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 30, 1999
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 26, 1999
----- -----------------
Common Stock, $.0068 par value 30,718,407
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INDEX TO FORM 10-Q
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Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the Quarters and Nine Months Ended October
30, 1999 and October 31, 1998........................ 3
Condensed Consolidated Balance Sheets at
October 30, 1999 and January 30, 1999.............. 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 30, 1999 and
October 31, 1998................................... 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..................................... 18
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 30, 1999 and October 31, 1998
(unaudited)
Quarters Ended Nine Months Ended
-------------- -----------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands except per share amounts)
Net sales................................. $272,289 $227,535 $787,436$ $649,098
Cost of sales............................. 122,414 103,117 380,319 318,412
-------- ------- -------- --------
Gross profit.............................. 149,875 124,418 407,117 330,686
Selling, general and administrative
expenses................................ 108,122 91,571 302,890 256,989
Amortization of goodwill.................. 2,760 2,760 8,280 8,280
-------- ------- -------- --------
Operating income.......................... 38,993 30,087 95,947 65,417
Interest expense.......................... 866 4,718 6,450 13,692
Other expense, net........................ 541 73 1,351 310
-------- ------- -------- --------
Income before income taxes and
extraordinary loss..................... 37,586 25,296 88,146 51,415
Income tax provision..................... 16,138 11,222 38,570 23,878
-------- ------- -------- --------
Income before extraordinary loss.......... 21,448 14,074 49,576 27,537
Extraordinary loss (net of income
tax benefit of $641,000)................ --- --- 962 ---
Net income................................$ 21,448 $ 14,074 $ 48,614 $ 27,537
======== ======== ======== ========
Basic earnings per share of common stock:
Basic earnings per share before
extraordinary loss..................$ 0.68 $ 0.55 $ 1.73 $ 1.07
Extraordinary loss per share.......... --- --- 0.03 ---
-------- ------- -------- --------
Basic earnings per share..............$ 0.68 $ 0.55 $ 1.70 $ 1.07
======== ======= ======== ========
Diluted earnings per share of common stock:
Diluted earnings per share before
extraordinary loss .................$ 0.65 $ 0.50 $ 1.58 $ 1.02
Extraordinary loss per share.......... --- --- 0.03 ---
-------- ------- -------- --------
Diluted earnings per share............$ 0.65 $ 0.50 $ 1.55$ $ 1.02
======== ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, 1999 and January 30, 1999
October 30, January 30,
1999 1999
---- ----
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents........................ $ 50,467 $ 67,031
Accounts receivable, net......................... 77,244 71,049
Merchandise inventories.......................... 165,334 136,748
Prepaid expenses and other current assets........ 29,673 23,637
-------- --------
Total current assets........................... 322,718 298,465
Property and equipment, net.......................... 171,440 151,785
Goodwill, net ....................................... 311,419 319,699
Deferred financing costs, net ....................... 5,661 2,627
Other assets......................................... 3,568 2,841
-------- ==------
Total assets................................... $814,806 $775,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 65,672 $ 65,419
Accrued salaries and bonus....................... 19,537 17,132
Accrued tenancy.................................. 8,235 8,465
Accrued expenses................................. 31,626 37,535
Current portion of long-term debt................ 1,282 1,206
-------- --------
Total current liabilities...................... 126,352 129,757
Long-term debt....................................... 114,072 103,951
Other liabilities.................................... 13,341 12,386
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of AnnTaylor Finance Trust
Holding Solely Convertible Debentures of
the Company...................................... --- 96,624
Stockholders' equity
Common stock, $.0068 par value; 120,000,000
shares authorized; 31,554,120 and
26,035,301 shares issued, respectively 214 177
Additional paid-in capital....................... 469,276 359,805
Warrants to acquire 2,814 shares of common stock. --- 46
Retained earnings................................ 121,813 73,295
Deferred compensation on restricted stock........ (3,057) (272)
-------- --------
588,246 433,051
Less treasury stock, 715,948 and 17,201 shares,
respectively, at cost.......................... (27,205) (352)
-------- --------
Total stockholders' equity................. 561,041 432,699
-------- --------
Total liabilities and stockholders' equity. $814,806 $775,417
======== ========
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 30, 1999 and October 31, 1998
(unaudited)
Nine Months Ended
-----------------
October 30, October 31,
1999 1998
---- ----
(in thousands)
Operating activities:
Net income........................................... % 48,614 $ 27,537
