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 May 2, 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 May 29, 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.
=========================================================================
INDEX TO FORM 10-Q
Page No.
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the Quarters Ended May 2, 1998
and May 3, 1997..................................... 3
Condensed Consolidated Balance Sheets at
May 2, 1998 and January 31, 1998.................... 4
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended May 2, 1998 and
May 3, 1997......................................... 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Results
of Operations........................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 10
Item 6. Exhibits and Reports on Form 8-K...................... 10
==========================================================================
<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended May 2, 1998 and May 3, 1997
(unaudited)
Quarters Ended
--------------------------
May 2, 1998 May 3, 1997
----------- -----------
(in thousands)
Net sales....................................... $198,170 $197,064
Cost of sales................................... 96,836 98,428
------- -------
Gross profit.................................... 101,334 98,636
Selling, general and administrative expenses.... 81,129 76,637
Amortization of goodwill........................ 2,760 2,760
------- -------
Operating income................................ 17,445 19,239
Interest expense................................ 4,727 5,546
Other expense, net.............................. 180 250
------- -------
Income before income taxes...................... 12,538 13,443
Income tax provision............................ 6,119 6,968
------- -------
Net income.................................... $ 6,419 $ 6,475
======= =======
See accompanying notes to condensed consolidated financial statements.
==========================================================================
<PAGE 4>
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
May 2, 1998 and January 31, 1998
May 2, 1998 January 31, 1998
----------- ----------------
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents..................... $ 36,706 $ 31,369
Accounts receivable, net...................... 65,597 60,211
Merchandise inventories....................... 110,188 97,234
Prepaid expenses and other current assets..... 20,918 21,291
------- -------
Total current assets........................ 233,409 210,105
Property and equipment, net...................... 140,251 139,610
Goodwill, net.................................... 327,979 330,739
Deferred financing costs, net.................... 972 1,258
Other assets..................................... 1,920 1,949
------- -------
Total assets................................ $704,531 $683,661
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.............................. $ 46,531 $ 38,185
Accrued tenancy............................... 6,815 6,727
Accrued expenses.............................. 47,637 41,893
Current portion of long-term debt............. 1,148 1,119
------- -------
Total current liabilities................... 102,131 87,924
Long-term debt................................... 104,856 105,157
Other liabilities................................ 10,513 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.................... 446,000 445,886
Retained earnings............................. 41,030 34,611
------- -------
Total stockholder's equity.................. 487,031 480,498
------- -------
Total liabilities and stockholder's equity.. $704,531 $683,661
======= =======
See accompanying notes to condensed consolidated financial statements.
==============================================================================
<PAGE 5>
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended May 2, 1998 and May 3, 1997
(unaudited)
Quarters Ended
------------------------
May 2, 1998 May 3, 1997
----------- -----------
(in thousands)
Operating activities:
Net income............................................. $ 6,419 $ 6,475
Adjustments to reconcile net income to net cash........
provided by operating activities:
Provision for loss on accounts receivable............ 331 409
Depreciation and amortization........................ 7,053 6,965
Amortization of goodwill............................. 2,760 2,760
Non-cash interest.................................... 286 391
Amortization of deferred compensation................ 133 263
Loss on disposal of property and equipment........... 201 ---
(Increase) decrease in:
Receivables........................................ (5,717) (192)
Merchandise inventories............................ (12,954) 2,675
Prepaid expenses and other current assets.......... 373 417
Increase (decrease) in:
Accounts payable................................... 8,346 (1,239)
Accrued liabilities................................ 5,832 10,573
Other non-current assets and liabilities, net...... 456 612
------- -------
Net cash provided by operating activities.............. 13,519 30,109
Investing activities:
Purchases of property and equipment.................... (7,891) (6,500)
------- -------
Net cash used by investing activities.................. (7,891) (6,500)
Financing activities:
Payments on mortgage................................... (272) (70)
Parent company contribution............................ (19) 426
------- -------
Net cash (used by) provided by financing activities.... (291) 356
------- -------
Net increase in cash.................................... 5,337 23,965
Cash and cash equivalents, beginning of period.......... 31,369 7,025
------- -------
Cash and cash equivalents, end of period................ $ 36,706 $ 30,990
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest............... $ 2,389 $ 2,932
======= =======
Cash paid during the period for income taxes........... $ 2,920 $ 1,073
======= =======
See accompanying notes to condensed consolidated financial statements.
