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 October 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3499319
-------- ----------
(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 November 27,1998
----- ----------------
Common Stock, $.0068 par value 25,747,307
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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 and Nine Months Ended
October 31, 1998 and November 1, 1997.............. 3
Condensed Consolidated Balance Sheets at
October 31, 1998 and January 31, 1998.............. 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 1998 and
November 1, 1997................................... 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 19
Item 6. Exhibits and Reports on Form 8-K...................... 19
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Nine Months Ended October 31, 1998 and November 1, 1997
(unaudited)
Quarters Ended Nine Months Ended
------------- -----------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands except per share amounts)
Net sales............................. $227,535 $187,200 $649,098 $569,263
Cost of sales......................... 103,117 94,468 318,412 292,541
------- ------ ------- -------
Gross profit.......................... 124,418 92,732 330,686 276,722
Selling, general and administrative
expenses 91,571 78,669 256,989 229,039
Amortization of goodwill.... ......... 2,760 2,760 8,280 8,280
------- ------ ------- -------
Operating income...................... 30,087 11,303 65,417 39,403
Interest expense...................... 4,718 4,958 13,692 15,531
Other expense, net.................... 73 342 310 617
------- ------ ------- -------
Income before income taxes and
extraordinary loss.................. 25,296 6,003 51,415 23,255
Income tax provision.................. 11,222 3,818 23,878 13,610
------- ------ ------- -------
Income before extraordinary loss...... 14,074 2,185 27,537 9,645
Extraordinary loss (net of income
tax benefit of $130,000)............ --- --- --- (173)
------- ------ ------- -------
Net income............................ $ 14,074 $ 2,185 $ 27,537 $ 9,472
======== ======== ======== ========
Basic earnings per share:
Basic earnings per share before
extraordinary loss.............. $ 0.55 $ 0.09 $ 1.07 $ 0.38
Extraordinary loss per share...... --- --- --- (0.01)
------- ------ ------- -------
Basic earnings per share.......... $ 0.55 $ 0.09 $ 1.07 $ 0.37
======== ======== ======== ========
Diluted earnings per share:
Diluted earnings per share before
extraordinary loss.............. $ 0.50 $ 0.09 $ 1.02 $ 0.38
Extraordinary loss per share...... --- --- --- (0.01)
------- ------ ------- -------
Diluted earnings per share........ $ 0.50 $ 0.09 $ 1.02 $ 0.37
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 1998 and January 31, 1998
October 31, January 31,
1998 1998
---- ----
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents........................ $ 26,224 $ 31,369
Accounts receivable, net......................... 69,767 60,211
Merchandise inventories.......................... 148,526 97,234
Prepaid expenses and other current assets........ 25,239 21,291
------- -------
Total current assets........................... 269,756 210,105
Property and equipment, net.......................... 147,979 139,610
Goodwill, net ....................................... 322,458 330,739
Deferred financing costs, net ....................... 2,957 1,258
Other assets......................................... 2,742 1,949
------- -------
Total assets................................... $745,892 $683,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 57,892 $ 38,185
Accrued expenses................................. 61,753 48,620
Current portion of long-term debt................ 1,191 1,119
------- -------
Total current liabilities...................... 120,836 87,924
Long-term debt....................................... 104,253 105,157
Other liabilities.................................... 11,808 10,082
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary, AnnTaylor
Finance Trust, Holding Solely Convertible
Debentures....................................... 96,565 96,391
Stockholders' equity
Common stock, $.0068 par value; 40,000,000
shares authorized; 25,695,557 and
25,657,590 shares issued, respectively.......... 175 174
Additional paid-in capital....................... 351,329 350,647
Warrants to acquire 2,814 shares of common stock. 46 46
Retained earnings................................ 61,567 34,204
Deferred compensation on restricted stock........ (436) (737)
------- -------
412,681 384,334
Treasury stock, 14,204 and 12,659 shares,
respectively, at cost.................... (251) (227)
------- -------
Total stockholders' equity................. 412,430 384,107
------- -------
Total liabilities and stockholders' equity. $745,892 $683,661
======== ========
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended October 31, 1998 and November 1, 1997
(unaudited)
Nine Months Ended
-----------------
October 31, November 1,
1998 1997
---- ----
(in thousands)
Operating activities:
