UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10738
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 May 28, 1999
----- ------------
Common Stock, $.0068 par value 26,327,838
===============================================================================
2
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the Quarters Ended May 1, 1999
and May 2, 1998..................................... 3
Condensed Consolidated Balance Sheets at
May 1, 1999 and January 30, 1999................... 4
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended May 1, 1999 and
May 2, 1998........................................ 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .. 17
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
==============================================================================
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended May 1, 1999 and May 2, 1998
(unaudited)
Quarters Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
(in thousands, except per
(share amounts)
Net sales............................................$ 249,400 $ 198,170
Cost of sales........................................ 118,063 96,836
------- ------
Gross profit......................................... 131,337 101,334
Selling, general and administrative expenses......... 97,156 81,129
Amortization of goodwill............................. 2,760 2,760
------- ------
Operating income..................................... 31,421 17,445
Interest expense..................................... 4,321 4,727
Other expense, net................................... 668 180
------- ------
Income before income taxes........................... 26,432 12,538
Income tax provision................................. 11,677 6,119
------- ------
Net income........................................$ 14,755 $ 6,419
======= ======
Basic earnings per share.............................$ 0.56 $ 0.25
======= ======
Diluted earnings per share...........................$ 0.51 $ 0.25
======= ======
See accompanying notes to condensed consolidated financial statements.
==============================================================================
4
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
May 1, 1999 and January 30, 1999
May 1, January 30,
1999 1999
---- ----
(unaudited)
(in thousands)
ASSETS
Current assets
Cash and cash equivalents........................ $ 65,473 $ 67,031
Accounts receivable, net......................... 73,458 71,049
Merchandise inventories.......................... 136,353 136,748
Prepaid expenses and other current assets........ 24,965 23,637
-------- --------
Total current assets........................... 300,249 298,465
Property and equipment, net.......................... 156,701 151,785
Goodwill, net ....................................... 316,939 319,699
Deferred financing costs, net ....................... 2,291 2,627
Other assets......................................... 2,649 2,841
-------- --------
Total assets................................... $778,829 $775,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 48,020 $ 65,419
Accrued salaries and bonus....................... 11,113 17,132
Accrued tenancy.................................. 8,113 8,465
Accrued expenses................................. 43,076 37,535
Current portion of long-term debt................ 1,231 1,206
-------- --------
Total current liabilities...................... 111,553 129,757
Long-term debt....................................... 103,632 103,951
Other liabilities.................................... 12,380 12,386
Commitments and contingencies
Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities of
Subsidiary, AnnTaylor Finance Trust,
Holding Solely Convertible Debentures............ 96,682 96,624
Stockholders' equity
Common stock, $.0068 par value; 40,000,000
shares authorized; 26,323,237 and 26,035,301
shares issued, respectively...................... 179 177
Additional paid-in capital....................... 369,032 359,805
Warrants to acquire 2,520 and 2,814 shares
of common stock, respectively................ 41 46
Retained earnings................................ 87,992 73,295
Deferred compensation on restricted stock........ (2,257) (272)
-------- --------
454,987 433,051
Treasury stock, 18,577 and 17,201 shares,
respectively, at cost........................ (405) (352)
-------- --------
Total stockholders' equity..................... 454,582 432,699
-------- --------
Total liabilities and stockholders' equity..... $778,829 $775,417
======== ========
See accompanying notes to condensed consolidated financial statements.
=============================================================================
5
ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended May 1, 1999 and May 2, 1998
(unaudited)
Quarters Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
(in thousands)
Operating activities:
Net income................................................$14,755 $ 6,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loss on accounts receivable.............. 291 331
Depreciation and amortization.......................... 7,569 7,053
Amortization of goodwill............................... 2,760 2,760
Amortization of deferred compensation.................. 161 133
Non-cash interest...................................... 336 286
Loss on disposal of property and equipment............. 653 201
(Increase) decrease in:
Receivables.......................................... (2,700) (5,717)
Merchandise inventories.............................. 395 (12,954)
Prepaid expenses and other current assets............ (1,328) 373
Increase (decrease) in:
Accounts payable.....................................(17,399) 8,346
Accrued liabilities.................................. (830) 5,832
Other non-current assets and liabilities, net........ 185 456
------- -------
Net cash provided by operating activities................. 4,848 13,519
Investing activities:
Purchases of property and equipment.......................(13,137) (7,891)
------- -------
Net cash used by investing activities.....................(13,137) (7,891)
Financing activities:
Payments on mortgage...................................... (294) (272)
Proceeds from exercise of stock options................... 7,030 ---
Proceeds from exercise of warrants........................ (5) ---
Repurchase of restricted stock............................ --- (19)
------- -------
Net cash provided by (used by) financing activities....... 6,731 (291)
------- -------
Net (decrease) increase in cash............................. (1,558) 5,337
Cash and cash equivalents, beginning of period.............. 67,031 31,369
------- -------
Cash and cash equivalents, end of period....................$65,473 $36,706
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest..................$ 2,503 $ 2,389
======= =======
Cash paid during the period for income taxes..............$ 744 $ 2,920
======= =======
See accompanying notes to condensed consolidated financial statements.
