Commitments and contingencies Stockholder's equity Common stock, $1.00 par value; 1,000 shares authorized; 1 share issued and outstanding 1 1 Additional paid-in capital 311,567 311,115 Retained earnings 14,120 14,996 ------- ------- Total stockholder's equity 325,688 326,112 ------- ------- Total liabilities and stockholder's equity $678,709 $598,254 ======= =======
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
Fiscal Years Ended Feb. 3, Jan. 28, Jan. 29, 1996 1995 1994 ------ ------- --------
(in thousands) Operating activities: Net income (loss) $ (876) $ 31,752 $ 3,209 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss --- 1,522 17,244 Distribution center restructuring charge --- --- 2,000 Equity earnings in CAT (1,646) (1,547) (517) Provision for loss on accounts receivable 1,280 1,727 1,171 Depreciation and amortization 18,788 11,787 8,505 Amortization of goodwill 9,506 9,506 9,508 Amortization of deferred compensation 68 298 279 Non-cash interest 1,004 978 4,199 Deferred income taxes 3,150 --- (1,750) Loss on disposal of property and equipment 1,143 1,268 312 Increase in receivables (10,464) (13,659) (7,447) Increase in merchandise inventories (8,980) (32,815) (10,583) Increase in prepaid expenses and other current assets (12,951) (772) (1,280) Decrease in refundable income taxes --- --- 5,097 Increase in accounts payable and accrued liabilities 6,925 6,537 18,218 Decrease (increase) in other non-current assets and liabilities, net 429 567 (843) ------- ------- ------- Net cash provided by operating activities 7,376 17,149 47,322 ------- ------- ------- Investing activities: Purchases of property and equipment (78,378) (61,341) (25,062) Investment in CAT --- --- (1,640) ------- ------- ------- Net cash used by investing activities (78,378) (61,341) (26,702) ------- ------- ------- Financing activities: Borrowings (repayments) under revolving credit facility 37,000 64,000 (3,500) Decrease in bank overdrafts --- --- (2,361) Payments of long-term debt (542) (56,000) (137,610) Purchase of Subordinated Debt Securities --- --- (93,689) Net proceeds from 8-3/4% Notes --- --- 107,387 Proceeds from term loan 25,000 --- 80,000 Parent company contribution 384 34,791 10,485 Proceeds from mortgage 7,000 --- --- Proceeds from Receivables Facility 4,000 3,000 33,000 Purchase of 8-3/4% Notes --- --- (10,225) Payment of financing costs (2,108) (340) (4,041) ------- ------- ------- Net cash provided by (used by) financing activities 70,734 45,451 (20,554) ------- ------- ------- Net increase (decrease) in cash (268) 1,259 66 Cash, beginning of year 1,551 292 226 ------- ------- ------- Cash, end of year $ 1,283 $ 1,551 $ 292 ======= ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest $ 19,607 $ 13,211 $ 12,664 ======= ======= ======= Cash paid during the year for income taxes $ 6,886 $ 26,242 $ 5,114 ======= ======= =======
See accompanying notes to consolidated financial statements.
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -------------------------------------------
AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold principally under the Ann Taylor brand name.
All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC").
Basis of Presentation ---------------------
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts have been eliminated in consolidation.
Certain Fiscal 1994 and 1993 amounts have been reclassified to conform to the Fiscal 1995 presentation.
Fiscal Year -----------
The Company follows the standard fiscal year of the retail industry, which is a 52-or 53-week period ending on the Saturday closest to January 31 of the following calendar year. The fiscal year ended February 3, 1996 included 53 weeks.
Finance Service Charge Income -----------------------------
Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $8,328,000 for Fiscal 1995, $6,871,000 for Fiscal 1994, and $6,166,000 for Fiscal 1993.
Merchandise Inventories -----------------------
Merchandise inventories are accounted for by the retail inventory method and are stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment ----------------------
Property and equipment are recorded at cost. The Company capitalized interest costs of approximately $1,300,000 and $500,000 in Fiscal 1995 and Fiscal 1994, respectively. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter.
Pre-Opening Expenses --------------------
Pre-opening store expenses are charged to selling, general and administrative expenses in the period incurred.
