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 1, 1999
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 28, 1999
----- ------------
Common Stock, $1.00 par value 1
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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<PAGE> 2
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the Quarters Ended May 1, 1999
and May 2, 1998..................................... 3
Condensed Consolidated Balance Sheets at
May 1, 1999 and January 30, 1999................... 4
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended May 1, 1999 and
May 2, 1998........................................ 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Results
of Operations...................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................... 13
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended May 1, 1999 and May 2, 1998
(unaudited)
Quarters Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
(in thousands)
Net sales..........................................$ 249,400 $ 198,170
Cost of sales...................................... 118,063 96,836
------- --------
Gross profit....................................... 131,337 101,334
Selling, general and administrative expenses....... 97,156 81,129
Amortization of goodwill........................... 2,760 2,760
------- --------
Operating income................................... 31,421 17,445
Interest expense................................... 4,321 4,727
Other expense, net................................. 668 180
------- --------
Income before income taxes......................... 26,432 12,538
Income tax provision............................... 11,677 6,119
------- --------
Net income......................................$ 14,755 $ 6,419
======= ========
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
May 1, 1999 and January 30, 1999
May 1, January 30,
1999 1999
---- ----
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents........................ $ 65,473 $ 67,031
Accounts receivable, net......................... 73,458 71,049
Merchandise inventories.......................... 136,353 136,748
Prepaid expenses and other current assets........ 24,965 23,637
------- -------
Total current assets........................... 300,249 298,465
Property and equipment, net.......................... 156,701 151,785
Goodwill, net ....................................... 316,939 319,699
Deferred financing costs, net ....................... 2,291 2,627
Other assets......................................... 2,649 2,841
------- -------
Total assets................................... $778,829 $775,417
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable................................. $ 48,020 $ 65,419
Accrued salaries and bonus....................... 11,113 17,132
Accrued tenancy.................................. 8,113 8,465
Accrued expenses................................. 43,076 37,535
Current portion of long-term debt................ 1,231 1,206
------- -------
Total current liabilities...................... 111,553 129,757
Long-term debt....................................... 204,257 204,576
Other liabilities.................................... 12,380 12,386
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....................... 361,948 354,762
Retained earnings................................ 88,690 73,935
------- -------
Total stockholder's equity..................... 450,639 428,698
------- -------
Total liabilities and stockholder's equity..... $778,829 $775,417
======= =======
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
ANNTAYLOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended May 1, 1999 and May 2, 1998
(unaudited)
Quarters Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
(in thousands)
Operating activities:
Net income................................................$14,755 $ 6,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loss on accounts receivable.............. 291 331
Depreciation and amortization.......................... 7,569 7,053
Amortization of goodwill............................... 2,760 2,760
Amortization of deferred compensation.................. 161 133
Non-cash interest...................................... 336 286
Loss on disposal of property and equipment............. 653 201
(Increase) decrease in:
Receivables.......................................... (2,700) (5,717)
Merchandise inventories.............................. 395 (12,954)
Prepaid expenses and other current assets............ (1,328) 373
Increase (decrease) in:
Accounts payable..................................... (17,399) 8,346
Accrued liabilities.................................. (830) 5,832
Other non-current assets and liabilities, net........ 185 456
------ ------
Net cash provided by operating activities................. 4,848 13,519
Investing activities:
Purchases of property and equipment....................... (13,137) (7,891)
-------- -------
Net cash used by investing activities..................... (13,137) (7,891)
Financing activities:
Parent company activity................................... 7,025 (19)
Payments on mortgage...................................... (294) (272)
------- -------
Net cash provided by (used by) financing activities....... 6,731 (291)
------ -------
Net (decrease) increase in cash............................. (1,558) 5,337
Cash and cash equivalents, beginning of period.............. 67,031 31,369
------ ------
Cash and cash equivalents, end of period....................$65,473 $36,706
====== ======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest..................$ 2,503 $ 2,389
====== ======
Cash paid during the period for income taxes..............$ 744 $ 2,920
====== ======
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 1999 interim period shown in this report
are not necessarily indicative of results to be expected for the fiscal year.
The January 30, 1999 condensed consolidated balance sheet amounts have been
derived from the previously audited consolidated balance sheet of the Company.
Certain fiscal 1998 amounts have been reclassified to conform to the 1999
presentation.
Detailed footnote information is not included for the quarters ended May 1,
1999 and May 2, 1998. 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 1998 Annual Report on Form 10-K.
