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 November 2, 1996
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 of 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 29, 1996
------- -----------------
Common Stock, $.0068 par value 25,482,930
=============================================================================
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
November 2, 1996 and October 28, 1995..................... 3
Condensed Consolidated Balance Sheets at
November 2, 1996 and February 3, 1996..................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended November 2, 1996 and
October 28, 1995.......................................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Operations....... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Item 6. Exhibits and Reports on Form 8-K......................... 18
=============================================================================
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANN TAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Nine Months Ended November 2, 1996 and October 28,
1995
(unaudited)
Quarters Ended Nine Months Ended
Nov. 2, Oct. 28, Nov. 2, Oct. 28,
1996 1995 1996 1995
-------- -------- --------- -------
(in thousands except per share amounts)
Net sales........................... $212,670 $178,500 $584,999 $530,501
Cost of sales....................... 115,580 98,362 324,008 304,586
------- ------- ------- -------
Gross profit........................ 97,090 80,138 260,991 225,915
Selling, general and administrative
expenses.......................... 75,838 69,074 216,121 198,758
Employment contract separation
expense........................... 3,500 --- 3,500 ---
Amortization of goodwill............ 2,578 2,377 7,331 7,130
------- ------- ------- -------
Operating income.................... 15,174 8,687 34,039 20,027
Interest expense.................... 6,345 5,402 18,676 14,368
Other expense, net.................. 898 374 474 200
------- ------- ------- -------
Income before income taxes.......... 7,931 2,911 14,889 5,459
Income tax provision................ 4,669 2,225 9,188 5,091
------- ------- ------- -------
Net income....................... $ 3,262 $ 686 $ 5,701 $ 368
======= ======= ======= =======
Net income per share.......... $ .13 $ .03 $ .24 $ .02
======= ======= ======= =======
Weighted average number of
shares and share
equivalents outstanding........ 24,334 23,195 23,597 23,244
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
========================================================================
4
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
November 2, 1996 and February 3, 1996
November 2, February 3,
1996 1996
---------- ----------
(unaudited)
(in thousands)
ASSETS
Current assets
Cash............................................. $ 2,421 $ 1,283
Accounts receivable, net......................... 70,521 70,395
Merchandise inventories.......................... 127,952 102,685
Prepaid expenses and other current assets........ 9,687 12,808
Prepaid tenancy.................................. 7,748 8,099
Deferred income taxes............................ 4,400 3,400
------- -------
Total current assets........................... 222,729 198,670
Property and equipment
Land and building................................ 8,983 8,923
Leasehold improvements........................... 78,426 73,677
Furniture and fixtures........................... 114,722 99,548
Construction in progress......................... 4,383 14,190
------- -------
206,514 196,338
Less accumulated depreciation and amortization... 59,850 42,443
------- -------
Net property and equipment..................... 146,664 153,895
Goodwill, net of accumulated amortization of $74,056
and $66,725, respectively........................ 340,927 313,525
Deferred financing costs, net of accumulated
amortization of $3,158 and $1,960, respectively.. 3,117 3,933
Other assets........................................ 3,785 8,686
------- -------
Total assets................................... $717,222 $678,709
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 39,394 $ 42,909
Accrued expenses................................. 38,333 29,018
Current portion of long-term debt................ 281 40,266
------- -------
Total current liabilities...................... 78,008 112,193
Long-term debt...................................... 163,979 232,192
Deferred income taxes............................... 3,500 1,300
Other liabilities................................... 8,120 7,336
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary, AnnTaylor
Finance Trust, Holding Solely Convertible
Debentures of the Company........................ 96,100 ---
Stockholders' equity
Common stock, $.0068 par value; 40,000,000
shares authorized; 25,494,122 and 23,127,743
shares issued, respectively.................... 173 157
Additional paid-in capital 347,798 311,284
Warrants to acquire 2,814 and 36,605 shares of
common stock, respectively...................... 46 596
Retained earnings................................ 19,706 14,120
Deferred compensation on restricted stock........ (8) (33)
------- -------
367,715 326,124
Less treasury stock, 11,192 and 44,983 shares,
respectively, at cost.......................... (200) (436)
------- -------
Total stockholders' equity.................. 367,515 325,688
------- -------
Total liabilities and stockholders' equity.. $717,222 $678,709
======= =======
See accompanying notes to condensed consolidated financial statements.