===============================================================================
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").
Certain fiscal 1998 amounts have been reclassified to conform to the 1999
presentation.
Detailed footnote information is not included for the quarters ended May 1,
1999 and May 2, 1998. The financial information set forth herein should be read
in conjunction with the Notes to the Company's Consolidated Financial Statements
contained in the 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 preferred securities. Basic and diluted
earnings per share calculations follow:
Three Months Ended
-------------------------------------------------
May 1, 1999 May 2, 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 $ 14,755 26,187 $0.56 $ 6,419 25,644 $0.25
===== =====
EFFECT OF DILUTIVE
SECURITIES
- ------------------
Warrants --- 3 --- 3
Stock options --- 333 --- 36
Preferred securities 1,297 5,122 --- ---
-------- ----- ------- ------
DILUTED EARNINGS PER SHARE
- --------------------------
Income available to common
stockholders $ 16,052 31,645 $0.51 $ 6,419 25,683 $0.25
======== ====== ===== ======= ====== =====
================================================================================
7
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. NET INCOME PER SHARE (CONTINUED)
- ------------------------------------
Conversion of the preferred securities into common stock is not included in
the computation of diluted earnings per share for the quarter ended May 2, 1998
due to the antidilutive effect of the conversion as of that date.
3. LONG-TERM DEBT
- ------------------
The following summarizes long-term debt outstanding at May 1, 1999:
(in thousands)
8-3/4% Notes............................... $ 100,000
Mortgage................................... 4,863
-------
Total debt ............................. 104,863
Less current portion....................... 1,231
-------
Total long-term debt.................... $ 103,632
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.
================================================================================
8
ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. SUBSEQUENT EVENTS
- -----------------------
On May 20, 1999, the Company announced that it will be redeeming all of its
outstanding 8-1/2% Convertible Subordinated Debentures due 2016 (the
"Debentures"). The Debentures are held by AnnTaylor Finance Trust, a Delaware
business trust (the "Trust"). As a result of this redemption, AnnTaylor Finance
Trust issued a notice on May 27, 1999 calling for the redemption of all of the
Trust's outstanding 8 1/2% Convertible Originated Preferred Securities (the
"Preferred Securities") and 8 1/2% Convertible Common Securities (together with
the Preferred Securities, the "Trust Securities"). The redemption date for the
Debentures and the Trust Securities will be June 29, 1999.
The Trust Securities were issued in April 1996 and are convertible into
shares of Company common stock at a conversion price of $19.65 per share of
common stock, or 2.545 shares of common stock per $50 liquidation amount of
Trust Security. Holders of Trust Securities will have the right to convert the
Trust Securities into shares of Company common stock on or before June 28, 1999.
Holders of Trust Securities that are not tendered for conversion by that date
will receive 105.95% of the liquidation amount of the Trust Securities redeemed,
plus accrued distributions. The Trust Securities are convertible into an
aggregate of 5,121,812 shares of Company common stock representing approximately
16% of the Company's outstanding common stock as of May 1, 1999. Because the
market price of the Company's common stock has been significantly higher than
the conversion price, the Company expects that most of the holders of the
preferred securities will exercise their right to convert the preferred
securities to shares of Company common stock.
The Company's 1999 Annual Meeting of Stockholders was held on May 18, 1999.
At that meeting, an amendment of the Company's Restated Certificate of
Incorporation, increasing the number of shares of common stock the Corporation
is authorized to issue from 40,000,000 to 120,000,000, was approved.
================================================================================
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
- ---------------------
Quarters Ended
------------------------
May 1, 1999 May 2, 1998
----------- -----------
Number of Stores:
Open at beginning of period....................... 365 324
Opened during period.............................. 11 16
Expanded or remodeled during period*.............. --- 2
Closed during period.............................. 5 1
Open at end of period............................. 371 339
Type of Stores Open at End of Period:
Ann Taylor stores................................. 309 291
Ann Taylor Loft stores............................ 50 34
Ann Taylor Factory Stores......................... 12 14
--------------
* Expanded stores are excluded from comparable store sales for the first
year following expansion.
