-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Et9w05yCxu+ToFQ6hcSXcPEm4lcKmYWAKa7VD6sFlkPN6TWNms8nZdvKXgCIAoFJ fElCzXyGxLr8Oe4qq3pChw== 0000850090-98-000004.txt : 19980504 0000850090-98-000004.hdr.sgml : 19980504 ACCESSION NUMBER: 0000850090-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNTAYLOR INC CENTRAL INDEX KEY: 0000850090 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 510297083 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11980 FILM NUMBER: 98605546 BUSINESS ADDRESS: STREET 1: 142 W 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125413300 10-K 1 ANNTAYLOR, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 . For the fiscal year ended January 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File No. 1-11980 ANNTAYLOR, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0297083 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 142 West 57th Street, New York, NY 10019 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) (212) 541-3300 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered 8-3/4% Subordinated Notes due 2000 The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . As of April 2, 1998, 1 share of Common Stock was outstanding. Documents Incorporated by Reference: None The registrant meets the conditions set forth in general Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. ============================================================================ PART I ITEM 1. Business - -------------------- General - ------- AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold primarily under the Ann Taylor brand name. The Company believes that "Ann Taylor" is a highly recognized national brand that defines a distinct fashion point of view. Ann Taylor merchandise represents classic styles, updated to reflect current fashion trends. The Company's stores offer a full range of career and casual separates, weekend wear, dresses, tops, accessories and shoes, coordinated as part of a total wardrobing strategy. This total wardrobing strategy is reinforced by an emphasis on customer service. Ann Taylor sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the "Ann Taylor look" while reflecting the customers' personal styles. As of January 31, 1998, the Company operated 324 stores in 41 states and the District of Columbia, under the names Ann Taylor, Ann Taylor Factory Store and Ann Taylor Loft. Of the 283 stores operated under the Ann Taylor name, approximately three- quarters are located in regional malls and upscale specialty retail centers, with the balance located in downtown and village locations. These stores represent the Company's core merchandise line. The Company believes that the customer base for its Ann Taylor stores consists primarily of relatively affluent, fashion- conscious women from the ages of 25 to 55, and that the majority of its customers are working women with limited time to shop, who are attracted to Ann Taylor by its focused merchandising and total wardrobing strategies, personalized customer service, efficient store layouts and continual flow of new merchandise. In 1995, the Company began testing Ann Taylor Loft, a separate moderate-price store concept for women who appreciate the Ann Taylor style but are more cost conscious. Merchandise is designed uniquely for these stores and is sold under the Ann Taylor Loft label. As of January 31, 1998, the Company operated 27 Ann Taylor Loft stores, all located in factory outlet centers. The Company believes that the Ann Taylor Loft concept represents an opportunity for the Company to compete in the moderately- priced women's apparel market. In 1998, the Company plans to open Ann Taylor Loft stores outside the factory outlet center environment for the first time, primarily in regional malls and strip shopping centers. The Company also operates 14 stores in factory outlet centers that serve primarily as a clearance vehicle for merchandise from both Ann Taylor and Ann Taylor Loft stores. The Company is introducing a limited selection of original priced Ann Taylor Loft merchandise to many of these stores as well, so that the Company's emphasis on wardrobing can be represented in these stores at all times. The Company was incorporated under the laws of the state of Delaware in 1986. All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Ann Taylor was acquired by ATSC in a leveraged buyout transaction in 1989. Sourcing Acquisition - --------------------- The Company believes that procuring merchandise directly from manufacturers improves the Company's competitive position by providing it with greater control over pre-production processes, resulting in greater consistency in merchandise quality and sizing, and by reducing merchandise costs. To this end, in May 1992, the Company commenced a joint venture, known as "CAT", with ======================================================================= one of its private label vendors, Cygne Designs, Inc. ("Cygne"). CAT was formed for the purpose of acting as a sourcing agent exclusively for Ann Taylor, placing merchandise orders directly with manufacturers. Until September 1996, the Company owned a minority interest in CAT. In September 1996, the Company acquired Cygne's entire interest in CAT, which became a wholly owned subsidiary of the Company, as well as certain assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the "Division") that Cygne used in sourcing merchandise for Ann Taylor. The Company's sourcing division is now known as Ann Taylor Global Sourcing ("ATGS"). In consideration for Cygne's interest in CAT and the Assets, ATSC and the Company paid (i) 2,348,145 shares of common stock of ATSC having an aggregate value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash payments for inventory and fixed assets and (iii) approximately $6,500,000 in cash in settlement of open accounts payable by Ann Taylor to Cygne for merchandise delivered by Cygne prior to the closing. The Company also assumed certain liabilities related to the operations of the Division. The purchase price was subject to post-closing adjustments based upon final determination of the value of certain of the assets purchased and liabilities assumed. As of February 1, 1997, certain post-closing adjustments reduced the net cash paid for inventory and fixed assets to approximately $227,000. The total purchase price has been allocated to the tangible and intangible assets and liabilities of CAT and the Division that were acquired, based on estimates of their respective fair values. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 25 years. Pursuant to the terms of a Stockholders Agreement entered into at the time of the Sourcing Acquisition, ATSC registered the sale of the shares of ATSC Common Stock issued to Cygne as part of the consideration for the acquisition. Cygne subsequently sold, pursuant to this registration statement, all of the shares of ATSC Common stock issued to it by ATSC. ITEM 2. Properties - ------------------ As of January 31, 1998, the Company operated 324 stores, all of which were leased. The store leases typically provide for initial terms of ten years, although some leases have shorter or longer initial periods, and grant the Company the right to extend the term for one or two additional five-year periods. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. Most of the leases also require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs. Ann Taylor leases corporate offices at 142 West 57th Street in New York City and office space at 1372 Broadway in New York City. The Company also leases office space in New Haven, Connecticut. Ann Taylor's wholly owned subsidiary, AnnTaylor Distribution Services, Inc., owns its 256,000 square foot distribution center located in Louisville, Kentucky. Nearly all Ann Taylor merchandise is distributed to the Company's stores through this facility. The parcel on which the Louisville distribution center is located comprises approximately 20 acres and could accommodate possible future expansion of the facility. ITEM 3. Legal Proceedings - -------------------------- On April 26, 1996, certain alleged stockholders of ATSC filed a purported class action lawsuit in the United States District Court Southern District of New York, against ATSC, the Company, certain officers and directors of the Company, Merrill Lynch & Co., Inc. ("ML&Co.") and certain affiliates of ML&Co. (Novak v. Kasaks, et. al., No. 96 CIV 3073 (S.D.N.Y. 1996)). The complaint alleged causes of action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, by ======================================================================= alleging that ATSC and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of ATSC's common stock during the period commencing February 3, 1994 through May 4, 1995 due to alleged false and misleading statements about ATSC and the Company. The complaint sought, among other things, certification as a class action on behalf of all