==============================================================================
5
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended November 2, 1996 and October 28, 1995
(unaudited)
Nine Months Ended
------------------
Nov. 2, Oct. 28,
1996 1995
------- --------
(in thousands)
Operating activities:
Net income.............................................. $ 5,701 $ 368
Adjustments to reconcile net income to net cash provided
by operating activities:
Employment contract separation expense................ 3,500 ---
Equity earnings in CAT................................ (1,043) (1,064)
Provision for loss on accounts receivable............. 1,315 866
Depreciation and amortization......................... 19,232 14,008
Amortization of goodwill.............................. 7,331 7,130
Amortization of deferred financing costs.............. 1,198 624
Amortization of deferred compensation................. 25 78
Deferred income taxes................................. 3,200 1,200
Loss on disposal of property and equipment............ 641 947
Change in assets and liabilities net of effects from
purchase of ATGS:
(Increase) decrease in:
Receivables....................................... (1,441) (13,444)
Merchandise inventories........................... (19,731) (27,261)
Prepaid expenses and other current assets......... 1,472 (6,621)
Increase (decrease) in:
Accounts payable.................................. (3,515) 25,372
Accrued expenses.................................. 5,576 (2,071)
Other non-current assets and liabilities, net..... 208 1,331
------- -------
Net cash provided by operating activities............... 23,669 1,463
------- -------
Investing activities:
Purchases of property and equipment..................... (9,795) (68,994)
Purchase of ATGS........................................ (356) ---
------- -------
Net cash used by investing activities................... (10,151) (68,994)
------- -------
Financing activities:
Net borrowings (repayments) under revolving
credit agreement...................................... (94,000) 39,000
Payments on mortgage.................................... (198) ---
Net proceeds from issuance of Preferred Securities...... 95,985 ---
Exercise of stock options............................... 215 388
Net (repayments) borrowings under receivables facility.. (14,000) 4,000
Payments of financing costs............................. (382) (1,643)
Increase in bank overdrafts............................. --- 486
Proceeds from term loan................................. --- 25,000
------- -------
Net cash (used by) provided by financing activities..... (12,380) 67,231
------- -------
Net increase (decrease) in cash.......................... 1,138 (300)
Cash, beginning of period................................ 1,283 1,551
------- -------
Cash, end of period...................................... $ 2,421 $ 1,251
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest................ $ 14,998 $ 10,398
======= =======
Cash paid during the period for income taxes............ $ 4,803 $ 7,549
======= =======
See accompanying notes to condensed consolidated financial statements.
=============================================================================
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 1996 interim period shown in
this report are not necessarily indicative of results to be
expected for the fiscal year.
The February 3, 1996 condensed consolidated balance sheet
amounts have been derived from the previously audited
consolidated balance sheet of AnnTaylor Stores Corporation (the
"Company").
Certain fiscal 1995 amounts have been reclassified to conform
to the 1996 presentation.
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 1995 Annual Report to Stockholders.
2. Income Per Share
----------------
Net income per share is calculated by dividing net income by
the total of the weighted average number of common shares and
common share equivalents outstanding, assuming the exercise of
outstanding warrants and the dilutive effect of outstanding stock
options, computed in accordance with the treasury stock method.
The number of shares used in the calculation was as follows:
Quarters Ended Nine Months Ended
---------------- ------------------
Nov. 2, Oct. 28, Nov. 2, Oct. 28,
1996 1995 1996 1995
------- ------- ------- -------
(in thousands)
Common shares........... 24,229 23,079 23,470 23,062
Warrants................ 17 37 28 47
Stock options........... 88 79 99 135
------ ------ ------ ------
24,334 23,195 23,597 23,244
=============================================================================
7
Fully diluted income per share, assuming the conversion into
common stock of the 8-1/2% Convertible Trust Originated Preferred
Securities described below, is not presented for the quarter and
nine months ended November 2, 1996 due to the anti-dilutive
effect of the assumed conversion.