Net income............................................ $ 27,537 $ 9,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss................................. --- 303
Provision for loss on accounts receivable.......... 1,086 1,366
Depreciation and amortization...................... 21,798 21,022
Amortization of goodwill........................... 8,280 8,280
Non-cash interest.................................. 955 1,097
Amortization of deferred compensation.............. 301 797
Deferred income taxes.............................. (218) ---
Loss on disposal of property and equipment......... 336 246
(Increase) decrease in:
Receivables.................................... (10,642) (4,423)
Merchandise inventories........................ (51,292) (14,140)
Prepaid expenses and other current assets...... (2,947) 1,320
Increase in:
Accounts payable............................... 19,707 9,580
Accrued expenses............................... 13,133 7,315
Other non-current assets and liabilities, net.. 149 2,171
------- -------
Net cash provided by operating activities............. 28,183 44,406
------- -------
Investing activities:
Purchases of property and equipment................... (30,502) (20,220)
------- -------
Net cash used by investing activities................. (30,502) (20,220)
------- -------
Financing activities:
Net repayments under term loan........................ --- (24,500)
Term loan prepayment penalty.......................... --- (184)
Payments on mortgage.................................. (832) (213)
Proceeds from exercise of stock options............... 581 871
Issuance of restricted stock.......................... 97 ---
Receipt of restricted stock........................... (19) ---
Payment of deferred financing costs................... (2,653) (69)
------- -------
Net cash used by financing activities................. (2,826) (24,095)
------- -------
Net increase (decrease) in cash......................... (5,145) 91
Cash, beginning of period............................... 31,369 7,025
------- -------
Cash, end of period..................................... $ 26,224 $ 7,116
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest.............. $ 11,675 $ 12,491
======= =======
Cash paid during the period for income taxes.......... $ 23,080 $ 12,973
======= =======
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated financial statements of AnnTaylor Stores
Corporation (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
October 31, 1998 and November 1, 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 to Stockholders.
2. Income Per Share
----------------
In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which specifies the
computation, presentation and disclosure requirements for basic and diluted
earnings per share. Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of additional shares
of common stock, that are issuable by the Company upon the conversion of all
outstanding warrants, stock options, and convertible preferred securities.
Basic and diluted earnings per share calculations follow.
[Tables on next page]
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<PAGE> 7
Three Months Ended
------------------------------------------------
October 31, 1998 November 1, 1997
------------------------ ----------------------
(in thousands, except per share amounts)
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ -------- ------ ------ ------
Basic Earnings per Share
- ------------------------
Income available to common
stockholders
before extraordinary loss $14,074 25,671 $0.55 $2,185 25,640 $ 0.09
===== ======
Effect of Dilutive Securities
- -----------------------------
Warrants --- 3 --- 3
Stock options --- 240 --- 41
Trust Originated Preferred
Securities 1,297 5,120 --- ---
----- ----- ----- -----
Diluted Earnings per Share
- --------------------------
Income available to common
stockholders before
extraordinary loss $15,371 31,034 $0.50 $2,185 25,684 $ 0.09
======= ====== ===== ====== ====== ======
Nine Months Ended
------------------------------------------------
October 31, 1998 November 1, 1997
------------------------ ----------------------
(in thousands, except per share amounts)
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ -------- ------ ------ ------
Basic Earnings per Share
- ------------------------
Income available to common
stockholders before
extraordinary loss $27,537 25,653 $1.07 $9,645 25,624 $0.38
===== =====
Effect of Dilutive Securities
- -----------------------------
Warrants --- 3 --- 3
Stock options --- 110 --- 56
Trust Originated Preferred
Securities 3,892 5,120 --- ---
------ ------ ------ ------
Diluted Earnings per Share
- --------------------------
Income available to common
stockholders before
extraordinary loss $31,429 30,886 $1.02 $9,645 25,683 $0.38
======= ====== ===== ====== ====== =====
Shares of common stock issuable upon the conversion of the preferred
securities have not been included in the computation of diluted earnings per
share for the quarter ended and nine months ended November 1, 1997 due to
the antidilutive effect of the conversion.