purchasers of common stock during the period commencing February 3, 1994 through May 4, 1995, the awarding of compensatory damages to the plaintiffs and purported members of the class, the awarding of costs, including pre- judgment and post-judgment interest, reasonable attorneys' fees and expert witness fees to the plaintiffs and purported members of the class and equitable and/or injunctive relief. On March 10, 1998, the Court granted the defendants' motions to dismiss the complaint. The Court found that the complaint failed to state a claim upon which relief may be granted, and failed to plead fraud with particularity and an inability to do so. The Court's Opinion grants the plaintiffs leave to amend and re-file the complaint within thirty days of the date of the Opinion, and an amended complaint was filed by the plaintiffs on April 9, 1998. The Company believes that the amended complaint is without merit and intends to continue to defend the action vigorously. As the case is in preliminary stages, any liability that may arise from this action cannot be predicted at this time. The Company is also a party to routine litigation incident to its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations and liquidity of the Company. ====================================================================== PART II ITEM 5. Market for Registrant's Common Equity and Related - ------------------------------------------------------------ Stockholder Matters -------------------- There is no public market for the common stock of the Company. All of the outstanding stock of the Company, consisting of one share of common stock, is owned by ATSC. From time to time, the Company pays dividends to ATSC in amounts sufficient to fund ATSC's operating expenses. Further, in connection with the 8-1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") issued by ATSC's financing vehicle, AnnTaylor Finance Trust (the "Trust"), the Company makes regular dividend payments to ATSC in amounts sufficient to allow ATSC to pay interest on certain debentures issued to the Trust. The payment of dividends by Ann Taylor to ATSC is subject to certain restrictions under the Company's bank credit agreement, the indenture relating to the Company's 8-3/4% Subordinated Notes due 2000 and the receivables facility. See Note 2 to the Consolidated Financial Statements of the Company. ITEM 7. Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operations ------------------------- Fiscal 1997 Compared to Fiscal 1996 - ----------------------------------- The Company's net sales decreased to $781,028,000 in Fiscal 1997 from $798,117,000 in Fiscal 1996, a decrease of $17,089,000, or 2.1%. Comparable store sales for Fiscal 1997 decreased 5.5% compared to Fiscal 1996. Management believes that the decreases were primarily attributable to lower customer acceptance of certain of the Company's merchandise offerings and, to a lesser extent, planned decreases in promotional inventory for certain periods during the year. Gross profit as a percentage of net sales increased to 47.3% in 1997 from 44.4% in 1996. This increase was primarily attributable to benefits achieved by the Company's sourcing division. Selling, general and administrative expenses were $308,232,000, or 39.5% of net sales, in 1997, compared to $291,027,000, or 36.5% of net sales, in 1996. The increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased tenancy expense related to increased retail square footage, investments in certain strategic initiatives, such as marketing and enhanced merchandising information systems, and decreased leverage on fixed expenses due to lower sales in 1997. Operating income increased to $50,000,000, or 6.4% of net sales, in 1997 from $46,461,000, or 5.8% of net sales, in 1996. Operating income in 1996 was reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of the Company's obligations under the former Chairperson's employment contract following her resignation in August 1996, and by a one-time charge of $3,600,000, or 0.4% of net sales, relating to the planned closing of all nine Ann Taylor Studio shoe stores announced in January 1997. Amortization of goodwill was $11,040,000, or 1.4% of net sales, in 1997 compared to $10,086,000, or 1.3% of net sales, in 1996. Operating income without giving effect to such amortization was $61,040,000, or 7.8% of net sales, in 1997 and $56,547,000, or 7.1% of net sales, in 1996. Interest expense was $19,989,000 in 1997 compared to $24,416,000 in 1996. The decrease in interest expense was primarily attributable to a decrease in the Company's outstanding long-term debt, resulting in part from the prepayment in July 1997 of a $24,500,000 term loan referred to below, and to greater interest income earned on cash on hand. The weighted average interest rate on the Company's outstanding indebtedness at January 31, 1998 was 8.59% compared to 8.63% at February 1, 1997. ===================================================================== The income tax provision was $17,466,000, or 59.3% of income before income taxes and extraordinary loss, in the 1997 period compared to $12,975,000, or 60.0% of income before income taxes, in 1996. The effective tax rates for both periods were higher than the statutory rates, primarily as a result of non-deductible goodwill expense. On July 2, 1997, the Company used available cash to prepay the outstanding balance of a $24,500,000 term loan due September 1998. This loan repayment resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income tax benefit. As a result of the foregoing factors, the Company had net income of $11,824,000, or 1.5% of net sales, for 1997, compared to net income of $8,667,000, or 1.1% of net sales, for 1996. ITEM 8. Financial Statements and Supplementary Data - ------------------------------------------------------ The following consolidated financial statements of the Company for the years ended January 31, 1998, February 1, 1997 and February 3, 1996 are included as a part of this Report (See Item 14): Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997. Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Notes to Consolidated Financial Statements. ITEM 9. Changes in and Disagreements with Accountants on Accounting - -------------------------------------------------------------------- and Financial Disclosures ------------------------- None. ============================================================================ PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ---------------------------------------------------------------------------- (a) List of documents filed as part of this Annual Report: The following consolidated financial statements of the Company and the independent auditors' report are included on pages 12 through 29 and are filed as part of this Annual Report: Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996; Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997; Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996; Notes to Consolidated Financial Statements; Independent Auditors' Report. (b) Reports on Form 8-K The Company filed a report with the Commission on Form 8-K dated March 12, 1998 with respect to the dismissal of the purported class action lawsuit against ATSC, Ann Taylor, certain officers and directors of ATSC and Ann Taylor, ML&Co. and certain affiliates of ML&Co. Additionally the Form 8-K reported on an Amendment to ATSC's amended and restated 1992 Stock Option and Restricted Stock and Unit Award Plan. (c) Exhibits The exhibits listed below are filed as a part of this Annual Report. Exhibit Number - ------- 3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit 3.3 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33-28522). 3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.4 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522). 4.1 Indenture, dated as of June 15, 1993, between Ann Taylor and Fleet Bank, N.A., as Trustee, including the form of Subordinated Note due 2000. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Ann Taylor filed on July 7, 1993. 4.1.1 Instrument of Resignation, Appointment and Acceptance, dated as of December 1, 1995, among Ann Taylor, Fleet Bank, N.A., as Resigning Trustee, and Norwest Bank Minnesota, N.A., the Successor Trustee. Incorporated by reference to Exhibit 4.1.1 to the Annual Report on Form 10-K of the Company filed on April 8, 1996. 10.1 Amended and Restated Credit Agreement, dated as of September 29, 1995, among Ann Taylor, Bank of America National Trust and Savings Association ("Bank of America"), and Fleet Bank, National Association, as Co- Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.1.1 First Amendment to Amended and Restated Credit Agreement, dated as of January 4, 1996, among Ann Taylor, Bank of America, Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities, Inc., as Arranger, and Bank of America, as Agent. Incorporated by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996. =========================================================================== Exhibit Number ------- 10.1.2 Second Amendment to the Amended and Restated Credit Agreement, dated as of April 9, 1996 among Ann Taylor, Bank of America and Fleet Bank, National Association, as Co-Agents, the financial institutions from time to time party thereto, BA Securities Inc. as Arranger, and Bank of America as Agent. Incorporated by reference to Exhibit 10.1 on Form 10-Q of ATSC for the Quarter ended August 3, 1996 filed on September 16, 1996. 