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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