Quarter Ended May 1, 1999 Compared to Quarter Ended May 2, 1998
- ---------------------------------------------------------------
The Company's net sales in the first quarter of 1999 increased to
$249,400,000 from $198,170,000 in the first quarter of 1998, an increase of
$51,230,000 or 25.9%. Comparable store sales for the first quarter of 1999
increased 16.9%, compared to a decrease of 5.5% in the first quarter of 1998.
Management believes that the sales increase was primarily attributable to the
opening of new stores and a net increase in comparable store sales as a result
of favorable customer reaction to the Company's product offerings and
merchandise assortment.
Gross profit as a percentage of net sales increased to 52.7% in the first
quarter of 1999 from 51.1% in the first quarter of 1998. This increase in gross
margin primarily reflects a greater percentage of merchandise being sold at full
price and higher margins achieved on those sales, offset in part by a higher
markdown rate on goods that were sold below full price, compared to the first
quarter of 1998.
Selling, general and administrative expenses represented 39.0% of net sales
in the first quarter of 1999, compared to 40.9% of net sales in the first
quarter of 1998. The decrease in selling, general, and administrative expenses
as a percentage of net sales was primarily attributable to increased leverage on
fixed expenses resulting from increased comparable store sales, partially offset
by an increase in the provision for management performance bonus expense.
==============================================================================
10
As a result of the foregoing, the Company had operating income of
$31,421,000, or 12.6% of net sales, in the first quarter of 1999, compared to
operating income of $17,445,000, or 8.8% of net sales, in the first quarter of
1998. Amortization of goodwill was $2,760,000 in both the first quarter of 1999
and the first quarter of 1998. Operating income, without giving effect to
goodwill amortization in either year, was $34,181,000, or 13.7% of net sales, in
the first quarter of 1999 and $20,205,000, or 10.2% of net sales, in the first
quarter of 1998.
Interest expense was $4,321,000 in the first quarter of 1999 and $4,727,000
in the first quarter of 1998. The decrease in interest expense is attributable
to greater interest income earned on cash on hand.
The income tax provision was $11,677,000, or 44.2% of income before income
taxes, in the first quarter of 1999 compared to $6,119,000, or 48.8% of income
before income taxes, in the first quarter of 1998. The effective income tax rate
for both periods was higher than the statutory rate primarily as a result of
non-deductible goodwill amortization.
As a result of the foregoing factors, the Company had net income of
$14,755,000, or 5.9% of net sales, for the first quarter of 1999, compared to
net income of $6,419,000, or 3.2% of net sales, for the first quarter of 1998.
AnnTaylor Stores Corporation conducts no business other than the management
of Ann Taylor.
Financial Condition
- -------------------
For the first quarter of 1999, net cash provided by operating activities
totaled $4,848,000, primarily as a result of earnings and noncash charges
partially offset by a decrease in accounts payable and accrued liabilities and
an increase in receivables, prepaid expenses and other current assets. Cash used
by investing activities during the first quarter of 1999 amounted to
$13,137,000, for the purchase of property and equipment. Cash provided by
financing activities during the first quarter of 1999 amounted to $6,731,000
primarily as a result of the receipt of proceeds from exercises of employee
stock options to purchase Company common stock.
Merchandise inventories were $136,353,000 at May 1, 1999, compared to
inventories of $136,748,000 at January 30, 1999. Merchandise inventories at May
1, 1999 and January 30, 1999 included approximately $12,161,000 and $32,329,000,
respectively, of inventory associated with the Company's sourcing division,
which is primarily finished goods in transit from factories.
At May 1, 1999, there were no borrowings outstanding under Ann Taylor's
$150,000,000 senior secured revolving credit facility (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
==============================================================================
11
under the Credit Facility is governed by a monthly borrowing base, determined by
the application of specified advance rates against certain eligible assets.
The Company also has outstanding an aggregate of $100,625,000 of convertible
preferred securities issued by its financing vehicle, AnnTaylor Finance Trust.
On May 27, 1999, the Trust issued a notice calling for the redemption of all of
these preferred securities on June 29, 1999. In connection with the redemption
of the preferred securities, the Company will redeem all of its 8 1/2%
Convertible Subordinated Debentures due 2016 which are held by the Trust. The
preferred securities were issued in April 1996 and are convertible into shares
of Company common stock at a conversion price of $19.65 per share of common
stock, or 2.545 shares of common stock per $50 liquidation amount of the
security. Holders of the preferred securities will have the right to convert the
preferred securities into shares of Company common stock on or before June 28,
1999. Holders of the preferred securities that are not tendered for conversion
by that date will receive 105.95% of the liquidation amount of the preferred
securities redeemed, plus accrued distributions. Because the market price of the
Company's common stock has been significantly higher than the conversion price,
the Company expects that most of the holders of the preferred securities will
exercise their right to convert the preferred securities to shares of Company
common stock. To the extent that some of the preferred securities are not
tendered for conversion by June 28, 1999, the Company expects to fund the
required payments to holders of such preferred securities from internally
generated funds.
