UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11980
ANNTAYLOR, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0297083
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
142 West 57th Street, New York, NY 10019
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(212) 541-3300
-----------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No .
----- -----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable date.
Outstanding as of
Class August 27, 1998
----------------------------- -------------------
Common Stock, $1.00 par value 1
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
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.
INDEX TO FORM 10-Q
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations for the Quarters and
Six Months Ended August 1, 1998
and August 2, 1997.............................. 3
Condensed Consolidated Balance Sheets at
August 1, 1998 and January 31, 1998............. 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 1, 1998 and
August 2, 1997.................................. 5
Notes to Condensed Consolidated Financial
Statements...................................... 6
Item 2. Management's Discussion and Analysis of Results
of Operations.................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................12
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<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Six Months Ended August 1, 1998 and August 2, 1997
(unaudited)
Quarters Ended Six Months Ended
--------------------- --------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands)
Net sales......................... $223,393 $184,999 $421,563 $382,063
Cost of sales..................... 118,459 99,645 215,295 198,073
------- ------- ------- -------
Gross profit...................... 104,934 85,354 206,268 183,990
Selling, general and
administrative expenses......... 84,289 73,733 165,418 150,370
Amortization of goodwill.......... 2,760 2,760 5,520 5,520
------- ------- ------- -------
Operating income.................. 17,885 8,861 35,330 28,100
Interest expense.................. 4,247 5,027 8,974 10,573
Other expense, net................ 57 25 237 275
------- ------- ------- -------
Income before income taxes
and extraordinary loss.......... 13,581 3,809 26,119 17,252
Income tax provision.............. 6,537 2,824 12,656 9,792
------- ------- ------- -------
Income before extraordinary loss.. 7,044 985 13,463 7,460
Extraordinary loss (net of income
tax benefit of $130,000)........ --- (173) --- (173)
------- ------- ------- -------
Net income........................ $ 7,044 $ 812 $ 13,463 $ 7,287
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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<PAGE 4>
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
August 1, 1998 and January 31, 1998
August 1, 1998 January 31, 1998
-------------- ----------------
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents............... $ 44,206 $ 31,369
Accounts receivable, net................ 60,867 60,211
Merchandise inventories 113,454 97,234
Prepaid expenses and other current
assets................................ 24,085 21,291
------- -------
Total current assets.................. 242,612 210,105
Property and equipment, net................ 142,282 139,610
Goodwill, net.............................. 325,219 330,739
Deferred financing costs, net.............. 3,169 1,258
Other assets............................... 3,073 1,949
------- -------
Total assets.......................... $716,355 $683,661
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................ $ 55,974 $ 38,185
Accrued expenses........................ 49,422 48,620
Current portion of long-term debt....... 1,169 1,119
------- -------
Total current liabilities............. 106,565 87,924
Long-term debt............................. 104,558 105,157
Other liabilities.......................... 11,024 10,082
Commitments and contingencies
Stockholder's equity
Common stock, $1.00 par value;
1,000 shares authorized;
1 share issued and outstanding....... 1 1
Additional paid-in capital.............. 446,133 445,886
Retained earnings....................... 48,074 34,611
------- -------
Total stockholder's equity......... 494,208 480,498
------- -------
Total liabilities and
stockholder's equity............. $716,355 $683,661
======= =======
See accompanying notes to condensed consolidated financial statements.
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<PAGE 5>
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended August 1, 1998 and August 2, 1997
(unaudited)
Six Months Ended
------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
(in thousands)
Operating activities:
Net income........................................ $ 13,463 $ 7,287
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary loss.............................. --- 303
Provision for loss on accounts receivable....... 748 909
Depreciation and amortization................... 14,340 13,976
Amortization of goodwill........................ 5,520 5,520
Non-cash interest............................... 618 775
Amortization of deferred compensation........... 266 530
Loss on disposal of property and equipment...... 249 191
(Increase) decrease in:
Receivables................................... (1,404) 4,484
Merchandise inventories....................... (16,220) 11,382
Prepaid expenses and other current assets..... (2,794) 1,311
Increase (decrease) in:
Accounts payable.............................. 17,789 7,046
Accrued expenses.............................. 802 1,955
Other non-current assets and liabilities, net. (184) 1,037
------- -------
Net cash provided by operating activities......... 33,193 56,706
Investing activities:
Purchases of property and equipment............... (17,259) (14,000)
------- -------
Net cash used by investing activities............. (17,259) (14,000)
Financing activities:
Net repayments under term loan.................... --- (24,500)
Term loan prepayment penalty...................... --- (184)
Payments on mortgage.............................. (549) (141)
Parent company activity........................... (19) 845
Payment of deferred financing costs............... (2,529) ---
------- -------
Net cash used by financing activities............. (3,097) (23,980)
------- -------
Net increase in cash............................... 12,837 18,726
Cash and cash equivalents, beginning of period..... 31,369 7,025
------- -------
Cash and cash equivalents, end of period........... $ 44,206 $ 25,751
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest.......... $ 9,161 $ 10,103
======= =======
Cash paid during the period for income taxes...... $ 17,019 $ 12,682
======= =======
See accompanying notes to condensed consolidated financial statements.