2. LONG-TERM DEBT
- -- --------------
The following summarizes long-term debt outstanding at May 1, 1999:
(in thousands)
8 3/4% Notes............................... $ 100,000
Mortgage................................... 4,863
Note Payable to ATSC....................... 100,625
--------
Total debt ............................. 205,488
Less current portion....................... 1,231
--------
Total long-term debt.................... $ 204,257
========
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<PAGE> 7
3. SUBSEQUENT EVENT
- - ----------------
The Company's note (the "intercompany note") payable to its sole
stockholder, AnnTaylor Stores Corporation ("ATSC"), was issued in connection
with the issuance by ATSC of its 8 1/2% Convertible Subordinated Debentures due
2016 (the "Debentures"), which are held by AnnTaylor Finance Trust, a Delaware
business trust (the "Trust"). On May 20, 1999, ATSC announced that it will be
redeeming all of the outstanding Debentures and, as a result of this redemption,
AnnTaylor Finance Trust issued a notice on May 27, 1999 calling for the
redemption of all of the Trust's outstanding 8 1/2% Convertible Originated
Preferred Securities and 8 1/2% Convertible Common Securities (together, the
"Trust Securities"). The redemption date for the Debentures and the Trust
Securities will be June 29, 1999. Holders of Trust Securities have the right to
convert their Trust Securities into shares of ATSC on or before June 28, 1999.
To the extent that Trust Securities are not converted into shares of ATSC common
stock prior to the redemption date, the Company will make a prepayment on the
intercompany note in an amount equal to the amount of the Trust Securities to be
redeemed for cash, and the balance of the intercompany note will be forgiven by
ATSC and will constitute a contribution of capital by ATSC to the Company.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- ------- -------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Quarters Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
Number of Stores:
Open at beginning of period....................... 365 324
Opened during period.............................. 11 16
Expanded or remodeled during period*.............. --- 2
Closed during period.............................. 5 1
Open at end of period............................. 371 339
Type of Stores Open at End of Period:
Ann Taylor stores................................. 309 291
Ann Taylor Loft stores............................ 50 34
Ann Taylor Factory Stores......................... 12 14
------------
* Expanded stores are excluded from comparable store sales for the first
year following expansion.
QUARTER ENDED MAY 1, 1999 COMPARED TO QUARTER ENDED MAY 2, 1998
- ---------------------------------------------------------------
The Company's net sales in the first quarter of 1999 increased to
$249,400,000 from $198,170,000 in the first quarter of 1998, an increase of
$51,230,000 or 25.9%. Comparable store sales for the first quarter of 1999
increased 16.9%, compared to a decrease of 5.5% in the first quarter of 1998.
Management believes that the sales increase was primarily attributable to the
opening of new stores and a net increase in comparable store sales as a result
of favorable customer reaction to the Company's product offerings and
merchandise assortment.
Gross profit as a percentage of net sales increased to 52.7% in the first
quarter of 1999 from 51.1% in the first quarter of 1998. This increase in gross
margin primarily reflects a greater percentage of merchandise being sold at full
price and higher margins achieved on those sales, offset in part by a higher
markdown rate on goods that were sold below full price, compared to the first
quarter of 1998.
Selling, general and administrative expenses represented 39.0% of net sales
in the first quarter of 1999, compared to 40.9% of net sales in the first
quarter of 1998. The decrease in selling, general, and administrative expenses
as a percentage of 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.
As a result of the foregoing, the Company had operating income of
$31,421,000, or 12.6% of net sales, in the first quarter of 1999, compared to
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<PAGE> 9
operating income of $17,445,000, or 8.8% of net sales, in the first quarter of
1998. Amortization of goodwill was $2,760,000 in both the first quarter of 1999
and the first quarter of 1998. Operating income, without giving effect to
goodwill amortization in either year, was $34,181,000, or 13.7% of net sales, in
the first quarter of 1999 and $20,205,000, or 10.2% of net sales, in the first
quarter of 1998.
Interest expense was $4,321,000 in the first quarter of 1999 and $4,727,000
in the first quarter of 1998. The decrease in interest expense is attributable
to greater interest income earned on cash on hand.
The income tax provision was $11,677,000, or 44.2% of income before income
taxes, in the first quarter of 1999 compared to $6,119,000, or 48.8% of income
before income taxes, in the first quarter of 1998. The effective income tax rate
for both periods was higher than the statutory rate primarily as a result of
non-deductible goodwill amortization.
As a result of the foregoing factors, the Company had net income of
$14,755,000, or 5.9% of net sales, for the first quarter of 1999, compared to
net income of $6,419,000, or 3.2% of net sales, for the first quarter of 1998.
PROPOSED REFINANCING
- --------------------
The Company's credit facility matures on June 30, 2000 and includes an
automatic one-year extension, contingent upon the satisfaction of certain
conditions. However, the commitments under the credit facility terminate on
February 16, 2000 unless the Company's outstanding 8 3/4% Subordinated Notes due
2000 (the "8 3/4% Notes") 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 lenders under the credit facility. ATSC
intends to raise at least $100 million through the sale of discounted
convertible subordinated debentures due 2019 ("Convertible Debentures"), and to
use the proceeds from the issuance of these securities to refinance the 8 3/4%
Notes. The Convertible Debentures will be convertible at the option of the
holders thereof into shares of ATSC's common stock. Consummation of the issuance
of the Convertible Debentures is subject to obtaining the consents of the
required lenders under the credit facility, and to market and other conditions,
and there can be no assurance that the offering of the Convertible Debentures
will be consummated. The Convertible Debentures will not be registered or
required to be registered under the Securities Act of 1933 (the "Securities
Act") and will be sold in the United States in a private placement under Rule
144A under the Securities Act, and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.