For Fiscal 1999, the Company's capital expenditures, which are primarily
attributable to the Company's store expansion, renovation, and refurbishment
programs and investment in information systems, are expected to be approximately
$50,000,000, of which $13,137,000 were incurred in the three months ended May 1,
1999. During the first three months of Fiscal 1999, the Company opened 7 new Ann
Taylor stores and 4 Ann Taylor Loft stores, including one location that was
converted from an Ann Taylor store. The Company expects to open a total of 19
Ann Taylor stores and 29 Ann Taylor Loft stores (including four Ann Taylor
stores being converted to Ann Taylor Loft stores), and to expand or relocate a
total of 10 Ann Taylor stores, in Fiscal 1999.
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.
=============================================================================
12
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.
Ann Taylor's Credit Facility matures on June 30, 2000 and includes an
automatic one-year extension, contingent upon the satisfaction of certain
conditions. However, the commitments under the Credit Facility terminate on
February 16, 2000 unless Ann Taylor's outstanding 8 3/4% Subordinated Notes due
2000 (the "8 3/4% Notes") are refinanced on or prior to such date with the
proceeds of subordinated debt or capital stock, the terms and conditions of
which are reasonably satisfactory to lenders under the Credit Facility. The
Company intends to raise at least $100 million through the sale of discounted
convertible subordinated debentures due 2019 ("Convertible Debentures"), and to
use the proceeds from the issuance of these securities to refinance the 8 3/4%
Notes. The Convertible Debentures will be convertible at the option of the
holders thereof into shares of the Company's common stock. Consummation of the
issuance of the Convertible Debentures is subject to obtaining the consents of
the required lenders under the Credit Facility, and to market and other
conditions, and there can be no assurance that the offering of the Convertible
Debentures will be consummated. The Convertible Debentures will not be
registered or required to be registered under the Securities Act of 1933 (the
"Securities Act") and will be sold in the United States in a private placement
under Rule 144A under the Securities Act, and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.
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
==============================================================================
13
contingency plans, where feasible, to address potential third party
non-compliance or failure of material Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned, leased or licensed by
the Company, and identification of those systems and equipment requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.
All material computer hardware and equipment in the Company's U.S. home
offices, distribution center and retail stores that was not Year 2000 compliant
has been remediated or replaced. Of those software systems that were found not
to be Year 2000 compliant, approximately 90% of all material systems have been
remediated or replaced by Year 2000 compliant software. The Company anticipates
that all remaining material systems, will be remediated or replaced by the end
of the second quarter of Fiscal 1999. Hardware and software unique to the
Company's sourcing offices located outside the United States are scheduled to be
remediated or replaced by the end of the second quarter of Fiscal 1999.
Over the past few years, the Company's strategic plan has included
significant investment in and modernization of many of the Company's computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned information systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the Company's financial position or results of operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project, remediating existing systems and replacing non-compliant
systems, is approximately $2.1 million, of which approximately $1.1 million is
being expensed as incurred (including $965,000 expensed in Fiscal 1998, and
$61,000 in the first quarter of Fiscal 1999), and $1 million which was
capitalized (including $855,000 capitalized in Fiscal 1998 and approximately
$175,000 in the first quarter of 1999).
Although the Company believes its Year 2000 compliance efforts with respect
to its systems will be successful, any failure or delay could result in actual
costs and timing differing materially from that presently contemplated, and in a
disruption of business. The Company is developing a contingency plan to permit
its primary operations to continue if the Company's modifications and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures arising
out of a response to any such contingencies that materialize. The Company's cost
estimates also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.
==============================================================================
14
The Company has been communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. During the first quarter of fiscal 1999, the Company
completed an initial assessment of the Year 2000 readiness of those third
parties whose services are most significant to the Company's business. The
Company intends to continue to monitor the Year 2000 readiness of its key
suppliers of goods and services during the year. Failure of third parties to
remediate Year 2000 issues affecting their respective businesses on a timely
basis, or to implement contingency plans sufficient to permit uninterrupted
continuation of their businesses in the event of a failure of their systems,
could have a material adverse effect on the Company's business and results of
operations. Potential interruptions of such third parties' business or service
to the Company resulting from Year 2000 issues will be addressed in the
Company's contingency planning efforts, discussed below.