3. Long-Term Debt
--------------
The following summarizes long-term debt outstanding at
November 2, 1996.
(in thousands)
Revolving Credit Facility............ $ 7,000
Term Loan............................ 24,500
8-3/4% Notes......................... 100,000
Receivables Facility................. 26,000
Mortgage............................. 6,760
-------
Total debt......................... 164,260
Less current portion................. 281
-------
Total long-term debt............... $163,979
=======
In November 1996, the maturity date of the AnnTaylor Funding,
Inc. receivables financing facility was extended from January 27,
1997 to May 4, 1998. All other aspects of this financing
agreement remain the same.
In connection with the CAT/Cygne Transaction discussed in Note
4, the HongKong and Shanghai Banking Corporation allowed
AnnTaylor Global Sourcing, Inc. ("ATGS", formerly known as CAT US
Inc. ("CAT") and now a wholly owned subsidiary of AnnTaylor, Inc.
("Ann Taylor")), to continue CAT's $40,000,000 credit facility.
The maximum amount that may be borrowed under this credit
facility is $8,000,000; the balance of $32,000,000 can only be
used for letters of credit. Such credit facility matures on July
29, 1997 and contains financial and other covenants. As of
November 2, 1996, there was no balance outstanding under ATGS's
credit agreement.
On April 25, 1996, the Company completed the sale (the
"Initial Sale"), in a private placement, of $87,500,000 8-1/2%
Convertible Trust Originated Preferred Securities ("Preferred
Securities") issued by its financing vehicle, AnnTaylor Finance
Trust, a Delaware business trust (the "Trust"). On May 17, 1996,
the Trust, a wholly-owned subsidiary of the Company, issued an
additional $13,125,000 of Preferred Securities pursuant to the
exercise of an over-allotment option (the "Over-allotment Sale")
granted to the placement agents in connection with the Initial
Sale. The Preferred Securities have a liquidation preference of
$50 per security ($100,625,000 in the aggregate) and are
convertible at the option of the holders thereof into the
Company's common stock at a conversion rate of 2.545 shares of
common stock for each Preferred Security (equivalent to $19.65
per share of common stock, which represented a 20% premium to the
$16.375 closing price of the common stock on the New York Stock
Exchange at the date of the execution of the purchase agreement
relating to the sale of the Preferred Securities). The sole
======================================================================
8
assets of the Trust are $103,700,000 of 8-1/2% Convertible
Subordinated Debentures of the Company maturing on April 15,
2016. A total of 2,012,500 Preferred Securities were issued, and
are convertible into an aggregate of 5,121,812 shares of common
stock.
The sale of the Preferred Securities enabled the Company to
pay down $94,000,000 of outstanding borrowings under its
revolving credit facility, without reduction of the commitment
thereunder.
4. CAT/Cygne Transaction
---------------------
In Fiscal 1995, the Company purchased approximately 16% of its
merchandise directly from Cygne Designs, Inc. ("Cygne") and an
additional 38% of its merchandise through the Company's direct
sourcing joint venture with Cygne known as CAT. On September 20,
1996 (the "Effective Date"), pursuant to the Stock and Asset
Purchase Agreement dated as of June 7, 1996, by and among the
Company, Ann Taylor, Cygne and Cygne Group F.E. Limited (as
amended, the "Purchase Agreement"), Ann Taylor acquired the
entire interest of Cygne in CAT and certain of the assets (the
"Assets") of the Ann Taylor Woven Division of Cygne (the
"Division") that were used for sourcing merchandise for
Ann Taylor (the "CAT/Cygne Transaction"). As a result of
the CAT/Cygne Transaction, CAT became an indirect wholly owned
subsidiary of the Company and will perform all of Ann Taylor's
direct sourcing functions, including those previously provided
by the Division, under the name Ann Taylor Global Sourcing.
For financial reporting purposes, the transaction has been
accounted for as of the Effective Date under the purchase
method of accounting in accordance with Accounting Principles
Board Opinion No. 16, Accounting for Business Combinations.