Adjustments to reconcile net income to net
cash provided
by operating activities:
Extraordinary loss................................ 1,603 ---
Provision for loss on accounts receivable......... 672 1,086
Depreciation and amortization..................... 22,882 21,798
Amortization of goodwill.......................... 8,280 8,280
Non-cash interest................................. 1,982 955
Amortization of deferred compensation............. 1,151 301
Deferred income taxes............................. (2,000) (218)
Loss on disposal of property and equipment........ 1,217 336
(Increase) decrease in:
Receivables................................... (6,867) (10,642)
Merchandise inventories....................... (28,586) (51,292)
Prepaid expenses and other current assets..... (5,036) (2,947)
Increase (decrease) in:
Accounts payable.............................. 253 19,707
Accrued expenses.............................. (3,734) 13,133
Other non-current assets and liabilities, net. 1,229 149
------- -------
Net cash provided by operating activities............ 41,660 28,183
------- -------
Investing activities:
Purchases of property and equipment.................. (43,755) (30,502)
------- -------
Net cash used by investing activities................ (43,755) (30,502)
------- -------
Financing activities:
Payments on mortgage................................. (897) (832)
Proceeds from exercise of stock options.............. 8,869 581
Issuance of restricted stock......................... --- 97
Repurchase of restricted stock....................... --- (19)
Redemption of 8-3/4% Notes........................... (101,375) ---
Redemption of Company Obligated Mandatorily
Redeemable Convertible Preferred
Securities......................................... (100) ---
Proceeds from issuance of Convertible
Debentures Due 2019................................ 110,000 ---
Repurchase of Common Stock............................ (26,816) ---
Payment of deferred financing costs................... (4,150) (2,653)
------- -------
Net cash used by financing activities................. (14,469) (2,826)
------- -------
Net decrease in cash.................................... (16,564) (5,145)
Cash, beginning of period............................... 67,031 31,369
------- -------
Cash, end of period..................................... $ 50,467 $ 26,224
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest.............. $ 6,804 $ 11,675
======= =======
Cash paid during the period for income taxes.......... $ 34,334 $ 23,080
======= =======
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 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
AnnTaylor Stores Corporation ("the Company").
Detailed footnote information is not included for the quarters ended
October 30, 1999 and October 31, 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 AnnTaylor Stores
Corporation 1998 Annual Report to Stockholders.
2. NET INCOME 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 securities. Basic and
diluted earnings per share calculations follow:
[Tables on next page]
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<PAGE> 7
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. NET INCOME PER SHARE (CONTINUED)
Quarters Ended
-----------------------------------------------
October 30, 1999 October 31, 1998
--------------------- ---------------------
(in thousands, except per share amounts)
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
Income available to common
stockholders $21,448 31,408 $0.68 $14,074 25,671 $0.55
===== =====
EFFECT OF DILUTIVE
SECURITIES
Warrants --- --- --- 3
Stock options --- 270 --- 240
Preferred Securities --- --- 1,297 5,120
Convertible Debentures
due 2019 626 2,404 --- ---
------ ------ ------ ------
DILUTED EARNINGS PER SHARE
Income available to
common stockholders $22,074 34,082 $0.65 $15,371 31,034 $0.50
======= ====== ===== ======= ====== =====
Nine Months Ended
-----------------------------------------------
October 30, 1999 October 31, 1998
--------------------- ---------------------
(in thousands, except per share amounts)
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
BASIC EARNINGS PER SHARE
Income available to common
stockholders before
extraordinary loss $49,576 28,617 $1.73 $27,537 25,653 $1.07
===== =====
EFFECT OF DILUTIVE SECURITIES
Warrants --- 1 --- 3
Stock options --- 292 --- 110
Preferred Securities 1,297 2,776 3,892 5,120
Convertible Debentures
due 2019 911 1,165 --- ----
------ ------ ------ ------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders before
extraordinary loss $51,784 32,851 $1.58 $31,429 30,886 $1.02
======= ====== ===== ======= ====== =====
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<PAGE> 8
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. LONG-TERM DEBT
The following summarizes long-term debt outstanding at October 30, 1999:
(in thousands)
Convertible Debentures due 2019,
net of discount of $87,978,000............ $ 111,094
Mortgage................................... 4,260
-------
Total debt ............................. 115,354
Less current portion....................... 1,282
-------
Total long-term debt.................... $ 114,072
=======
To facilitate the securities repurchase program discussed in Note 5 and the
Company's capital expenditure program, on September 7, 1999 AnnTaylor, Inc.