10.2 Amended and Restated Guaranty, dated as of September 29, 1995, made by ATSC in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.3 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.4 Amended and Restated Security and Pledge Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.5 Trademark Security Agreement, dated as of September 29, 1995, made by Ann Taylor in favor of Bank of America, as Agent. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Ann Taylor filed on October 17, 1995. 10.6 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522). 10.6.1 Amendment to 1989 Stock Option Plan. Incorporated by reference to Exhibit 10.15.1 to the Annual Report on Form 10-K of ATSC filed on April 30, 1993. 10.7 Lease, dated as of March 17, 1989, between Carven Associates and Ann Taylor concerning the West 57th Street headquarters. Incorporated by reference to Exhibit 10.21 to the Registration Statement of ATSC and Ann Taylor filed on May 3, 1989 (Registration No. 33- 28522). 10.7.1 First Amendment to Lease, dated as of November 14, 1990, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.1 to the Registration Statement of ATSC filed on April 11, 1991 (Registration No. 33-39905). 10.7.2 Second Amendment to Lease, dated as of February 28, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.17.2 to the Annual Report on Form 10-K of ATSC filed on April 29, 1993. 10.7.3 Extension and Amendment to Lease dated as of October 1, 1993, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.11 to the Form 10-Q of Ann Taylor for the Quarter ended October 30, 1993 filed on November 26, 1993. 10.7.4 Modification of Amendment and Extension to Lease, dated as of April 14, 1994 between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.4 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. 10.7.5 Fifth Amendment to Lease, dated as of March 14, 1995, between Carven Associates and Ann Taylor. Incorporated by reference to Exhibit 10.15.5 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. ========================================================================= Exhibit Number -------- 10.7.6 Sixth Amendment to Lease, dated as of January 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.6 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.7.7 Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.7 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.7.8 Eighth Amendment to Lease, undated, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.8 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.7.9 Ninth Amendment to Lease, dated as of May 13, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.7.10 Tenth Amendment to Lease, dated as of May 21, 1997, between Pacific Metropolitan Corporation and Ann Taylor. Incorporated by reference to Exhibit 10.8.10 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.8 Tax Sharing Agreement, dated as of July 13, 1989, between ATSC and Ann Taylor. Incorporated by reference to Exhibit 10.24 to Amendment No. 2 to the Registration Statement of ATSC and Ann Taylor filed on July 13, 1989 (Registration No. 33-28522). 10.9 Employment Agreement dated as of February 1, 1994 between ATSC and Sally Frame Kasaks. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of ATSC for the Quarter ended October 29, 1994 filed on December 9, 1994. 10.10 Employment Agreement dated February 16, 1996 between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of ATSC filed on April 8, 1996. 10.10.1 Amendment to the Employment Agreement, dated August 23, 1996, between ATSC and J. Patrick Spainhour. Incorporated by reference to Exhibit 10.11.1 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 10.11 Employment Agreement dated November 25, 1996 between ATSC and Patricia DeRosa. Incorporated by reference to Exhibit 10.3 to Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.12 Employment Agreement dated September 20, 1996 between Ann Taylor and Dwight F. Meyer. Incorporated by reference to Exhibit 10.4 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.13 Separation Agreement dated January 24, 1997 between Ann Taylor and Paul E. Francis. Incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 10.14 Separation Agreement dated July 15, 1997 between Ann Taylor and Barry Shapiro. Incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K of ATSC filed on April 30, 1998. 10.15 The AnnTaylor Stores Corporation 1992 Stock Option and Restricted Stock and Unit Award Plan, Amended and Restated as of February 23, 1994 (the "1992 Option Plan"). Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. ======================================================================= Exhibit Number - -------- 10.15.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated 1992 Stock Option and Restricted Stock and Unit Award Plan, as approved by stockholders on June 18, 1997. Incorporated by reference to Exhibit 10.15.1 to the Form 10-Q of ATSC for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.15.2 Amendment to the AnnTaylor Stores Corporation Amended and Restricted 1992 Stock Option and Restricted Stock and Unit Award Plan dated as of January 16, 1998. Incorporated by reference to Exhibit 10 on the Current Report on Form 8-K of ATSC filed on March 12, 1998. 10.16 AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan, as approved by stockholders on June 18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q of ATSC for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.16.1 Amendment to the AnnTaylor Stores Corporation Amended and Restated Management Performance Compensation Plan dated as of March 12, 1998. Incorporated by reference to Exhibit 10.17.1 to the Annual Report of ATSC filed on April 30, 1998. 10.17 Associate Stock Purchase Plan. Incorporated by reference to Exhibit 10.31 to the Form 10-Q of ATSC for the Quarter Ended October 31, 1992 filed on December 15, 1992. 10.18 Amended and Restated Receivables Financing Agreement dated October 31, 1995, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.31.4 to the Form 10-Q of ATSC for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.18.1 First Amendment to the Amended and Restated Receivables Financing Agreement, dated as of November 1, 1996, among AnnTaylor Funding, Inc., Ann Taylor, Market Street Capital Corp. and PNC Bank, National Association. Incorporated by reference to Exhibit 10.5 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.19 Purchase and Sale Agreement dated as of January 27, 1994 between Ann Taylor and AnnTaylor Funding, Inc. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of ATSC filed on March 31, 1994. 10.20 AnnTaylor Stores Corporation Deferred Compensation Plan. Incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of ATSC filed on April 28, 1995. 10.20.1 Amendment to the AnnTaylor Stores Corporation Deferred Compensation Plan as approved by the Board of Directors on August 11, 1995. Incorporated by reference to Exhibit 10.33.1 to the Form 10-Q of ATSC for the Quarter Ended July 29, 1995 filed on September 11, 1995. 10.21 Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Financing Statement dated November 20, 1995, between AnnTaylor Distribution Services, Inc., as Mortgagor, and General Electric Capital Assurance Company, as Mortgagee. Incorporated by reference to Exhibit 10.34 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. 10.22 Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor Distribution Services, Inc., collectively as Borrower, to General Electric Capital Assurance Company, as Lender. Incorporated by reference to Exhibit 10.35 to the Form 10-Q of Ann Taylor for the Quarter ended October 28, 1995 filed on December 8, 1995. ======================================================================== Exhibit Number ------- 10.23 Amended and Restated Credit Agreement, dated as of September 20, 1996, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.6 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.23.1 Promissory Note dated September 20, 1996 from AnnTaylor Global Sourcing, Inc. to the Hongkong and Shanghai Banking Corporation Limited, New York Branch. Incorporated by reference to Exhibit 10.7 to Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.23.2 Amended and Restated Security Agreement, dated as of September 20, 1996, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.8 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.23.3 Letter of Negative Pledge, dated as of September 20, 1996 from AnnTaylor Global Sourcing, Inc. to the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.9 to the Form 10-Q of Ann Taylor for the Quarter ended November 2, 1996 filed on December 17, 1996. 