- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ANNTAYLOR STORES CORPORATION
---------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ANNTAYLOR STORES CORPORATION
---------------------------------------------------
(NAME OF PERSON FILING PROXY STATEMENT)
Payment of Filing Fee (Check appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
X Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ANNTAYLOR LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 15, 1996
-------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of AnnTaylor
Stores Corporation, a Delaware corporation (the "Company"), will be held at
10:00 a.m. on Thursday, August 15, 1996, at the corporate offices of the
Company, 142 West 57th Street, New York, New York, for the purpose of approving
and ratifying the financing transaction described in the accompanying proxy
statement.
Only stockholders of record at the close of business on July 1, 1996 are
entitled to notice of and to vote at the Special Meeting and at any and all
adjournments or postponements thereof. A list of stockholders entitled to vote
at the Special Meeting will be available for inspection at the office of the
Secretary of the Company, 142 West 57th Street, New York, New York, for at least
ten days prior to the meeting, and will also be available for inspection at the
meeting.
By Order of the Board of Directors,
JOCELYN F.L. BARANDIARAN,
Secretary
New York, New York
July 22, 1996
YOUR VOTE IS IMPORTANT
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE
ENCLOSED PROXY TO THE COMPANY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. RETURNING A SIGNED PROXY WILL NOT
PREVENT YOU FROM ATTENDING THE MEETING AND VOTING IN PERSON, IF YOU SO
DESIRE.
<PAGE>
[ANNTAYLOR LOGO]
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 15, 1996
PROXY STATEMENT
-------------------
This Proxy Statement is being furnished to the stockholders of AnnTaylor
Stores Corporation (the "Company") in connection with the solicitation of
proxies by the Board of Directors of the Company for use at the Special Meeting
of Stockholders of the Company, to be held at 10:00 a.m. on Thursday, August 15,
1996, at the corporate offices of the Company at 142 West 57th Street, New York,
New York and at any and all adjournments or postponements thereof. At the
Special Meeting, the stockholders will be asked to consider and vote upon a
single Proposal--the approval and ratification of the financing transaction
described below (the "Financing Transaction").
This Proxy Statement and the enclosed form of proxy are first being mailed
to stockholders of the Company on or about July 22, 1996.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Only holders of record of the Company's common stock, par value $.0068 per
share ("Common Stock"), at the close of business on July 1, 1996 (the "Record
Date"), are entitled to notice of and to vote at the Special Meeting. At the
close of business on the Record Date, there were 23,104,058 shares of Common
Stock outstanding. The presence, either in person or by proxy, of the holders of
a majority of the shares of Common Stock outstanding on the Record Date is
necessary to constitute a quorum at the Special Meeting. All abstentions and
broker non-votes, if any, will be included as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
meeting.
Each stockholder will be entitled to one vote per share, in person or by
proxy, for each share of Common Stock held in such stockholder's name as of the
Record Date on any matter submitted to a vote of stockholders at the Special
Meeting. Approval and ratification of the Financing Transaction will require the
affirmative vote of a majority of the votes cast by holders of Common Stock on
the Proposal, provided that the total number of votes cast on the Proposal
represents more than 50% of the shares of Common Stock entitled to vote thereon
at the Special Meeting. Certain affiliates of Merrill Lynch & Co. Inc. ("ML &
Co.") which, on the Record Date, owned an aggregate of 6,155,118 shares of
Common Stock (or 26.6% of the outstanding Common Stock) have indicated that they
intend to vote for approval and ratification of the Financing Transaction. In
determining whether the Proposal has received the requisite number of
affirmative votes, (i) abstentions will be included as votes cast and will have
the same effect as a vote against the Proposal and (ii) proxies for which a
broker does not have discretionary authority and has not received voting
instructions from the beneficial owners ("broker non-votes"), if any, will not
be counted and will not have any effect on the outcome of such vote.
Shares of Common Stock represented by properly executed proxies received in
time for voting at the Special Meeting will, unless such proxy previously has
been revoked, be voted in accordance with the instructions indicated thereon. In
the absence of specific instructions to the contrary, the persons named in the
accompanying form of proxy intend to vote all properly executed proxies received
by them FOR the approval and ratification of the Financing Transaction. The
persons named in the accompanying form of proxy may vote properly executed
proxies received by them to adjourn the Special Meeting to another date and/or
place for any proper purpose (including, without limitation, for the purpose of
soliciting additional proxies.) No business other than as set forth in the
Notice of Special Meeting accompanying the Proxy Statement may be properly
brought before the Special Meeting.
Under applicable Delaware law, none of the holders of Common Stock is
entitled to appraisal rights in connection with the Proposal to be acted on at
the Special Meeting.
<PAGE>
Execution of the enclosed proxy will not prevent a stockholder from
attending the Special Meeting and voting in person. Any proxy may be revoked at
any time prior to the exercise thereof by delivering in a timely manner a
written revocation or a new proxy bearing a later date to the Secretary of the
Company, 142 West 57th Street, New York, New York 10019, or by attending the
Special Meeting and voting in person. Attendance at the Special Meeting will
not, however, in and of itself constitute a revocation of proxy.
This solicitation is being made by the Company. The cost of this
solicitation will be borne by the Company. Solicitation will be made by mail,
and may be made personally or by telephone by officers and other employees of
the Company who will not receive additional compensation for solicitation.
The principal executive offices of the Company are located at 142 West 57th
Street, New York, New York 10019.
PROPOSAL
APPROVAL AND RATIFICATION OF THE FINANCING TRANSACTION
BACKGROUND
The Company has been exploring various financing opportunities to improve
its financial flexibility and recently consummated the Financing Transaction
described herein. On April 25, 1996, the Company completed the sale (the
"Initial Sale") of $87,500,000 8 1/2% Convertible Trust Originated Preferred
SecuritiesSM ("Preferred Securities") issued by its financing vehicle, AnnTaylor
Finance Trust, a Delaware business trust (the "Trust"). On May 17, 1996, the
Trust issued an additional $13,125,000 of Preferred Securities pursuant to the
exercise of the over-allotment option (the "Over-allotment Sale") granted to the
Initial Purchasers (as defined herein) under the terms of the Purchase Agreement
(the "Purchase Agreement") between the Company and the Initial Purchasers. 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 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 price of the Common Stock at the
date of the execution of the Purchase Agreement). The 2,012,500 Preferred
Securities issued in the Financing Transaction are convertible into an aggregate
of 5,121,812 shares of Common Stock, representing approximately 22% of the
outstanding Common Stock as of July 1, 1996.
The sale of the Preferred Securities enabled the Company to repay
$94,000,000 of outstanding borrowings under its revolving credit facility,
without reduction of the commitment thereunder, thereby strengthening the
Company's balance sheet and improving its total debt to capitalization ratio.
The Preferred Securities were sold through Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation and Robertson, Stephens &
Company LLC (collectively, the "Initial Purchasers") in the United States and
outside the United States in a private placement under Rule 144A and Regulation
S, respectively, under the Securities Act of 1933 (the "Securities Act"), and
may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. The Company has agreed
to file a registration statement under the Securities Act for, among other
things, registration of the resale of the Preferred Securities and the
underlying Common Stock by the holders thereof.
2
<PAGE>
SUMMARY OF TERMS OF PREFERRED SECURITIES
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Trust. The Company owns all the common securities (the
"Common Securities" and, together with the Preferred Securities, the "Trust
Securities") representing undivided beneficial interests in the assets of the
Trust. The Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in an equivalent amount of 8 1/2% Convertible
Subordinated Debentures due 2016 (the "Convertible Debentures") of the Company.
Upon an event of default under the Declaration (as defined herein), the holders
of the Preferred Securities will have a preference over the holders of the
Common Securities with respect to payments in respect of distributions and
payments upon redemption, liquidation and otherwise.
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of 8 1/2% of the liquidation amount of $50 per
Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears on each January 15, April 15, July 15 and October 15,
commencing July 15, 1996. See "Description of the Preferred
Securities--Distributions". The payment of distributions out of moneys held by
the Trust and payments on liquidation of the Trust or the redemption of
Preferred Securities, as described below, are guaranteed by the Company (the
"Guarantee") to the extent the Trust has funds available therefor as described
under "Description of the Guarantee". The Guarantee, when taken together with
the Company's obligations under the Indenture (as defined herein) pursuant to
which the Convertible Debentures were issued, the Convertible Debentures and its
obligations under the Declaration, including its obligations under such
Indenture to pay costs, expenses, debts and liabilities of the Trust (other than
with respect to the Trust Securities), provide a full and unconditional
guarantee of amounts due on the Preferred Securities. The Company's obligations
under the Guarantee rank (i) subordinate and junior to all other liabilities of
the Company except any liabilities that may be pari passu by their terms,
(ii) pari passu with the most senior preferred stock issued from time to time by
the Company and with any guarantee now or hereafter entered into by the Company
in respect of any preferred or preference stock or any preferred securities of
any affiliate of the Company and (iii) senior to the Common Stock. See
"Description of the Guarantee". The obligations of the Company under the
Convertible Debentures are subordinate and junior in right of payment to Senior
Indebtedness (as defined herein) of the Company.
The distribution rate and the distribution payment dates and other payment
dates for the Preferred Securities correspond to the interest rate and interest
payment dates and other payment dates for the Convertible Debentures, which are
the sole assets of the Trust. If the Company fails to make principal or interest
payments on the Convertible Debentures, the Trust will not have sufficient funds
to make distributions on the Preferred Securities, in which event the Guarantee
will not apply to such distributions until the Trust has sufficient funds
available therefor.
The Company has the right to defer payments of interest on the Convertible
Debentures at any time for up to 20 consecutive quarters (each, an "Extension
Period"), but not beyond the maturity of the Convertible Debentures. If interest
payments are so deferred, distributions on the Preferred Securities also will be
deferred. During any Extension Period, distributions will continue to accrue
with interest thereon (to the extent permitted by applicable law) at a rate of 8
1/2% per annum compounded quarterly. See "Description of the Convertible
Debentures--Option to Extend Interest Payment Period".