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<PAGE 6>
ANNTAYLOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
- ------------------------
The condensed consolidated financial statements of AnnTaylor,
Inc. (the "Company") are unaudited but, in the opinion of
management, contain all adjustments (which are of a normal
recurring nature) necessary to present fairly the financial
position, results of operations and cash flows for the periods
presented. All significant intercompany accounts and
transactions have been eliminated.
The results of operations for the 1998 interim period shown in
this report are not necessarily indicative of results to be
expected for the fiscal year.
The January 31, 1998 condensed consolidated balance sheet
amounts have been derived from the previously audited
consolidated balance sheet of the Company.
Certain fiscal 1997 amounts have been reclassified to conform
to the 1998 presentation.
Detailed footnote information is not included for the periods
ended August 1, 1998 and August 2, 1997. The financial
information set forth herein should be read in conjunction with
the Notes to the Company's Consolidated Financial Statements
contained in the Company's 1997 Annual Report on Form 10-K.
2. Long-Term Debt
- -----------------
The following summarizes long-term debt outstanding at August
1, 1998:
(in thousands)
8-3/4% Notes.......................... $100,000
Mortgage.............................. 5,727
-------
Total debt......................... 105,727
Less current portion.................. 1,169
-------
Total long-term debt............... $104,558
=======
On June 30, 1998, the Company entered into a new $150,000,000
senior secured revolving credit facility (the "Credit Facility")
with Bank of America National Trust and Savings Association and a
syndicate of lenders. This facility replaced the Company's
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<PAGE 7>
then-existing $122,000,000 bank credit agreement that was
scheduled to expire in July 1998 and also resulted in the non-
renewal by the Company's sourcing division of its $50,000,000
credit facility and in the non-renewal by AnnTaylor Funding, Inc
of a $40,000,000 accounts receivable facility. The Credit
Facility will be used by the Company for the issuance of
commercial and standby letters of credit and to provide revolving
loans for other general corporate purposes.
Loans outstanding under the Credit Facility at any time may
not exceed $50,000,000. Maximum availability for loans and
letters of credit under the Credit Facility is governed by a
monthly borrowing base, determined by the application of
specified advance rates against certain eligible assets. Based
on this calculation, the maximum amount available for loans and
letters of credit under the Credit Facility at August 1, 1998 was
approximately $130,000,000. Commercial and standby letters of
credit outstanding under the Credit Facility at August 1, 1998
were approximately $68,000,000, and there were no loans
outstanding. The outstanding loan balance is required to be
reduced to zero for the thirty-day period commencing January 1
each year.
Amounts outstanding under the Credit Facility bear interest at
a rate equal to, at the Company's option, the Bank of America
Base Rate, or Eurodollar Rate, plus a margin ranging from 0.25%
to 1.00% and from 1.25% to 2.00%, respectively. In addition, the
Company is required to pay the lenders a quarterly commitment fee
on the unused revolving loan commitment amount at a rate ranging
from 0.375% to 0.5% per annum. Fees for outstanding commercial and
standby letters range from 0.625% to 1.0% and from 1.25% to 2.0%,
respectively.
The Credit Facility contains financial and other covenants,
including limitations on indebtedness, liens, investments and
capital expenditures, restrictions on dividends or other
distributions to stockholders and maintenance of certain
financial ratios including specified levels of net worth. For
Fiscal 1998, the capital expenditure limit is $52,000,000. For
Fiscal 1999, capital expenditures are limited to a maximum of
$55,000,000, subject to reduction based on 1998 available cash,
as defined, and comparable store sales results.