10.23.4 First Amendment to the Amended and Restated Credit Agreement, dated as of April 11, 1997, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.25.4 to the Form 10-Q of ATSC for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.23.5 Second Amendment to the Amended and Restated Credit Agreement, dated as of July 29, 1997, between AnnTaylor Global Sourcing, Inc. and the Hongkong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.25.5 to the Form 10-Q of ATSC for the Quarter Ended August 2, 1997 filed on September 12, 1997. 10.23.6 Notification of extension of termination date of the Amended and Restated Credit Agreement, dated as of September 20, 1996 between AnnTaylor Global Sourcing, Inc. and the HongKong and Shanghai Banking Corporation Limited. Incorporated by reference to Exhibit 10.25.6 to the Form 10-Q of ATSC for the Quarter Ended November 1, 1997 filed on December 16, 1997. 10.24 Stock and Asset Purchase Agreement, dated as of June 7, 1996, by and among ATSC, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 2 to the Registrants' Current Report on Form 8- K filed on June 10, 1996. 10.24.1 Amendment to Stock and Asset Purchase Agreement, dated as of August 27, 1996, by and among ATSC, Ann Taylor, Cygne and Cygne Group (F.E.) Limited. Incorporated by reference to Exhibit 3 to the Registrants' Current Report on Form 8-K filed on August 30, 1996. 10.24.2 Stockholders Agreement, dated as of September 20, 1996, among ATSC, Cygne and Cygne Group (F.E.) Limited, a Hong Kong corporation and wholly owned subsidiary of Cygne. Incorporated by reference to Exhibit 10.26.2 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 10.24.3 Consulting Agreement, dated as of September 20, 1996, by and between ATSC, Cygne and Mr. Bernard M. Manuel. Incorporated by reference to Exhibit 10.26.3 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 10.24.4 Consulting Agreement, dated as of September 20, 1996, by and between ATSC, Cygne and Mr. Irving Benson. Incorporated by reference to Exhibit 10.26.4 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997. 27 Financial Data Schedule. ===================================================================== SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANNTAYLOR, INC. By: /s/ J. Patrick Spainhour ------------------------- J. Patrick Spainhour Chairman and Chief Executive Officer Date: April 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ J. Patrick Spainhour Chairman and Chief Executive April 29, 1998 - ------------------------ Officer and Director J. Patrick Spainhour /s/ Patricia DeRosa President and Chief Operating April 29, 1998 - ------------------------ Officer and Director Patricia DeRosa /s/ Walter J. Parks Senior Vice President - April 29, 1998 - ------------------------ Chief Financial Officer Walter J. Parks and Treasurer /s/ James M. Smith Vice President and Controller April 29, 1998 - ------------------------ Principal Accounting Officer James M. Smith /s/ Gerald S. Armstrong Director April 29, 1998 - ----------------------- Gerald S. Armstrong /s/ James J. Burke, Jr. Director April 29, 1998 - ------------------------ James J. Burke, Jr /s/ Robert C. Grayson Director April 29, 1998 - ------------------------ Robert C. Grayson /s/ Rochelle B. Lazarus Director April 29, 1998 - ------------------------- Rochelle B. Lazarus /s/ Hanne M. Merriman Director April 29, 1998 - -------------------------- Hanne M. Merriman ============================================================================== ANNTAYLOR, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. -------- Independent Auditors' Report....................................... 13 Consolidated Financial Statements: Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996.............................................. 14 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997............................................... 15 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996... 16 Notes to Consolidated Financial Statements........................ 17 ============================================================================= INDEPENDENT AUDITORS' REPORT To the Stockholder of ANNTAYLOR, INC.: We have audited the accompanying consolidated financial statements of AnnTaylor, Inc. and its subsidiaries, listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York March 19, 1998 ========================================================================= ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996 Fiscal Years Ended ----------------------------------- January 31, February 1, February 3, 1998 1997 1996 ---------- ---------- --------- (in thousands) Net sales............................... $781,028 $798,117 $731,142 Cost of sales........................... 411,756 443,443 425,225 ------- ------- ------- Gross profit............................ 369,272 354,674 305,917 Selling, general and administrative expenses.............................. 308,232 291,027 271,136 Studio shoe stores closing expense...... --- 3,600 --- Employment contract separation expense.. --- 3,500 --- Amortization of goodwill................ 11,040 10,086 9,506 ------- ------- ------- Operating income........................ 50,000 46,461 25,275 Interest expense........................ 19,989 24,416 20,956 Other expense, net...................... 548 403 38 ------- ------- ------- Income before income taxes and extraordinary loss................... 29,463 21,642 4,281 Income tax provision.................... 17,466 12,975 5,157 ------- ------- ------- Income (loss) before extraordinary loss. 11,997 8,667 (876) Extraordinary loss (net of income tax benefit of $130,000).............. 173 --- --- ------- ------- ------- Net income (loss).................... $ 11,824 $ 8,667 $ (876) ======= ======= ======= See accompanying notes to consolidated financial statements. ============================================================================== ANNTAYLOR, INC. CONSOLIDATED BALANCE SHEETS January 31, 1998 and February 1, 1997 January 31, February 1, 1998 1997 ----------- ---------- ASSETS (in thousands) Current assets Cash and cash equivalents........................... $ 31,369 $ 7,025 Accounts receivable, net............................ 60,211 63,605 Merchandise inventories............................. 97,234 100,237 Prepaid expenses and other current assets........... 21,291 25,653 ------- ------- Total current assets............................ 210,105 196,520 Property and equipment, net.......................... 139,610 143,433 Goodwill, net........................................ 330,739 341,779 Deferred financing costs, net........................ 1,258 2,743 Other assets......................................... 1,949 3,664 ------- ------- Total assets.................................... $683,661 $688,139 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable.................................... $ 38,185 $ 34,341 Accrued tenancy..................................... 6,727 6,827 Gift certificates redeemable........................ 5,935 4,903 Accrued expenses.................................... 35,958 31,312 Current portion of long-term debt................... 1,119 287 ------- ------- Total current liabilities....................... 87,924 77,670 Long-term debt....................................... 105,157 130,905 Deferred income taxes................................ --- 4,872 Other liabilities.................................... 10,082 7,952 Commitments and contingencies Stockholder's equity Common stock, $1.00 par value; 1,000 shares authorized; 1 share issued and outstanding................................... 1 1 Additional paid-in capital.......................... 445,886 443,952 Retained earnings................................... 34,611 22,787 ------- ------- Total stockholder's equity...................... 480,498 466,740 ------- ------- Total liabilities and stockholder's equity...... $683,661 $688,139 ======= ======= See accompanying notes to consolidated financial statements. ============================================================================ ANNTAYLOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996 Fiscal Years Ended --------------------------------- Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 -------- -------- -------- (in thousands) Operating activities: Net income (loss)..................... $ 11,824 $ 8,667 $ (876) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss................ 303 --- --- Equity earnings in CAT............ --- (1,402) (1,646) Provision for loss on accounts receivable............. 1,795 1,803 1,280 Depreciation and amortization..... 27,803 26,208 18,788 Amortization of goodwill.......... 