Deferred Financing Costs ------------------------
Deferred financing costs are being amortized using the interest method over the terms of the related debt.
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies - (Continued) --------------------------------------------------------
Goodwill --------
Goodwill is being amortized on a straight-line basis over 40 years. On an annual basis the Company compares the carrying value of its goodwill to an estimate of the Company's fair value to evaluate the reasonableness of the carrying value and remaining amortization period. Fair value is computed using projections of future cash flows.
The Financial Accounting Standards Board issued in March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company believes this statement will not have a material impact on the financial statements of the Company when adopted in Fiscal 1996.
Income Taxes ------------
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to elect to file consolidated income tax returns for federal income tax purposes and may elect to file such returns in states and other relevant jurisdictions that permit such an election, for income tax purposes. With respect to such consolidated income tax returns, the Tax Sharing Agreement generally requires the company to pay to ATSC the entire tax shown to be due on such consolidated returns, provided that the amount paid by the Company shall not exceed the amount of taxes that would have been owed by the Company on a stand-alone basis.
Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates.
2. Long-Term Debt ---------------
The following summarizes long-term debt outstanding at February 3, 1996 and January 28, 1995: February 3, 1996 January 28, 1995 ------------------- ------------------ Carrying Estimated Carrying Estimated Amount Value Amount Value ------- ------- ------- ------
(in thousands) Senior Debt: Revolving credit facility $101,000 $101,000 $64,000 $ 64,000 Term loan 24,500 24,500 --- --- Mortgage 6,958 6,958 --- --- 8-3/4% Notes 100,000 83,125 100,000 97,000 Interest rate swap agreement --- 384 --- 4,125 Receivables facility 40,000 40,000 36,000 36,000 ------- ------- ------- ------- Total debt 272,458 255,967 200,000 201,125 Less current portion 40,266 40,266 --- --- ------- ------- ------- ------- Total long-term debt $232,192 $215,701 $200,000 $201,125 ======= ======= ======= =======
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Long-Term Debt (continued) --------------------------
In September 1995, the Company entered into an amended and restated credit agreement (the "Bank Credit Agreement") to replace its then-existing bank credit agreement. The Bank Credit Agreement provides, among other things, for a $25,000,000 term loan and continuation of a $125,000,000 revolving credit facility provided for under the preceding credit agreement. As described below, the revolving credit facility was reduced to $122,000,000 in January 1996. The principal amount of the term loan is payable on September 29, 1998, and the maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding loan balance under the revolving credit facility to $50,000,000 or less for thirty consecutive days during Fiscal 1996 and in each fiscal year thereafter. The maximum amount that may be borrowed under the revolving credit facility is reduced by the amount of commercial and standby letters of credit outstanding. At February 3, 1996 the amount available under the revolving credit facility was $13,150,000.
The term loan bears interest at a rate equal to, at the Company's option, the Bank of America National Trust and Savings Association ("Bank of America") (1) Base Rate plus 2.50%, or (2) Eurodollar Rate plus 3.50%, and amounts outstanding under the revolving credit facility bear interest at a rate equal to, at the Company's option, the Bank of America (1) Base Rate plus .75%, or (2) Eurodollar Rate plus 1.75%. In addition, the Company is required to pay Bank of America a quarterly commitment fee of 0.375% per annum of the unused revolving loan commitment. At February 3, 1996, the $101,000,000 outstanding under the revolving credit facility bore interest at the weighted average rate of 7.46% per annum and the $24,500,000 outstanding under the term loan bore interest at 8.875% per annum.
Under the terms of the Bank Credit Agreement, Bank of America obtained a pledge of the Company's outstanding common stock held by ATSC and a security interest in certain assets of the Company, excluding inventory and accounts receivable. In addition, the Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and maintaining certain financial ratios and specified levels of net worth. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $25,000,000 in Fiscal 1996 and $32,500,000 in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied.