("Ann Taylor") entered into an amendment to its senior secured revolving credit
facility (the "Credit Facility") with its bank lending group that eliminated the
Credit Facility's limitation on annual capital expenditures, replacing it with a
fixed charge coverage ratio covenant, and specifically permits the securities
repurchase program. Additionally, Ann Taylor elected to reduce the commitment
of the lenders under the Credit Facility by $25,000,000 to $125,000,000 from
$150,000,000 effective September 3, 1999, and the term of the Credit Facility
was extended to June 30, 2001.
4. ENTERPRISE-WIDE OPERATING INFORMATION
The Company is a specialty retailer of women's apparel, shoes, and
accessories. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one
reportable segment. The Company believes that the customer base for its
stores consists primarily of relatively affluent, fashion-conscious women
from the ages of 25 to 55, and that the majority of its customers are working
women with limited time to shop.
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<PAGE> 9
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. SECURITIES REPURCHASE PROGRAM
During the third quarter of Fiscal 1999, the Board of Directors
authorized a program under which the Company was authorized to purchase up to
$40 million of the Company's common stock and/or its convertible debentures
due 2019 (the "Convertible Debentures") through open market purchases and/or
in privately negotiated transactions. As of October 30, 1999, 700,000 shares
of the Company's common stock had been repurchased for an aggregate purchase
price of $26,816,000. During November 1999, the Company purchased an
additional 332,500 shares of its common stock for an aggregate purchase price
of $13,118,000, completing the securities repurchase program. All of the
repurchased shares became treasury shares and may be used for general
corporate and other purposes. No Convertible Debentures were repurchased
under the program.
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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
-------------- -----------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
---- ---- ---- ----
Number of Stores:
Open at beginning of period.. 387 342 365 324
Opened during period......... 17 17 44 37
Expanded during period*...... 5 3 7 6
Closed during period......... 2 --- 7 2
Open at end of period........ 402 359 402 359
Type of Stores Open at End
of Period:
Ann Taylor stores............ 318 303
Ann Taylor Factory Stores.... 11 14
Ann Taylor Loft stores....... 73 42
- ----------------------------
* Expanded stores are excluded from comparable store sales for the first
year following expansion.
QUARTER ENDED OCTOBER 30, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
The Company's net sales in the third quarter of 1999 increased to
$272,289,000 from $227,535,000 in the third quarter of 1998, an increase of
$44,754,000 or 19.7%. The increase is attributable to the opening of new
stores, expansion of certain stores and an increase in comparable store
sales of 8.1%. Management believes that the comparable store sales increase
was primarily attributable to the favorable customer reaction to the
Company's product offerings and merchandise assortment.
Gross profit as a percentage of net sales increased to 55.0% in the third
quarter of 1999 from 54.7% in the third quarter of 1998.
Selling, general and administrative expenses represented 39.7% of net
sales in the third quarter of 1999, compared to 40.2% of net sales in the
third 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
and improved operating efficiencies, partially offset by an increase in
marketing expenditures in support of the Company's strategic initiatives to
enhance the Ann Taylor brand and an increase in third party credit charges
resulting from the increase in third party charge sales as a percentage of
total sales.