Pursuant to the Purchase Agreement, at the closing the Company
and Ann Taylor delivered to Cygne, as the purchase price for
Cygne's interest in CAT and the Assets (i) 2,348,145
shares of common stock of the Company having an aggregate value,
as of the Effective Date, of $36,000,000, (ii) $3,200,000 in cash
as payment for inventory and fixed assets and (iii) approximately
$6,500,000 in cash in settlement of open accounts payable by Ann
Taylor to Cygne for merchandise delivered by Cygne prior to the
closing. The Company also assumed certain liabilities related to
the operations of the Division. The purchase price is subject to
post-closing adjustments based upon final determination of the
value of certain of the assets purchased and liabilities assumed.
As of November 2, 1996, certain post-closing adjustments are
expected to reduce the net cash paid to approximately $400,000.
The total purchase price to the Company of the CAT/Cygne
Transaction has been allocated to the tangible and intangible
assets and liabilities of CAT and the Division that were
acquired, based on preliminary estimates of their respective fair
values. Accordingly, the allocation of the purchase price
reflected in the accompanying Condensed Consolidated Balance
======================================================================
9
Sheets may be adjusted upon final determination of the
purchase price adjustments. Management does not believe the
subsequent changes, if any, will be significant. The excess
of the purchase price over the fair value of the net assets
acquired was recorded as goodwill and is being amortized
on a straight-line basis over 25 years.
In connection with the CAT/Cygne Transaction, Ann Taylor
entered into two three-year consulting agreements with Cygne for
the services of Mr. Bernard Manuel, Chairman and Chief Executive
Officer of Cygne, and Mr. Irving Benson, President of Cygne. In
November 1996, Mr. Benson resigned from his employment with Cygne
and, in accordance with the terms of the consulting agreement
relating to Mr. Benson's services, Cygne's obligations and rights
under the consulting agreement were automatically assigned to Mr.
Benson. In addition, Mr. Dwight Meyer, formerly president of
CAT, has entered into a three-year employment agreement with Ann
Taylor pursuant to which he will serve as Executive Vice
President - Sourcing of Ann Taylor and Ann Taylor Global
Sourcing.
5. Supplementary Data
------------------
The following unaudited pro forma condensed consolidated data
for the nine months ended November 2, 1996 and October 28,
1995 have been presented to reflect the CAT/Cygne Transaction
as if it had occurred at the beginning of each such period:
Nine Months Ended Nine Months Ended
November 2, 1996 October 28, 1995
-------------------- ------------------
Actual Pro Forma Actual Pro Forma
-------- --------- -------- --------
(in thousands except per share amounts)
Net sales................. $584,999 $584,999 $530,501 $530,501
Net income................ $ 5,701 $ 8,629 $ 368 $ 3,178
Net income per share...... $ .24 $ .34 $ .02 $ .12
Weighted average shares... 23,597 25,567 23,244 25,592
The pro forma data set forth above does not purport to be
indicative of the results that actually would have occurred if
the CAT/Cygne Transaction had occurred at the beginning of the
periods presented or of results which may occur in the future.
======================================================================
10
6. Supplemental Schedule of Noncash Investing and Financing Activities:
--------------------------------------------------------------------
A summary of the noncash activity which occurred in
conjunction with the CAT/Cygne Transaction is as follows:
(in thousands)
Fair value of assets acquired................ $ 8,333
Excess of purchase price over
the fair value of net assets
acquired.................................. 34,734
Ann Taylor's previous investment in CAT..... (6,711)
Issuance of ATSC common stock............... (36,000)
--------
Cash paid................................... $ 356
========
======================================================================
11
Item 2. Management's Discussion and Analysis of Operations
--------------------------------------------------
Results of Operations
- ---------------------
Quarters Ended Nine Months Ended
----------------- ------------------
Nov. 2, Oct. 28, Nov. 2, Oct.28,
1996 1995 1996 1995
------- ------- ------- -------
Number of Stores:
Open at beginning of period....... 306 289 306 262
Opened during period............... 4 14 9 43
Expanded during period*............ 6 12 7 29
Closed during period............... 1 --- 6 2
Open at end of period.............. 309 303 309 303
Type of Stores Open at End of Period:
AnnTaylor Stores................... 260 256
AnnTaylor Factory Stores........ 23 23
AnnTaylor Loft stores.............. 17 15
AnnTaylor Studio stores............ 9 9
-------------
* Expanded stores are excluded from comparable store sales for
the first year following expansion.