==============================================================================
<PAGE 6>
ANNTAYLOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
----------------------
The condensed consolidated financial statements 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 AnnTaylor, Inc. ("the Company").
Certain fiscal 1997 amounts have been reclassified to conform
to the 1998 presentation.
Detailed footnote information is not included for the quarters
ended May 2, 1998 and May 3, 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
AnnTaylor, Inc. 1997 Annual Report on Form 10-K.
2. Long-Term Debt
--------------
The following summarizes long-term debt outstanding at May 2, 1998:
(in thousands)
8-3/4% Notes.................... $100,000
Mortgage........................ 6,004
-------
Total debt.................... 106,004
Less current portion............ 1,148
-------
Total long-term debt......... $104,856
=======
On May 7, 1998, the Company signed a commitment for a new
$150,000,000 senior secured revolving credit facility (the "New
Facility"). This New Facility will replace the $122,000,000
credit facility scheduled to expire in July, and will also result
in the termination of the $50,000,000 credit facility maintained
by the Company's sourcing division and the non-renewal of the
$40,000,000 accounts receivable financing facility.
=======================================================================
<PAGE 7>
ANNTAYLOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The New Facility will have a term of two years, and will
include an automatic one-year extension, contingent upon the
satisfaction of certain conditions. The New 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.
Maximum availability under the New Facility will be governed
by a monthly borrowing base amount as determined through the
application of advance rates against certain eligible assets.
Additionally, the New Facility contains financial and other
covenants, including a cleandown provision.
The amounts outstanding under the New Facility will bear
interest at a rate equal to, at the Company's option, the Bank of
America (1) Base Rate, or (2) Eurodollar Rate. In addition, the
Company is required to pay the lenders a quarterly commitment fee
on the unused revolving loan commitment.
Under the terms of the New Facility, the lenders will obtain a
perfected first priority lien and security interest in (i) the
capital stock of the Company and certain subsidiaries; (ii) all
tangible and intangible assets, including accounts receivable,
trademarks, inventory, store furniture and fixtures of the
Company and its subsidiaries.
The New Facility is subject to negotiation and execution of a
credit agreement and related documentation. The Company
anticipates closing on the New Facility in June.
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 quarter ended May 2, 1998. It is not possible
to determine the effect of the change on income in any previously
reported fiscal periods.
======================================================================
<PAGE 8>
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
Results of Operations
- - - ---------------------
Quarters Ended
--------------------------
May 2, 1998 May 3, 1997
----------- -----------
Number of Stores:
Open at beginning of period............... 324 309
Opened during period...................... 16 2
Expanded during period*................... 2 ---
Closed during period...................... 1 ---
Open at end of period..................... 339 311
Type of Stores Open at End of Period:
Ann Taylor stores...................... 291 261
Ann Taylor Factory Stores.............. 14 14
Ann Taylor Loft stores................. 34 27
Ann Taylor Studio stores............... --- 9
- - - -----------
* Expanded stores are excluded from comparable store sales for
the first year following expansion.
Quarter Ended May 2, 1998 Compared to Quarter Ended May 3, 1997
- - - ---------------------------------------------------------------
The Company's net sales in the first quarter of 1998 increased
to $198,170,000 from $197,064,000 in the first quarter of 1997,
an increase of $1,106,000 or 0.6%. This increase is attributable
to the opening of new stores and the expansion of existing
stores, offset by a decrease in comparable store sales of 5.5%.
Management believes that the decrease in comparable store sales
was principally 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.
Gross profit as a percentage of net sales increased to 51.1%
in the first quarter of 1998 from 50.1% in the first quarter of
1997. This increase was primarily due to a change in the
accounting method by which the Company accounts for inventory,
from the retail method to the average cost method.
Selling, general and administrative expenses represented 40.9%
of net sales in the first quarter of 1998, compared to 38.9% of
net sales in the first quarter of 1997. The increase in selling,
general, and administrative expenses as a percentage of net sales
was primarily attributable to decreased leverage on fixed
expenses resulting from lower comparable store sales and
increased investments in marketing.
====================================================================
<PAGE 9>
As a result of the foregoing, the Company had operating income
of $17,445,000, or 8.8% of net sales, in the first quarter of
1998, compared to operating income of 19,239,000, or 9.8% of net
sales, in the first quarter of 1997. Amortization of goodwill
was $2,760,000 in both the first quarter of 1998 and the first
quarter of 1997. Operating income, without giving effect to
goodwill amortization in either year, was $20,205,000, or 10.2%
of net sales, in the first quarter of 1998 and $21,999,000, or
11.2% of net sales, in the first quarter of 1997.