The lenders have been granted a pledge of the common stock of
the Company and certain of its subsidiaries, and a security
interest in substantially all other tangible and intangible
assets, including accounts receivable, trademarks, inventory,
store furniture and fixtures, of the Company and its
subsidiaries, as collateral for performance of the Company's
obligations under the Credit Facility.
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<PAGE 8>
The Credit Facility matures on June 30, 2000 and includes an
automatic one-year extension, contingent upon the satisfaction of
certain conditions. In addition, the commitments under the
Credit Facility terminate on February 16, 2000 unless the 8-3/4%
Subordinated Notes due 2000 are refinanced on or prior to such
date with the proceeds of subordinated debt or capital stock, the
terms and conditions of which are reasonably satisfactory to the
Requisite Lenders under the Credit Facility.
3. Change in Accounting Principle
- -----------------------------------
Effective February 1, 1998, the Company elected to change its
method of inventory valuation from the retail method to the
average cost method. The Company believes the cost method is a
preferable method for matching the cost of merchandise with the
revenues generated. The cumulative effect of this accounting
change as of February 1, 1998 was immaterial, and therefore no
disclosure is noted on the condensed consolidated statement of
operations for the six months ended August 1, 1998. It is not
possible to determine the effect of the change on income in any
previously reported fiscal periods.
4. Subsequent Event
- --------------------
On August 13, 1998, the Company declared a dividend to its
sole stockholder, AnnTaylor Stores Corporation ("ATSC"), of a
promissory note in the original principal amount of $100,625,000
(the "Dividend Note"). The Dividend Note was issued by the
Company on August 28, 1998 and has interest and payment terms
substantially similar to the terms of the 8-1/2% Convertible
Subordinated Debentures Due 2016 (the "Convertible Debentures")
that were issued in 1996 by ATSC to AnnTaylor Finance Trust. The
Dividend Note was declared in order to (1) relieve the Company of
the administrative burden associated with declaring cash
dividends to ATSC quarterly, which has been necessary in order to
provide ATSC with funds sufficient to meet its quarterly interest
payment obligations on the Convertible Debentures, and (2)
enhance financial reporting, by more closely associating the debt
obligation with the entity that was the ultimate beneficiary of
the cash received upon the creation of debt. ATSC has pledged
the Dividend Note to the lenders as collateral for ATSC's
guarantee of the Company's performance of its obligations under
the Credit Facility.
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<PAGE 9>
Item 2. Management's Discussion and Analysis of Results of Operations
- -----------------------------------------------------------------------
Results of Operations
- ---------------------
Six Months Ended
----------------------
August 1, August 2,
1998 1997
--------- ---------
Number of Stores:
Open at beginning of period.............. 324 309
Opened during period..................... 20 9
Expanded during period*.................. 3 1
Closed during period..................... 2 8
Open at end of period.................... 342 310
Type of Stores Open at End of Period:
Ann Taylor stores..................... 293 268
Ann Taylor Factory Stores............. 14 14
Ann Taylor Loft stores................ 35 27
Ann Taylor Studio stores.............. --- 1
- --------------------
* Expanded stores are excluded from comparable store sales
for the first year following expansion.
Six Months ended August 1, 1998 Compared to Six Months ended August 2, 1997
- ---------------------------------------------------------------------------
The Company's net sales in the first six months of 1998
increased to $421,563,000 from $382,063,000 in the first six
months of 1997, an increase of $39,500,000 or 10.3%. This
increase is attributable to the opening of new stores and the
expansion of existing stores, and an increase in comparable store
sales of 2.2%. The increase in comparable store sales for the
six-month period was a result of the increase in comparable store
sales in the second quarter of 1998 principally attributable to
positive customer reaction to the Company's second quarter
merchandise offerings and assortment, and a successful summer
sale event, offset in part by a decrease in comparable store
sales in the first quarter of 1998. As described in the
Company's Quarterly Report on Form 10-Q for the first quarter,
management believes that the decrease in first quarter comparable
store sales was attributable to lower customer acceptance of
certain of the Company's first quarter merchandise offerings, as
well as to an acceleration of the Company's end-of-Fall season
clearance sale, held in February of the prior year, to January in
1998 (which is part of fourth quarter 1997).