Quarter Ended November 2, 1996 Compared to Quarter Ended October 28, 1995
- -------------------------------------------------------------------------
The Company's net sales in the third quarter of 1996 increased
to $212,670,000 from $178,500,000 in the third quarter of 1995,
an increase of $34,170,000 or 19.1%. The increase in net sales
was primarily attributable to sales by the fourteen new stores
opened and the eight existing stores expanded since the end of
the third quarter of 1995, and to a 12.6% increase in comparable
store sales in the third quarter of 1996, partially offset by the
closing of eight stores since the end of the third quarter of
1995. Management believes that the increase in comparable store
sales was due primarily to favorable customer reaction to the
Company's Fall merchandise assortment and inventory levels
sufficient to support sales momentum during the period.
Gross profit as a percentage of net sales increased to 45.7%
in the third quarter of 1996 from 44.9% in the third quarter of
1995. This increase was attributable to decreased cost of goods
sold as a percentage of net sales, primarily resulting from lower
markdowns as a percentage of sales and a higher initial markup.
Selling, general and administrative expenses were $75,838,000,
or 35.7% of net sales in the third quarter of 1996, compared to
$69,074,000, or 38.7% of net sales in the third quarter of 1995.
The increase in expense was primarily attributable to increased
retail square footage, which at quarter end was 5.8% higher than
at the end of the third quarter of 1995. The operating expense
rate as a percentage of sales decreased primarily as a result of
increased leverage on fixed expenses as a result of positive
comparable store sales.
========================================================================
12
In connection with the resignation in August of Sally Frame
Kasaks as Chairman and Chief Executive Officer of the Company, a
one-time pre-tax charge of $3,500,000 ($1,958,000 net of related
tax benefit, or $0.08 per share) was recorded relating to the
estimated costs of the Company's obligations under Ms. Kasaks'
employment contract with the Company.
As a result of the foregoing, the Company had operating income
of $15,174,000, or 7.1% of net sales, in the third quarter of
1996, compared to operating income of $8,687,000, or 4.9% of net
sales, in the third quarter of 1995. As described above,
operating income was reduced by $3,500,000, or 1.6% of net sales,
related to the estimated costs of the Company's obligations under
Ms. Kasaks' employment contract. Amortization of goodwill was
$2,578,000 in the third quarter of 1996 compared to $2,377,000 in
the third quarter of 1995. Operating income, without giving
effect to such goodwill amortization in either year, was
$17,752,000, or 8.3% of net sales, in the 1996 period and
$11,064,000, or 6.2% of net sales, in the 1995 period.
Interest expense was $6,345,000 in the third quarter of 1996
and $5,402,000 in the third quarter of 1995. The increase in
interest expense is attributable to higher interest rates
applicable to the Company's debt obligations and higher
outstanding indebtedness in 1996.
The income tax provision was $4,669,000, or 58.9% of income
before income taxes, in the third quarter of 1996 compared to
$2,225,000, or 76.4% of income before income taxes, in the third
quarter of 1995. The effective income tax rate for both periods
differed from 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 $3,262,000, or 1.5% of net sales, for the third quarter
of 1996 compared to $686,000, or 0.4% of net sales, for the third
quarter of 1995.
AnnTaylor Stores Corporation conducts no business other than
the management of Ann Taylor.
Nine Months Ended November 2, 1996 Compared to Nine Months Ended
- ----------------------------------------------------------------
October 28, 1995
- -----------------
The Company's net sales in the first nine months of 1996
increased to $584,999,000 from $530,501,000 in the first nine
months of 1995, an increase of $54,498,000 or 10.3%. The
increase in net sales was primarily attributable to the fourteen
new stores opened and the eight existing stores expanded since
the end of the third quarter of 1995, partially offset by the
====================================================================
13
closing of eight stores since the end of the third quarter of 1995
and by a 0.5% decrease in comparable store sales in the first nine
months of 1996. Management believes that the decrease in comparable
store sales was due primarily to the Company's lower inventory
position during the period; during the first nine months of 1996,
inventories were on average approximately 15% lower on a per
square foot basis compared to the same period of the prior fiscal
year. This inventory comparison excludes raw materials, work-in-
progress and finished goods acquired September 1996 in connection
with the Company's acquisition of CAT and the Assets of the
Division.