The Convertible Debentures are redeemable by the Company, in whole or in
part, from time to time, on or after April 15, 1999 at the redemption prices
described herein. The Convertible Debentures may also be redeemed at any time
upon the occurrence of a Tax Event (as defined herein). If the Company redeems
Convertible Debentures, the Trust must redeem Trust Securities on a pro rata
basis having an aggregate liquidation amount equal to the aggregate principal
amount of the Convertible Debentures so redeemed at a redemption price
corresponding to the redemption price of the Convertible Debentures plus accrued
and unpaid distributions thereon to the date fixed for redemption. See
3
<PAGE>
"Description of the Preferred Securities--Redemption". The Preferred Securities
will be redeemed upon maturity of the Convertible Debentures. In addition, the
Trust will be dissolved upon the occurrence of a Tax Event arising from a change
in law or a change in legal interpretation regarding tax matters, unless the
Convertible Debentures are redeemed in the limited circumstances described
herein. The Trust also will be dissolved upon the occurrence of an Investment
Company Event (as defined herein). Upon dissolution of the Trust, the
Convertible Debentures will be distributed to the holders of the Preferred
Securities, on a pro rata basis, in lieu of any cash distribution. If the
Convertible Debentures are distributed to the holders of the Preferred
Securities, the Company will use its best efforts to cause the Convertible
Debentures to be listed on the New York Stock Exchange ("NYSE") or other
national securities exchange or similar organization as the Preferred Securities
are then listed or quoted. See "Description of the Preferred Securities--Special
Event Redemption or Distribution" and "Description of the Convertible
Debentures".
In the event of the liquidation, winding up or termination of the Trust, the
holders of the Preferred Securities will be entitled to receive for each
Preferred Security a liquidation amount of $50 plus accrued and unpaid
distributions thereon (including interest thereon) to the date of payment,
unless, in connection with such dissolution, Convertible Debentures are
distributed to the holders of the Preferred Securities. See "Description of the
Preferred Securities--Liquidation Distribution Upon Dissolution".
The issuance of shares of Common Stock upon conversion of any Preferred
Securities will increase the number of outstanding shares of Common Stock and
thereby dilute the voting power of the shares of Common Stock then outstanding.
INTERESTS OF CERTAIN PERSONS IN THE FINANCING TRANSACTION
Certain affiliates of ML&Co. own approximately 26.6% of the outstanding
Common Stock. Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate
of ML& Co., was one of the Initial Purchasers in the Financing Transaction. The
Initial Purchasers received aggregate fees of $3,018,750 in connection with the
Financing Transaction. Messrs. Gerald S. Armstrong and James J. Burke, Jr.,
directors of the Company, serve on the Company's Board of Directors as
representatives of certain affiliates of ML&Co.
PURPOSE OF SOLICITATION
Approval and ratification of the Financing Transaction is being sought in
accordance with the requirements of paragraph 312.03(c) of the NYSE Listed
Company Manual, which requires, as a prerequisite to listing on the NYSE,
stockholder approval when securities convertible into common stock are issued,
other than in a public offering for cash, if the common stock has or will have
upon issuance voting power equal to or in excess of 20% of the voting power
outstanding prior to the issuance of such securities.
The Preferred Securities issued in the Initial Sale were convertible into
less than 20% of the outstanding shares of Common Stock and, accordingly, did
not require stockholder approval under NYSE rules. Upon issuance of the
additional Preferred Securities in the Over-allotment Sale, the aggregate
Preferred Securities became convertible into approximately 22% of the
outstanding Common Stock, thereby necessitating stockholder approval and
ratification of the Financing Transaction. In the event that the requisite
stockholder approval and ratification is not obtained, the Preferred Securities
would remain outstanding, but the NYSE could seek to delist the Common Stock
from the NYSE. In such event, the Company would consider alternatives then
available to it, which may include seeking to obtain listing on the Nasdaq
National Market. There can be no assurance that such event would not have an
adverse effect on the market for or liquidity of the Common Stock.
4
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL
AND RATIFICATION OF THE FINANCING TRANSACTION.
Attached hereto as Annex A is a description of the Preferred Securities, the
Guarantee and the Convertible Debentures.
BENEFICIAL OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS
As of July 1, 1996, the Record Date, the outstanding Common Stock was held
of record by 796 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 each named executive officer,
and by all directors and executive officers as a group, as of the Record Date.
Except as otherwise indicated, all persons listed below have (i) sole voting
power and investment power with respect to their shares of Common Stock, 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.
<TABLE>
<CAPTION>
NO. OF
SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT
- ---------------------------------------------------------------------- ------------ -------
<S> <C> <C>
Merrill Lynch Entities(a)............................................. 6,155,118 26.6%
LGT Asset Management, Inc.(b)......................................... 2,237,500 9.7%
The Crabbe Huson Group, Inc. and
The Crabbe Huson Special Fund, Inc.(c).............................. 2,169,800 9.4%
The Capital Group Companies, Inc.(d).................................. 1,661,600 7.2%
Sally Frame Kasaks(e)................................................. 327,497 1.4%
Paul E. Francis(e).................................................... 122,644 *
J. Patrick Spainhour.................................................. -- --
Andrea M. Weiss(e)(f)................................................. 340 *
Anthony D. Atenasio(e)(g)............................................. 1,666 *
Barry I. Shapiro(e)................................................... 21,583 *
Randy Richardson(e)(h)................................................ 2,250 *
Gerald S. Armstrong(i)(j)............................................. 10,964 *
James J. Burke, Jr.(i)................................................ 52,920 *
Robert C. Grayson..................................................... 25,000 *
Rochelle B. Lazarus(k)................................................ 600 *
Hanne M. Merriman..................................................... 200 *
All executive officers and directors as a group (16 persons)(e)....... 655,926 2.8%
</TABLE>
- ------------
<TABLE>
<C> <S>
* Less than 1%
(a) As of the Record Date, certain affiliates of ML&Co. (collectively, the "Merrill Lynch
Entities") beneficially owned an aggregate of 6,155,118 shares, or approximately 26.6%,
of the outstanding Common Stock. Shares of Common Stock beneficially owned by the
Merrill Lynch Entities were held as follows: 3,010,249 shares by Merrill Lynch Capital
Appreciation Partnership No. B-II, L.P.; 1,756,892 shares by ML Offshore LBO
Partnership No. B-II; 851,656 shares by ML IBK Positions, Inc.; 334,796 shares by
Merchant Banking L.P. No. III; 163,448 shares by Merrill Lynch KECALP L.P. 1989; 29,834
shares by MLCP Associates L.P. No. I; 7,483 shares by Merrill Lynch KECALP L.P. 1987;
and 760 shares by ML Capital Partners. The Merrill Lynch Entities are deemed to have
shared voting and investment power with other ML&Co. affiliates with respect to the
shares of Common Stock indicated as held by them. The address for ML IBK Positions,
Inc. is 250 Vesey Street, World Financial Center, North Tower, New York, New York
10281. The address for ML Offshore LBO Partnership No. B-II is P>O> Box 25, Roseneath,
The Grange, St. Peter Port, Guernsey, The Channel Islands. The address for each of the
other Merrill Lynch Entities is 225 Liberty Street, New York,
</TABLE>
(Footnotes continued on following page)
5
<PAGE>
(Footnotes continued from preceding page)
<TABLE>
<C> <S>
New York 10080. Pursuant to a Schedule 13-G dated February 13, 1996, and filed with the
Commission by ML&Co. and certain of its affiliates, certain other entities associated
with ML&Co. own an additional 2,100 shares.
(b) Pursuant to a Schedule 13-G dated February 13, 1996 and filed with the Commission by
LGT Asset Management, Inc. ("LGT"), as of December 31, 1995, LGT had sole voting and
dispositive power with respect to 2,237,500 shares. The address for LGT is 50
California Street, San Francisco, California 94111.
(c) Pursuant to a Schedule 13-G dated February 13, 1996 and filed with the Commission, The
Crabbe Huson Group, Inc. and The Crabbe Huson Special Fund, Inc. have shared voting and
dispositive power with respect to 1,756,200 shares and The Crabbe Huson Group, Inc. has
shared voting and dispositive power with respect to an additional 413,600 shares. The
address for The Crabbe Huson Group, Inc. and The Crabbe Huson Special Fund, Inc. is 121
SW Morrison, Suite 1400, Portland, Oregon 97204.
(d) Pursuant to a Schedule 13-G dated February 9, 1996 and filed with the Commission by The
Capital Group Companies, Inc., as of December 29, 1995, The Capital Group Companies,
Inc. had sole voting power with respect to 381,600 shares, shared voting power with
respect to no shares, and sole dispositive power with respect to 1,661,600 shares;
Capital Research and Management Company, a subsidiary of The Capital Group Companies,
Inc., had sole or shared voting power with respect to no shares and sole dispositive
power with respect to 1,240,000 shares; and SMALLCAP World Fund, Inc., a fund to which
Capital Research and Management Company serves as investment adviser, has sole voting
power with respect to 1,200,000 shares, shared voting power with respect to no shares,
and sole dispositive power with respect to no shares. The address for The Capital Group
Companies, Inc. is 333 South Hope Street, Los Angeles, California 90071.
(e) The shares listed include shares subject to options exercisable within 60 days of July
1, 1996 as follows: Ms. Kasaks, 256,497 shares; Mr. Francis, 71,832 shares; Mr.
Atenasio, 1,666 shares; Mr. Shapiro, 21,382 shares; Ms. Weiss, 0 shares; Mr.
Richardson, 0 shares; and all executive officers and directors as a group (16 persons),
433,953 shares.
(f) Ms. Weiss resigned from her position with the Company effective January 24, 1996.
(g) Mr. Atenasio resigned from his position with the Company effective April 12, 1996.
(h) Mr. Richardson resigned from his position with the Company effective March 15, 1996.
(i) James J. Burke, Jr. and Gerald S. Armstrong serve on the Board of Directors of the
Company and Ann Taylor as designees of certain affiliates of ML&Co. and are directors
of ML Capital Partners. Each of Messrs. Burke and Armstrong disclaims beneficial
ownership of shares beneficially owned by the Merrill Lynch Entities.
(j) 3,000 of these shares are held by Mr. Armstrong's wife, as Custodian for their
children. Mr. Armstrong disclaims beneficial ownership of these shares.