Since the fourth quarter of 1993, the Company sells its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary of the Company, which uses the receivables to secure borrowings under a receivables financing facility due January 1997. In October 1995, AnnTaylor Funding, Inc. entered into an amended and restated receivables financing agreement (the "Receivables Facility"), refinancing its then existing receivables financing facility on substantially the same terms as the prior facility. AnnTaylor Funding, Inc. can borrow up to $40,000,000 under the Receivables Facility based on its eligible accounts receivable balance. As of February 3, 1996, $40,000,000 was outstanding under the Receivables Facility. The interest rate under this facility as of February 3, 1996 was 7.0%. At February 3, 1996, AnnTaylor Funding, Inc. had total assets of approximately $58,091,000 all of which are subject to the security interest of the lender under the Receivables Facility.
On June 28, 1993, the Company issued $110,000,000 principal amount of its 8-3/4% Subordinated Notes due 2000 ("8-3/4% Notes"). The outstanding principal amount of these notes as of February 3, 1996 was $100,000,000.
In July 1993, the Company entered into a $110,000,000 (notional amount) interest rate swap agreement, which had the effect of converting the Company's interest obligations on the 8-3/4% Notes to a variable rate. Under the agreement, the Company receives a fixed rate of 4.75% and pays a floating rate based on LIBOR, as determined in six month intervals. The swap agreement matures in July 1996. The Company is currently receiving a fixed rate of 4.75% and paying a rate of 5.375%. Net receipts or payments under the agreement are recognized as an adjustment to interest expense.
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Long-Term Debt - (Continued) ----------------------------
In November 1995, the Company and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. received the proceeds of a $7,000,000 seven-year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $65,000 through December 1, 1997, and thereafter in monthly installments sufficient to amortize the then remaining principal balance over a period of five years. The Bank Credit Agreement required the Company to reduce the commitment under the revolving credit facility and term loan by one-half the proceeds from the mortgage.
The aggregate principal payments of all long-term obligations are as follows:
Fiscal Year (in thousands) 1996 $ 40,266 1997 287 1998 125,809 1999 333 2000 100,359 2001 and thereafter 5,404 ------- Total $272,458 =======
At February 3, 1996 and January 28, 1995, the Company had outstanding commercial and standby letters of credit under its credit facilities with Bank of America totaling $7,850,000 and $6,430,000, respectively.
In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the Company determined the estimated fair value of its debt instruments and interest rate swap using quoted market information, as available. As judgment is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange.
3. Allowance for Doubtful Accounts
A summary of activity in the allowance for doubtful accounts for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 is as follows:
Fiscal Years Ended Feb. 3, Jan. 28, Jan. 28, 1996 1995 1994 ------ -------- ------- (in thousands)
Balance at beginning of year $ 931 $ 787 $ 1,006 Provision for loss on accounts receivable 1,280 1,727 1,171 Accounts written off (1,475) (1,583) (1,390) ------- ------ ------ Balance at end of year $ 736 $ 931 $ 787 ====== ====== ======
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Commitments and Contingencies -----------------------------
Rental Commitments ------------------
The Company occupies its retail stores and administrative facilities under operating leases, most of which are non- cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the leases require the Company to pay real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. Most of the store leases require the Company to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a certain threshold.
Future minimum lease payments under non-cancelable operating leases at February 3, 1996 are as follows:
Fiscal Year (in thousands) ----------- 1996 $54,592 1997 53,745 1998 52,041 1999 49,500 2000 46,389 2001 and thereafter 240,858 ------- Total $497,125 =======
Rent expense for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 was as follows:
Fiscal Years Ended ---------------------------
(in thousands)
Feb. 3, Jan. 28, Jan. 29, 1996 1995 1994 -------- --------- ------- Minimum rent $47,132 $35,382 $28,076 Percentage rent 3,090 4,684 3,343 ------ ------ ------ Total $50,222 $40,066 $31,419 ====== ====== ======
Dependency on Certain Suppliers -------------------------------
In 1995, the Company purchased 38.3% and 16.3% of its merchandise from CAT U.S., Inc. ("CAT") and Cygne Designs, Inc. ("Cygne"), respectively (see Note 7 and Note 11). CAT is a joint venture formed by the Company with Cygne for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. As of February 3, 1996, the Company owned a 40% interest in CAT. CAT has a loan facility in place with the same bank as Cygne and, although CAT has represented that it is in compliance with the terms of its credit agreement, the agreement contains a cross- default provision relating to defaults under other indebtedness of CAT or Cygne. Currently, Cygne is in default of its credit agreement and CAT's lender has the right to cancel its $40 million credit facility with CAT and demand repayment of all amounts outstanding under the facility. Should the lender exercise such right and if CAT was unable to obtain alternative financing, the interruption or cessation of business by CAT could have a material adverse effect on the consolidated financial statements of the Company in an amount not presently determinable.