Gross profit as a percentage of net sales increased to 48.9%
in the first six months of 1998 from 48.2% in the first six
months of 1997.
Selling, general and administrative expenses represented 39.2%
of net sales, in the first six months of 1998, compared to 39.4%
of net sales, in the first six months of 1997. The decrease in
selling, general and administrative expenses as a percentage of
=================================================================
<PAGE 10>
net sales was primarily attributable to increased leverage on
fixed expenses resulting from increased comparable store sales,
partially offset by an increase in the provision for management
performance bonus expense and an increase in marketing
expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand.
As a result of the foregoing, the Company had operating income
of $35,330,000, or 8.4% of net sales, in the first six months of
1998, compared to operating income of $28,100,000, or 7.4% of net
sales, in the first six months of 1997. Amortization of goodwill
was $5,520,000 in each of the first six months of 1998 and 1997.
Operating income, without giving effect to goodwill amortization
in either year, was $40,850,000, or 9.7% of net sales, in the
1998 period and $33,620,000, or 8.8% of net sales, in the 1997
period.
Interest expense was $8,974,000 in the first six months of
1998 and $10,573,000 in the first six months of 1997. The
decrease in interest expense is attributable to reduced
outstanding indebtedness in the first six months of 1998 compared
to the first six months of 1997.
The income tax provision was $12,656,000, or 48.5% of income
before income taxes, in the 1998 period, compared to $9,792,000,
or 56.8% of income before income taxes and extraordinary loss, in
the 1997 period. The effective income tax rate for both periods
differed from the statutory rate primarily because of non-
deductible goodwill amortization. Without giving effect to such
non-deductible goodwill amortization, the Company's effective
income tax rate was 40% of income before income taxes in the 1998
period, compared to 43% in the 1997 period. This decrease in the
effective income tax rate resulted primarily from an increase in
the amount of income earned outside the United States by the
Company's non-U.S. sourcing subsidiaries.
On July 2, 1997 the Company used available cash to prepay the
outstanding balance of a $24,500,000 term loan due September
1998. This loan repayment resulted in an extraordinary charge to
earnings in Fiscal 1997 of $173,000, net of income tax benefit.
As a result of the foregoing factors, the Company had net
income of $13,463,000, or 3.2% of net sales, for the first six
months of 1998, compared to net income of $7,287,000 or 1.9% of
net sales, for the first six months of 1997.
Year 2000 Status
- ----------------
The Company has been conducting a comprehensive review of its
computer systems to identify those that could be adversely
affected by the "Year 2000 issue" (which refers to the inability
of many computer systems to process accurately dates
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<PAGE 11>
later than December 31, 1999), and is developing an
implementation plan to remediate or replace affected systems on a
timely basis. Equipment and other non-information technology
systems that use microchips or other embedded technology, such as
certain conveyor systems at the Company's distribution center,
will also be tested for Year 2000 compliance. The Company
expects to complete remediation of its material systems by the
end of the second quarter of 1999. The Company believes that,
with the modifications of existing software and conversions to
new software that the Company plans to implement in 1998 and
1999, the Year 2000 issue will not pose significant operating
problems for the Company's computer systems. The Company also
intends to develop a contingency plan to permit its primary
operations to continue if such modifications and conversions of
its systems are not completed on a timely basis.
The Company is communicating with key manufacturers, vendors,
banks and other third parties with whom it does business, to
obtain information regarding their state of readiness with
respect to the Year 2000 issue. Failure of third parties to
remediate Year 2000 issues affecting their respective businesses
on a timely basis, or to implement contingency plans sufficient
to permit uninterrupted continuation of their businesses in the
event of a failure of their systems, could have a material
adverse effect on the Company's business and results of
operations. Assessment of third party Year 2000 readiness is
expected to be substantially completed in early 1999. The Company
will develop eontingency plans based on the results of this
assessment. The Company may not be able to compensate adequately
for business interruption caused by certain third parties.
Potential risks include suspension or significant curtailment of
services by banks, utilities or common carriers, or at ports.