Gross profit as a percentage of net sales increased to 44.6%
in the first nine months of 1996 from 42.6% in the first nine
months of 1995. This increase was attributable to decreased cost
of goods sold as a percentage of net sales, primarily resulting
from lower markdowns.
Selling, general and administrative expenses were
$216,121,000, or 36.9% of net sales in the first nine months of
1996, compared to $198,758,000, or 37.5% of net sales in the
first nine months of 1995. The increase in expense was primarily
attributable to increased retail square footage, which at the end
of the nine-month period was 5.8% higher than at the end of the
same nine-month period in 1995. The operating expense rate as a
percentage of sales decreased primarily as a result of increased
leverage on fixed expenses and the suspension of the Company's
mail order catalog, partially offset by higher expense rates in
new retail square footage.
In connection with the resignation in August of Sally Frame
Kasaks as Chairman and Chief Executive Officer of the Company, a
one-time pre-tax charge of $3,500,000 ($1,958,000 net of related
tax benefit, or $0.08 per share) was recorded relating to the
estimated costs of the Company's obligations under Ms. Kasaks'
employment contract with the Company.
As a result of the foregoing, operating income increased to
$34,039,000, or 5.8% of net sales, in the first nine months of
1996, from $20,027,000, or 3.8% of net sales, in the first nine
months of 1995. As described above, operating income was reduced
by $3,500,000, or 0.6% of net sales, related to the estimated
costs of the Company's obligations under Ms. Kasaks' employment
contract. Amortization of goodwill was $7,331,000 in the first
nine months of 1996 compared to $7,130,000 in the first nine
months of 1995. Operating income, without giving effect to such
goodwill amortization in either year, was $41,370,000, or 7.1% of
net sales, in the 1996 period and $27,157,000, or 5.1% of net
sales, in the 1995 period.
===================================================================
14
Interest expense was $18,676,000 in the first nine months of
1996 and $14,368,000 in the first nine months of 1995. The
increase in interest expense is primarily attributable to higher
interest rates applicable to the Company's debt obligations and
higher outstanding indebtedness in 1996.
The income tax provision was $9,188,000, or 61.7% of income
before income taxes in the 1996 period, compared to $5,091,000,
or 93.3% of income before income taxes in the 1995 period. 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 $5,701,000, or 1.0% of net sales, for the first nine
months of 1996 compared to net income of $368,000, or 0.1% of net
sales, for the first nine months of 1995.
Financial Condition
- --------------------
For the first nine months of 1996, net cash provided by
operating activities totaled $23,669,000, primarily as a result
of net income and non-cash operating expenses, partially offset
by an increase in merchandise inventories. Cash used for
investing activities during the first nine months of 1996
amounted to $9,795,000 for the purchase of property and equipment
and $356,000 for the CAT/Cygne Transaction. Cash used by
financing activities during the first nine months of 1996
amounted to $12,380,000, primarily as a result of repayments of
amounts outstanding under the revolving credit agreement and the
receivables facility, partially offset by net proceeds from the
issuance of the Preferred Securities.
Accounts receivable increased to $70,521,000 at November 2,
1996 from $70,395,000 at February 3, 1996, an increase of
$126,000 or 0.2%. This increase was primarily attributable to
Ann Taylor credit card receivables which increased approximately
$3,487,000 and third-party credit card receivables which
increased approximately $2,484,000, partially offset by lower
construction allowance receivables outstanding, which decreased
$4,324,000.
Merchandise inventories were $127,952,000 at November 2, 1996,
compared to inventories of $102,685,000 at February 3, 1996.
Merchandise inventories at November 2, 1996 included
approximately $7,500,000 of raw materials, work-in-progress and
finished goods of ATGS. Total square footage increased to
1,698,000 square feet at November 2, 1996 from 1,651,000 square
feet at February 3, 1996.