The Company's Year 2000 compliance project includes development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company operates a large number of retail stores in
widely disbursed geographical locations, and Company merchandise is manufactured
by a large number of suppliers. The Company believes that these factors will
help to mitigate the adverse impact of potential Year 2000 failures by third
party suppliers or utilities. The Company believes that the most reasonably
likely worst case scenarios would involve an interruption of the supply of
merchandise to the Company's stores, as a result of the delay in completion of
the Company's merchandise orders by manufacturers, or a delay in the delivery of
merchandise to the Company's stores due to a disruption of service at ports of
export or at the U.S. port of import, or a disruption in service by
transportation providers, or a disruption in operation of the Company's
distribution center. The Company anticipates that its contingency plans will be
substantially developed by the end of the second quarter of Fiscal 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
==============================================================================
15
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.
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 Note 5 to the Consolidated Financial Statements of the
Company as of January 30, 1999 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.
===============================================================================
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
AnnTaylor Stores Corporation's 1999 Annual Meeting of Stockholders was held
on May 18, 1999. The following matters were voted upon and approved by the
Company's stockholders at the meeting:
1. Mr. James J. Burke, Ms. Patricia DeRosa and Mr. Ronald W. Hovsepian were
re-elected as Class II Directors of the Company for terms expiring in
2002. 19,145,829, 19,146,019, and 19,138,995 shares were voted in favor
of, and 1,006,356, 1,006,166, and 1,013,190 were voted against, the
reelection of Mr. Burke, Ms. DeRosa and Mr. Hovsepian, respectively. Mr.
Gerald S. Armstrong, Mr. Wesley E. Cantrell and Ms. Hanne M. Merriman
continued as Class III Directors with terms expiring in 2000 and Mr.
Robert C. Grayson, Ms. Rochelle B. Lazarus, and Mr. J. Patrick Spainhour
continued as Class I Directors with terms expiring in 2001.
2. The amendment of the Company's Restated Certificate of Incorporation to
increase the numbers of shares of common stock the Corporation is
authorized to issue from 40,000,000 to 120,000,000 was approved. 16,196,419
shares were voted in favor of, 3,945,425 shares were voted against, and
10,341 shares abstained from voting on, this proposal.
3. The adoption of the Company's Associate Discount Stock Purchase Plan was
approved. 19,772,250 shares were voted in favor for, 143,810 shares were
voted against, and 24,409 shares abstained from voting on, this proposal.
4. The appointment of Deloitte & Touche llp as the Company's independent
auditors for the 1999 fiscal year was ratified. 20,131,509 shares were
voted in favor of, 8,715 shares were voted against, and 11,961 shares
abstained from voting on, this proposal.
===============================================================================
17
Item 5. Other Information
- -------------------------
On May 20, 1999, the Company announced that it will be redeeming all of its
outstanding 8-1/2% Convertible Subordinated Debentures due 2016 (the
"Debentures"). The Debentures are held by AnnTaylor Finance Trust, a Delaware
business trust (the "Trust"). As a result of this redemption, AnnTaylor Finance
Trust issued a notice on May 27, 1999 calling for the redemption of all of the
Trust's outstanding 8 1/2% Convertible Originated Preferred Securities (the
"Preferred Securities") and 8 1/2% Convertible Common Securities (together with
the Preferred Securities, the "Trust Securities"). The redemption date for the
Debentures and the Trust Securities will be June 29, 1999.
The Trust Securities were issued in April 1996 and are convertible into
shares of Company common stock at a conversion price of $19.65 per share of
common stock, or 2.545 shares of common stock per $50 liquidation amount of
Trust Security. Holders of Trust Securities will have the right to convert the
Trust Securities into shares of Company common stock on or before June 28, 1999.
Holders of Trust Securities that are not tendered for conversion by that date
will receive 105.95% of the liquidation amount of the Trust Securities redeemed,
plus accrued distributions. The Trust Securities are convertible into an
aggregate of 5,121,812 shares of Company common stock, representing
approximately 16% of the Company's outstanding common stock as of May 1, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company.
10.21 Separation Agreement dated March 25, 1999 between Ann
Taylor and Walter Parks.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
==============================================================================
18
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: June 11, 1999 By: /s/ J. Patrick Spainhour
---------------------------- ----------------------------
J. Patrick Spainhour
Chairman and Chief Executive
Officer
Date: June 11, 1999 By: /s/ Barry Erdos
---------------------------- ----------------------------
Barry Erdos
Executive Vice President -
Chief Financial Officer and
Treasurer