Interest expense was $4,727,000 in the first quarter of 1998
and $5,546,000 in the first quarter of 1997. The decrease in
interest expense is attributable to reduced outstanding
indebtedness in the first quarter of 1998 compared to the first
quarter of 1997.
The income tax provision was $6,119,000, or 48.8% of income
before income taxes, in the first quarter of 1998 compared to
$6,968,000, or 51.8% of income before income taxes, in the first
quarter of 1997. This decrease is attributable to a reduction in
the Company's effective income tax rate from 43% to 40%, which
was due to increased income earned outside the United States by
the Company's non-U.S. sourcing subsidiaries. The effective
income tax rate for both periods differed from the statutory rate
primarily because of non-deductible goodwill amortization.
As a result of the foregoing factors, the Company had net
income of $6,419,000, or 3.2% of net sales, for the first quarter
of 1998, compared to net income of $6,475,000, or 3.3% of net
sales, for the first quarter of 1997.
=====================================================================
<PAGE 10>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As previously disclosed in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission
on April 30, 1998, AnnTaylor Stores Corporation ("ATSC"), the
Company, certain current and former officers and directors of
ATSC and the Company, and Merrill Lynch & Co. and certain of
its affiliates, are defendants in a purported class action
lawsuit filed on April 26, 1996 by certain alleged stockholders
of ATSC in the United States District Court for the Southern
District of New York. (Novak v. Kasaks, et. al., No. 96 CIV
3073 (S.D.N.Y. 1996)). On March 10, 1998, the Court granted the
defendants' motions to dismiss the complaint. The Court found
that the complaint failed to state a claim upon which relief
may be granted, and failed to plead fraud with particularity.
The Court's opinion granted the plaintiffs leave to amend and
re-file the complaint within thirty days of the date of the
opinion and an amended complaint was filed by the plaintiffs
on April 9, 1998. The Company believes that the amended
complaint is without merit and intends to continue to defend
the action vigorously. Defendants have served the plaintiffs
with motions to dismiss the amended complaint and briefing
on these motions is now underway. As the case is in preliminary
stages, any liability that may arise from this action cannot
be predicted at this time.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits:
10.15.3 Amendment to the AnnTaylor Stores
Corporation Amended and Restated 1992
Stock Option and Restricted Stock and Unit
Award Plan dated as of May 12, 1998.
Incorporated by reference to Exhibit 10.16.3
to the Quarterly Report on Form 10-Q of ATSC
for the Quarter ended May 2, 1998 filed on
June 16, 1998.
10.25 Commitment Letter dated as of May 7, 1998
among Ann Taylor, Inc., Bank of America
National Trust and Savings Association,
BancAmerica Robertson Stephens, Citicorp USA
and CoreStates Bank, N.A. Incorporated by
reference to Exhibit 10.27 to the Quarterly
Report on Form 10-Q of ATSC for the Quarter
ended May 2, 1998 filed on June 16, 1998.
============================================================================
<PAGE 11>
18 Preferability letter relating to the change
in accounting principle. Incorporated by
reference to Exhibit 18 to the Quarterly
Report on Form 10-Q of ATSC for the Quarter
ended May 2, 1998 filed on June 16, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
=============================================================================
<PAGE 12>
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: June 16, 1998 By: /s/ J. Patrick Spainhour
------------------ -------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: June 16, 1998 By: /s/ Walter J. Parks
----------------- --------------------------
Walter J. Parks
Senior Vice President and
Chief Financial Officer
<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> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 36706
<SECURITIES> 0
<RECEIVABLES> 66374
<ALLOWANCES> 777
<INVENTORY> 110188
<CURRENT-ASSETS> 233409
<PP&E> 243719
<DEPRECIATION> 103468
<TOTAL-ASSETS> 704531
<CURRENT-LIABILITIES> 102131
<BONDS> 100000
0
0
<COMMON> 1
<OTHER-SE> 487030
<TOTAL-LIABILITY-AND-EQUITY> 704531
<SALES> 198170
<TOTAL-REVENUES> 198170
<CGS> 96836
<TOTAL-COSTS> 96836
<OTHER-EXPENSES> 84069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4727
<INCOME-PRETAX> 12538
<INCOME-TAX> 6119
<INCOME-CONTINUING> 6419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6419
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