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<PAGE> 11
As a result of the foregoing, the Company had operating income of
$38,993,000, or 14.3% of net sales, in the third quarter of 1999, compared to
operating income of $30,087,000, or 13.2% of net sales, in the third quarter of
1998. Amortization of goodwill was $2,760,000 in both the third quarter of 1999
and the third quarter of 1998. Operating income, without giving effect to
goodwill amortization in either year, was $41,753,000, or 15.3% of net sales, in
the third quarter of 1999 and $32,847,000, or 14.4% of net sales, in the third
quarter of 1998.
Interest expense was $866,000 in the third quarter of 1999 and $4,718,000
in the third quarter of 1998. The decrease in interest expense is attributable
to the redemption during the second quarter of 1999 of the preferred securities
and the 8-3/4% Notes, as well as greater interest income earned on cash on hand,
offset in part by interest expense on the Convertible Debentures issued during
the second quarter of 1999.
The income tax provision was $16,138,000, or 42.9% of income before income
taxes, in the third quarter of 1999, compared to $11,222,000, or 44.4% of income
before income taxes, in the third 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
$21,448,000, or 7.9% of net sales, for the third quarter of 1999, compared to
net income of $14,074,000, or 6.2% of net sales, for the third quarter of 1998.
AnnTaylor Stores Corporation conducts no business other than the management
of Ann Taylor.
NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1998
The Company's net sales in the first nine months of 1999 increased to
$787,436,000 from $649,098,000 in the first nine months of 1998, an increase
of $138,338,000 or 21.3%. The increase is attributable to the opening of new
stores, the expansion of existing stores and an increase in comparable store
sales of 10.9%. Management believes that the increase in comparable store
sales was primarily attributable to favorable customer reaction to the
Company's product offerings and merchandise assortment.
Gross profit as a percentage of net sales increased to 51.7% in the first
nine months of 1999 from 50.9% in the first nine months of 1998. This
increase in gross margin primarily reflects a higher initial markup rate,
reflecting on-going improvements achieved by the Company's sourcing division,
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<PAGE> 12
offset in part by a higher markdown rate on goods that were sold below full
price. Gross margin also benefited in the first quarter of 1999 from a greater
percentage of merchandise being sold at full price compared to the first quarter
of 1998.
Selling, general and administrative expenses represented 38.5% of net
sales in the first nine months of 1999, compared to 39.6% of net sales in the
first nine months 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 and improved operating efficiencies, partially offset
by 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
$95,947,000, or 12.2% of net sales, in the first nine months of 1999,
compared to operating income of $65,417,000, or 10.1% of net sales, in the
first nine months of 1998. Amortization of goodwill was $8,280,000 in each
of the first nine months of 1999 and 1998. Operating income, without giving
effect to goodwill amortization, was $104,227,000, or 13.2% of net sales, in
the 1999 period and $73,697,000, or 11.4% of net sales, in the 1998 period.
Interest expense was $6,450,000 in the first nine months of 1999 and
$13,692,000 in the first nine months of 1998. The decrease in interest expense
is attributable to the redemption in the second quarter of 1999 of the preferred
securities and the 8-3/4% Notes, and to greater interest income earned on cash
on hand, offset in part by interest expense on the Convertible Debentures issued
in the second quarter of 1999.
The income tax provision was $38,570,000, or 43.8% of income before
income taxes and extraordinary loss, in the 1999 period, compared to
$23,878,000, or 46.4% of income before income taxes in the 1998 period. The
effective income tax rate for both periods differed from the statutory rate
primarily because of non-deductible goodwill amortization.
On July 22, 1999, the Company applied the proceeds received from the
issuance of its Convertible Debentures to redeem the outstanding 8-3/4% Notes.
This resulted in an extraordinary charge to earnings in the first nine months of
Fiscal 1999 of $962,000, net of income tax benefit, or $0.03 per share on a
diluted basis.