(k) Shares are held in a pension fund of which Ms. Lazarus' husband is the sole
beneficiary. Ms. Lazarus has no voting or investment power with respect to these
shares.
</TABLE>
6
<PAGE>
ANNEX A
DESCRIPTION OF THE PREFERRED SECURITIES
GENERAL
The Preferred Securities represent undivided beneficial ownership interests
in the assets of the Trust and entitle the holders thereof to a preference in
certain circumstances with respect to distributions and amounts payable on
redemption or liquidation over the common securities of the Trust (the "Common
Securities" and together with the Preferred Securities, the "Trust Securities"),
as well as other benefits.
All of the Common Securities are owned by the Company. The Common Securities
rank pari passu, and payments will be made thereon on a pro rata basis, with the
Preferred Securities, except that upon the occurrence of an event of default (a
"Declaration Event of Default") under the Amended and Restated Declaration of
Trust of the Trust (the "Declaration"), the rights of the holders of the Common
Securities to receive payment of periodic distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of Preferred Securities. See "--Subordination of Common Securities"
below. Title to the Convertible Debentures will be held by The Bank of New York,
as property trustee of the Trust (the "Property Trustee"), for the benefit of
the holders of the Trust Securities. The Declaration does not permit the
issuance by the Trust of any securities other than the Trust Securities or the
incurrence of any indebtedness by the Trust. The payment of distributions out of
money held by the Trust, and payments upon redemption of the Preferred
Securities or liquidation of the Trust, are guaranteed pursuant to the Guarantee
by the Company to the extent described under "Description of the Guarantee"
below. The Guarantee is held by The Bank of New York (the "Guarantee Trustee")
for the benefit of the holders of the Preferred Securities. The Guarantee does
not cover payment of distributions when the Trust does not have sufficient
available funds to pay such distributions. In such event, the remedy of a holder
of Preferred Securities is to (i) vote to direct the Property Trustee to enforce
the Property Trustee's rights under the Convertible Debentures or (ii) if the
failure of the Trust to pay distributions is attributable to the failure of the
Company to pay interest or principal on the Convertible Debentures, to institute
a proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on the Convertible Debentures having a
principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder on or after the respective due date specified in the
Convertible Debentures. See "--Voting Rights" below. The Guarantee, when taken
together with the Company's obligations under the Convertible Debentures, the
Indenture and the Declaration, including its obligations under the Indenture to
pay costs, expenses, debts and liabilities of the Trust (other than with respect
to the Trust Securities), provide a full and unconditional guarantee of amounts
due on the Preferred Securities. See "Description of the Guarantee."
DISTRIBUTIONS
Distributions on Preferred Securities are fixed at a rate per annum of 8
1/2% of the stated liquidation amount of $50 per Preferred Security.
Distributions in arrears for more than one quarter will bear interest thereon at
a rate per annum of 8 1/2% thereof compounded quarterly. The term "distribution"
as used herein includes any such interest (including any Additional Interest and
Liquidation Damages, each as defined herein) payable unless otherwise stated.
The amount of distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months.
Distributions on the Preferred Securities will be cumulative, will accrue
from the date of initial issuance and will be payable quarterly in arrears on
each January 15, April 15, July 15 and October 15, commencing July 15, 1996,
when, as and if available for payment, by the Property Trustee, except as
otherwise described below. The Company has the right under the Indenture to
defer interest payments from time to time on the Convertible Debentures for
successive periods not exceeding 20 consecutive
7
<PAGE>
quarterly interest periods during which no interest shall be due and payable,
provided, that no such Extension Period may extend beyond the maturity date of
the Convertible Debentures. As a consequence of such extension, quarterly
distributions on the Preferred Securities would be deferred (though such
distributions would continue to accrue with interest since interest would
continue to accrue on the Convertible Debentures) during any such extended
interest payment period. In the event that the Company exercises this right,
then, during such period the Company (i) shall not declare or pay dividends on,
make distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock except for
dividends or distributions in shares of its capital stock of the same class on
which such dividend or distribution is being paid and conversions or exchanges
of common stock of one class into common stock of another class and except for a
redemption, purchase or other acquisition of shares of its capital stock made
for the purpose of an employee incentive plan or benefit of the Company or any
of its subsidiaries, (ii) shall not make any payment of interest, principal of
or premium, if any, on, or repay, repurchase or redeem any debt securities
issued by the Company that rank pari passu with or junior to the Convertible
Debentures (except by conversion into or exchange for shares of its capital
stock), and (iii) shall not make any guarantee payments with respect to the
foregoing. Prior to the termination of any such Extension Period, the Company
may further extend such Extension Period; provided, that such Extension Period,
together with all previous and further extensions thereof, may not exceed 20
consecutive quarters and that such Extension Period may not extend beyond the
maturity date of the Convertible Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may select
a new Extension Period, subject to the above requirements. Consequently, there
could be multiple Extension Periods of varying lengths throughout the term of
the Convertible Debentures. See "Description of the Convertible
Debentures--Interest" and "Description of the Convertible Debentures--Option to
Extend Interest Payment Period" below. If distributions are deferred, the
deferred distributions and accrued interest thereon shall be paid to the holders
of record of Preferred Securities as they appear on the books and records of the
Trust on the record date next following the termination of such deferral period.
Distributions on the Preferred Securities will be made to the extent that
the Trust has funds available for the payment of such distributions in the
account maintained by the Property Trustee (the "Property Account"). Amounts
available to the Trust for distribution to the holders of the Preferred
Securities will be limited to payments received by the Trust from the Company
for the Convertible Debentures. See "Description of the Convertible Debentures"
below. The payment of distributions out of funds held by the Trust, is
guaranteed by the Company, as set forth under "Description of the Guarantee"
below.
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which will be fifteen days prior to the relevant payment dates. In
the event that any date on which distributions are payable on the Preferred
Securities is not a Business Day, payment of the distribution payable on such
date will be made on the next succeeding day which is a Business Day (without
any distribution or other payment in respect of any such delay) except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date. A "Business Day" shall mean any day other
than a day on which banking institutions in The City of New York or in
Wilmington, Delaware are authorized or required by law to close.
CONVERSION RIGHTS
General. Preferred Securities are convertible at any time prior to the
Business Day immediately preceding the date of repayment of such Preferred
Securities, whether at maturity or upon redemption (either at the option of the
Company or pursuant to a Tax Event (as defined herein)), at the option of the
holder thereof and in the manner described below, into shares of Company Common
Stock at an
8
<PAGE>
initial conversion rate of 2.545 shares of Company Common Stock for each
Preferred Security (equivalent to a conversion price of $19.65 per share of
Company Common Stock), subject to adjustment as described under "--Conversion
Price Adjustments" below. The Trust will covenant in the Declaration not to
convert Convertible Debentures held by it except pursuant to a notice of
conversion delivered to the Property Trustee, as conversion agent (the
"Conversion Agent") by a holder of Preferred Securities. A holder of a Preferred
Security wishing to exercise its conversion right shall deliver an irrevocable
conversion notice, together, if the Preferred Security is a Certificated
Security (as defined herein), with such Certificated Security, to the Conversion
Agent which shall, on behalf of such holder, exchange such Preferred Security
for a portion of the Convertible Debentures and immediately convert such
Convertible Debentures into Company Common Stock. Holders may obtain copies of
the required form of the conversion notice from the Conversion Agent. Procedures
for converting book-entry Preferred Securities into shares of Company Common
Stock will differ.
Holders of Preferred Securities at the close of business on a distribution
record date will be entitled to receive the distribution payable on such
Preferred Securities on the corresponding distribution payment date
notwithstanding the conversion of such Preferred Securities following such
distribution record date but prior to such distribution payment date. Except as
provided in the immediately preceding sentence, neither the Trust nor the
Company will make, or be required to make, any payment, allowance or adjustment
for accumulated and unpaid distributions, whether or not in arrears, on
converted Preferred Securities. The Company will make no payment or allowance
for distributions on the shares of Company Common Stock issued upon such
conversion, except to the extent that such shares of Company Common Stock are
held of record on the record date for any such distributions. Each conversion
will be deemed to have been effected immediately prior to the close of business
on the day on which the related conversion notice was received by the Conversion
Agent.
No fractional shares of Company Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by the
Company in cash based on the last reported sale price of Company Common Stock on
the date such Preferred Securities are surrendered for conversion.
Conversion Price Adjustments--General. The conversion price is subject to
adjustment in certain events, including (a) the issuance of shares of Company
Common Stock as a dividend or a distribution with respect to Company Common
Stock, (b) subdivisions, combinations and reclassification of Company Common
Stock, (c) the issuance to all holders of Company Common Stock of rights or
warrants entitling them (for a period not exceeding 45 days) to subscribe for
shares of Company Common Stock at less than the then Current Market Price (as
defined below) of the Company Common Stock, (d) the distribution to holders of
Company Common Stock of evidences of indebtedness of the Company, securities or
capital stock, cash or assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above and dividends and
distributions paid exclusively in cash), (e) the payment of dividends (and other
distributions) on Company Common Stock paid exclusively in cash, excluding cash
dividends if the annualized per share amount thereof does not exceed 15% of the
current market price of Company Common Stock as of the trading day immediately
preceding the date of declaration of such dividend, and (f) payment to holders
of Company Common Stock in respect of a tender or exchange offer (other than an
odd-lot offer) by the Company for Company Common Stock at a price in excess of
110% of the then Current Market Price of Company Common Stock as of the trading
day next succeeding the last date tenders or exchanges may be made pursuant to
such tender or exchange offer. "Current Market Price" means the average of the
daily closing prices for the five consecutive trading days selected by the
Company commencing not more than 20 trading days before, and ending not later
than, the earlier of the day in question or, if applicable, the day before the
"ex" date with respect to the issuance or distribution in question.
The Company from time to time may reduce the conversion price of the
Convertible Debentures (and thus the conversion price of the Preferred
Securities) by any amount selected by the Company for any period of at least 20
days, in which case the Company shall give at least 15 days' notice of such
reduction. The Company may, at its option, make such reductions in the
conversion price, in addition to
9
<PAGE>
those set forth above, as the Company's Board of Directors deems advisable to
avoid or diminish any income tax to holders of Company Common Stock resulting
from any dividend or distribution of stock (or rights to acquire stock) or from
any event treated as such for income tax purposes.