===================================================================
15
At November 2, 1996, borrowings of $7,000,000 were outstanding
under the revolving credit agreement and $26,000,000 were
outstanding under AnnTaylor Funding, Inc.'s receivables facility.
Ann Taylor can borrow up to $122,000,000 under the revolving
credit agreement and AnnTaylor Funding, Inc. can borrow up to
$40,000,000 under the receivables facility, depending upon its
accounts receivable balance. In November 1996, the maturity date
of the receivables facility was extended to May 4, 1998; all
other aspects of the receivables agreement remain the same.
Additionally, there is $12,000,000 available under ATGS's credit
agreement of which $8,000,000 can be borrowed and the remainder
used only for letters of credit.
On April 25, 1996, the Company completed the sale of
$87,500,000 of Preferred Securities issued by its financing
vehicle, AnnTaylor Finance Trust. On May 17, 1996, the Trust
issued an additional $13,125,000 of Preferred Securities pursuant
to the exercise of an over-allotment option granted to the
placement agents in connection with the Initial Sale. The
Preferred Securities have a liquidation preference of $50 per
security and are convertible at the option of the holders thereof
into shares of common stock of the Company at a conversion rate
of 2.545 shares of common stock for each Preferred Security. A
total of 2,012,500 Preferred Securities were issued, and are
convertible into an aggregate of 5,121,812 shares of common
stock, representing approximately 22% of the Company's
outstanding common stock as of May 31, 1996. The sale of the
Preferred Securities enabled the Company to pay down $94,000,000
of outstanding borrowings under its revolving credit facility,
without reduction of the commitment thereunder.
The Company's capital expenditures, which are primarily
attributable to the Company's store expansion, renovation and
refurbishment programs, totaled $9,795,000 in the first nine
months of 1996. The Company currently expects to open a total of
nine new Ann Taylor Stores, one Ann Taylor Loft Store and one Ann
Taylor Factory Store, and to expand seven existing Ann Taylor
Stores, in fiscal 1996. Total capital expenditures for 1996,
including capital expenditures for this store expansion program,
are expected to be approximately $16,000,000.
Dividends and distributions from Ann Taylor to the Company are
restricted by the Bank Credit Agreement, the Receivables Facility
and the Indenture for the 8-1/2% Notes (the "Indenture"). 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 Bank Credit
Agreement. 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.
====================================================================
16
Distributions on the Preferred Securities accrue from the date
of the original issuance of the Preferred Securities and are
payable at the annual rate of 8-1/2% of the liquidation amount of
$50 per Preferred Security. Subject to certain distribution
deferral provisions, distributions on the Preferred Securities
are payable quarterly in arrears on each January 15, April 15,
July 15 and October 15, commencing July 15, 1996. Payment of
distributions on the Preferred Securities by the Trust is
dependent upon receipt of payment of interest by the Company on
its 8-1/2% Convertible Subordinated Debentures held by the Trust.
The Company's ability to make such interest payments is dependent
upon its receipt of dividends or other distributions from Ann
Taylor. As indicated above, the payment of dividends and
distributions from Ann Taylor to the Company is subject to
certain restrictions contained in the Bank Credit Agreement and
the Indenture. The Company currently believes that Ann Taylor
will be able to make such distributions to the Company in the
foreseeable future within the limitations set forth in the
Indenture relating to the 8-3/4% Notes. Provided that Ann Taylor
is not then in default under the Bank Credit Agreement at the
time of any such distribution, the lenders under the Bank Credit
Agreement have consented to quarterly distributions by Ann Taylor
to the Company equal to the amount of interest due on
the Convertible Subordinated Debentures.
In order to finance its operations and capital requirements,
the Company expects to use internally generated funds, trade
credit, and funds available under the revolving credit facility
and the receivables facility. The Company believes that cash
flow from operations and funds available under the revolving
credit facility and the receivables facility are sufficient to
enable it to meet its ongoing cash needs for the foreseeable
future.