As a result of the foregoing factors, the Company had net income of
$48,614,000, or 6.2% of net sales, for the first nine months of 1999,
compared to net income of $27,537,000 or 4.2% of net sales, for the first
nine months of 1998.
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<PAGE> 13
FINANCIAL CONDITION
For the first nine months of 1999, net cash provided by operating
activities totaled $41,660,000, primarily as a result of net income and non-cash
operating expenses, partially offset by increases in merchandise inventories,
prepaid expenses and other assets, and accounts receivable, and a decrease in
accrued expenses. Cash used for investing activities during the first nine
months of 1999 amounted to $43,755,000, for the purchase of property and
equipment. Cash used by financing activities during the first nine months of
1999 amounted to $14,469,000, reflecting the redemption of the 8-3/4% Notes, the
repurchase of Company common stock and the payment of deferred financing costs
related to the issuance of the Convertible Debentures, partially offset by the
proceeds from the issuance of the Convertible Debentures and proceeds from
exercises of employee stock options to purchase Company common stock.
Merchandise inventories were $165,334,000 at October 30, 1999, compared
to inventories of $136,748,000 at January 30, 1999. Merchandise inventories
at October 30, 1999 and January 30, 1999 included approximately $15,539,000
and $32,329,000, respectively, of inventory associated with the Company's
sourcing division, which is primarily finished goods in transit from
factories.
In September 1999, Ann Taylor entered into an amendment to its Credit
Facility that eliminated the credit agreement's limitation on annual capital
expenditures, replacing it with a fixed charge coverage ratio test, and
specifically permits a securities repurchase program. Additionally, Ann Taylor
elected to reduce the commitment of the lenders under the Credit Facility by
$25,000,000, to $125,000,000 from $150,000,000 and the term of the Credit
Facility was extended to June 30, 2001.
At October 30, 1999, there were no borrowings outstanding under the
Credit Facility. 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 rates against certain eligible assets.
For Fiscal 1999, the Company's capital expenditures, which are primarily
attributable to the Company's store expansion, renovation and refurbishment
programs, and the investment in information systems, are expected to total
approximately $55,000,000, of which $43,755,000 were incurred for the nine
months ended October 30, 1999. During the first nine months of fiscal 1999,
the Company opened 17 new Ann Taylor stores and 27 Ann Taylor Loft stores,
including 4 locations that were converted from Ann Taylor stores. In
addition, the Company completed the expansion of 7 Ann Taylor stores. The
Company expects to open a total of 18 new Ann Taylor stores and 29 Ann Taylor
Loft stores (including four Ann Taylor stores being converted to Ann Taylor
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<PAGE> 14
Loft stores), and to expand or relocate a total of 8 Ann Taylor stores, in
Fiscal 1999.
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.
During the third quarter of Fiscal 1999, the Board of Directors
authorized a program under which the Company was authorized to purchase up to
$40 million of the Company's common stock and/or its Convertible Debentures
through open market purchases and/or in privately negotiated transactions.
As of October 30, 1999, 700,000 shares of the Compan's common stock had been
repurchased for an aggregate purchase price of $26,816,000. During November
1999, the Company purchased an additional 332,500 shares of its common stock
for an aggregate purchase price of $13,118,000, completing the securities
repurchase program. All of the repurchased shares became treasury shares and
may be used for general corporate and other purposes. No Convertible
Debentures were repurchased.
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
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<PAGE> 15
by the Company, and identification of those systems and equipment requiring
Year 2000 remediation. This analysis was completed during Fiscal 1998.
All material computer software, hardware and equipment in the Company's
sourcing offices located outside of the United States, and U.S. home offices,
distribution center and retail stores that was not Year 2000 compliant has
been remediated or replaced.
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 $2.4
million, of which approximately $1.3 million is being expensed as incurred
(including $965,000 expensed in Fiscal 1998, and $275,000 in the first nine
months of Fiscal 1999), and $1.1 million which was capitalized (including
$855,000 capitalized in Fiscal 1998 and approximately $175,000 in the first
nine months 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 has continued to monitor the Year 2000 readiness of its key
suppliers of goods and services throughout 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
================================================================================
<PAGE> 16
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 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 has developed
contingency plans for its business functions and has analyzed the plans to
ensure their adequacy to address potential disruption to the extent
practicable.