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Commitments and Contingencies (continued) -----------------------------------------
In addition, the Company has outstanding a $4 million standby letter of credit to support CAT's obligations to its lender under the above mentioned credit facility.
While the Company has made significant purchases of merchandise from Cygne in 1995, management believes that, if Cygne were to experience problems in fulfilling its merchandise commitments, alternative sources of product could be obtained and such interruption would not have a material adverse effect on the consolidated financial statements of the Company.
Additionally, three other sources accounted for approximately 15% of the Company's 1995 purchases. Management of the Company believes that if these sources of product were interrupted, alternative sources could be obtained without a material adverse effect on the consolidated financial statements of the Company.
Litigation ----------
Ann Taylor has been named as a defendant in several legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the consolidated financial statements of the Company.
5. Extraordinary Items -------------------
On May 18, 1994, ATSC completed a public offering of 1,000,000 shares of common stock (the "ATSC Offering") at a price of $32.00 per share, resulting in aggregate net proceeds of $30,420,000 (after payment of underwriting discounts and expenses of the ATSC Offering payable by ATSC). As required by the Company's then- existing bank credit agreement, $30,000,000 of the net proceeds of the ATSC Offering were contributed to the Company and subsequently used by the Company to reduce the amount of a term loan outstanding under that agreement. The write-off of deferred financing costs associated with the payment on the term loan with the proceeds of the ATSC Offering and refinancing of long-term debt resulted in an extraordinary loss of $1,522,000 ($868,000 net of income tax benefit).
The ATSC Offering was consummated concurrently with the public offering and sale by certain affiliates of Merrill Lynch & Co., Inc. ("ML&Co.") (the "Selling Stockholders") of 4,075,000 shares of ATSC's common stock held by them. ATSC did not receive any of the proceeds of the shares sold by the Selling Stockholders.
In 1993, the Company entered into a series of debt refinancing transactions that resulted in an extraordinary loss of $17,244,000 ($11,121,000 net of income tax benefit). The loss was attributable to the premiums paid in connection with the purchase or discharge of the Company's 14-3/8% Senior Subordinated Discount Notes due 1999 ("Discount Notes") and its 13-3/4% Subordinated Notes due 1999 ("Notes") and the purchase of $10,000,000 principal amount of its 8-3/4% Notes and the write-off of deferred financing costs.
6. Restructuring -------------
The Company recorded a $2,000,000 pre-tax restructuring charge in the fourth quarter of 1993 in connection with the announced relocation of its distribution center from New Haven, Connecticut to Louisville, Kentucky. The primary components of the restructuring charge are approximately $1,100,000 for employee related costs, principally for severance and job training benefits, and approximately $900,000 for the write-off of the estimated net book value of fixed assets at the time of relocation. The relocation was completed by late spring 1995.
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Certain Relationships and Related Transactions ----------------------------------------------
Transactions with Merrill Lynch and its Affiliates --------------------------------------------------
At February 3, 1996, certain affiliates of ML&Co. held approximately 26.7% of ATSC's outstanding common stock. Two of the members of the Board of Directors of the Company and ATSC serve as representatives of ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a position to influence the management of the Company and ATSC.
The Company paid commissions aggregating approximately $2,692,000 to Merrill Lynch in 1993 in connection with the issuance of the 8-3/4% Notes, and repurchases of Discount Notes, Notes and 8-3/4% Notes. In 1994, ATSC also paid underwriting commissions of approximately $1,027,000 to Merrill Lynch in connection with the ATSC Offering. ATSC agreed to indemnify Merrill Lynch, as underwriter, against certain liabilities, including certain liabilities under the federal securities law, in connection with the ATSC Offering.