The total cost to the Company of addressing the Year 2000
issue with respect to its own computer systems has not been, and
is not anticipated to be, material to the Company's financial
position or results of operations in any given year. These costs
and the timing for management's completion of Year 2000 issue
modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no assurance that these estimates will be
achieved, and actual costs and ultimate timing could differ
materially from those presently contemplated.
The Securities and Exchange Commission recently issued a
statement regarding disclosure of Year 2000 issues and
consequences by public companies (Release No. 33-7558). The
Company is reviewing its Year 2000 disclosures in the context of
this guidance and will update its disclosures, if necessary, to
conform to such guidance, commencing with the Company's Quarterly
Report on Form 10-Q for the third fiscal quarter ended October
31, 1998.
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<PAGE 12>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1.3 Third Amendment to the Amended and Restated
Credit Agreement dated as of June 19, 1998,
between the Company, Bank of America
National Trust and Savings Association
("Bank of America") and Fleet Bank,
National Association. Incorporated by
reference to Exhibit 10.2.3 to the
Quarterly Report on Form 10-Q of ATSC for
the Quarter ended August 1, 1998 filed on
September 14, 1998.
10.26 Credit Agreement, dated as of June 30, 1998
among the Company, Bank of America,
Citicorp USA ("Citicorp") and First Union
National Bank, as Co-Agents, the financial
institutions from time to time party
thereto, BancAmerica Robertson Stephens, as
Arranger, and Bank of America, as
Administrative Agent. Incorporated by
reference to Exhibit 10.28 to the Quarterly
Report on Form 10-Q of ATSC for the Quarter
ended August 1, 1998 filed on September 14,
1998.
10.26.1 Trademark Security Agreement, dated as of
June 30, 1998, made by the Company in favor
of Bank of America, as Administrative
Agent. Incorporated by reference to
Exhibit 10.28.1 to the Quarterly Report on
Form 10-Q of ATSC for the Quarter ended
August 1, 1998 filed on September 14, 1998.
10.26.2 Guaranty, dated as of June 30, 1998, made
by ATSC in favor of Bank of America, as
Administrative Agent. Incorporated by
reference to Exhibit 10.28.2 to the
Quarterly Report on Form 10-Q of ATSC for
the Quarter ended August 1, 1998 filed on
September 14, 1998.
10.26.3 Security and Pledge Agreement, dated as of
June 30, 1998, made by ATSC in favor of
Bank of America, as Administrative Agent.
Incorporated by reference to Exhibit
10.28.3 to the Quarterly Report on Form 10-
Q of ATSC for the Quarter ended August 1,
1998 filed on September 14, 1998.
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<PAGE 13>
10.26.4 Security and Pledge Agreement, dated as of
June 30, 1998, made by the Company in favor
of Bank of America, as Administrative
Agent. Incorporated by reference to
Exhibit 10.28.4 to the Quarterly Report on
Form 10-Q of ATSC for the Quarter ended
August 1, 1998 filed on September 14, 1998.
10.26.5 Subsidiary Guaranty, dated as of June 30,
1998, made by AnnTaylor Distribution
Services, Inc. in favor of Bank of America,
as Administrative Agent. Incorporated by
reference to Exhibit 10.28.5 to the
Quarterly Report on Form 10-Q of ATSC for
the Quarter ended August 1, 1998 filed on
September 14, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE 14>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AnnTaylor, Inc.
Date: September 14, 1998 By: /s/ J. Patrick Spainhour
----------------------- --------------------------
J. Patrick Spainhour
Chairman and Chief
Executive Officer
Date: September 14, 1998 By: /s/ Walter J. Parks
------------------------ ---------------------------
Walter J. Parks
Senior Vice President -
Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 44206
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<RECEIVABLES> 61670
<ALLOWANCES> 803
<INVENTORY> 113454
<CURRENT-ASSETS> 242612
<PP&E> 252480
<DEPRECIATION> 110198
<TOTAL-ASSETS> 716355
<CURRENT-LIABILITIES> 106565
<BONDS> 100000
0
0
<COMMON> 1
<OTHER-SE> 494207
<TOTAL-LIABILITY-AND-EQUITY> 716355
<SALES> 421563
<TOTAL-REVENUES> 421563
<CGS> 215295
<TOTAL-COSTS> 215295
<OTHER-EXPENSES> 171175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8974
<INCOME-PRETAX> 26119
<INCOME-TAX> 12656
<INCOME-CONTINUING> 13463
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