3. Long-Term Debt
--------------
The following summarizes long-term debt outstanding at October 31, 1998:
(in thousands)
8-3/4% Notes..................................$ 100,000
Mortgage...................................... 5,444
-------
Total debt ................................ 105,444
Less current portion.......................... 1,191
-------
Total long-term debt.......................$ 104,253
=======
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<PAGE> 8
On June 30, 1998, the Company's wholly owned subsidiary AnnTaylor, Inc.
("Ann Taylor") 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. The Credit Facility is
used by Ann Taylor for the issuance of commercial and standby letters of
credit and to provide revolving loans for other general corporate purposes.
The Credit Facility matures on June 30, 2000 and includes an automatic
one-year extension, contingent upon the satisfaction of certain conditions.
4. 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 nine months ended October 31, 1998. It is not possible to determine the
effect of the change on income in fiscal periods ending prior to February 1,
1998.
5. Recently Issued Statements of Financial Accounting Standards
------------------------------------------------------------
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure
About Pensions and Other Postretirement Benefits", which standardizes the
disclosure requirements for pension and other postretirement benefits,
eliminates certain disclosures, and requires additional information on the
changes in the benefit obligations and fair value of plan assets. This
statement is effective for periods beginning after December 15, 1997. The
Company will adopt this statement for its Consolidated Financial Statements
for fiscal year 1998 contained in the Company's 1998 Annual Report to
Stockholders.
6. Legal Proceedings
-----------------
On November 9, 1998, the U.S. District Court for the Southern District of
New York issued an Opinion dismissing, with prejudice, the amended complaint,
filed in April 1998, in the purported class action lawsuit against the
Company, Ann Taylor, certain present and former directors and officers of the
Company and Ann Taylor, Merrill Lynch & Co. ("Merrill") and certain affiliates
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<PAGE> 9
of Merrill (Novak v. Kasaks, et al.No. 96 CIV 3073 (S.D.N.Y. 1996)),
relating to the period commencing February 3, 1994 through May 4, 1995. The
amended complaint alleged causes of action under Section 10(b) and Section 20(a)
of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. The Court found that the amended complaint failed to state a claim
upon which relief may be granted, and failed to plead fraud with particularity
and an inability to do so. The plaintiffs may appeal the Court's ruling within
thirty days of the date of entry of the Court's order.
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<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations
- ---------------------
Quarters Ended Nine Months Ended
-------------- -----------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---- ---- ---- ----
Number of Stores:
Open at beginning of period.. 342 310 324 309
Opened during period......... 17 15 37 24
Expanded during period*...... 3 7 6 8
Closed during period......... --- 1 2 9
Open at end of period........ 359 324 359 324
Type of Stores Open at End of Period:
Ann Taylor stores............ 303 283
Ann Taylor Factory Stores.... 14 14
Ann Taylor Loft stores....... 42 27
* Expanded stores are excluded from comparable store sales for the first
year following expansion.
Quarter ended October 31, 1998 Compared to Quarter ended November 1, 1997
- -------------------------------------------------------------------------
The Company's net sales in the third quarter of 1998 increased to
$227,535,000 from $187,200,000 in the third quarter of 1997, an increase of
$40,335,000 or 21.5%. This increase is attributable to the opening of new
stores and the expansion of existing stores, and an increase in comparable
store sales of 12.5%. Management believes that the increase in comparable
store sales was principally attributable to improved customer acceptance of
the Company's product offerings and the Company's merchandise assortment.