No adjustment of the conversion price will be made upon the issuance of any
shares of Company Common Stock pursuant to any present or future plan providing
for the reinvestment of dividends or interest payable on securities of the
Company and the investment of additional optional amounts in shares of Company
Common Stock under any such plan. No adjustment in the conversion price will be
required unless such adjustment would require a change of at least one percent
(1%) in the price then in effect; provided, however, that any adjustment that
would not be required to be made shall be carried forward and taken into account
in any subsequent adjustment. If any action would require adjustment of the
conversion price pursuant to more than one of the provisions described above,
only one adjustment shall be made and such adjustment shall be the amount of
adjustment that has the highest absolute value to the holder of the Preferred
Securities.
Conversion Price Adjustments--Merger, Consolidation or Sale of Assets of the
Company. In the event that the Company shall be a party to any transaction
(including, without limitation, and with certain exceptions, (a)
recapitalization or reclassification of the Company Common Stock, (b)
consolidation of the Company with, or merger of the Company into, any other
Person, or any merger of another Person into the Company, (c) any sale, transfer
or lease of all or substantially all of the assets of the Company or (d) any
compulsory share exchange) pursuant to which the Company Common Stock is
converted into the right to receive other securities, cash or other property
(each of the foregoing being referred to as a "Transaction"), then the holders
of Preferred Securities then outstanding shall have the right to convert the
Preferred Securities into the kind and amount of securities, cash or other
property receivable upon the consummation of such Transaction by a holder of the
number of shares of Company Common Stock issuable upon conversion of such
Preferred Securities immediately prior to such Transaction.
In the case of a Transaction, each Preferred Security would become
convertible into the securities, cash or property receivable by a holder of the
number of shares of the Company Common Stock into which such Preferred Security
was convertible immediately prior to such Transaction. This change could
substantially lessen or eliminate the value of the conversion privilege
associated with the Preferred Securities in the future. For example, if the
Company were acquired in a cash merger, each Preferred Security would become
convertible solely into cash and would no longer be convertible into securities
whose value would vary depending on the future prospects of the Company and
other factors.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends to holders of Preferred Securities or to the holders of Company
Common Stock.
REDEMPTION
The Convertible Debentures will mature on April 15, 2016, and may be
redeemed, in whole or in part, at any time after April 15, 1999 or at any time
in certain circumstances upon the occurrence of a Tax Event. Upon the repayment
of the Convertible Debentures, whether at maturity or upon redemption (either at
the option of the Company or pursuant to a Tax Event), the proceeds from such
repayment shall simultaneously be applied to redeem Trust Securities having an
aggregate liquidation amount equal to the Convertible Debentures so repaid or
redeemed at the applicable redemption price of the Convertible Debentures plus
accrued and unpaid distribution thereon (the "Redemption Price"), together with
accrued and unpaid distributions through the date of redemption; provided, that
holders of the Trust Securities shall be given not less than 30 nor more than 60
days' notice of such redemption. See "--Special Event Redemption or
Distribution", "--Redemption Procedures", "Description of the Convertible
Debentures--General" and "Description of the Convertible Debentures--Optional
Redemption" below.
10
<PAGE>
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If, at any time, a Tax Event or an Investment Company Event (as defined
below) shall occur and be continuing, the Trust shall, unless the Convertible
Debentures are redeemed in the limited circumstances described below, be
dissolved with the result that, after satisfaction of creditors, if any, of the
Trust, Convertible Debentures with an aggregate principal amount equal to the
aggregate stated liquidation amount of, with an interest rate identical to the
distribution rate of, and accrued and unpaid interest equal to accrued and
unpaid distributions on, and having the same record date for payment as the
Preferred Securities and the Common Securities outstanding at such time would be
distributed on a pro rata basis to the holders of the Preferred Securities and
the Common Securities in liquidation of such holders' interests in the Trust,
within 90 days following the occurrence of such Tax Event or Special Event
(each, a"Special Event"); provided, however, that in the case of the occurrence
of a Tax Event, as a condition of such dissolution and distribution, the
trustees of the Trust who are employees of the Company (the "Regular Trustees")
shall have received an opinion of nationally recognized independent tax counsel
experienced in such matters (a "No Recognition Opinion"), which opinion may rely
on published revenue rulings of the Internal Revenue Service, to the effect that
the holders of the Preferred Securities will not recognize any income, gain or
loss for United States Federal income tax purposes as a result of such
dissolution and distribution of Convertible Debentures; and, provided, further,
that if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure which in the sole judgment of the Company
has or will cause no adverse effect on the Trust, the Company or the holders of
the Trust Securities and will involve no material cost, the Trust will pursue
such measure in lieu of dissolution. Furthermore, if in the case of the
occurrence of a Tax Event, (i) the Regular Trustees have received an opinion (a
"Redemption Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters that, as a result of a Tax Event, there is more than
an insubstantial risk that the Company would be precluded from deducting the
interest on the Convertible Debentures for United States Federal income tax
purposes even if the Convertible Debentures were distributed to the holders of
Preferred Securities and Common Securities in liquidation of such holders'
interests in the Trust as described above or (ii) the Regular Trustees shall
have been informed by such tax counsel that a No Recognition Opinion cannot be
delivered to the Trust, the Company shall have the right, upon not less than 30
nor more than 60 days' notice, to redeem the Convertible Debentures, in whole
(but not in part) for cash within 90 days following the occurrence of such Tax
Event, and promptly following such redemption, the Preferred Securities and
Common Securities will be redeemed by the Trust at the Redemption Price;
provided, however, that if at the time there is available to the Company or the
Trust the opportunity to eliminate, within such 90-day period, the Tax Event by
taking some ministerial action, such as filing a form or making an election, or
pursuing some other similar reasonable measure which in the sole judgment of the
Company has or will cause no adverse effect on the Trust, the Company or the
holders of the Trust Securities and will involve no material cost, the Company
or the Trust will pursue such measure in lieu of redemption.
Because the Company is a holding company whose operations are conducted
through Ann Taylor, the ability of the Company to redeem the Convertible
Debentures, and, therefore for the Trust to redeem the Preferred Securities,
will be dependent on Ann Taylor's ability to pay dividends to the Company in
sufficient amounts.
"Tax Event" means that the Regular Trustees shall have received an opinion
of nationally recognized independent tax counsel experienced in such matters (a
"Dissolution Tax Opinion") to the effect that as a result of (a) any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, (b) any amendment to, or change in, an
interpretation or application of any such laws or regulations by any legislative
body, court, governmental agency or regulatory authority (including the
enactment of any legislation and the publication of any judicial decision or
11
<PAGE>
regulatory determination), (c) any interpretation or pronouncement that provides
for a position with respect to such laws or regulations that differs from the
theretofore generally accepted position or (d) any action taken by any
governmental agency or regulatory authority, which amendment or change is
enacted, promulgated, issued or announced or which interpretation or
pronouncement is issued or announced or which action is taken, in each case on
or after April 18, 1996 (collectively, a "Change in Tax Law"), there is more
than an insubstantial risk that (i) the Trust is, or will be within 90 days of
the date thereof, subject to United States Federal income tax with respect to
income accrued or received on the Convertible Debentures, (ii) the Trust is, or
will be within 90 days of the date thereof, subject to more than a de minimis
amount of other taxes, duties or other governmental charges or (iii) interest
payable by the Company to the Trust on the Convertible Debentures is not, or
within 90 days of the date thereof will not be, deductible by the Company for
United States Federal income tax purposes. Notwithstanding anything in the
previous sentence to the contrary, a Tax Event shall not include any Change in
Tax Law that requires the Company for United States Federal income tax purposes
to defer taking a deduction for any original issue discount ("OID") that accrues
with respect to the Convertible Debentures until the interest payment related to
such OID is paid by the Company in money; provided, that such Change in Tax Law
does not create more than an insubstantial risk that the Company will be
prevented from taking a deduction for OID accruing with respect to the
Convertible Debentures at a date that is no later than the date the interest
payment related to such OID is actually paid by the Company in money.
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "1940 Act"),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the date hereof.
On the date fixed for any distribution of Convertible Debentures, upon
dissolution of the Trust, (i) the Preferred Securities and the Common Securities
will no longer be deemed to be outstanding and (ii) certificates representing
Trust Securities will be deemed to represent beneficial interests in the
Convertible Debentures having an aggregate principal amount equal to the stated
liquidation amount of, and bearing accrued and unpaid interest equal to accrued
and unpaid distributions on, such Trust Securities until such certificates are
presented to the Company or its agent for transfer or reissuance.
There can be no assurance as to the market price for the Convertible
Debentures which may be distributed in exchange for Trust Securities if a
dissolution and liquidation of the Trust were to occur. Accordingly, the
Convertible Debentures which the investor may subsequently receive on
dissolution and liquidation of the Trust may trade at a discount to the price of
the Trust Securities exchanged. If the Convertible Debentures are distributed to
the holders of the Preferred Securities, the Company will use its best efforts
to cause the Convertible Debentures to be listed on the NYSE or on any such
other national securities exchange or similar organization as the Preferred
Securities are then listed or quoted.
REDEMPTION PROCEDURES
The Trust may not redeem fewer than all of the outstanding Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Preferred Securities for all quarterly distribution periods terminating on or
prior to the date of redemption.
12
<PAGE>
In the event of any redemption in part, the Trust shall not be required to
(i) issue, register the transfer of or exchange any Preferred Security during a
period beginning at the opening of business 15 days before any selection for
redemption of Preferred Securities and ending at the close of business on the
earliest date in which the relevant notice of redemption is deemed to have been
given to all holders of Preferred Securities to be so redeemed and (ii) register
the transfer of or exchange any Preferred Securities so selected for redemption,
in whole or in part, except for the unredeemed portion of any Preferred
Securities being redeemed in part.