11,040 10,086 9,506 Amortization of deferred compensation.................... 1,065 191 68 Non-cash interest................. 1,419 1,574 1,004 Deferred income taxes............. (2,687) (985) 3,150 Loss on disposal of property and equipment................... 248 3,209 1,143 Change in assets and liabilities net of effects from purchase of AnnTaylor Global Sourcing: Decrease (increase) in receivables......... 1,599 4,987 (10,464) Decrease (increase) in merchandise inventories.. 3,003 9,342 (8,980) Decrease (increase) in prepaid expenses and other current assets..... 1,894 247 (12,951) Decrease in other non-current assets and liabilities, net...... 2,861 738 429 Increase in accounts payable and accrued liabilities................. 9,422 2,867 6,925 ------- ------- ------- Net cash provided by operating activities.......................... 71,589 67,532 7,376 ======= ======= ======= Investing activities: Purchases of property and equipment... (22,945) (16,107) (78,378) Purchase of AnnTaylor Global Sourcing --- (227) --- ------- ------- ------- Net cash used by investing activities.......................... (22,945) (16,334) (78,378) ------- ------- ------- Financing activities: Borrowings (repayments) under revolving credit facility......... --- (101,000) 37,000 Parent company contribution........... 869 96,194 384 Proceeds from (repayment of) term loan (24,500) --- 24,500 Term loan prepayment penalty.......... (184) --- --- Proceeds from (payments of) mortgage.. (416) (266) 6,958 Borrowings (repayments) under receivables facility............... --- (40,000) 4,000 Payment of financing costs............ (69) (384) (2,108) ------- ------- ------- Net cash provided by (used by) financing activities................ (24,300) (45,456) 70,734 ------ ------- ------- Net increase (decrease) in cash......... 24,344 5,742 (268) Cash, beginning of year................. 7,025 1,283 1,551 ------ ------- ------- Cash, end of year....................... $ 31,369 $ 7,025 $ 1,283 ======== ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest........................ $ 19,251 $ 22,689 $ 19,607 ======= ======== ======== Cash paid during the year for income taxes............... $ 17,220 $ 8,990 $ 6,886 ======= ======== ======== See accompanying notes to consolidated financial statements. ========================================================================= ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies - ------------------------------------------------ AnnTaylor, Inc. (the "Company" or "Ann Taylor") is a leading national specialty retailer of better quality women's apparel, shoes and accessories sold principally under the Ann Taylor brand name. All of the outstanding capital stock of the Company, consisting of one share of common stock, is owned by AnnTaylor Stores Corporation ("ATSC"). Basis of Presentation - --------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts have been eliminated in consolidation. Certain Fiscal 1996 and 1995 amounts have been reclassified to conform to the Fiscal 1997 presentation. Fiscal Year - ----------- The Company follows the standard fiscal year of the retail industry, which is a 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year. The fiscal year ended February 3, 1996 included 53 weeks. The other fiscal years presented included 52 weeks. Finance Service Charge Income - ----------------------------- Income from finance service charges relating to customer receivables, which is deducted from selling, general and administrative expenses, amounted to $8,568,000 for Fiscal 1997, $9,024,000 for Fiscal 1996 and $8,328,000 for Fiscal 1995. Merchandise Inventories - ----------------------- Merchandise inventories are accounted for by the retail inventory method and are stated at the lower of cost (first-in, first-out method) or market. The majority of the Company's inventory represents finished goods available for sale. Property and Equipment - ----------------------- Property and equipment are recorded at cost. The Company capitalized interest costs of approximately $1,300,000 in Fiscal 1995. Depreciation and amortization are computed on a straight- line basis over the estimated useful lives of the assets (3 to 40 years) or, in the case of leasehold improvements, over the lives of the respective leases, if shorter. ====================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies (Continued) - ------------------------------------------------------------- Deferred Financing Costs - ------------------------ Deferred financing costs are being amortized using the interest method over the term of the related debt. Accumulated amortization at January 31, 1998 and February 1, 1997 was $4,427,000 and $3,534,000, respectively. Goodwill - -------- Goodwill relating to the 1989 acquisition of Ann Taylor by ATSC is being amortized on a straight-line basis over 40 years. Goodwill relating to the 1996 Sourcing Acquisition (see Note 9) is being amortized on a straight-line basis over 25 years. Accumulated amortization at January 31, 1998 and February 1, 1997 was $87,851,000 and $76,811,000, respectively. On an annual basis, the Company compares the carrying value of its goodwill to an estimate of the Company's fair value to evaluate the reasonableness of the carrying value and remaining amortization period. Fair value is computed using projections of future cash flows. Income Taxes - ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized, and income or expense is recorded, for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to elect to file consolidated income tax returns for federal income tax purposes and may elect to file such returns in states and other relevant jurisdictions that permit such an election, for income tax purposes. With respect to such consolidated income tax returns, the Tax Sharing Agreement generally requires the Company to pay to ATSC the entire tax shown to be due on such consolidated returns, provided that the amount paid by the Company shall not exceed the amount of taxes that would have been owed by the Company on a stand-alone basis. Use of Estimates - ------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates. ======================================================================= ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies (Continued) - ------------------------------------------------------------- Recent Accounting Pronouncements - ---------------------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires that components of comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements; and Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, major customers and the material countries in which the entity holds assets and reports revenues. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits", which revises disclosures, but does not change the measurement or recognition of these plans. Management is currently evaluating the impact of these standards and believes their adoption will not impact the Company's consolidated financial position, results of operations or cash flows, and any impact will be limited to the form and content of its disclosures. All of these statements are effective for fiscal years beginning after December 15, 1997. 2. Long-Term Debt - ------------------- The following table summarizes long-term debt outstanding at January 31, 1998 and February 1, 1997: January 31, 1998 February 1, 1997 -------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (in thousands) Senior Debt: Term loan...................... $ --- $ --- $ 24,500 $ 24,500 Mortgage....................... 6,276 6,276 6,692 6,692 8-3/4% Notes.................... 100,000 100,500 100,000 97,750 ------- ------- ------- ------- Total debt............. 106,276 106,776 131,192 128,942 Less current portion............ 