Gross profit as a percentage of net sales increased to 54.7% in the third
quarter of 1998 from 49.5% in the second quarter of 1997. As discussed in
Note 4 of the Condensed Consolidated Financial Statements, the Company
elected to change the accounting method by which the Company accounts for
inventory, from the retail method to the average cost method. Under the
retail method, gross margin as a percentage of net sales would have been
approximately 51.6%. The increase also reflects continued merchandise margin
improvements resulting from the maturation of the Company's sourcing
organization, since the acquisition of the Company's sourcing joint venture
two years ago.
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<PAGE> 11
Selling, general and administrative expenses represented 40.2% of net
sales in the third quarter of 1998, compared to 42.0% of net sales in the
third quarter of 1997. 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.
This leverage was 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
$30,087,000, or 13.2% of net sales, in the third quarter of 1998, compared to
operating income of $11,303,000, or 6.0% of net sales, in the third quarter
of 1997. Amortization of goodwill was $2,760,000 in the third quarters of
both 1998 and 1997. Operating income, without giving effect to goodwill
amortization in either year, was $32,847,000, or 14.4% of net sales, in the
1998 period and $14,063,000, or 7.5% of net sales, in the 1997 period.
Interest expense was $4,718,000 in the third quarter of 1998 and
$4,958,000 in the third quarter of 1997. The decrease in interest expense is
attributable to reduced outstanding indebtedness in the third quarter of 1998
compared to the third quarter of 1997.
The income tax provision was $11,222,000, or 44.4% of income before
income taxes, in the 1998 period, compared to $3,818,000, or 63.6% 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% before income taxes and extraordinary loss 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.
As a result of the foregoing factors, the Company had net income of
$14,074,000, or 6.2% of net sales, for the third quarter of 1998, compared to
net income of $2,185,000, or 1.2% of net sales, for the third quarter of 1997.
AnnTaylor Stores Corporation conducts no business other than the
management of Ann Taylor.
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<PAGE> 12
Nine Months ended October 31, 1998 Compared to Nine Months ended November 1,
- ---------------------------------- ----------------------------- -----------
1997
- ----
The Company's net sales in the first nine months of 1998 increased to
$649,098,000 from $569,263,000 in the first nine months of 1997, an increase
of $79,835,000 or 14.0%. This increase is attributable to the opening of new
stores and the expansion of existing stores, and an increase in comparable
store sales of 5.7%. The increase in comparable store sales for the
nine-month period was a result of increases in comparable store sales in the
second and third quarters of 1998, as a result of improved customer
acceptance of the Company's product offerings and merchandise assortment,
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 of 1998, 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 was part of fourth
quarter 1997).
Gross profit as a percentage of net sales increased to 50.9% in the first
nine months of 1998 from 48.6% in the first nine months of 1997.
Selling, general and administrative expenses represented 39.6% of net
sales, in the first nine months of 1998, compared to 40.2% of net sales in
the first nine months of 1997. 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. This leverage was 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
$65,417,000, or 10.1% of net sales, in the first nine months of 1998,
compared to operating income of $39,403,000, or 6.9% of net sales, in the
first nine months of 1997. Amortization of goodwill was $8,280,000 in each
of the first nine months of 1998 and 1997. Operating income, without giving
effect to goodwill amortization in either year, was $73,697,000, or 11.4% of
net sales, in the 1998 period and $47,683,000, or 8.4% of net sales, in the
1997 period.
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<PAGE> 13
Interest expense was $13,692,000 in the first nine months of 1998 and
$15,531,000 in the first nine months of 1997. The decrease in interest
expense was attributable to reduced outstanding indebtedness in the first
nine months of 1998 compared to the first nine months of 1997.
The income tax provision was $23,878,000, or 46.4% of income before
income taxes, in the 1998 period, compared to $13,610,000, or 58.5% 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% before income taxes and extraordinary loss 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
$27,537,000, or 4.2% of net sales, for the first nine months of 1998,
compared to net income of $9,472,000 or 1.7% of net sales, for the first nine
months of 1997.