If the Trust gives a notice of redemption in respect of Preferred Securities
(which notice will be irrevocable), and if the Company has paid to the Property
Trustee a sufficient amount of cash in connection with the related redemption or
maturity of the Convertible Debentures, then, by 12:00 noon, New York time, on
the redemption date, the Trust will irrevocably deposit with the Depository
Trust Company ("DTC") funds sufficient to pay the amount payable on redemption
of all book-entry certificates and will give DTC irrevocable instructions and
authority to pay such amount in respect of Preferred Securities represented by
one or more fully registered global Preferred Security certificates (the "Global
Certificates") registered in the name of Cede & Co. (as nominee for DTC) and
will irrevocably deposit with the paying agent for the Preferred Securities
funds sufficient to pay such amount in respect of any Preferred Security
certificates in fully registered, certificated form (the "Certificated
Securities") and will give such paying agent irrevocable instructions and
authority to pay such amount to the holders of Certificated Securities upon
surrender of their certificates. If notice of redemption shall have been given
and funds are deposited as required, then upon the date of such deposit, all
rights of holders of such Preferred Securities so called for redemption will
cease, except the right of the holders of such Preferred Securities to receive
the Redemption Price, but without interest on such Redemption Price. In the
event that any date fixed for redemption of Preferred Securities is not a
Business Day, then payment of the amount payable on such date will be made on
the next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities is improperly withheld or refused and not paid
either by the Trust or by the Company pursuant to the Guarantee described under
"Description of the Guarantee", distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the original redemption
date to the date of payment, in which case the actual payment date will be
considered the date fixed for redemption for purposes of calculating the amount
payable upon redemption (other than for calculating any premium).
In the event that fewer than all of the outstanding Preferred Securities are
to be redeemed, the Preferred Securities will be redeemed pro rata.
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), the Company or its subsidiaries may at
any time and from time to time purchase outstanding Preferred Securities by
tender, in the open market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of, the
Trust Securities, as applicable, shall be made pro rata based on the liquidation
amount of the Trust Securities; provided, however, that, if on any distribution
date or redemption date a Declaration Event of Default shall have occurred and
be continuing, no payment of any distribution on, or amount payable upon
redemption of, any Common Security, and no other payment on account of the
redemption, liquidation or other acquisition of Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all outstanding Preferred Securities for all distribution periods terminating on
or prior thereto, or in the case of payment of the amount payable upon
redemption of the Preferred Securities, the full amount of such amount in
respect of all outstanding Preferred Securities shall have
13
<PAGE>
been made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all distributions on, or the
amount payable upon redemption of, Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until all such Declaration Events of Default with respect to the Preferred
Securities have been cured, waived or otherwise eliminated. Until any such
Declaration Events of Default with respect to the Preferred Securities have been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Preferred Securities and not the holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then holders
of the Preferred Securities will be entitled to receive out of the assets of the
Trust, after satisfaction of liabilities to creditors, distributions in an
amount equal to the aggregate of the stated liquidation amount of $50 per
Preferred Security plus accrued and unpaid distributions thereon to the date of
payment (the "Liquidation Distribution"), unless, in connection with such
Liquidation, Convertible Debentures in an aggregate stated principal amount
equal to the aggregate stated liquidation amount of, with an interest rate
identical to the distribution rate of, and accrued and unpaid interest equal to
accrued and unpaid distributions on, the Preferred Securities have been
distributed on a pro rata basis to the holders of the Preferred Securities.
If, upon any such Liquidation, the Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities shall be paid on a pro rata basis. The holders
of the Common Securities will be entitled to receive distributions upon any such
dissolution pro rata with the holders of the Preferred Securities, except that
if a Declaration Event of Default has occurred and is continuing, the Preferred
Securities shall have a preference over the Common Securities with regard to
such distributions.
Pursuant to the Declaration, the Trust shall terminate (i) on April 15,
2021, the expiration of the term of the Trust, (ii) upon the bankruptcy of the
Company, (iii) upon the filing of a certificate of dissolution or the equivalent
with respect to the Company, the filing of a certificate of cancellation with
respect to the Trust after having obtained the consent of at least a majority in
liquidation amount of the Trust Securities, voting together as a single class,
to file such certificate of cancellation, or the revocation of the charter of
the Company and the expiration of 90 days after the date of revocation without a
reinstatement thereof, (iv) upon the distribution of all of the Convertible
Debentures upon the occurrence of a Special Event, (v) upon the entry of a
decree of a judicial dissolution of the Company or the Trust, or (vi) upon the
redemption of all the Trust Securities.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other entity, except as
described below. The Trust may, with the consent of a majority of the Regular
Trustees and without the consent of the holders of the Trust Securities, the
Property Trustee or The Bank of New York (Delaware) (the "Delaware Trustee")
consolidate, amalgamate, merge with or into, or be replaced by a trust organized
as such under the laws of any State of the United States; provided, that (i) if
the Trust is not the survivor, such successor entity either (x) expressly
assumes all of the obligations of the Trust under the Trust Securities or (y)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Securities (the "Successor Securities"), so long as the
Successor
14
<PAGE>
Securities rank the same as the Securities rank with respect to distributions,
assets and payments, (ii) the Company expressly acknowledges a trustee of such
successor entity possessing the same powers and duties as the Property Trustee
as the holder of the Convertible Debentures, (iii) the Preferred Securities or
any Successor Securities are listed, or any Successor Securities will be listed
upon notification of issuance, on any national securities exchange or with
another organization on which the Preferred Securities are then listed or
quoted, (iv) such merger, consolidation, amalgamation or replacement does not
cause the Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, (vi)
such successor entity has a purpose substantially identical to that of the
Trust, (vii) the Company guarantees the obligations of such successor entity
under the Successor Securities to the same extent as provided by the Guarantee,
(viii) prior to such merger, consolidation, amalgamation or replacement, the
Company has received an opinion of a nationally recognized independent counsel
to the Trust reasonably acceptable to the Property Trustee experienced in such
matters to the effect that: (A) such merger, consolidation, amalgamation or
replacement will not adversely affect the rights, preferences and privileges of
the holders of the Trust Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders'
interest in the new entity), (B) following such merger, consolidation,
amalgamation or replacement, neither the Trust nor such successor entity will be
required to register as an investment company under the 1940 Act and (C)
following such merger, consolidation, amalgamation or replacement, the Trust (or
such successor trust) will be treated as a grantor trust for United States
Federal income tax purposes. Notwithstanding the foregoing, the Trust shall not,
except with the consent of holders of 100% in liquidation amount of the Common
Securities, consolidate, amalgamate, merge with or into, or be replaced by any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it, if such consolidation, amalgamation, merger or
replacement would cause the Trust or the successor entity to be classified as
other than a grantor trust for United States Federal income tax purposes.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes a Declaration Event of Default; provided, that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Preferred Securities have been
cured, waived or otherwise eliminated. Until such Declaration Events of Default
with respect to the Preferred Securities have been so cured, waived or otherwise
eliminated, the Property Trustee will be deemed to be acting solely on behalf of
the holders of the Preferred Securities and only the holders of the Preferred
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration and, therefore, the Indenture.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures after a holder of Preferred Securities has made a written request,
such holder of record of Preferred Securities may directly institute a legal
proceeding against the Company to enforce the Property Trustee's rights under
the Convertible Debentures without first instituting any legal proceeding
against the Property Trustee or any other person or entity. Notwithstanding the
foregoing, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest or
principal on the Convertible Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, the redemption date), then a
holder of Preferred Securities may directly institute a proceeding (a "Direct
Action") for enforcement of payment to such holder directly of the principal of
or interest on the Convertible Debentures having a principal amount equal to the
aggregate liquidation amount of the Preferred Securities of such holder on or
after the respective due date specified in the Convertible Debentures. In
connection with such Direct Action, the Company will be
15
<PAGE>
subrogated to the rights of such holder of Preferred Securities under the
Declaration to the extent of any payment made by the Company to such holder of
Preferred Securities in such Direct Action. The holders of Preferred Securities
will not be able to exercise directly any other remedy available to the holders
of the Convertible Debentures.
Upon the occurrence of a Declaration Event of Default, the Property Trustee
as the sole holder of the Convertible Debentures will have the right under the
Indenture to declare the principal of and interest on the Convertible Debentures
to be immediately due and payable. The Company and the Trust are each required
to file annually with the Property Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Delaware Business Trust Act, as
amended (the "Trust Act"), the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act") and under "Description of the Guarantee--Amendments and
Assignment" below, and as otherwise required by law and the Declaration, the
holders of the Preferred Securities have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in liquidation amount of the Preferred Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Convertible Debentures,
to (i) exercise the remedies available to it under the Indenture as a holder of
the Convertible Debentures, (ii) waive any past Indenture Event of Default that
is waiveable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Convertible Debentures shall be due
and payable or (iv) consent to any amendment, modification, or termination of
the Indenture or the Convertible Debentures where such consent shall be
required; provided, however, that where a consent or action under the Indenture
would require the consent or act of the holders of more than a majority of the
aggregate principal amount of Convertible Debentures affected thereby, only the
holders of the percentage of the aggregate stated liquidation amount of the
Preferred Securities which is at least equal to the percentage required under
the Indenture may direct the Property Trustee to give such consent or take such
action. If the Property Trustee fails to enforce its rights under the
Convertible Debentures after a holder of record of Preferred Securities has made
a written request, such holder of record of Preferred Securities may directly
institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights under the Convertible Debentures without first
instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of the principal of or interest on the Convertible Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder on or after the respective due date specified in the
Convertible Debentures. The Property Trustee shall notify all holders of the
Preferred Securities of any notice of default received from the Indenture
Trustee with respect to the Convertible Debentures. Such notice shall state that
such Indenture Event of Default also constitutes a Declaration Event of Default.
The Property Trustee shall be under no obligation to take any of the actions
described in clause (i), (ii) or (iii) above unless the Property Trustee has
obtained an opinion of independent tax counsel to the effect that as a result of
such action, the Trust will not fail to be classified as a grantor trust for
United States Federal income tax purposes and each holder will be treated as
owning an undivided beneficial interest in the Convertible Debentures.