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<PAGE> 10
YEAR 2000 STATUS
- ----------------
Many computer systems use only two digits to identify a year (for example,
"99" is used for the year "1999"). As a result, these systems may be unable to
process accurately dates later than December 31, 1999, since they may recognize
"00" as the year "1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the Company has
been executing a 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, are also covered by the Company's Year 2000
compliance project.
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned, leased or licensed by
the Company, and identification of those systems and equipment requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.
All material computer hardware and equipment in the Company's U.S. home
offices, distribution center and retail stores that was not Year 2000 compliant
has been remediated or replaced. Of those software systems that were found not
to be Year 2000 compliant, approximately 90% of all material systems have been
remediated or replaced by Year 2000 compliant software. The Company anticipates
that all remaining material systems, will be remediated or replaced by the end
of the second quarter of Fiscal 1999. Hardware and software unique to the
Company's sourcing offices located outside the United States are scheduled to be
remediated or replaced by the end of the second quarter of Fiscal 1999.
Over the past few years, the Company's strategic plan has included
significant investment in and modernization of many of the Company's computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned information systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the Company's financial position or results of operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project, remediating existing systems and replacing non-compliant
===============================================================================
<PAGE> 11
systems, is approximately $2.1 million, of which approximately $1.1 million is
being expensed as incurred (including $965,000 expensed in Fiscal 1998, and
$61,000 in the first quarter of Fiscal 1999), and $1 million which was
capitalized (including $855,000 capitalized in Fiscal 1998 and approximately
$175,000 in the first quarter of 1999).
Although the Company believes its Year 2000 compliance efforts with respect
to its systems will be successful, any failure or delay could result in actual
costs and timing differing materially from that presently contemplated, and in a
disruption of business. The Company is developing a contingency plan to permit
its primary operations to continue if the Company's modifications and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures arising
out of a response to any such contingencies that materialize. The Company's cost
estimates also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.
The Company has been communicating with its business partners, including 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. During the first quarter of fiscal 1999, the Company
completed an initial assessment of the Year 2000 readiness of those third
parties whose services are most significant to the Company's business. The
Company intends to continue to monitor the Year 2000 readiness of its key
suppliers of goods and services during the year. 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. Potential interruptions of such third parties' business or service
to the Company resulting from Year 2000 issues will be addressed in the
Company's contingency planning efforts, discussed below.
The Company's Year 2000 compliance project includes development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company operates a large number of retail stores in
widely disbursed geographical locations, and Company merchandise is manufactured
by a large number of suppliers. The Company believes that these factors will
help to mitigate the adverse impact of potential Year 2000 failures by third
party suppliers or utilities. The Company believes that the most reasonably
likely worst case scenarios would involve an interruption of the supply of
merchandise to the Company's stores, as a result of the delay in completion of
the Company's merchandise orders by manufacturers, or a delay in the delivery of
merchandise to the Company's stores due to a disruption of service at ports of
===============================================================================
<PAGE> 12
export or at the U.S. port of import, or a disruption in service by
transportation providers, or a disruption in operation of the Company's
distribution center. The Company anticipates that its contingency plans will be
substantially developed by the end of the second quarter of Fiscal 1999.
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 service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
The costs and timing for management's completion of Year 2000 compliance
modification and testing processes, and management's assessment and contingency
planning with respect to reasonably likely worst case scenarios, are based on
management's best judgement and estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, the success of third parties' Year 2000 compliance efforts and other
factors. There can be no assurance that these assumptions will be realized or
that actual results will not vary materially.
==============================================================================
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits:
10.19 Separation Agreement dated March 25, 1999 between the
Company and Walter Parks. Incorporated by reference
to Exhibit 10.21 to the Quarterly Report on Form 10-Q
of ATSC for the Quarter ended May 1, 1999 filed on
June 11,1999.
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: June 11, 1999 By: /s/ J. Patrick Spainhour
--------------------------- ----------------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: June 11, 1999 By: /s/ Barry Erdos
--------------------------- --------------------------------
Barry Erdos
Executive 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>
<CIK> 0000850090
<NAME> AnnTaylor, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> MAY-01-1999
<CASH> 65,473
<SECURITIES> 0
<RECEIVABLES> 74,256
<ALLOWANCES> 798
<INVENTORY> 136,353
<CURRENT-ASSETS> 300,249
<PP&E> 277,335
<DEPRECIATION> 120,634
<TOTAL-ASSETS> 778,829
<CURRENT-LIABILITIES> 111,553
<BONDS> 100,000
0
0
<COMMON> 1
<OTHER-SE> 450,638
<TOTAL-LIABILITY-AND-EQUITY> 778,829
<SALES> 249,400
<TOTAL-REVENUES> 249,400
<CGS> 118,063
<TOTAL-COSTS> 118,063
<OTHER-EXPENSES> 100,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,321
<INCOME-PRETAX> 26,432
<INCOME-TAX> 11,677
<INCOME-CONTINUING> 14,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,755
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