Financial Condition
- -------------------
For the first nine months of 1998, net cash provided by operating
activities totaled $28,183,000, primarily as a result of net income, non-cash
operating expenses, and an increase in current liabilities partially offset
by an increase in current assets. Cash used for investing activities during
the first nine months of 1998 amounted to $30,502,000, for the purchase of
property and equipment. Cash used for financing activities during the first
nine months of 1998 amounted to $2,826,000, primarily for the payment of
deferred financing costs.
Merchandise inventories were $148,526,000 at October 31, 1998, compared
to inventories of $97,234,000 at January 31, 1998. Merchandise inventories
at October 31, 1998 and January 31, 1998 included approximately $15,319,000
and $21,124,000, respectively, of inventory associated with the Company's
sourcing division. Inventory levels at the end of October, excluding
inventories attributable to the Company's sourcing division, were up 14.9% on
a per square foot basis compared to 1997 levels but were 7.2% below 1996
levels on a per square foot basis.
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<PAGE> 14
On June 30, 1998, the Company's wholly owned subsidiary, Ann Taylor,
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. The Credit Facility is used by Ann
Taylor for the issuance of commercial and standby letters of credit and to
provide revolving loans for other general corporate purposes. The Credit
Facility matures on June 30, 2000 and includes an automatic one-year
extension, contingent upon the satisfaction of certain conditions.
The Company also has outstanding an aggregate of $100,625,000 of
convertible preferred securities issued by its financing vehicle, AnnTaylor
Finance Trust.
For Fiscal 1998, the Company's capital expenditures, which are primarily
attributable to the Company's store expansion, renovation and refurbishment
programs, as well as the investment the Company is making in certain
information systems, are expected to total approximately $49,000,000, of
which $30,500,000 were incurred for the nine months ended October 31, 1998.
Capital expenditures are expected to be less than originally planned as a
result of net construction costs for planned square footage being less than
anticipated during Fiscal 1998. During the first nine months of fiscal 1998,
the Company opened 22 new Ann Taylor stores and 15 Ann Taylor Loft stores,
and expanded or relocated 6 Ann Taylor stores. The Company expects to open a
total of 26 new Ann Taylor stores and 19 Ann Taylor Loft stores, and to
expand or relocate a total of 8 Ann Taylor stores, in Fiscal 1998.
Dividends and distributions from Ann Taylor to the Company are restricted
by the terms of the Credit Facility and the Indenture for Ann Taylor's 8-3/4%
Subordinated Notes due 2000. The payment of cash dividends by the Company on
its capital stock is also subject to certain restrictions contained in the
Company's guarantee of Ann Taylor's obligations under the Credit Facility.
Any determination to pay cash dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by the Company's
Board of Directors.
In order to finance its operations and capital requirements, the Company
expects to use internally generated funds, trade credit and funds available
to it under the Credit Facility. The Company believes that cash flow from
operations and funds available under the Credit Facility are sufficient to
enable it to meet its on-going cash needs for its business, as presently
conducted, for the foreseeable future.
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<PAGE> 15
Year 2000 Status
- ----------------
As described in the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1998, 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 later than December 31, 1999),
and 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 or licensed by the
Company, and identification of those systems and equipment requiring Year
2000 remediation. Analysis of all material software and hardware has been
completed, except with respect to systems unique to the Company's sourcing
offices located outside of the United States, discussed below. Of those
software systems requiring remediation or replacement, approximately 75% of
all material systems have already been remediated or replaced by Year 2000
compliant software. The Company anticipates that 90% of all material systems
will have been remediated or replaced by the end of fiscal 1998, and that all
remaining material systems will be remediated or replaced by the end of the
second quarter of fiscal 1999. In addition, all computer hardware in the
Company's home offices and distribution center that was not Year 2000
compliant has been remediated or replaced; non-compliant hardware in the
Company's retail stores is scheduled to be remediated or replaced by the end
of fiscal 1998; and hardware and software unique to the Company's sourcing
offices located outside the United States are scheduled to be evaluated and
remediated or replaced by the end of the second quarter of fiscal 1999.