16
<PAGE>
In the event the consent of the Property Trustee, as the holder of the
Convertible Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture, the Property Trustee
shall request the direction of the holders of the Trust Securities with respect
to such amendment, modification or termination and shall vote with respect to
such amendment, modification or termination as directed by a majority in
liquidation amount of the Trust Securities voting together as a single class;
provided, however, that where a consent under the Indenture would require the
consent of the holders of more than a majority of the aggregate principal amount
of the Convertible Debentures, the Property Trustee may only give such consent
at the direction of the holders of at least the same proportion in aggregate
stated liquidation amount of the Securities. The Property Trustee shall not take
any such action in accordance with the directions of the holders of the Trust
Securities unless the Property Trustee has obtained an opinion of tax counsel to
the effect that for the purposes of United States Federal income tax the Trust
will not be classified as other than a grantor trust.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may be
given at a separate meeting of holders of Preferred Securities convened for such
purpose, at a meeting of all of the holders of Trust Securities or pursuant to
written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Convertible Debentures in
accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Company or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
Holders of the Preferred Securities will have no rights to appoint or remove
the Regular Trustees, who may be appointed, removed or replaced solely by the
Company as the holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Property Trustee and the Delaware
Trustee), provided, that if any proposed amendment provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Trust Securities, whether by
way of amendment to the Declaration or otherwise or (ii) the dissolution,
winding-up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of at
least a majority in liquidation amount of the Trust Securities affected thereby;
provided, that if any amendment or proposal referred to in clause (i) above
would adversely affect only the Preferred Securities or the Common Securities,
then only the affected class will be entitled to vote on such amendment or
proposal
17
<PAGE>
and such amendment or proposal shall not be effective except with the approval
of a majority in liquidation amount of such class of Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified for purposes of United States Federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Property Trustee or (iii) cause the Trust to be deemed an "investment
company" which is required to be registered under the 1940 Act.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Company and certain of its subsidiaries maintain deposit accounts and
conduct other banking transactions with the Property Trustee in the ordinary
course of their businesses. The Property Trustee, prior to the occurrence of a
default with respect to the Trust Securities, undertakes to perform only such
duties as are specifically set forth in the Declaration and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provisions, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Preferred Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The holders of Preferred Securities will not be
required to offer such indemnity in the event such holders, by exercising their
voting rights, direct the Property Trustee to take any action following a
Declaration Event of Default.
GOVERNING LAW
The Declaration and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for United States Federal income tax
purposes so that the Debentures will be treated as indebtedness of the Company
for United States Federal income tax purposes. In this connection, the Regular
Trustees are authorized to take any action, not inconsistent with applicable
law, the certificate of trust or the Declaration that the Regular Trustees
determine in their discretion to be necessary or desirable for such purposes as
long as such action does not adversely affect the interests of the holders of
the Preferred Securities.
Holders of the Preferred Securities have no preemptive rights.
18
<PAGE>
DESCRIPTION OF THE GUARANTEE
GENERAL
Pursuant to and to the extent set forth in the Guarantee, the Company (the
"Guarantor") irrevocably and unconditionally agrees to pay in full to the
holders of the Preferred Securities (except to the extent paid by such Trust),
as and when due, regardless of any defense, right of set off or counterclaim
which the Trust may have or assert, the following payments (the "Guarantee
Payments"), without duplication: (i) any accrued and unpaid distributions that
are required to be paid on the Preferred Securities to the extent the Trust has
funds available therefor, (ii) the Redemption Price, with respect to any
Preferred Securities called for redemption by the Trust, to the extent the Trust
has funds available therefor and (iii) upon a voluntary or involuntary
dissolution, winding-up or termination of the Trust (other than in connection
with the distribution of Convertible Debentures to the holders of Preferred
Securities or the redemption of all the Preferred Securities), the lesser of (a)
the aggregate of the liquidation amount and all accrued and unpaid distributions
on the Preferred Securities to the date of payment to the extent the Trust has
funds available therefor and (b) the amount of assets of the Trust remaining
available for distribution to holders of Preferred Securities upon the
liquidation of the Trust. The holders of a majority in liquidation amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to The Bank of New York, as
Guarantee Trustee (the "Guarantee Trustee") or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
Notwithstanding the foregoing, any holder of Preferred Securities may directly
institute a legal proceeding against the Company to enforce the obligations of
the Guarantor under the Guarantee without first instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. If the
Company were to default on its obligation to pay amounts payable on the
Convertible Debentures, the Trust would lack available funds for the payment of
distributions or amounts payable on redemption of the Preferred Securities or
otherwise, and in such event holders of the Preferred Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, a holder
of the Preferred Securities would be required to rely on the enforcement (1) by
the Property Trustee of its rights, as registered holder of the Convertible
Debentures, against the Company pursuant to the terms of the Convertible
Debentures or (2) by such holder of Preferred Securities of its right against
the Company to enforce payments on Convertible Debentures. See "Description of
the Convertible Debentures" below. The Declaration provides that each holder of
Preferred Securities, by acceptance thereof, agrees to the provisions of the
Guarantee, including the subordination provisions thereof, and the Indenture.
The Guarantee is a guarantee on a subordinated basis with respect to the
Preferred Securities from the time of issuance of such Preferred Securities but
does not apply to any payment of distributions or Redemption Price, or to
payments upon the dissolution, winding-up or termination of the Trust, except to
the extent the Trust shall have funds available therefor. If the Company does
not make interest payments on the Convertible Debentures, the Trust will not pay
distributions on the Preferred Securities and will not have funds available
therefor. See "Description of the Convertible Debentures" below. The Guarantee,
when taken together with the Company's obligations under the Convertible
Debentures, and the Indenture thereto and the Declaration, including its
obligations under the Indenture to pay costs, expenses, debts and liabilities of
the Trust (other than with respect to the Trust Securities), provide a full and
unconditional guarantee on a subordinated basis by the Company of payments due
on the Preferred Securities issued by the Trust.
The Company has also irrevocably guaranteed the obligations of the Trust
with respect to the Common Securities (the "Common Securities Guarantee") to the
same extent as the Guarantee, except that upon the occurrence and during the
continuation of a Declaration Event of Default, holders of Preferred Securities
shall have priority over holders of Common Securities with respect to
distributions and payments on liquidation, redemption or otherwise.
19
<PAGE>
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company has covenanted that, so long as any Preferred
Securities remain outstanding, if (i) the Company has exercised its option to
defer interest payments on the Convertible Debentures by extending the interest
payment period and such extension shall be continuing, (ii) the Company shall be
in default with respect to its payment or other obligations under the Guarantee
or (iii) there shall have occurred and be continuing any event that, with the
giving of notice or the lapse of time or both, would constitute an Indenture
Event of Default, then the Company (a) shall not declare or pay dividends on,
make distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock, except for
dividends or distributions in shares of its capital stock of the same class on
which such dividend or distribution is being paid and conversions or exchanges
of common stock of one class into common stock of another class and except for a
redemption, purchase or other acquisition of shares of its capital stock made
for the purpose of an employee incentive plan or benefit plan of the Company or
any of its subsidiaries, (b) shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior to the Convertible Debentures
(except by conversion into or exchange for shares of its capital stock), and (c)
shall not make any guarantee payments with respect to the foregoing.
As part of the Guarantee, the Company has agreed that it will honor all
obligations described therein relating to the conversion of the Preferred
Securities into Company Common Stock as described above under "Description of
the Preferred Securities--Conversion Rights".
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of Preferred Securities (in which case no vote will be
required), the Guarantee may be amended only with the prior approval of the
holders of at least a majority in liquidation amount of all the outstanding
Preferred Securities. The manner of obtaining any such approval of holders of
the Preferred Securities will be as set forth under "Description of the
Preferred Securities--Voting Rights". All guarantees and agreements contained in
the Guarantee bind the successors, assigns, receivers, trustees and
representatives of the Company and inure to the benefit of the holders of the
Preferred Securities then outstanding. Except in connection with any permitted
merger or consolidation of the Company with or into another entity or any
permitted sale, transfer or lease of the Company's assets to another entity as
described below under "Description of the Convertible Debentures--Consolidation,
Merger and Sale of Assets", the Company may not assign its rights or delegate
its obligations under the Guarantee without the prior approval of the holders of
at least a majority of the aggregate stated liquidation amount of the Preferred
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Preferred Securities upon
(i) full payment of the Redemption Price of all Preferred Securities, (ii) upon
distribution of the Convertible Debentures held by the Trust to the holders of
the Preferred Securities, (iii) upon liquidation of the Trust or (iv) upon the
distribution of Company Common Stock to such holder in respect of the conversion
of such holder's Preferred Securities into Company Common Stock and will
terminate completely upon full payment of the amounts payable in accordance with
the Declaration of the Trust. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Preferred
Securities must restore payment of any sum paid under such Preferred Securities
or such Guarantee.
STATUS OF THE GUARANTEE; SUBORDINATION
The Guarantee constitutes an unsecured obligation of the Company and ranks
(i) subordinate and junior to all other liabilities of the Company except any
liabilities that may be pari passu expressly by
20
<PAGE>
their terms, (ii) pari passu with the most senior preferred stock issued from
time to time by the Company and with any guarantee now or hereafter entered into
by the Company in respect of any preferred or preference stock or preferred
securities of any affiliate of the Company and (iii) senior to the Company
Common Stock. The terms of the Preferred Securities provide that each holder of
Preferred Securities by acceptance thereof agrees to the subordination
provisions and other terms of the Guarantee.
The Guarantee constitutes a guarantee of payment and not of collection (that
is, the guaranteed party may directly institute a legal proceeding against the
Company to enforce its rights under a Guarantee without instituting a legal
proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default with respect to the Guarantee, shall
exercise the same degree of care as a prudent man would exercise in the conduct
of his own affairs. Subject to such provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Preferred Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
GOVERNING LAW
The Guarantee is governed by, and will be construed in accordance with, the
laws of the State of New York.
21
<PAGE>
DESCRIPTION OF THE CONVERTIBLE DEBENTURES
Under certain circumstances involving the dissolution of the Trust following
the occurrence of a Special Event, Convertible Debentures may be distributed to
the holders of the Trust Securities in liquidation of the Trust. See
"Description of the Preferred Securities--Special Event Redemption or
Distribution".
If the Convertible Debentures are distributed to the holders of Preferred
Securities, the Company will use its best efforts to have the Convertible
Debentures listed on the NYSE or on such other national securities exchange or
similar organization on which the Preferred Securities are then listed or
quoted.