1,119 1,119 287 287 ------- ------- ------- ------- Total long-term debt... $105,157 $105,657 $130,905 $128,655 ======= ======= ======= ======= In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the Company determined the estimated fair value of its financial instruments using quoted market information, as available. As judgment is involved, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. ======================================================================= ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Long-Term Debt (Continued) - -------------------------------- Ann Taylor's Bank Credit Agreement originally provided, among other things, for a $25,000,000 term loan and a $125,000,000 revolving credit facility. As described below, in January 1996, the Company prepaid a portion of the term loan and reduced the revolving credit facility to $122,000,000. On July 2, 1997, the Company used available cash to prepay $24,500,000, the outstanding balance of the term loan. The maturity date of the revolving credit facility is July 29, 1998; however, the Company is required to reduce the outstanding loan balance under the revolving credit facility to $50,000,000 or less for thirty consecutive days during Fiscal 1996 and in each fiscal year thereafter. The maximum amount that may be borrowed under the revolving credit facility is reduced by the amount of commercial and standby letters of credit outstanding under the Bank Credit Agreement. At January 31, 1998 and February 1, 1997, Ann Taylor had outstanding commercial and standby letters of credit under the Bank Credit Agreement of $33,000,000 and $12,000,000, respectively. At January 31, 1998 the amount available under the revolving credit facility was $89,000,000. The amounts outstanding under the revolving credit facility bear interest at a rate equal to, at the Company's option, the Bank of America (1) Base Rate, or (2) Eurodollar Rate plus 0.75%. In addition, Ann Taylor is required to pay the lenders a quarterly commitment fee of 0.25% per annum of the unused revolving loan commitment. Under the terms of the Bank Credit Agreement, Bank of America obtained a pledge of Ann Taylor's outstanding common stock held by ATSC and a security interest in certain assets of Ann Taylor, excluding inventory and accounts receivable. In addition, the Bank Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens and investments, restrictions on dividends or other distributions to stockholders, and requirements to maintain certain financial ratios and specified levels of net worth. The Bank Credit Agreement also provides for, among other things, an annual limitation on capital expenditures of $32,500,000 in Fiscal 1997 and beyond, subject to increase if certain conditions are satisfied. Ann Taylor sells its proprietary credit card accounts receivable to AnnTaylor Funding, Inc., a wholly owned subsidiary of the Company, that uses the receivables to secure borrowings of up to $40,000,000, based on its eligible accounts receivable, under a receivables financing facility (the "Receivables Facility"). As of January 31, 1998, there were no borrowings outstanding under the Receivables Facility. AnnTaylor Funding, Inc. had total assets of approximately $50,440,000 at January 31, 1998, all of which are subject to the security interest of the lender under the Receivables Facility. The Receivables Facility matures in May 1998. In connection with the Sourcing Acquisition discussed in Note 9, the Hongkong and Shanghai Banking Corporation entered into an Amended and Restated Credit Agreement with AnnTaylor Global Sourcing, Inc. ("ATGS", formerly known as CAT US Inc. ("CAT") and now a wholly owned subsidiary of Ann Taylor), continuing the $40,000,000 credit facility of ATGS's predecessor. On July 29, 1997, ATGS amended its credit facility with the HKSBC, increasing the commitment available to $50,000,000. The facility is available principally for the issuance of letters of credit; cash borrowings under the facility are limited to a maximum of $5,000,000. Such credit facility matures on July 29, 1998 and contains financial and other covenants. As of January 31, 1998 and February 1, 1997, commercial and standby letters of credit outstanding under this facility totaled $25,102,000 and $28,189,000, respectively, and there were no borrowings outstanding under this facility. ================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Long-Term Debt (Continued) - -------------------------------- As noted above, the Company's Bank Credit Agreement, Receivables Facility and HKSBC Agreement mature in May and July 1998. The Company is currently negotiating to obtain new financing and anticipates new arrangements will be in place in the second quarter of Fiscal 1998. On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8-3/4% Subordinated Notes due 2000 ("8-3/4% Notes"). The outstanding principal amount of these notes as of January 31, 1998 was $100,000,000. In July 1993, Ann Taylor entered into a $110,000,000 (notional amount) interest rate swap agreement, which had the effect of converting the Company's interest obligations on the 8-3/4% Notes to a variable rate. Under the agreement, the Company received a fixed rate of 4.75% and paid a floating rate based on LIBOR, as determined in six month intervals. The swap agreement matured in July 1996. Net receipts or payments under the agreement were recognized as adjustments to interest expense. The Company and its wholly owned subsidiary AnnTaylor Distribution Services, Inc. are parties to a $7,000,000 seven- year mortgage loan secured by the Company's distribution center land and building in Louisville, Kentucky. The mortgage loan bears interest at 7.5% and is payable in monthly installments of approximately $130,000. Pursuant to the requirements of the Bank Credit Agreement, in January 1996, the Company applied one-half of the proceeds of the mortgage to reduce the amount available under the revolving credit facility, thereby reducing the revolving credit facility by $3,000,000, and prepaid a portion of the term loan. The aggregate principal payments of all long-term obligations are as follows: Fiscal Year (in thousands) ---------- 1998................................... $ 1,119 1999................................... 1,206 2000................................... 101,300 2001................................... 1,401 2002................................... 1,250 ------- Total............................... $106,276 ======= 3. Preferred Securities - ------------------------- In April and May of Fiscal 1996, ATSC completed the sale of an aggregate of $100,625,000 of 8-1/2% Company-Obligated Mandatorily Redeemable Convertible Preferred Securities (the "preferred securities") issued by its financing vehicle, AnnTaylor Finance Trust, a Delaware business trust (the "Trust"). The preferred securities have a liquidation preference of $50 per security ($100,625,000 in the aggregate) and are convertible at the option of the holders thereof into ATSC's common stock at a conversion rate of 2.545 shares of common stock for each preferred security (equivalent to $19.65 per share of common stock, which represented a 20% premium to the $16.375 closing price of the common stock on the New York Stock Exchange at the date of the execution of the purchase agreement relating to the sale of the ==================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Preferred Securities (Continued) - ------------------------------------- preferred securities. The sole assets of the Trust are $103,700,000 of 8-1/2% Convertible Subordinated Debentures of ATSC maturing on April 15, 2016. A total of 2,012,500 preferred securities were issued, and are convertible into an aggregate of 5,121,812 shares of ATSC's common stock. ATSC received net proceeds of $95,984,000 in connection with the sale of the preferred securities, of which $94,000,000 was applied to reduce outstanding borrowings under the Company's revolving credit facility. 4. Allowance for Doubtful Accounts - ------------------------------------ A summary of activity in the allowance for doubtful accounts for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 is as follows: Fiscal Years Ended ----------------------------- Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 -------- -------- ------- (in thousands) Balance at beginning of year.......... $ 811 $ 736 $ 931 Provision for loss on accounts receivable................. 1,795 1,803 1,280 Accounts written off.................. (1,794) (1,728) (1,475) ------ ------ ------ Balance at end of year................ $ 812 $ 811 $ 736 ====== ====== ====== 5. Commitments and Contingencies - ---------------------------------- Rental Commitments - ------------------ Ann Taylor occupies its retail stores and administrative facilities under operating leases, most of which are non- cancelable. Some leases contain renewal options for periods ranging from one to ten years under substantially the same terms and conditions as the original leases. Most of the store leases require Ann Taylor to pay a specified minimum rent, plus a contingent rent based on a percentage of the store's net sales in excess of a specified threshold. In addition, most of the leases require Ann Taylor to pay real estate taxes, insurance and certain common area and maintenance costs in addition to the future minimum lease payments shown below. Future minimum lease payments under non-cancelable operating leases at January 31, 1998 are as follows: Fiscal Year (in thousands) 1998................................. $68,663 1999................................. 67,537 2000................................. 65,491 2001................................. 62,446 2002................................. 59,515 2003 and thereafter.................. 251,998 ------- Total........................... $575,650 ======= ========================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Commitments and Contingencies (continued) - ---------------------------------------------- Rent expense for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 was as follows: Fiscal Years Ended ---------------------------- Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 ------- ------- ------- (in thousands) Minimum rent................ $59,495 $55,571 $47,132 Percentage rent............. 1,671 2,433 3,090 ------ ------ ------ Total.................. $61,166 $58,004 $50,222 ====== ====== ====== Litigation - ---------- The Company has been named as a defendant in several legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. In addition, ATSC, Ann Taylor, certain officers and directors of ATSC and Ann Taylor, Merrill Lynch & Co. ("ML&Co.") and certain affiliates of ML&Co. have been named as defendants in a purported class action lawsuit filed by certain alleged stockholders alleging that ATSC and the other defendants engaged in a fraudulent scheme and course of business that operated a fraud or deceit on purchasers of ATSC's common stock. On March 10, 1998, the Court issued an Opinion dismissing the complaint. The Court's Opinion granted the plaintiffs leave to amend and re- file the complaint within thirty days of the date of the Opinion, and an amended complaint was filed by the plaintiffs on April 9, 1998. The Company believes that the amended complaint is without merit and intends to defend the action vigorously. As the case is in preliminary stages, any liability that may arise from this action cannot be predicted at this time. Other - ----- The Internal Revenue Service (the "IRS") examination of ATSC has recently been concluded. The IRS has made an assessment, which ATSC has paid, that is not material to ATSC's or the Company's consolidated financial condition, operating results or liquidity. All matters in the IRS examination are subject to final review by the Congressional Joint Committee on Taxation. 6. Property and Equipment - -------------------------- Property and equipment consists of the following: Fiscal Years Ended --------------------- Jan. 31, Feb. 1, 1998 1997 -------- ------- (in thousands) Land and building................. $ 8,625 $ 8,603 Leasehold improvements............ 85,332 76,576 Furniture and fixtures............ 136,314 120,595 Construction in progress.......... 6,422 3,307 ------- ------- 236,693 209,081 Less accumulated depreciation and amortization................ 97,083 65,648 ------- ------- Net property and equipment.... $139,610 $143,433 ======= ======= =========================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Extraordinary Item - --------------------- On July 2, 1997, the Company used available cash to prepay $24,500,000, the outstanding balance of its term loan due September 1998, which resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000, net of income tax benefit. 8. Nonrecurring Charges - ----------------------- Studio Shoe Stores Closing - -------------------------- In connection with the planned closing of all of the Company's Ann Taylor Studio shoe stores, announced in January 1997, the Company recorded a pre-tax charge of $3,600,000. Of the total impairment loss, $2,500,000 represented impairment of long-lived assets such as properties and store fixtures and $1,100,000 pertained to lease and other related costs for these locations until the properties are sublet. Resignation of the Chairman and Chief Executive Officer - ------------------------------------------------------- Effective August 23, 1996, the then Chairman and Chief Executive Officer and Director of ATSC and Ann Taylor resigned. In connection with this resignation, a one-time pre-tax charge of $3,500,000 was recorded relating to the estimated costs of the Company's obligations under the former Chairman's employment contract with ATSC. 9. Certain Relationships and Related Transactions - --------------------------------------------------- Transactions with Merrill Lynch and its Affiliates - -------------------------------------------------- At January 31, 1998, certain affiliates of ML&Co. held approximately 24.0% of ATSC's outstanding common stock. Two of the members of the Board of Directors of the Company and ATSC serve as representatives of ML&Co. and its affiliates. As a result, ML&Co. and such affiliates are in a position to influence the management of the Company and ATSC. In Fiscal 1996, ATSC paid approximately $1,207,500 to ML&Co. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in connection with their services as placement agents for the sale of the preferred securities (see Note 3). ATSC agreed to indemnify ML&Co. and Merrill Lynch, as placement agents, against certain liabilities, including certain liabilities under the federal securities law, in connection with the sale of the preferred securities. Sourcing Acquisition - -------------------- In Fiscal 1995, the Company purchased approximately 16% of its merchandise directly from Cygne Designs, Inc. ("Cygne") and an additional 38% of its merchandise through the Company's direct sourcing joint venture with Cygne known as CAT. On September 20, 1996 (the "Effective Date"), pursuant to the Stock and Asset Purchase Agreement dated as of June 7, 1996, by and among ATSC, Ann Taylor, Cygne and Cygne Group F.E. Limited (as amended, the "Purchase Agreement"), Ann Taylor acquired the entire interest ====================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Certain Relationships and Related Transactions (Continued) - ------------------------------------------------------------- of Cygne in CAT and certain of the assets (the "Assets") of the Ann Taylor Woven Division of Cygne (the "Division") that were used for sourcing merchandise for Ann Taylor (the "Sourcing Acquisition"). As a result of the Sourcing Acquisition, CAT became an indirect wholly owned subsidiary of the Company and now performs all of the Company's direct sourcing functions, including those previously provided by the Division, under the name AnnTaylor Global Sourcing, Inc. For financial reporting purposes, the transaction has been accounted for as of the Effective Date under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations". In consideration for Cygne's interest in CAT and the Assets, ATSC and the Company paid (i) 2,348,145 shares of common stock of ATSC having an aggregate value, as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash as payment for inventory and fixed assets and (iii) approximately $6,500,000 in cash in settlement of open accounts payable by Ann Taylor to Cygne for merchandise delivered by Cygne prior to the closing. The Company also assumed certain liabilities related to the operations of the Division. The purchase price was subject to post-closing adjustments based upon final determination of the value of certain of the assets purchased and liabilities assumed. As of February 1, 1997, certain post-closing adjustments reduced the net cash paid to approximately $227,000. The total purchase price to the Company of the Sourcing Acquisition has been allocated to the tangible and intangible assets and liabilities of CAT and the Division that were acquired, based on estimates of their respective fair values. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 25 years. The following unaudited proforma consolidated data for the Company for the fiscal year ended February 1, 1997 has been presented to reflect the Sourcing Acquisition as if it had occurred at the beginning of such period: Fiscal Year Ended February 1, 1997 ------------------ Actual Proforma (in thousands) Net sales............................ $798,117 $798,117 Net income........................... $ 8,667 $ 11,595 The proforma data set forth above does not purport to be indicative of the results that actually would have occurred if the Sourcing Acquisition had occurred at the beginning of the period presented or of results which may occur in the future. A summary of the noncash activity that occurred in the fiscal year ended February 1, 1997 in conjunction with the Sourcing Acquisition is as follows: (in thousands) Fair value of assets acquired................ $ 4,727 Excess of purchase price over the fair value of net assets acquired................................... 38,340 Ann Taylor's previous investment in CAT...... (6,840) Issuance of ATSC's common stock.............. (36,000) ------- Cash paid.................................... $ 227 ======= ======================================================================= ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Stock Option Plans - ---------------------- ATSC accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation costs have been recognized for stock option awards. Had compensation costs of option awards been determined under a fair value alternative method as stated in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ATSC would have been required to prepare a fair value model for such options and record such amount in the financial statements as compensation expense. Proforma net income (loss) before extraordinary loss for Fiscal 1997, Fiscal 1996, and Fiscal 1995 after taking into account such expense would have been $11.0 million, $8.2 million, and $(1.1) million, respectively. For purposes of this calculation, ATSC arrived at the fair value of each stock grant at the date of grant by using the Black Scholes option pricing model with the following weighted average assumptions used for grants for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996: risk-free interest rate of 6.2%, 5.8%, and 7.0%, respectively; expected life of 5.0 years, 4.3 years, and 5.0 years, respectively; and expected volatility of 67.9%, 55.2%, and 44.8%, respectively. 