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> 17
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, 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 predict accurately 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; financial or political instability in any of the
countries in which the Company's goods are manufactured; 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 in Part II, Item 1 of this quarterly report on Form
10-Q that materially and adversely affects the Company's financial
condition. 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> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended January 30, 1999 filed with the Securities and Exchange
Commission on March 29, 1999, the Company, Ann Taylor, certain current and
former officers and directors of the Company and Ann Taylor, and Merrill
Lynch & Co. ("Merrill Lynch") and certain of its affiliates, are defendants
in a purported class action lawsuit, originally filed on April 26, 1996, by
certain alleged stockholders of the Company 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 November 9, 1998, the District Court issued an
order granting the defendant's motion to dismiss the amended complaint with
prejudice for its failure to plead fraud with particularity. On or about
December 15, 1998, the plaintiffs filed a notice of appeal to the United
States Court of Appeals for the Second Circuit, seeking review of the
District court's order. Merrill Lynch, its affiliates and the two directors
who previously served on the Company's Board of Directors as representatives
of certain affiliates of Merrill Lynch, have reached a proposed settlement
with the plaintiffs, which provides, among other things, for the
establishment of a settlement fund in the amount of $3,000,000 plus interest,
which is subject to court approval. The action as against these defendants
has been remanded by the Court of Appeals to the District Court for
proceedings in connection with that settlement. The District Court has
certified the class only for the purpose of effecting the proposed
settlement. The settling parties seek the entry of a contribution bar order
that purportedly would bar and enjoin any non-settling defendant from making
any claim for contribution against any of the settling defendants or released
parties. A settlement hearing has been set by the District Court for
December 14, 1999. The appeal as against the remaining defendants, including
the Company, is pending before the Second Circuit Court of Appeals. As a
result, any liability that may arise from this action cannot be predicted at
this time. The Company believes that the amended complaint is without merit
and intends to continue to defend the action vigorously.
================================================================================
<PAGE> 19
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 December 6, 1999
with the Commission on Form 8-K, correcting the unaudited
consolidated balance sheet for AnnTaylor Stores Corporation
as of October 30, 1999 that was included in the Company's
third quarter earnings press release issued to the public
on November 16, 1999, and in the prospectus dated November
23, 1999 that is part of Amendment No. 1 to the
Registration Statement on Form S-3 filed by the Company and
AnnTaylor, Inc. with the Securities and Exchange Commission
on November 23, 1999 (Registration Nos. 333-86955 and
333-86955-01).
================================================================================
<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, 1999 By: /s/ J. Patrick Spainhour
------------------ -------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: December 14, 1999 By: /s/ Barry Erdos
------------------ -------------------------
Barry Erdos
Executive Vice President -
Chief Financial Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SUMMARY 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> 0000874214
<NAME> ANNTAYLOR STORES CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 50,467
<SECURITIES> 0
<RECEIVABLES> 65,822
<ALLOWANCES> 627
<INVENTORY> 165,334
<CURRENT-ASSETS> 322,718
<PP&E> 302,757
<DEPRECIATION> 131,317
<TOTAL-ASSETS> 814,806
<CURRENT-LIABILITIES> 126,352
<BONDS> 111,094
0
0
<COMMON> 214
<OTHER-SE> 560,827
<TOTAL-LIABILITY-AND-EQUITY> 814,806
<SALES> 787,436
<TOTAL-REVENUES> 787,436
<CGS> 380,319
<TOTAL-COSTS> 380,319
<OTHER-EXPENSES> 312,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,450
<INCOME-PRETAX> 88,146
<INCOME-TAX> 38,570
<INCOME-CONTINUING> 49,576
<DISCONTINUED> 0
<EXTRAORDINARY> 962
<CHANGES> 0
<NET-INCOME> 48,614
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.55
</TABLE>