Transactions with CAT ---------------------
As previously discussed in Note 4, in May 1992, the Company commenced a joint venture known as CAT which was formed for the purpose of sourcing Ann Taylor merchandise directly with manufacturers. As of February 3, 1996, the Company owned a 40% interest in CAT which is being accounted for under the equity method of accounting. The Company's agreement with Cygne relating to the parties' ownership of CAT provides that, at any time after July 1, 1995, either Cygne or the Company may offer to purchase the other party's interest in CAT. Merchandise purchased by the Company through CAT was $167,000,000 or 38.3%, and $142,429,000, or 36.3%, of all merchandise purchased by the Company in 1995 and 1994, respectively. Accounts payable to CAT in the ordinary course of business was approximately $17,800,000 and $4,800,000 as of February 3, 1996 and January 28, 1995, respectively.
8. Income Taxes ------------
The provision for income taxes for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 consists of the following:
Fiscal Years Ended ----------------------------
Feb. 3, Jan. 28, Jan. 29 1996 1995 1994 ------- -------- -------- (in thousands) Federal: Current $1,400 $22,534 $13,739 Deferred 2,249 --- (1,150) ----- ------ ------ Total federal 3,649 22,534 12,589 ----- ------ ------ State and local: Current 607 7,740 5,200 Deferred 901 --- (600) ----- ------ ------ Total state and local 1,508 7,740 4,600 Total $5,157 $30,274 $17,189 ===== ====== ======
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Income Taxes (continued) ------------------------
The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 is as follows:
Fiscal Years Ended -------------------------- Feb. 3, Jan. 28, Jan. 29, 1996 1995 1994 ------- ------- ------- (in thousands)
Income before income taxes and extraordinary loss $4,281 $62,894 $31,519 ===== ====== ====== Federal statutory rate 35% 35% 35% ==== ====== ====== Provision for income taxes at federal statutory rate $1,498 $22,013 11,032 State and local income taxes, net of federal income tax benefit 980 5,031 2,990 Non-deductible amortization of goodwill 3,327 3,327 3,328 Undistributed income of joint venture (387) (420) --- Other (261) 323 (161) ----- ------ ------ Provision for income taxes $5,157 $30,274 $17,189 ===== ====== ======
The tax effects of significant items comprising the Company's net deferred tax assets as of February 3, 1996 and January 28, 1995 are as follows:
Feb. 3, Jan. 28, 1996 1996 ------- -------- (in thousands) Current: Inventory $1,899 $1,464 Accrued expenses 2,188 1,524 Real estate (1,139) (762) Restructuring --- 700 Other 452 724 ------ ------- Total current $ 3,400 $ 3,650 ====== ====== Noncurrent: Depreciation $(3,024) $ 340 Rent expense 2,840 2,052 Other (1,116) (792) ------ ------ Total noncurrent $(1,300) $ 1,600 ====== ======
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Retirement Plans ----------------
Savings Plan. The Company maintains a defined contribution 401(k) savings plan for substantially all employees. Participants may contribute to the plan an aggregate of up to 10% of their annual earnings. The Company makes a matching contribution of 50%, with respect to the first 3% of each participant's annual earnings contributed to the plan. The Company's contributions to the plan for Fiscal 1995, Fiscal 1994 and Fiscal 1993 were $337,000, $333,000 and $199,000, respectively.
Pension Plan. Substantially all employees of the Company are covered under a noncontributory defined benefit pension plan. The pension plan is a "cash balance pension plan". An account balance is established for each participant which is credited with a benefit based on compensation and years of service with the Company. The Company's funding policy for the plan is to contribute annually the amount necessary to provide for benefits based on accrued service and projected pay increases. Plan assets consist primarily of cash, equity and fixed income securities.