GENERAL
The Convertible Debentures are unsecured debt under the Indenture. The
Convertible Debentures are limited in aggregate principal amount of
$103,737,200, such amount being the sum of the aggregate stated liquidation
amount of the Preferred Securities and the Common Securities.
The Convertible Debentures are not subject to a sinking fund provision. The
entire principal amount of the Convertible Debentures will become due and
payable, together with any accrued and unpaid interest thereon, including
Compounded Interest (as defined herein) and Additional Interest, if any, on
April 15, 2016.
The Convertible Debentures, if distributed to holders of Preferred
Securities in liquidation of such holder's interest in the Trust, will initially
be issued in the same form as the Preferred Securities that such Convertible
Debentures replace. Any Global Certificate will be replaced with one or more
global certificates (each a "Global Security") registered in the name of the
depositary of its nominee. Under certain limited circumstances, Convertible
Debentures may be issued in certificated form in exchange for a Global Security.
In the event that Convertible Debentures are issued in certificated form, such
Convertible Debentures will be in denominations of $50 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Payments on Convertible Debentures issued as a Global Security will be made
to DTC, a successor depositary or, in the event that no depositary is used, to a
Paying Agent for the Convertible Debentures. In the event Convertible Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Convertible Debentures will be registrable and Convertible
Debentures will be exchangeable for Convertible Debentures of other
denominations of a like aggregate principal amount at the corporate trust office
of the Indenture Trustee in The City of New York; provided, that unless the
Convertible Debentures are held by the Trust or any successor permissible under
"Description of the Preferred Securities--Merger, Consolidation or Amalgamation
of the Trust", payment of interest may be made at the option of the Company by
check mailed to the address of the persons entitled thereto.
There are no covenants or provisions in the Indenture that afford holders of
Convertible Debentures protection in the event of a highly leveraged transaction
or other similar transaction involving the Company that may adversely affect
such holders.
INTEREST
Each Convertible Debenture bears interest at the rate of 8 1/2% per annum
from the original date of issuance, payable quarterly in arrears on January 15,
April 15, July 15 and October 15 (each, an "Interest Payment Date"), commencing
July 15, 1996, to the person in whose name such Convertible Debenture is
registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. If any Convertible
Debentures are held in certificated form, the record date for each Interest
Payment Date shall be 15 days prior to such Interest Payment Date.
22
<PAGE>
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full quarterly period for which interest is computed
will be computed on the basis of the actual number of days elapsed. In the event
that any date on which interest is payable on the Convertible Debentures is not
a Business Day, then payment of the interest payable on such date will be made
on the next succeeding day which is a Business Day (without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right at any time during the term of the Convertible
Debentures to defer interest payments from time to time by extending the
interest payment period for successive periods not exceeding 20 consecutive
quarters for each such period; provided, no Extension Period may extend beyond
the maturity date of the Convertible Debentures. At the end of each Extension
Period, the Company shall pay all interest then accrued and unpaid (including
Additional Interest and Liquidated Damages) together with interest thereon
compounded quarterly at the rate specified for the Convertible Debentures to the
extent permitted by applicable law ("Compounded Interest"); provided, that
during any Extension Period, the Company (i) shall not declare or pay dividends
on, make distributions with respect to, or redeem, purchase or acquire, or make
a liquidation payment with respect to, any of its capital stock, except for
dividends or distributions in shares of its capital stock of the same class on
which such dividend or distribution is being paid and conversions or exchanges
of common stock of one class into common stock of another class and except for a
redemption, purchase or other acquisition of shares of its capital stock made
for the purpose of an employee incentive plan or benefit plan of the Company or
any of its subsidiaries, (ii) shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem, any debt securities
issued by the Company that rank pari passu with or junior to the Convertible
Debentures (except by conversion into or exchange for shares of its capital
stock) and (iii) shall not make any guarantee payments with respect to the
foregoing. Prior to the termination of any such Extension Period, the Company
may further extend such Extension Period; provided, that such Extension Period
together with all previous and further extensions thereof may not exceed 20
consecutive quarters and may not extend beyond the maturity of the Convertible
Debentures. Upon the termination of any Extension Period and the payment of all
amounts then due, the Company may commence a new Extension Period, subject to
the above requirements. No interest during an Extension Period, except at the
end thereof, shall be due and payable. The Company has no current intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Convertible Debentures. If the Property Trustee shall be
the sole holder of the Convertible Debentures, the Company shall give the
Regular Trustees and the Property Trustee notice of its selection of such
Extension Period at least one Business Day prior to the earlier of (i) the date
the distributions on the Preferred Securities are payable or (ii) the date the
Trust is required to give notice to the NYSE (or any applicable self-regulatory
organization) or to holders of the Preferred Securities of the record date or
the date such distribution is payable, but in any event not less than ten
Business Days prior to such record date. The Company shall cause the Trust to
give notice of the Company's selection of such Extension Period to the holders
of the Preferred Securities. If the Property Trustee shall not be the sole
holder of the Convertible Debentures, the Company shall give the holders of the
Convertible Debentures notice of its selection of such Extension Period at least
ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii)
the date the Company is required to give notice to the NYSE (or any applicable
self-regulatory organization) or to holders of the Convertible Debentures on the
record or payment date of such related interest payment, but in any event not
less than two Business Days prior to such record date.
23
<PAGE>
ADDITIONAL INTEREST
If the Trust would be required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States, or any other taxing authority, then, in any such case, the
Company will pay as additional interest ("Additional Interest") such amounts as
shall be required so that the net amounts received and retained by the Trust
after paying any such taxes, duties, assessments or governmental charges will be
not less than the amounts the Trust would have received had no such taxes,
duties, assessments or governmental charges been imposed.
CONVERSION OF THE CONVERTIBLE DEBENTURES
The Convertible Debentures are convertible into Company Common Stock at the
option of the holders of the Convertible Debentures at any time prior to the
Business Day immediately preceding the date of repayment of such Convertible
Debentures, whether at maturity or upon redemption (either at the option of the
Company or pursuant to a Tax Event), at the initial conversion price of $19.65
subject to the conversion price adjustments described under "Description of the
Preferred Securities--Conversion Rights". The Trust has covenanted not to
convert Convertible Debentures held by it except pursuant to a notice of
conversion delivered to the Conversion Agent by a holder of Preferred
Securities. Upon surrender of a Preferred Security to the Conversion Agent for
conversion, the Trust will distribute $50 principal amount of the Convertible
Debentures to the Conversion Agent on behalf of the holder of the Preferred
Securities so converted, whereupon the Conversion Agent will convert such
Convertible Debentures to Company Common Stock on behalf of such holder. The
Company's delivery to the holders of the Convertible Debentures (through the
Conversion Agent) of the fixed number of shares of Company Common Stock into
which the Convertible Debentures are convertible (together with the cash
payment, if any, in lieu of fractional shares) will be deemed to satisfy the
Company's obligation to pay the principal amount of the Convertible Debentures
so converted, and the accrued and unpaid interest thereon attributable to the
period from the last date to which interest has been paid or duly provided for;
provided, however, that if any Convertible Debenture is converted after a record
date for payment of interest, the interest payable on the related interest
payment date with respect to such Convertible Debenture shall be paid to the
Trust (which will distribute such interest to the converting holder) or other
holder of Convertible Debentures, as the case may be, despite such conversion.
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Convertible Debentures, in
whole or in part, at any time or from time to time after April 15, 1999 upon not
less than 30 nor more than 60 days' notice, at a redemption price equal to
105.95% of the principal amount of the Convertible Debentures to be redeemed
plus any accrued and unpaid interest, including Additional Interest, Compounded
Interest and Liquidation Damages, if any, to the redemption date if redeemed on
or before April 15, 2000, and at the following optional redemption prices
(expressed as a percentage of the principal amount of Convertible Debentures),
if redeemed during the 12-month period beginning April 15:
OPTIONAL
REDEMPTION
YEAR PRICE
---- ----------
2000................................ 105.10%
2001................................ 104.25
2002................................ 103.40
2003................................ 102.55
2004................................ 101.70
2005................................ 100.85
2006 and thereafter................. 100.00
24
<PAGE>
plus, in each case, accrued and unpaid interest, including Additional Interest,
Compounded Interest and Liquidation Damages, if any, to the redemption date.
If a partial redemption of the Preferred Securities resulting from a partial
redemption of the Convertible Debentures would result in the delisting of the
Preferred Securities, the Company may only redeem Convertible Debentures in
whole.
SUBORDINATION
The Indenture provides that the Convertible Debentures are subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. No payment of principal of (including redemption payments, if any),
premium, if any, or interest on, the Convertible Debentures may be made if (i)
any Senior Indebtedness of the Company is not paid when due and any applicable
grace period with respect to such default has ended and such default has not
been cured or waived, or ceased to exist or (ii) the maturity of any Senior
Indebtedness of the Company has been accelerated because of a default. At
February 3, 1996, Senior Indebtedness of the Company consisted of the Company's
guarantee of $186.5 million of indebtedness of Ann Taylor. Upon any distribution
of assets of the Company to creditors upon any dissolution, winding up,
liquidation or reorganization, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all principal of, and
premium, if any, and interest due or to become due on, all Senior Indebtedness
of the Company must be paid in full before the holders of the Convertible
Debentures are entitled to receive or retain any payment. Upon satisfaction of
all claims related to all Senior Indebtedness of the Company then outstanding,
the rights of the holders of the Preferred Securities will be subrogated to the
rights of the holders of Senior Indebtedness of the Company to receive payments
or distributions applicable to Senior Indebtedness until all amounts owing on
the Convertible Debentures are paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company: (i) the
principal, premium, if any, and interest in respect of (A) indebtedness of such
obligor for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by such obligor, (ii) all
capital lease obligations of such obligor, (iii) all obligations of such obligor
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of such obligor and all obligations of such obligor under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business), (iv) all obligations of such obligor for the
reimbursement of any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction, (v) all obligations of the type referred
to in clauses (i) through (iv) above of other persons for the payment of which
such obligor is responsible or liable as obligor, guarantor or otherwise, and
(vi) all obligations of the type referred to in clauses (i) through (v) above of
other persons secured by any lien on any property or asset of such obligor
(whether or not such obligation is assumed by such obligor), except for (1) any
such indebtedness that is by its terms subordinated to or pari passu with the
Convertible Debentures and (2) any indebtedness between or among such obligor or
its affiliates, including all other debt securities and guarantees in respect of
those debt securities issued to any other trust, or trustee of such trust,
partnership or other entity affiliated with the Company that is, directly or
indirectly, a financing vehicle of the Company (a "Financing Entity") in
connection with the issuance by such Financing Entity of preferred securities or
other securities that rank pari passu with, or junior to, the Preferred
Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness
and entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued by the Company. The Company's operations are conducted
through its wholly owned subsidiary, Ann Taylor. At May 4, 1996, indebtedness of
Ann Taylor, including trade payables of $40.2 million, aggregated approximately
$218.6 million, which indebtedness is effectively senior to the Convertible
Debentures.