Statement Regarding Forward Looking Disclosures
- ------------------------------------------------
Certain 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. These forward looking statements involve certain risks
and uncertainties, and no assurance can be given that any of
such matters will be realized. Factors that may cause actual
results to differ materially from those contemplated by such
forward looking statements include, among others, the following
======================================================================
17
possibilities: competitive pressure in the retail apparel industry
increases significantly; demand for merchandise offered by
the Company declines; costs or difficulties related to
the assimilation of the sourcing functions and employees
acquired in connection with the CAT/Cygne Transaction are greater
than expected; the Company's substantial degree of leverage
hinders its ability to obtain additional financing, reduces funds
available for operations or hinders its ability to adjust rapidly
to changing market conditions; general economic conditions are
less favorable than expected; the regulatory environment changes
significantly, or the rate of import duties or export quotas
increases significantly with respect to the Company's merchandise;
the Company's financial condition is materially and adversely affected
by the outcome of certain litigation described in the Company's
Current Report on Form 8-K dated May 2, 1996.
==========================================================================
18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
As reported in the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 3, 1996, a Special Meeting of
the Company's stockholders was held on August 15, 1996 to approve
and ratify the financing transaction pursuant to which the
$100,625,000 8-1/2% Convertible Trust Originated Preferred
Securities were issued (the "Financing Transaction"). At the
Special Meeting, 15,200,945 shares were voted in favor of
approval and ratification of the Financing Transaction, 95,914
shares were voted against and 66,747 shares abstained from voting
on the transaction. Accordingly, the Financing Transaction was
approved and ratified by the stockholders of the Company.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits:
10.3 Employment Agreement dated November 25, 1996
between the Company and Patricia DeRosa.
10.4 Employment Agreement dated September 20,
1996 between Ann Taylor and Dwight F. Meyer.
10.5 First Amendment to the Amended and Restated
Receivables Financing Agreement, dated as of
October 31, 1995, among AnnTaylor Funding,
Inc., Ann Taylor, Market Street Capital
Corp. and PNC Bank, National Association.
10.6 Amended and Restated Credit Agreement, dated
as of September 20, 1996, between AnnTaylor
Global Sourcing, Inc. and the HongKong and
Shanghai Banking Corporation Limited.
10.7 Promissory Note dated September 20, 1996
from AnnTaylor Global Sourcing, Inc. to the
HongKong and Shanghai Banking Corporation
Limited, New York Branch.
========================================================================
19
10.8 Amended and Restated Security Agreement,
dated as of September 20, 1996, between
AnnTaylor Global Sourcing, Inc. and the
HongKong and Shanghai Banking Corporation
Limited.
10.9 Letter of Negative Pledge, dated as of
September 20, 1996, from AnnTaylor Global
Sourcing, Inc. to the HongKong and Shanghai
Banking Corporation Limited.
(b) Reports on Form 8-K:
The Company filed a report dated August 23, 1996
with the Commission on Form 8-K on August 30, 1996
with respect to (i) the resignation of Sally Frame
Kasaks as the Company's Chairman and Chief
Executive Officer and the promotion of J. Patrick
Spainhour from President and Chief Operating
Officer to Chairman and Chief Executive Officer,
(ii) the amendment of the Stock and Asset Purchase
Agreement among the Company, Ann Taylor, Cygne and
Cygne Group (F.E.) Limited providing for the
acquisition by Ann Taylor of Cygne's interest in
CAT and the assets of the Division, and (iii)
preliminary unaudited pro forma financial
information for the Company, CAT U.S., Inc., C.A.T.
(Far East) Limited and the Division on a combined
basis for the six months ended August 3, 1996.
The Company filed a report dated September 20, 1996
with the Commission on Form 8-K on September 26,
1996 with respect to the consummation of the
acquisition by the Company, through its wholly
owned subsidiary Ann Taylor, of Cygne's interest in
CAT and the Assets of the Division.
=======================================================================
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 17, 1996 By: /s/ Paul E. Francis
------------------ -------------------------
Paul E. Francis
Executive Vice President-
Finance and Administration
(Chief Financial Officer)
Date: December 17, 1996 By: /s/ Walter J. Parks
----------------- --------------------------
Walter J. Parks
Senior Vice President - Finance
(Principal Accounting Officer)