===============================================================================
<PAGE> 16
The Company has engaged a consultant to assist in the evaluation of the
equipment used in the Company's distribution center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described in the preceding paragraph). The equipment evaluation is
expected to be completed by the end of fiscal 1998, and remediation or
replacement of distribution center equipment found not to be Year 2000
compliant is scheduled to be completed 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
systems, is approximately $2.1 million, of which approximately $1.1 million has
been or will be expensed as incurred, and $1 million has been or will be
capitalized. Of these amounts, approximately $800,000 was expensed through the
third quarter of 1998 and it is expected that most of the capitalized costs will
be incurred by the end of fiscal 1998. 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
intends to develop 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 associated with such contingencies. 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 is 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. 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
==============================================================================
<PAGE> 17
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 by the end of the first quarter of
fiscal 1999. The Company will not be able to determine its most reasonably
likely worst case scenarios until assessment of third parties' Year 2000
compliance is completed.
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 anticipates that contingency plans
will be substantially developed by the end of the second quarter of 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 are based on management's best 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.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Sections of this Quarterly Report on Form 10-Q, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition,
==============================================================================
<PAGE> 18
results of operations and business of the Company. Examples of
forward-looking statements are statements that use the words "expect",
"anticipate", "plan", "intend", "project", "believe" and similar
expressions. These forward looking statements involve certain risks and
uncertainties, and no assurance can be given that any of such matters will be
realized. Actual results may differ materially from those contemplated by
such forward looking statements as a result of, among other things, failure
by the Company to accurately predict customer fashion preferences; a decline
in the demand for merchandise offered by the Company; competitive influences;
changes in levels of store traffic or consumer spending habits; effectiveness
of the Company's brand awareness and marketing programs; lack of sufficient
customer acceptance of the Ann Taylor Loft concept in the moderate-priced
women's apparel market; general economic conditions that are less favorable
than expected or a downturn in the retail industry; the inability of the
Company to locate new store sites or negotiate favorable lease terms for
additional stores or for the expansion of existing stores; a significant
change in the regulatory environment applicable to the Company's business; an
increase in the rate of import duties or export quotas with respect to the
Company's merchandise; any material adverse effects of the Year 2000 issue on
the business of the Company or third parties with which the Company does
business; or an adverse outcome of the litigation referred to below in Part
II, Item 1 of this Quarterly Report. The Company assumes no obligation to
update or revise any such forward looking statements, which speak only as of
their date, even if experience or future events or changes make it clear that
any projected financial or operating results implied by such forward-looking
statements will not be realized.
=============================================================================
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On November 9, 1998, the U.S. District Court for the Southern
District of New York issued an Opinion dismissing, with prejudice, the
amended complaint, filed in April 1998, in the purported class action
lawsuit against the Company, Ann Taylor, certain present and former
directors and officers of the Company and Ann Taylor, Merrill Lynch &
Co. ("Merrill") and certain affiliates of Merrill (Novak v Kasaks, et
al. No. 96 CIV 3073 (S.D.N.Y. 1996)), relating to the period commencing
February 3, 1994 through May 4, 1995. The amended complaint alleged
causes of action under Section 10(b) and Section 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. The Court found that the amended complaint failed to state
a claim upon which relief may be granted, and failed to plead fraud
with particularity and an inability to do so. The plaintiffs may
appeal the Court's ruling within thirty days of the date of entry of
the Court's order.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report dated November 9, 1998 with the Commission
on Form 8-K on November 12, 1998 with respect to the dismissal of the
amended complaint filed in Novaks v. Kasaks, et al. as discussed in
Footnote 6 to the Consolidated Financial Statements and Part II, Item
1 above.
==============================================================================
<PAGE> 20
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 Stores Corporation
Date: December 14, 1998 By: /s/ J. Patrick Spainhour
----------------- -------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: December 14, 1998 By: /s/ Walter J. Parks
----------------- -------------------------
Walter J. Parks
Senior Vice President -
Chief Financial Officer
and Treasurer
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