25
<PAGE>
CERTAIN COVENANTS
In the Indenture, the Company has covenanted that, so long as any
Convertible Debentures are outstanding, if (i) there shall have occurred and be
continuing any event that with the giving of notice or the lapse of time or
both, would constitute an Indenture Event of Default, (ii) the Company shall be
in default with respect to its payment of any obligations under the Guarantee,
or (iii) the Company has exercised its option to defer interest payments on the
Convertible Debentures by extending the interest payment period and such period,
or any extension thereof, shall be continuing, then the Company (a) shall not
declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of its
capital stock, except for dividends or distributions in shares of its capital
stock of the same class on which such dividend or distribution is being paid and
conversions or exchanges of common stock of one class into common stock of
another class and except for a redemption, purchase or other acquisition of
shares of its capital stock made for the purposes of an employee incentive plan
or benefit plan of the Company or any of its subsidiaries, (b) shall not make
any payment of interest, principal or premium, if any, on or repay, repurchase
or redeem any debt securities issued by the Company that rank pari passu with or
junior to the Convertible Debentures (except by conversion into or exchange for
shares of its capital stock), and (c) shall not make any guarantee payments with
respect to the foregoing.
The Company has covenanted (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (ii) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Convertible Debentures to the holders of
Trust Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Declaration, and (y) to otherwise continue to be
classified as a grantor trust for United States Federal income tax purposes.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company will not consolidate with or merge
into any other corporation or convey, transfer or lease its assets substantially
as an entirety unless (a) if the Company is not the survivor, the successor is a
corporation organized in the United States and expressly assumes the due and
punctual payment of the principal of (and premium, if any) and interest on all
Convertible Debentures issued thereunder and the performance of every other
covenant of the Indenture on the part of the Company and (b) immediately
thereafter no event of default under the Indenture and no event which, after
notice or lapse of time, or both, would become an event of default under the
Indenture, shall have happened and be continuing. Upon any such consolidation,
merger, conveyance or transfer, the successor corporation shall succeed to and
be substituted for the Company under the Indenture and thereafter the
predecessor corporation shall be relieved of all obligations and covenants under
the Indenture and the Convertible Debentures.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Convertible Debentures: (i) failure for 30 days to pay
interest on the Convertible Debentures, including any Additional Interest,
Compounded Interest and Liquidated Damages in respect thereof, when due provided
that a valid extension of an interest payment period will not constitute a
default in the payment of interest (including any Additional Interest,
Compounded Interest or Liquidated Damages) for this purpose; or (ii) failure to
pay principal of or premium, if any, on the Convertible Debentures when due
whether at maturity, upon redemption, by declaration or otherwise; or (iii)
failure by the Company to deliver shares of Company Common Stock upon an
election by a holder of Preferred Securities to convert such Preferred
Securities; or (iv) failure to observe or perform any other covenant contained
in the Indenture
26
<PAGE>
for 90 days after notice to the Company by the Trustee or by the holders of not
less than 25% in aggregate outstanding principal amount of the Convertible
Debentures; (v) the dissolution, winding up or termination of the Trust, except
in connection with the distribution of Convertible Debentures to the holders of
Preferred Securities in liquidation of the Trust upon the redemption of all
outstanding Preferred Securities and in connection with certain mergers,
consolidations or amalgamations permitted by the Declaration; or (vi) certain
events in bankruptcy, insolvency or reorganization of the Company.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Convertible Debentures may declare the
principal of and interest on the Convertible Debentures due and payable
immediately on the occurrence of an Event of Default; provided, however, that,
after such acceleration, but before a judgment or decree based on acceleration,
the holders of a majority in aggregate principal amount of outstanding
Convertible Debentures may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the nonpayment of accelerated
principal, have been cured or waived as provided in the Indenture. For
information as to waiver of defaults, see "--Modifications and Amendments of the
Indenture".
Notwithstanding the foregoing, if an Indenture Event of Default has occurred
and is continuing and such event is attributable to the failure of the Company
to pay interest or principal on the Convertible Debentures on the date such
interest or principal is otherwise payable, the Company acknowledges that, in
such event, a holder of Preferred Securities may institute a Direct Action for
payment on or after the respective due date specified in the Convertible
Debentures. The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of all the
holders of Preferred Securities. Notwithstanding any payment made to such holder
of Convertible Preferred Securities by the Company in connection with a Direct
Action, the Company shall remain obligated to pay the principal of or interest
on the Convertible Debentures held by the Trust or the Property Trustee and the
Company shall be subrogated to the rights of the holder of such Preferred
Securities with respect to payments on the Preferred Securities to the extent of
any payments made by the Company to such holder in any Direct Action. The
holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Convertible Debentures.
The Holders of not less than a majority in principal amount of the
outstanding Convertible Debentures may on behalf of the holders of all the
Convertible Debentures waive any past defaults except (a) a default in payment
of the principal of (or premium, if any) or interest, if any, on any Convertible
Debentures and (b) a default in respect of a covenant or provision of the
Indenture which cannot be amended or modified without the consent of the holder
of each Convertible Debenture; provided, however, that if the Convertible
Debentures are held by the Trust or a trustee of such Trust, such waiver or
modification to such waiver shall not be effective until the holders of a
majority in liquidation amount of Trust Securities shall have consented to such
waiver or modification to such waiver; provided, further, that if the consent of
the holder of each outstanding Convertible Debenture is required, such waiver
shall not be effective until each holder of the Trust Securities shall have
consented to such waiver.
A default under any other indebtedness of the Company or the Trust would not
constitute an Event of Default under the Convertible Debentures.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any holders of
Convertible Debentures, unless such holders shall have offered to the Indenture
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Indenture Trustee, the holders of a majority in aggregate principal
amount of the Convertible Debentures then outstanding will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the
27
<PAGE>
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee with respect to such series.
No holder of any Convertible Debenture has any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
(i) such holder shall have previously given to the Indenture Trustee written
notice of a continuing Event of Default, (ii) if the Trust is not the sole
holder of Convertible Debentures, the holders of at least 25% in aggregate
principal amount of the Convertible Debentures then outstanding shall also have
made written request, (iii) such holder has offered reasonable indemnity to the
Indenture Trustee to institute such proceeding as Indenture Trustee, (iv) the
Indenture Trustee shall have failed to institute such proceeding within 60 days
of such notice, and (v) the Indenture Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Convertible Debentures a direction inconsistent with such request. However, such
limitations do not apply to a suit instituted by a holder of a Convertible
Debenture for enforcement of payment of the principal of or interest on such
Convertible Debenture on or after the respective due dates expressed in such
Convertible Debenture.
The Company is required to file annually with the Indenture Trustee and the
Property Trustee a certificate as to whether or not the Company is in compliance
with all the conditions and covenants under the Indenture.
MODIFICATIONS AND AMENDMENTS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Convertible Debentures, to modify
the Indenture or the rights of the holders of Convertible Debentures; provided,
however, that no such modification may, without the consent of the holder of
each outstanding Convertible Debenture affected thereby, (i) extend the stated
maturity of the Convertible Debentures or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce
any premium payable upon the redemption thereof, or adversely affect the right
to convert Convertible Debentures or the subordination provisions of the
Indenture, or (ii) reduce the percentage in aggregate principal amount of
outstanding Convertible Debentures, the holders of which are required to consent
to any such supplemental indenture.
In addition, the Company and the Indenture Trustee may execute, without the
consent of any holder of Convertible Debentures, any supplemental indenture to
cure any ambiguities, comply with the Trust Indenture Act and for certain other
customary purposes.
GOVERNING LAW
The Indenture and the Convertible Debentures are governed by, and will be
construed in accordance with, the laws of the State of New York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Convertible Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
28
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL.
- -----------------------------------------------------------
( ) APPROVAL AND RATIFICATION OF THE
FINANCING TRANSACTION.
For Against Abstain
/ / / / / /
<TABLE>
<S> <C>
Dated: , 1996
-------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
(Signature)
Please mark, date, sign and return this proxy in the enclosed
envelope. Please sign as names appear at left. When signing as
agent, attorney, or fiduciary, or for a corporation or
partnership, indicate the capacity in which you are signing.
Shares registered in joint names should be signed by each joint
tenant or trustee.
</TABLE>
<PAGE>
ANNTAYLOR STORES CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OR ANNTAYLOR STORES CORPORATION
FOR THE SPECIAL MEETING TO BE HELD ON AUGUST 15, 1996
The undersigned hereby appoints J. Patrick Spainhour and Paul E. Francis,
and either of them, proxies of the undersigned with full power of substitution
to vote all shares of Common Stock, par value $.0068 per share, of AnnTaylor
Stores Corporation (the "Company") owned or held by the undersigned at the
Special Meeting of Stockholders of the Company to be held at the corporate
offices of the Company at 142 West 57th Street, New York, New York, on August
15, 1996 at 10:00 a.m. local time and at any adjournment thereof.
Such proxies are directed to vote as set forth on the reverse side hereof.
The shares represented by this proxy will be voted as directed by the
stockholder. IF NO DIRECTION IS GIVEN WHEN THE DULY EXECUTED PROXY IS RETURNED,
SUCH SHARES WILL BE VOTED "FOR" THE PROPOSAL. The persons named in this Proxy
may vote properly executed proxies received by them to adjourn the Special
Meeting to another date and/or place for any proper purpose (including, without
limitation, for the purpose of soliciting additional proxies.)
(Continued and to be signed on other side.)