The following table sets forth the funded status of the Pension Plan at February 3, 1996, January 28, 1995 and January 29, 1994, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions":
Feb .3, Jan. 28, Jan. 29, 1996 1995 1994 ----- ---- ----- (dollars in thousands) Actuarial present value of benefits obligation: Accumulated benefit obligation, including vested benefits of $2,064,000, $1,500,000 and $1,056,000, respectively $2,893 $2,516 $2,401 ===== ===== =====
Projected benefit obligation for service rendered to date $2,893 $2,516 $2,401 Plan assets at fair value 2,537 2,522 2,344 ----- ----- -----
Plan assets in excess of projected benefit obligation (projected benefit obligation in excess of plan assets) (356) 6 (57) Unrecognized net gain (231) (136) (58) ----- ----- -----
Accrued pension cost $ (587) $ (130) $ (115) ===== ===== =====
Net periodic pension cost for fiscal 1995, 1994 and 1993 included the following components: Service cost/benefits earned during the year $ 681 $ 622 $ 680 Interest cost on projected benefit obligation 185 133 117 Actual loss (return) on plan assets (104) 72 (124) Net amortization and deferral (132) (285) (36) ----- ----- -----
Net periodic pension cost $ 630 $ 542 $ 637 ===== ===== =====
Assumptions used to determine the projected benefit obligation and plan assets were: Discount rate 6.75% 8.50% 7.00% Rate of increase in compensation level 4.00% 5.50% 4.00% Expected long-term rate of return on assets 9.00% 8.00% 8.00%
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ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Stockholder's Equity ---------------------
The following summarizes the changes in stockholder's equity during fiscal 1995, 1994 and 1993:
Retained Additional Earnings Total Common Paid-in Accummul. Stockholders' Stock Capital Deficit Equity ----- --------- --------- ------------
(in thousands) Balance at January 30, 1993 $ 1 $265,262 $(19,965) $245,298 Net income --- --- 3,209 3,209 Parent company contributions --- 10,764 --- 10,764 ---- ------- ------- ------- Balance at January 29, 1994 1 276,026 (16,756) 259,271 Net income --- --- 31,752 31,752 Parent company contributions --- 35,089 --- 35,089 ---- ------- ------- ------- Balance at January 28, 1995 1 311,115 14,996 326,112 ---- ------- ------ ------- Net loss --- --- (876) (876) Parent company contributions --- 452 --- 452 ---- ------- ------ ------- Balance at February 3, 1996 $ 1 $311,567 $14,120 $325,688 ==== ======== ======= ========
11. Subsequent Event ----------------
ATSC and Cygne have entered into an agreement in principle dated as of April 8, 1996, pursuant to which ATSC, through a newly formed subsidiary, will purchase all of the shares of CAT stock owned by Cygne and the assets (the "Assets") of the Ann Taylor Woven Division (the "Division") of Cygne that are used in sourcing merchandise for Ann Taylor (collectively, the "CAT/Cygne Transaction"). Upon consummation of the CAT/Cygne Transaction, CAT will become an indirect wholly owned subsidiary of ATSC. In addition to continuing its own sourcing activities on behalf of the Company, CAT will own the Assets of the Division and will perform all sourcing functions for Ann Taylor currently performed by Cygne. The aggregate consideration to be paid by ATSC pursuant to the CAT/Cygne Transaction consists of (i) shares of common stock of ATSC having a market price, based on the closing price of ATSC's Common Stock for the ten trading days prior to the closing of the CAT/Cygne Transaction, of $36,000,000 (but in no event greater than 2,500,000 shares), and (ii) cash in an amount equal to the tangible net book value of the inventory and fixed assets included in the Assets, less certain assumed liabilities, currently estimated to be approximately $12,900,000. In addition, ATSC will assume the obligation to make payment to the president of CAT of approximately $2,000,000 becoming due under his existing employment agreement with CAT as a result of the CAT/Cygne Transaction.
The closing of the CAT/Cygne Transaction is subject to various conditions, and there can be no assurance that the CAT/Cygne Transaction will be consummated.
================================================================== April 9, 1996
Via EDGAR Transmission
Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Filing Desk
Re: AnnTaylor, Inc. Annual Report on Form 10-K
Dear Sirs/Madams:
On behalf of AnnTaylor, Inc. (the "Company"), enclosed and transmitted to you for filing pursuant to the Securities Exchange Act of 1934, as amended, via the Electronic Data Gathering Analysis and Retrieval System (EDGAR), is the Company's Annual Report on Form 10-K, for the fiscal year ended February 3, 1996.
Pursuant to Rule 3a of the Rules of Practice, the filing fee of $250 is in a wire transfer to Mellon Bank in Pittsburgh, Pennsylvania on April 3, 1996.
Please contact the undersigned if you have any questions or comments with respect to the foregoing.
Very truly yours,
/s/ Sallie A. DeMarsilis -------------------------- Sallie A. DeMarsilis Assistant Controller