11. Income Taxes - ----------------- The provision for income taxes for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996 consists of the following: Fiscal Years Ended Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 ------- ------- -------- (in thousands) Federal: Current..................... $14,427 $ 9,898 $ 1,400 Deferred.................... (1,917) (802) 2,249 ------ ------ ------ Total federal............ 12,510 9,096 3,649 ------ ------ ------ State and local: Current.................... 5,538 3,844 607 Deferred................... (769) (152) 901 ------ ------ ------ Total state and local.... 4,769 3,692 1,508 ------ ------ ------ Foreign: Current..................... 187 187 --- Deferred................... --- --- --- ------ ------ ------ Total foreign............ 187 187 --- ------ ------ ------ Total...................... $17,466 $12,975 $ 5,157 ====== ====== ====== The reconciliation between the provision for income taxes and the provision for income taxes at the federal statutory rate for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 is as follows: Fiscal Years Ended ---------------------------- Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 -------- ------- ------ (in thousands) Income before income taxes and extraordinary loss........ $29,463 $21,642 $ 4,281 ====== ====== ====== Federal statutory rate 35% 35% 35% ====== ====== ====== Provision for income taxes at federal statutory rate..... $10,312 $ 7,575 $ 1,498 State and local income taxes, net of federal income tax benefit................... 3,800 2,273 980 Non-deductible amortization of goodwill................... 3,500 3,429 3,327 Unremitted earnings of foreign subsidiaries.......... (314) (382) (387) Other........................... 168 80 (261) ------ ------ ------ Provision for income taxes...... $17,466 $12,975 $ 5,157 ====== ====== ====== ====================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Income Taxes (Continued) - ------------------------------ The tax effects of significant items comprising the Company's net deferred tax assets as of January 31, 1998 and February 1, 1997 are as follows: January 31, February 1, 1998 1997 ---------- ----------- (in thousands) Current: Inventory.......................... $ 2,854 $ 2,070 Accrued expenses................... 4,269 7,492 Real estate........................ (1,634) (1,433) Other.............................. --- (172) ------ ------ Total current....................... $ 5,489 $ 7,957 ====== ====== Noncurrent: Depreciation and amortization...... $(4,982) $ (6,528) Rent expense....................... 4,364 3,328 Other.............................. 901 (1,672) ------ ------ Total noncurrent.................... $ 283 $(4,872) ====== ====== Income taxes provided reflect the current and deferred tax consequences of events that have been recognized in the Company's financial statements or tax returns. U.S. federal income taxes are provided on unremitted foreign earnings except those that are considered permanently reinvested, which at January 31, 1998 amounted to approximately $6,775,000. However, if these earnings were not considered permanently reinvested, under current law, the incremental tax on such undistributed earnings would be approximately $2,022,000. 12. Retirement Plans - --------------------- Savings Plan. The Company maintains a defined contribution 401(k) savings plan for substantially all full-time employees. Participants may contribute to the plan an aggregate of up to 10% of their annual earnings. The Company makes a matching contribution of 50% with respect to the first 3% of each participant's annual earnings contributed to the plan. The Company's contributions to the plan for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $519,000, $390,000, and $337,000, respectively. Pension Plan. Substantially all full-time employees of the Company are covered under a noncontributory defined benefit pension plan. Through December 31, 1997, the pension plan was a "cash balance pension plan". Each participant accrued a benefit based on compensation and years of service with the Company. As of January 1, 1998, the Plan was amended and the formula to calculate benefits was changed. The new career average plan formula was used to determine the funding status of the plan for fiscal 1997. The Company's funding policy for the plan is to contribute annually the amount necessary to provide for benefits based on accrued service and projected pay increases. Plan assets consist primarily of cash, equity and fixed income securities. =================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Retirement Plans - --------------------- The following table sets forth the funded status of the Pension Plan at January 31, 1998, February 1, 1997 and February 3, 1996, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions": Jan. 31, Feb. 1, Feb. 3, 1998 1997 1996 ------- ------- ------- (dollars in thousands) Actuarial present value of benefits obligation: Accumulated benefit obligation, including vested benefits of $2,830,000, $2,435,000 and $2,064,000, respectively.............. $3,820 $3,413 $2,893 ===== ===== ===== Projected benefit obligation for service rendered to date......... $3,820 $3,413 $2,893 Plan assets at fair value............... 5,128 4,745 2,537 ----- ----- ----- Plan assets in excess of projected benefit obligation (projected benefit obligation in excess of plan assets)....... 1,308 1,332 (356) Unrecognized net gain................... (1,286) (802) (231) ------ ----- ----- Prepaid (accrued) pension cost.......... $ 22 $ 530 $ (587) ====== ===== ===== Net periodic pension cost for Fiscal 1997, Fiscal 1996 and Fiscal 1995 included the following components: Service cost/benefits earned during the year....................... $ 571 $ 981 $ 681 Interest cost on projected benefit obligation................... 250 213 185 Actual return on plan assets............ (907) (527) (104) Net amortization and deferral........... 462 300 (132) ------ ----- ----- Net periodic pension cost.............. $ 376 $ 967 $ 630 ====== ===== ===== Assumptions used to determine the projected benefit obligation and plan assets were: Discount rate........................ 7.50% 8.00% 6.75% Rate of increase in compensation level................. 4.00% 4.00% 4.00% Expected long-term rate of return on assets................. 9.00% 9.00% 9.00% 13. Stockholder's Equity - -------------------------- The following summarizes the changes in stockholder's equity during Fiscal 1997, Fiscal 1996 and Fiscal 1995: Total Additional Stock- Common Paid-in Retained holder's Stock Capital Earnings Equity ----- -------- ---------- ------- (in thousands) Balance at January 28, 1995........ $ 1 $311,115 $14,996 $326,112 Net loss......................... --- --- (876) (876) Parent company contributions..... --- 452 --- 452 --- ------- ------ ------- Balance at February 3, 1996........ 1 311,567 14,120 325,688 Net income....................... --- --- 8,667 8,667 Parent company contributions..... --- 132,385 --- 132,385 --- ------- ------ ------- Balance at February 1, 1997........ 1 443,952 22,787 466,740 Net income...................... --- --- 11,824 11,824 Parent company contributions..... --- 1,934 --- 1,934 --- ------- ------ ------- Balance at January 31, 1998........ $ 1 $445,886 $34,611 $480,498 === ======= ====== ======= ============================================================================== ANNTAYLOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Subsequent Event - --------------------- Effective February 1, 1998, the Company elected to change its method of inventory valuation from the retail method to a cost method. The Company believes the cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change and the effect on future financial statements resulting from this change is not expected to be material. It is not possible to determine the effect of the change on income in any previously reported fiscal years. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONDENSED CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000850090 ANNTAYLOR, INC. 1000 12-MOS JAN-31-1998 JAN-31-1998 31369 0 61023 812 97234 210105 236693 97083 683661 87924 100000 0 0 1 480497 683661 781028 781028 411756 411756 319820 0 19989 29463 17466 11997 0 (173) 0 11824 0 0
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